By Gary Meeks, RICP®
Key Features of an ETF:
– An exchange-traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock.
– ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds that only trade once per day after the market closes.
– ETFs can contain all types of investments, including stocks, commodities or bonds; some offer U.S. only holdings, while others are international.
– ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.
The first ETFs were launched in the early 1990’s and held an index for their portfolio such as the S&P 500 stock index. The first ETF was created in Canada in 1990, the Toronto 35 tracking the TSE-35 index. Since then, the popularity of ETFs have exploded. Now, there are ETFs available that track almost any industry or sector, including but not limited to the following:
- Technology
- Commodities
- Currencies
- Inverse ETFs
- Energy
- Hedge ETFs
- S&P 500 Index
- Bond Index
- Real Estate Securities
It is very likely that if there is an industry or stock sector you want to be invested in, there is an ETF available to get you that exposure, So, if an investor or a financial advisor wanted to add exposure to any of the above industries or indexes, they can do so by using ETFs. Because ETFs trade continuously when a stock exchange is open, portfolio changes can be made immediately and potentially at a lower cost than buying several different stocks.
ETFs and Taxes
An ETF is more tax efficient than a mutual fund since most buying and selling occurs through an exchange and the ETF sponsor does not need to redeem shares each time an investor wishes to sell, or issue new shares each time an investor wishes to buy. Redeeming shares of a fund can trigger a tax liability, so listing the shares on an exchange can keep tax costs lower. In the case of a mutual fund, each time an investor sells their shares, they sell it back to the fund and incur a tax liability that must be paid by the shareholders of the fund.
Active or Passive:
ETFs can be either passively managed or actively managed. Tracking the S&P would be an example of passive management since the ETF creator just holds the stocks in the S&P 500 and does not make changes to the portfolio. An actively-managed ETF does have a manager who adjusts the portfolio holdings according to what he or she feels fits the fund’s objective and will provide the best performance for the ETF. Normally, passive (Index ETFs) have much lower expenses than actively managed ETFs; however, lower cost does not guarantee better performance.
ETFs are a good alternative to traditional open-ended mutual funds providing potentially lower cost, more trading flexibility and the ability to provide exposure to many types of securities, industries and market sectors. Many investors and portfolio managers use both mutual funds and ETFs to build well diversified portfolios.
Gary D. Meeks, RICP®, is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker dealer and Registered Investment Adviser. Cetera is under separate ownership from any other named entity. 90 W 100 N STE 6, Price, UT 84501 (435) 637-8160.
The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. Investors can not invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. “The Standard & Poor’s 500 is an unmanaged group of securities considered to be representative of the stock market in general. Past performance does not guarantee future results.”
Exchange-traded funds are sold only by prospectus. Please consider the investment objectives, risks, charges and expenses carefully before investing. “The prospectus contains this and other information about the investment company, can be obtained from your financial professional at 435-637-8160. Be sure to read the prospectus carefully before deciding whether to invest.
Sources: https://www.investopedia.com/articles/exchangetradedfunds/12/brief-history-exchange-traded-funds.asp https://www.fidelity.com/learning-center/investment-products/etf/benefits-of-etfs https://www.investopedia.com/terms/e/etf.asp