Exchange Traded Funds (ETFs)

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Exchange Traded Funds (ETFs) Leveraged ETFs

• Chad Hartwick
• State of Michigan

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These views are my own views and not necessarily
those of NASAA or the State of Michigan
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ETFs in General

• Definition Security that tracks an index much
  like a index mutual fund but is traded like a
  stock on an exchange.
• ETFs hold assets such as stocks and bonds.
• Legally classified as
• Open-end investment companies
• Unit Investment Trusts (UITs)
• First ETFs were created by SSgA (1993)
• Spiders (SPDR) SP 500 SPY on AMEX
• Approximately 1000 ETFs

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Trading ETFs

• Trade intraday just like stocks
• Can sell short, limit orders, stop-loss orders,
  and buy on margin
• No minimums
• Many have the ability for options to be written
  against them
• Very small deviation between market price and net
  asset value

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ETFs Types

• Index ETFs most popular
• Sector ETFs more expensive
• Commodity ETFs not regulated as investment
  companies under the 40 act
• Fixed-Income ETFs Bond, Treasuries
• Currency ETFs generally not long term
• Actively Managed ETFs started in 2008
• Inverse ETFs moves opposite of benchmark
• Leveraged ETFs greater volatility

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ETFs vs Mutual Fund

• Costs
• ETFs would pay brokerage commissions, where MFs
  may be purchased direct with no load
• ETFs have a lower expense ratio (not actively
  managed)
• Most ETFs do not have 12b-1 fees
• Taxation
• ETFs are generally more tax-efficient
• ETFs investors only realize capital gains when
  they sell their own shares or when the ETF trades
  to reflect a change in the index
• Trading
• MFs end of the day pricing
• Rebalancing and Dollar-Cost Averaging easier with
  MFs

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ETFs vs Mutual Funds

• Dividends
• ETFs distribute quarterly
• MFs immediately
• Liquidity
• Some ETFs are not as liquid and may have high
  bid-ask spreads
• MFs always get NAV at the end of the day
• Transparency
• ETFs have transparent portfolios

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Leveraged ETFs

• Exposure to indexes with greater volatility
• If SP 500 rises by 1 the LETF would rise by 2
• If SP 500 falls by 1 the LETF would fall by 2
• Leveraged ETFs typically uses options and futures
• May be purchased in retirement accounts
• Usually has higher expense ratios
• Daily rebalancing, maintaining ratio
• Low liquidity
• Short Term

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Inverse ETFs

• Moves in opposite direction of benchmark
• If SP 500 rises by 1 the IETF fall by 1
• If SP 500 falls by 1 the IETF would rise by 1
• Uses short positions on underlying stocks
• Hedge for bearish markets when you dont want to
  sell or cant
• May be purchased in retirement accounts
• Daily basis investment objective
• Leveraged Inverse ETFs

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Leveraged Returns

• Day 1 Market -10
• Index 100 - 10 90
• LETF(2) 100 - 20 80
• Day 2 Market 10
• Index 90 9 99
• LETF(2) 80 16 96
• Index Return of -1
• LETF(2) Return of -4

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Resources

• NYSE Informed Investor What should you know
  about exchanged traded funds
• SEC Exchange-Traded Funds
• SEC/FINRA Investor Alert Leveraged Inverse
  ETFs
• FINRA Non Traditional ETFs FAQ
• FINRA Notice to Members 09-31

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Thank you!

• Have a nice day J