Finance and Credit Professional

Every investor should consider Exchange Traded Funds (ETFs). The younger brother of open-end index mutual funds is growing up fast and showing greater versatility. ETFs are open-end index mutual funds that trade like stocks (and closed-end mutual funds).

There are three legal structures of ETFs: Open-end mutual fund (the difference between the ETF structure and an open-end mutual fund is the ETF is exchange traded, whereas the traditional mutual fund is purchased and redeemed by the fund itself), Unit investment trust and Grantor trust.

The open-end mutual fund structure has a diversification requirement, mandated by the Investment Company Act of 1940, which limit how it mimics some smaller or specialized indices and could result in a tracking error. The other principal difference for the investor is that other than the open-end mutual fund, dividends must be paid out in cash to investors. These structural differences aren't significant for most investors. The more important question is whether it's the right one for you in terms of what index it's designed to follow.

The index and dividend payout requirements are disclosed in its prospectus and most Exchange Traded Funds also have websites where you can find this information. Tracking error is the difference between the return on the index the EFT is designed to follow and the actual return on the index.

An EFT which holds all 500 stocks in the S

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