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What is Index Shares (ETFs)?

Exchange Traded Funds (ETFs) are index-based products. Each ETF holds a portfolio of securities that approximates the price and yield performance of its underlying benchmark index.

The following are the most active (liquid) ETFs:

• The Nasdaq-100 Index Tracking Stock (QQQQ), commonly known as the "qubes" or "cubes". The cubes track the top 100 non-financial stocks of the NASDAQ;
   
• The Standard & Poor's Depositary Receipts (SPDR), commonly called "spiders," which track the stocks of the S&P 500;
   
• The "Diamonds" (DIA), which track the 30 stocks of the Dow Jones Industrial Average.

ETFs (also called index shares) track a specific basket of securities and trade continuously on the major exchanges like an ordinary stock. The pioneering big daddy of ETFs was the Standard & Poor's Depositary Receipts (AMEX: SPY) -- also known as SPDRs, pronounced "Spiders" -- which appeared in 1993. These were followed by the Dow Diamonds (AMEX: DIA), a basket of the 30 Dow stocks, and the Nasdaq 100 Shares (AMEX: QQQQ) -- a.k.a. Qubes -- which track the Nasdaq 100 stock index. Even though they've only been around since March 1999, Qubes are so popular, their daily trading volume rivals the companies on the New York Stock Exchange. (Today, only three companies on the Big Board traded more briskly.)

Another advantage is that ETFs can be shorted and bought on margin. We don't think that borrowing money to buy stocks is a smart way to invest, although in limited amounts by experienced investors it can be useful.

Perhaps the greatest benefit of ETFs is that investors will now have instant exposure to a diversified portfolio of stocks.

For many investors with a long-term vision who can embrace the benefits of ETFs without falling into the trading traps that accompany it, investing through ETFs can be quite rewarding to the pocketbook, and a superior alternative to mutual funds.

By trading the index, you eliminate concerns about picking the right company, balancing industry weightings, or incur the cost of trading individual stocks. Best of all, you eliminate the traditional bias to the upside, so you can profit from both bull as well as bear markets.

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