ETFs Exchange Traded Funds

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ETFsExchange Traded Funds
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What is an ETF?

• A security that tracks an index, a commodity or a
  basket of assets like an index fund.
• ETF trades like a stock on an exchange, thus
  experiencing price changes throughout the day as
  it is bought and sold.

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What motivates each player?

• fund manager takes a small portion of the fund's
  annual assets as their fee
• investors who loan stocks to make up a basket
  make a small interest fee for the favor
• custodial bank makes a small portion of assets
  (paid for by fund manager from fees)
• authorized participant is primarily driven by
  profits from the difference in price between the
  basket of stocks and the ETF and on part of the
  bid-ask spread of the ETF itself
• Whenever there is an opportunity to earn a little
  by buying one and selling the other, the
  authorized participant will jump in

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Why Exchange Traded Funds?

• Invest in the market quickly and cheaply
• Help investor focus on asset classes
• Trade just like stocks on major exchanges
• There are ETFs for large US companies, small
  ones, real estate investment trusts,
  international stocks, bonds, and even gold.

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How do ETFs differ from Mutual Funds?

• ETFs trade throughout the day unlike a mutual
  fund that is priced at the end of day.
• Fees are approx .09 of assets compared to 1.4
  for the avg. mutual fund.
• ETFs also perform well after taxes.

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Advantages to owning an ETF

• You get the diversification of an index fund
• Ability to sell short or to buy on margin
• Purchase as little as one share
• The expense ratios for most ETFs are lower than
  those of the average mutual fund
• Pay the same commission to your broker that you'd
  pay on any regular order
• ETFs also perform well after taxes

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Investing in ETFs

• ETFs are economical to buy and especially to
  maintain over the long-run, making them
  especially attractive for the typical
  buy-and-hold investor.
• ETFs are index funds at heart, so investors are
  encouraged to study the philosophy of index
  investing which focuses on buying the market as
  opposed to stock picking.

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Popular Exchange Traded Funds

• Standard Poor's 500 Index Depository Receipts
  (SPYAMEX)
• Nasdaq-100 Index Tracking Stock (QQQAMEX)
• DIAMONDS Trust (DIAAMEX)
• iShares S P 500 (IVVAMEX)
• Standard Poor's MidCap 400 SPDRs (MDYAMEX)
• iShares Russell 2000 (IWMAMEX)