ETF FAQ & List
November 5th, 2006 by Ian
With more and more ETFs sprouting up they are becoming harder to follow. Here are some good resources to help you keep track:
Frequently Asked Questions
From ici.org:
What is an ETF?
An exchange-traded fund (ETF) is an investment company with shares that trade intraday on stock exchanges at market-determined prices. Investors may buy or sell ETF shares through a broker or in a brokerage account, just as they would the shares of any publicly traded company.
How are ETFs regulated?
Exchange-traded funds are registered investment companies and must comply with the applicable provisions of the Investment Company Act, except to the extent the fund or trust has received exemptive relief from the Act. Exchange-traded funds have obtained exemptive relief to (1) allow them to register as mutual funds under the Act even though their shares are not individually redeemable (ETFs are, however, prohibited from referring to themselves as mutual funds.); (2) permit affiliated entities to purchase and redeem shares in kind rather than in cash; and (3) enable their shares to trade at negotiated prices on an exchange rather than at a current offering price described in the prospectus or at a price based on net asset value (NAV).
From Claymore Investments:
How is the trading price of an ETF determined?
The trading price of an ETF is expected to be approximately equal to the trading value of the underlying securities held in the fund plus any undistributed net income. The ETF’s market value will trade during the day based on supply and demand, but generally are expected to trade at or close to the fund’s NAV.
How do ETFs work?
ETFs share many of the characteristics of individual securities and traditional mutual funds, but they operate differently, giving them certain advantages over other investment solutions. With traditional mutual funds, an individual investor usually buys or redeems shares directly with the fund company. When shareholders redeem shares, the fund manager may have to sell securities to meet those redemptions, possibly incurring capital gains that will eventually be passed on to the fund’s shareholders. ETFs, on the other hand, are traded like individual stocks. Investors buy and sell shares on a stock exchange through a broker or brokerage account during normal operating hours. Designated brokers and underwriters engage in “in-kind” transactions with the fund itself, trading baskets of securities for very large blocks of shares called “creation baskets.” These transactions, which result in the creation or redemption of ETF shares, occur at net asset value (NAV). Market trades by individual investors occur at market prices rather than NAV. There is little or no need to keep cash on hand that would require the fund to purchase or sell portfolio securities, pay brokerage commissions, and possibly realize capital gains. This keeps costs down and limits the distribution of capital gains to shareholders. The creation/redemption process also means that an ETF’s market price may trade at or close to the fund’s NAV.
From AMEX:
Why invest in an index?
Indexing, often called “passive management,” involves investing in a group of securities that represent the composition of a broad stock market, stock industry sector, international stock, or U.S. bond index. Index funds offer “market level” performance; they aim to generally match the performance of a specific index. Index funds generally have lower management fees and operating expenses than actively managed funds.
What are the benefits of exchange traded funds trading as stocks?
The unique “exchange traded” structure offers several advantages to ETF investors:
- buy and sell at any time during the trading day
- instantly get exposure to a portfolio of stocks or bonds
- buy on margin
- sell short, even on a downtick
- no sales loads, although brokerage commissions will apply
- lower fees
- tax efficiencies
What are fixed income ETFs?
Fixed income ETFs are bond index funds that are listed and traded intraday on an exchange. They let investors buy or sell shares in the collective performance of an entire bond portfolio as a single security. ETFs add the flexibility, ease and liquidity of stock trading to the benefits of traditional bond index fund investing.
ETF Lists
