|
Click for ---
ETF Profit Driver Members Website
Some common questions about exchange-traded funds
What are exchange traded funds?
Exchange traded funds (ETFs) are index funds or trusts that are listed and traded intraday on
an exchange. ETFs allow investors to buy or sell shares in the collective performance of an
entire stock or bond portfolio as a single security. Exchange traded funds add the flexibility,
ease and liquidity of stock trading to the benefits of traditional index fund investing.
How can I buy or sell exchange traded funds?
Investors can buy or sell exchange traded funds through a broker, the same as stocks.
How easily can I buy or sell exchange traded funds?
As easily as buying or selling shares of stock. Exchange traded funds are listed on an exchange
and can be traded intraday, making it easy for investors to buy or sell ETFs.
What is the minimum size purchase of an exchange traded fund?
Investors can purchase as little as one share.
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
*
no sales loads, although brokerage commissions will apply
*
lower fees
*
tax efficiencies
How does the performance of an exchange traded fund compare with the performance of its
underlying index?
Exchange traded funds are designed to provide investment results that generally correspond to
their underlying benchmark index by holding a portfolio of securities designed to give similar
price and yield performance. In the secondary market, one mechanism that helps to keep an ETF
trading on the exchange at a price close to the value of its underlying portfolio is arbitrage.
Because exchange traded funds are both created from the securities of an underlying portfolio
and can be redeemed into the securities of an underlying portfolio on any day, arbitrage
traders may move to profit from any price discrepancies between an exchange traded fund and the
portfolio, which in turn helps to close the price gap between the two. (ETF creations and
redemptions are restricted to large transactions, typically in multiples of 50,000 shares but
ranging from 25,000 to 600,000 shares, usually transacted by large investors and institutions.)
Of course, because of the forces of supply and demand and other market factors, there may be
times when shares of an exchange traded fund trade at a premium or discount to its underlying
portfolio value.
Can exchange traded funds be purchased on margin?
Exchange traded funds may be purchased on margin, subject to the same terms that apply to
common stocks. Investors should contact their broker regarding initial and maintenance margin
requirements.
Can exchange traded funds be sold short?
Yes. All exchange traded funds may be sold short, representing the sale of "borrowed" shares in
anticipation of lower prices. Investors are required to make arrangements to borrow securities
before selling short.
Is there a sales load on exchange traded funds?
While exchange traded funds are not subject to sales loads, usual brokerage commissions for
securities purchases and sales will apply.
Do I get paid dividends on exchange traded funds?
ETF holders are eligible to receive their pro rata share of dividends, if any, accumulated on
the stocks held in an ETF, and interest on the bonds held in an ETF, less fees and expenses. Of
course, based on past performance, little, if any, dividend distributions can be expected on
certain ETFs. There may also be the opportunity for dividend reinvestment.
Where do exchange traded funds initially come from?
Exchange traded funds are "created" by large investors and institutions in block-sized units of
shares (or multiples thereof) known as "Creation Units" of a respective ETF. A creation
requires a deposit with the trustee for a specified number of shares of a portfolio of
securities closely approximating the composition of the specific index and a specific amount of
cash in return for shares of a specific exchange traded fund. Similarly, block-sized units of
exchange traded fund shares can be redeemed in return for a portfolio of securities
approximating the index and a specified amount of cash.
Where can I find exchange traded funds listed in the newspaper?
Investors can find exchange traded funds listed in the financial section of many newspapers
under the heading "American Stock Exchange Listed Stocks." They are also listed under "Exchange
Traded Portfolios" in the financial section of The Wall Street Journal.
Is the value of an exchange traded fund equivalent to the value of the underlying index?
Not necessarily. The share price of many exchange traded funds is initially set at a percentage
of the index upon which they are based, but may differ over time due to costs and other
factors.
Where can I get up-to-date price information on ETFs?
The pricing of exchange traded funds is continuous on the American Stock Exchange during normal
trading hours. Investors can obtain this information from their brokers, stock quotation
systems, or on a delayed basis by clicking here. The closing prices are also published in major
newspapers on the following business day.
Where can I get a prospectus?
It is important that investors read a prospectus for all exchange traded funds in which they
are interested. A prospectus, which contains more complete information, including charges,
expenses and potential risks, can be obtained on a specific exchange traded fund by clicking
here. Read the prospectus carefully before investing.
What are the risks of investing in ETFs?
Equity-based exchange traded funds are subject to risks similar to those of stocks; fixed
income-based ETFs are subject to risks similar to those of bonds. Investment returns will
fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or
sold, may be worth more or less than their original cost. Foreign investments have unique and
greater risks than domestic investments. Past performance is no guarantee of future results.
Fixed Income ETFs
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.
Why buy fixed income investments?
Diversifying into fixed income investments may provide stability to an equity portfolio because
the bond markets are often less volatile than the stock markets.
Do fixed income ETFs pay dividends?
Yes. Dividends, if any, will be distributed on a monthly basis, similar to bond mutual funds.
How will fixed income ETFs be taxed?
Dividends paid out of an ETF's net investment income and net short-term capital gains, if any,
are taxable as ordinary income. Distributions of net long-term capital gains, if any, in excess
of any net short-term capital losses, are taxable as long-term capital gains.
Will fixed income ETFs be as tax efficient as equity ETFs?
Because fixed income ETFs typically have higher yields than equity ETFs, they may not be as tax
efficient. In addition, the deletion of maturing bonds from bond indexes and the addition of
newly issued bonds may result in higher turnover rates than equity funds.
I'm a trading beginner. How can I learn to ETF trading from scratch?
We recommend signing up for Bill Poulos's new ETF Profit Driver System (home study course)
being released in March 2008. Learn successful ETF trading step by step at your own pace at home.
|
