About Select Sector SPDRs

ETF Background

The advantages of ETFs.
Exchange Traded Funds (ETFs) are innovative investment structures that combine the trading flexibility of individual stocks with the diversification benefits of mutual funds. Similar to equity mutual funds, ETFs are pooled investments that represent ownership in a basket of stocks. However, unlike mutual funds, ETFs trade on the American Stock Exchange and can be bought or sold throughout the day, just like individual stocks. And like traditional stocks, investors can use ETFs for stop orders, limit orders, margin purchases, and short selling. ETFs are subject to risks similar to those of stocks, including those regarding short-selling and margin account maintenance.

While ETFs operate like index funds—they invest in a pool of securities held within a particular index—they are not actively managed. The fees of ETFs may be lower than those of traditional mutual funds. In addition, because ETFs can be bought or sold throughout the day, it makes them more liquid than mutual funds, which can only be bought or sold at the end of each trading day. ETFs give investors instant exposure to a particular index or asset class through one simple, cost-effective transaction.