Saturday, September
4 2010
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Saturday, September
4 2010
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Announcing a new acquisition!!
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What's New at Forte for the year 2007 April 2007 - What Are Exchange-traded Funds and How Do They Work? By Forte News Department An exchange-traded fund (ETF) is a basket of securities
created to track as closely as possible a particular market index, such as the
Standard & Poor’s 500 Index or the Dow Jones Industrial Average. They’re similar to mutual funds in that they
represent investments in the same types of securities, but they generally have
lower fees and can be bought and sold with more pricing immediacy than mutual
funds. They also have some clear tax
advantages. Since their launch in the early 1990s on the American Stock
Exchange, there are now hundreds of ETFs available for investors to buy. As the market has struggled its way back
since 2000, investors have embraced ETFs as a more efficient alternative to a
mutual fund invested in the same securities.
A financial planner can tell you whether ETFs are right for your
portfolio, but here are some details to know beforehand: How are ETFs
created? An ETF is created by large
institutional investors who buy stocks aligning with the shares in a particular
index, and then they exchange those shares – in baskets as large as 50,000
shares – for shares in the ETF. The
redemption process works the same way in reverse -- the institutional investors exchange shares of the ETF for
baskets of the underlying stocks. Are all ETFs based on
indexes? Yes. Indexes, like the S&P 500 or the Hang Seng Index (the primary
stock index of the Hong Kong Stock Exchange), are a listing of stocks
reflecting the activity of a particular investment sector on a stock
exchange. One of the first popular ETFs
had an unusual nickname – Spiders – a play on its actual name, SPDR, short for
Standard and Poor’s Depositary Receipts.
Newer ETFs track less well-known indexes, even indexes of bonds, and
some ETFs are tracking very dynamic indexes that almost act like actively
managed funds. How are ETFs traded?
Unlike mutual funds, which have their prices set at the end of the
trading day, ETFs are priced and traded every moment of the trading day. That’s generally more meaningful to
institutional investors who buy and sell constantly than long-term investors
who buy and hold. Furthermore, unlike mutual funds, ETFs can be bought on
margin or sold short. Why might ETFs be more
tax-efficient? Generally, ETFs generate fewer capital gains
due to the unique creation and redemption process as well as the usually lower
turnover of securities that comprise their underlying portfolios. Financial planners note that investors can
better control the timing of the tax treatment of ETFs relative to mutual
funds. Most importantly -- by holding
an ETF for at least one year and a day, capital gains will be treated as
long-term capital gains, which are currently taxed at a federal rate of 15
percent (5 percent for low tax bracket investors). Are there other
advantages? Unlike traditional mutual funds, which must
disclose their holdings quarterly, ETF holdings are fully transparent, and
investors know what holdings are in the ETF at any given time. Each ETF also has a NAV tracking symbol for
even more precise analysis. This helps
keep ETFs trading within pennies of their intraday NAV. What about fees? Shares of index-based ETFs may have even lower annual
expenses than similar index mutual funds, which, in turn, tend to be lower than
those of actively managed mutual funds.
ETFs must, however, be bought and sold through brokers, and those trades
do involve transaction costs. ETFs may
prove to be more expensive than mutual funds to investors who add money each
month to their portfolio. What’s the downside? Unlike regular mutual funds, ETFs do not necessarily trade
at the net asset values of their underlying holdings. Instead, the market price of an ETF is determined by supply and
demand for the ETF shares alone.
Usually, the ETF value closely mirrors the value of the underlying
shares, but there’s always a chance for ETFs to trade at prices above or below
the value of their underlying portfolios.
Also, since so many new ETFs are hitting the market, investors should be
aware of the maturity of the particular ETF they are considering. -30- April 2007 — This column is produced
by the Financial Planning Association, the membership organization for the
financial planning community, and is provided by David W. Henion , a local
member of FPA | ||||||||||||||
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