Exchange Traded Funds (ETF's) are similar to stocks and mutual funds and at the same time, slightly different as well. ETF's trade on an exchange just like individual stocks do. They are easy to buy and sell, be bought and sold at any time throughout the tradeing day, have stop or limit orders placed on them, and can even be sold short. ETF's can provide diversification among value and growth stocks, small, mid, large and mega-cap stocks. They also cover overseas markets, individual countries, industry groups, and a variety of asset classes including realestate, currencies, fixed income, precious metals and natural resources.
An index is a collection of securities intended to represent a given market or market segment. Each holding within the index is called a constituent. An index can be as broad as the entire U.S. stock market, such as the iShares Russell 3000 Index which has almost 3000 constituents, or as narrow as a single country or industry (the iShares FTSE/ Xinhua China 25 Index Fund and iShares S&P GSTI™ Networking Index Fund both have less than 30 constituents). Each index has its own construction methodology, or set of rules for what is included in the index, which is established by its index provider.
ETF's are passively managed. They do not have a team of managers selecting the stocks. Instead, they either duplicate an index, or they have programs which use quantitative analysis to select stocks for the ETF based on a variety of criteria such as earnings, relative price strength, sector, market cap, etc,.
There are hundreds of ETF's and the tables to the right give a small sampling of what is available. The market for ETF's is growing at a phenomenal pace and there continues to be new ETF's coming to the marketplace and there are hundreds more currently in filing covering everything from U.S. and Internatioal fixed income, short-term paper, timber, municipal bonds, eastern Europe and more.