Download Electronically Traded Funds

Electronically Traded Funds
(Exchange Traded Funds)
First…what is an Index?
• A stock index is a compilation of stocks
constructed in such a manor to track a
particular market, sector, commodity,
currency, bond, or other asset.* (Examples
include tech, healthcare, & commodities)
• E.g., Gold and Precious Metals- XAU
http://www.investopedia.com/terms/m/m
arketcapitalization.asp
Examples of Indexes
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•
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S&P 500
Dow Jones Industrial Average
Nasdaq
An Index is just a list of stocks. Anyone can
create one.
How is the Index valued?
• Ideally, a change in the price of an index
represents an exactly proportional change in
the stocks included in the index.
• Average of the overall portfolio….sort of.
• Weighted average based on Market
Capitalization.
http://www.investopedia.com/university/in
dexes/index1.asp
How is the Index valued?
• Each company in the index is weighted based
on it’s value or “market capitalization.”
• If a company has 35 million shares
outstanding, each with a market value of
$100, the company's market capitalization is
$3.5 billion (35,000,000 x $100 per share).*
*http://www.investopedia.com/terms/m/
marketcapitalization.asp
What is an ETF?
Exchange Traded Fund(ETF)
• Acts like an individual stock
(this stock value follows
value of index its based on)
• Purchased directly on the
market
• Price is managed by
arbitrageur to match index
price
• Traded any time of day
Mutual Fund
• Multiple individuals as
owners of a “mutual” fund
• Purchased from a broker
• Usually actively managed;
stocks might be moved in
an out of the fund
• Traded at evening only
Benefits of ETFs
• Low fees
– One purchase of an index based stock, not multiple
purchases
• Tax treatment
– Typically don’t pay out capital gains distributions
– No need to constantly buy and sell multiple stocks
• Diversification
– Can invest in any index (energy, commodity, S&P)
• You know exactly what’s in it
• great for lump-sum investors, but you should use a
traditional index fund if you’re buying a little bit at a
time.
http://guides.wsj.com/personal-finance/investing/how-to-choose-an-exchange-traded-fund-etf/
Review
• ETFs combine the range of a diversified
portfolio with the simplicity of trading a single
stock
• Price of the ETF is closely matched with Net
Asset Value (NAV) of index by arbitrageur
• Cost-efficiency, tax-efficiency, flexibility
http://www.nasdaq.com/investing/etfs/what-are-etfs.aspx#.UXbTVGu_gYM