An ETF is a passive managed fund with no maturity limit that almost precisely tracks an underlying index. Thus, the performance of the ETF is nearly parallel with the performance of the given index. The purpose of an ETF is primarily to offer the investor the opportunity to participate in the development of an entire index just by purchasing a single security. Consequently, an ETF ensures the investors a high level of diversification in their portfolios. The difference between an ETF and a traditional mutual fund is that the ETF does not attempt to achieve a higher return than that of the underlying index. The ETF tracks the performance of the index. If the index increases by 9%, the ETF also rises by 9%. Accordingly, fees are significantly lower in the ETF since changes in the ETF portfolio are not made on an ongoing basis and there is no active fund manager who must be paid. Concerning a mutual fund, active fund management takes place on a regular basis which causes higher costs for the investors. Securities can be bought and sold at any time. This is not the case with an ETF. However, if changes occur in the underlying index, the same changes take place in the ETF.
