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ETF - Exchange Traded Fund

What is an ETF?
An ETF or Exchange Traded Fund is an investment fund which has its units freely tradable on a stock market. The price of units in an ETF will generally correspond to the underlying net asset value (and if the price gets out of line then arbitrageurs will trade it back to parity). An ETF will generally hold stocks and bonds, but some may also hold derivatives in order to replicate a certain strategy or exposure e.g. a short ETF or a double long ETF, or commodity ETFs, and so-on. ETFs are an innovative product set and new ETFs are being set up all the time, tracking different markets, indices, and instruments to suit investor demands. ETFs are a valuable tool in portfolio construction and can be particularly useful in executing on various investment strategies.

How does it relate to Markets?
ETFs are traded on the market, in terms of being an indicator, it may be informative to examine the volume of trade in an ETF over time, as well as looking at the movement of the ETF - particularly ones that track sectors of interest. But ETFs are primarily used as an investment instrument, and can be particularly useful in executing investment strategy, for example a view that the US dollar may go down could be capitalised on by buying units in the UDN ETF product that goes up in value when the US dollar falls; or a view that Chinese stocks will go up could be capitalized on by investing in GXC or FXI - which are both Chinese stock index tracking ETFs.

Sources and further reading:
Yahoo Finance - Exchange Traded Funds Center
Wikinvest - Concept: Exchange Traded Fund
Bloomberg - ETFs data
iShares (ETF Provider)
ETF.com (Everything Exchange-Traded Funds)
NASDAQ - Exchange Traded Funds (ETFs)

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Original Source: http://www.econgrapher.com/encyclopedia-etf.html

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