You must have heard many financial analyst talking about exchange traded funds or ETF. Most of you who have financial knowledge must know what ETF means and how it operates. For those who don't know how ETF work here is a quick summary.

ETFs are index funds that trade in a specific stock or a particular commodity. These funds are preferred by the investors because the maintenance cost of these funds is low. Some of the advantages on investing in these funds include:

a) Some exchange traded funds have diversified investments that help in reducing investor risk. There are many ETFs that invest in U.S. treasury that helps in reducing volatility.

b) Most ETFs that are available in the market have low expense ratio. Since the expenses are low they give better returns when compared to other mutual funds available in the market.

c) When you invest in mutual funds you have to keep track of your investments on a regular basis. However, when you invest in an ETF your investment is relatively safe and you don't have to check the working of the ETF on a regular basis.

d) People who invest in ETF can do so from the account that they have with their broker. Also the minimum quantity that you need to buy is small which reduces your risk. When investing in ETF you are not required to have an account with the fund company. You can invest from your brokerage account and purchase units without going through the formalities of opening an account with the fund company.

However, ETF is not risk free and it will be prudent on your part to do your homework before you invest.