Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail


What it is:

Created by Barclays Global Investors, iShares are a trademarked brand of exchange-traded funds (ETFs).

How it works (Example):

Exchange-traded funds (ETFs) are securities that closely resemble index funds but can be bought and sold during the day just like common stocks. Essentially, iShares offer the convenience of a stock along with the diversification of a mutual fund.

However, exchange-traded funds don't sell shares directly to investors. Instead, each ETF sponsor issues large blocks (often of 50,000 shares or more) that are known as creation units. These units are then bought by an "authorized participant" -- typically a market maker, specialist or institutional investor -- which obtains shares of the underlying securities and places them in a trust. The authorized participant then splits up these creation units into ETF shares -- each of which represents a legal claim to a tiny fraction of the assets in the creation unit -- and then sells them on a secondary market.

Just as closed-end funds don't always trade at a price that precisely reflects the value of the underlying assets in each share of the portfolio, it is also possible for an ETF to trade at a premium or a discount to its actual worth. To liquidate their holdings, most investors simply sell their ETF shares to other investors on the open market. However, it is possible to amass enough ETF shares to redeem them for one creation unit and then redeem the creation unit for the underlying securities. Because of the large number of shares involved, individual investors seldom use this option.

Why it Matters:

iShares, and exchanged-traded funds in general, have grown increasingly popular, and the number of iShares choices has swelled into the hundreds since the first iShares product launched in 1996. Today, these securities compete with mutual funds and offer a number of advantages over their predecessors, including: lower trading costs (loads), high liquidity, tax advantages and transparency and diversification regarding the underlying assets.

As with any security, the pros and cons should be weighed carefully, and investors should first do their homework to determine whether exchange-traded funds are the appropriate vehicle to meet their individual goals and objectives.

Related Terms View All
  • Qualifying Relative
    For example, let's assume that John and Jane Doe took in Jane's mother because she ran...
  • Ultrafast Trading
    Ultrafast trading relies on software and algorithms that react to other trades in the...
  • Lease Payments
    Leases can be for a variety of assets, though real estate often comes to mind first. For...
  • Shadow Open Market Committee (SOMC)
    Founded by two economists from Carnegie Mellon University and the University of Rochester...
  • Managed Futures Account
    When you buy a managed futures account, in essence you're hiring an expert to buy, sell...