Exchange Traded Funds (ETFs)

What is an ETF?

An ETF is a compilation of stocks grouped together to mimic an index, a commodity or other group of assets. Portfolio Theory, the basic foundation of all ETFs, states that a well diversified group of stocks (commodities, bonds, etc.) will over time outperform an individual investment in that same class. A way of saying that differently is, investing in the overall Dow Jones Industrials will over long periods of time outperform investing in one name in the Dow such as IBM. Whether that is true or not depends on several variables, most notably being able to pick the one diamond out of 29 other pieces of coal.

Prior to 2006 there were less than 100 ETFs traded. By the end of 2006, there were over 400 traded, demonstrating the strong interest in such instruments. Today there are over 1,200 ETFs in the US and overseas. As with any investment vehicle, there are those who praise them and those who frown on ETFs. Warren Buffet, for example, does not invest in the overall market preferring to find undervalued gems. His belief is that if you trade the averages your returns will be average. He does, however, recommend them to those who are unsophisticated as they have many benefits.

Benefits:

Easy Allocation of Capital
The cost and complexity of diversifying your portfolio through ETFs is minimal because the process is already done for you. ETFs by nature are diversified.

Low Expense Ratios
Expense ratios are the fees compared to the overall investment a fund charges to manage the account. ETFs typically have very low expenses compared to hedge funds and mutual funds.

Simplicity of Trading
ETFs are traded like stocks on the exchange and can be traded all day. Mutual funds can only be entered and exited at the closing price of the day’s trading, but ETFs can be entered and exited at any time during the normal trading hours.

• Hedging
Unlike mutual funds ETFs can often be hedged using options in that specific name.

• Liquidity
The amount of shares exchanging hands each day in many of the ETFs can be astronomical compared to even the biggest stocks. Liquidity will never be an issue as it is in many of the small volume stocks.

 

 

 

 

 

 

 

 

 

Because there are too many funds to keep track of, as they are changing on an almost daily basis, we will bow out to those who do it for a living as it is their bread and butter, whereas ours is options. The following link will provide you with the complete list:http://www.masterdata.com/HelpFiles/ETF_List.htm