What is an ETF?

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What is an ETF?
An ETF is an Exchange Traded Fund. It is a group of investments, a fund, that trades on the stock exchanges that typically represent an index of publicly traded securities. The most popular ETFs are stocks and bonds, as well, there are commodities and derivative investments which can short (bet against) the market index or leverage the securities up two times (2x) or three times (3x) an ETF is a tradable fund.

ADVANTAGES OF ETFs

The cost of ETFs are minimal and they trade on an exchange with a commission. There are a few discount firms which offer a list of commission free tradable ETFs. Additional costs are internal expense ratios, like open-end mutual funds, however, the typical ETF has half the cost of traditional open-end mutual funds. In some cases, the cost, such as the index S&P 500 funds are less than 12 basis points (0.0012) of 1 percent (100 basis points).

Typically, taxes inside ETFs are less because of the way the fund is constructed. Traditional mutual fund managers have more capital gains and losses because they must buy and sell securities to create their funds. ETFs do not change internal securities in this manner.

Transparency is the most popular feature of ETFs. The fund is required by the S.E.C. (Securities and Exchange Commission) to list their holdings at the trading day’s end. This list is available for public viewing on the fund managers website. In essence, full transparency. You are able to see the NAV (Net Asset Value) price of the fund change every second of the day on the exchanges through your iPhone, iPad, Laptop or other electronic devices. Unlike traditional open-end mutual funds which are not priced until the end of day, you will always know the price of your ETF during the trading day.

As you can see, the cost savings with the transparency allow the investor to make clear quick decisions about their assets in an efficient manner leading to more control for their investment posture.

HISTORY OF ETFs

The first ETF began trading in 1993 called Spdrs S&P 500 Index Fund, ticker symbol SPY, representing 500 stocks of the S&P 500 index. In 1999 Europe began to offer ETFs and the most significant advancement was in 2008 when the S.E.C. authorized actively traded indexed ETFs. Due to this major change in 2008 this industry has accelerated to enormous proportions and, furthermore, began to be adopted and accepted by pension funds.

ETF PORTFOLIO PLACEMENT

It is possible to use ETFs in place of a portfolio with old traditional mutual funds or separately managed accounts and reduce the internal costs by 30% to 50%. It is easy to apply sector rotation with major ETF asset classes and capture the best part of the momentum market regardless of the Market trend. Likewise, for pension managers in a retreating markets, it is much easier to reduce your positions with ETFs and protect your principal.

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