Understanding Exchange Traded Funds (ETFs) |
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Understanding Exchange Traded Funds (ETFs)Exchange Traded Funds give investors the opportunity to buy or sell a portfolio of stocks in a single security, as easily as to buy or sell a stock. They offer a wide range of investment opportunities. Stock-index ETFs undertake "representative sample", in this case, the Foundation is composed of key stocks, which represent the index. The ETF price therefore moves up and down in line with the index it is tracking. Investing in an ETF is like investing in the market as a whole (for an index) as against investing in specific stocks. ETFs were introduced in the United States in 1993 and until 2008 were all index funds. Thereafter, the creation of active managed ETFs has been allowed. What are differences between ETFs and Mutual Funds? For the common man, the ETFs appear to be similar to the mutual funds. This is not quite true. There are a number of differences between the Exchange-Traded funds and Mutual funds, as explained below: The first difference is with regard to hours and the manner of trading. While exchange-traded funds as stocks are traded through the day, Mutual fund orders are executed at the end of the day based on the Net Asset Value (NAV) of funds at the end of trading hours. Mutual funds are considered an investment because they have a fund manager who actively manages and churns the equity portfolio and other investments held in a particular fund. ETFs, on the other hand, are passive investments because they are followed by an index and to move in line with the index. Types of Exchange Traded Funds Usually the Exchange Traded Funds are classified according to the nature of the investment and asset class it is tracked to. ETFs are typically classified by the following nomenclature: Index ETFs These funds are the most common types of ETFs and are usually traded actively on the market, they tracked. Typically, they replicate a stock market index of performance and are backed by securities in the same proportion as the index they are linked. The objective of such a market index ETF is to follow the direction of the market. Investors choose to buy into market ETFs where they want exposure to a particular market. For instance, an investor willing to build exposure to the stock exchange in Germany can buy an ETF linked to the DAX average. Similarly, there are ETF's tracking S&P500, Nasdaq 100, Bovespa in Brazil, Korea's KOSPI and many other indices. Exchange Traded Funds created on the basis of the market capitalization of stocks in this category. Separate ETFs exist for large-cap, mid-cap or small cap. These ETFs are also sometimes called style ETFs that their goal is to copy an investment strategy or style. These ETFs generally followed the growth or value investment style, such as the Barra's composite, Russell and Standard & Poor. Hedge Fund ETFs Hedge fund ETFs are a new type of an ETF. Hedge funds ETF track a hedge fund and follow a group of hedge fund's activity. The new Hedge fund of ETFs are offered by IndexIQ include IQ Hedge Multi-Strategy Composite, IQ Hedge Global Macro, IQ Hedge Long/Short Equity, IQ Hedge Event-Driven and IQ Hedge Market Neutral Commodity ETFs Commodity ETFs invest in commodities such as precious metals and the futures. Among the commodity first ETFs were gold exchange-traded funds, which were offered in a number of countries. Commodity ETFs are index funds in general, but track non-securities indexes. Because they do not invest in securities, ETFs are not regulated as investment companies under the United States Investment Company Act of 1940, although their public offering is subject to the 'SEC review and they need a letter of SEC no-action under the Securities Exchange Act of 1934. They may, however, be subject to regulation by the Commodity Futures Trading Commission Country or Region Based ETFs These funds track the performance of a region or country and are followed by a primary index of a country. Advantages of Exchange Traded Funds Trading Flexibility One of the main advantages that ETFs have over traditional mutual funds is trading flexibility. ETFs trade throughout the day, you can buy and sell whenever you want. Costs In terms of annual expenditure at the expense of investors, ETFs are considerably cheaper than most mutual funds. Performance Because they are protected from investor trading, ETFs should not suffer from having to keep cash on hand to meet redemptions, or be forced to sell shares in a declining market for the same purpose. |
Understanding Exchange Traded Funds (ETFs)
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