ETF’s
Exchange Traded Funds
An exchange-traded fund (or ETF) is an investment vehicle traded on exchanges, much like individual stocks. An ETF holds securities such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying securities over the course of the trading day. Many ETFs track indexes, such as the Dow Jones Industrial Average or the S&P 500.
ETFs generally provide the easy diversification, low expense ratios, and tax efficiency of index funds, while still maintaining all the features of ordinary stock, such as being traded throughout the day, limit orders, short selling, and options. Because ETFs can be efficiently acquired, held, and sold, some investors invest in ETF shares as a long-term investment for asset allocation purposes, while other investors trade ETF shares frequently to implement market timing investment strategies.
Some Advantages of ETFs are the following:
- Lower costs – ETFs generally have lower costs than other investment products, like mutual funds, because most ETFs are not actively managed and are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. ETFs typically have lower operating expense ratios, and most do not have 12b-1 fees.
- Trading flexibility – ETFs can be bought and sold at current market prices at any time during the trading day, unlike mutual funds and unit investment trusts, which are only traded at the end of the trading day. As publicly traded securities, their shares can be purchased on margin, sold short, and traded using stop orders and limit orders. The features of ETFs enable the use of hedging strategies. Alamo Capital encourages investors to use limit orders when trading ETFs, as some of the thinner traded securities could experience unnecessary price movements on large orders relative to the average daily volume.
- Tax efficiency – ETFs generally generate relatively low capital gains, because they typically have low turnover of their portfolio securities. While this is an advantage they share with other index funds, their tax efficiency is further enhanced because they do not have to sell securities to meet investor redemptions.
- Market exposure and diversification – ETFs provide an economical way to rebalance portfolio allocations and to “equitize” cash by investing it quickly. An index ETF inherently provides diversification across an entire index. ETFs offer exposure to a diverse variety of markets, including broad-based indexes, broad-based international and country-specific indexes, industry sector-specific indexes, bond indexes, and commodities.
- Transparency – ETFs, whether index funds or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day.
Some of these advantages derive from the status of most ETFs as index funds.
Contact Us:
If you are interested in learning more about ETFs, please contact an Alamo Capital Broker by calling (877) 68-ALAMO : (877) 682-5266 or email: marketing@alamocapital.com.
Revised 01/03/2012