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.
Advantages of ETFs:
- 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. As publicly traded securities, their shares can be purchased on margin, sold short, and traded using stop orders and limit orders.
- Tax efficiency – ETFs generally generate relatively low capital gains, because they typically have low turnover of their portfolio securities.
- Market exposure and diversification – ETFs provide an economical way to rebalance portfolio allocations and to “equitize” cash by investing it quickly.
- Transparency – ETFs, whether index funds or actively managed, have transparent portfolios and are priced at frequent intervals throughout the trading day.
These are more complex ETF’s which may invest in futures, options, forward contracts or swaps. The general categories of these are: leveraged, inverse, leveraged inverse, futures, ETN’s and ETF’s of ETF’s. These are complex investment products which are meant for sophisticated, speculative investors only, as part of an overall investment strategy. Investors need to be aware that risks and returns can differ greatly from the funds objectives as well as from more traditional investments, including traditional ETF’s. Investors need to be able to answer the following questions:
- How does the ETF achieve its objective?
- What happens if I hold the position longer than 1-2 days?
- What is the risk that an ETF won’t meet its stated daily objective?
- What are the costs?
- What are the tax consequences?
Alamo Capital suggests investors do thorough research prior to investing in non-traditional ETF’s. You should read the entire prospectus and understand the special features of the position.
Please refer to the links below in order to assist you in beginning with this process:
If you are interested in learning more about ETFs, please contact an Alamo Capital Broker by calling (877) 68-ALAMO – or – (877) 682-5266 or email: [email protected].