Have You Been Introduced to Exchange-Traded Funds?
Today, if you’ve ever flipped on a financial TV program, or opened your newspaper to the business section, chances are you’ve heard about exchange-traded funds (ETFs). And there’s a good chance you still have questions about them.
Much of the media’s attention focuses on the amazing growth ETFs have achieved in the marketplace. In the US there are 1,327 ETFs with assets of $1.7 billion as compared to 119 ETFs and $103 billion AUM just 11 years ago.1
What is an ETF?
An ETF is an unique investment tool that combines some of the features of mutual funds with some of the features of individual stocks. Like a mutual fund, an ETF gives investors access to a group of securities through a single transaction. Like a stock, these ETF shares are traded on exchanges at market-determined prices.
There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risk similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply.
Past performance is not indicative of future similar results.
- Source: Bloomberg L.P., Investment Company Institute, as of Dec. 31, 2013
- Shares are not individually redeemable and owners of the Shares may acquire those shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, typically consisting of 50,000 Shares.
- ETFs disclose their full portfolio holdings daily.
Key Features of ETFs
We believe ETFs will receive major inflows as economic conditions improve and money begins to flow back into the market. Investors are increasingly drawn to the structural benefits of ETFs:
- Tax Efficiency. Taxes may be one of the most critical and yet overlooked factors in wealth creation over time as they can erode even the best fund’s returns. Because of their unique structure, ETFs may serve as a tax-efficient investment tool for shareholders who wish to defer capital gains until the point of sale.
- Transparency. ETFs report their holdings on a daily basis, allowing investors to regularly see the investments that underpin each ETF share.
- Flexibility. ETFs offer investment flexibility, allowing investors to buy and sell shares throughout the day on an exchange. Investors can use ETFs to implement advanced trading techniques such as purchasing on margin, short selling and placing limit and stop orders. In addition, ETFs are never closed to investors.
- Broad Exposure. ETFs provide exposure to multiple underlying securities, even in targeted market segments. For example, instead of an investor stock-picking among individual nanotechnology companies, investors can buy shares of a nanotechnology ETF and gain wider exposure to the industry.
- Trade at or Near NAV. ETFs generally trade at or near the value of the holdings that compose each fund — meaning that market speculation generally won’t drive the price of an ETF. Shares of the ETF may trade at a discount or premium to the net asset value of those underlying securities.
- Lower Ownership Cost. ETFs may provide lower ownership costs because of their efficient structure. ETFs have established expense caps to make the cost of ownership clear and straightforward for investors.1
Evolution of ETFs
When the first ETF was launched in 1993, its purpose was simple — to track the S&P 500® Index while trading on a major exchange. Since then, many traditional ETFs have been designed to mirror benchmark indexes. Not all investors, however, are willing to settle for simply a measure of the market.
1 Since ordinary brokerage commissions apply for each buy and sell transaction, frequent trading activity may increase the cost of ETFs.