ETFs by mnmgroup

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									Types of ETFs


ETFs can be broadly classified as Indexed ETFs and Actively managed ETFs.


Indexed ETFs: Indexed ETFs (sometimes referred to as Classical ETFs) typically offer low
management fees, since they have a low operating cost structure. Reasons for the low cost
structure are as follows:
• The fund manager does not have to exercise a high level of administration, as investors
wanting to buy or sell units can only do so on a particular index
• The turnover of underlying shares in the portfolio is minimal as the fund tracks a share market
index. In addition, once the target investment portfolio is established, there is no ongoing need
for the ETF manager to undertake research, since the portfolio composition is determined by the
index.


Actively Managed ETFs: Actively managed ETFs provide access to a much broader range of
investment management styles, strategies, asset classes and operational practices than indexed
ETFs.
Additionally, actively managed ETFs can usually accept cash applications, which means
investors, can buy units directly from the fund manager through lodging an application form
contained in the fund prospectus as well as to buy units already issued on that index.


Sector ETFs: Almost one third of the available ETFs give you exposure to sectors.
These are industry groups such as communications, financial, health care, natural resources,
precious metals, real estate, technology, and utilities. These sectors can be volatile and often go
from media darlings to fallen stars rather quickly, but they also give investors an easy way to
climb aboard a hot trend.
International ETFs
The major country indexes of many third-world countries have brought investors first- class
returns in recent years. ETFs tracking China and Brazil have been among the biggest winners.
You can diversify with broad emerging market ETFs which invest around the globe or focus on
key regions such as Asia, Europe and Latin America.
Commodities ETFs
Oil and gold prices have recently smashed their all-time records, and ETFs that track those
commodities have become very popular. A shortage of raw materials and the rapid growth of
countries like China have also driven up prices of other commodities. ETFs focusing on
agricultural commodities are also gaining steam.
Bond ETFs
Again, there are a lot of choices here, including short-term, intermediate-term, and long-term
government bonds. Other options: corporate bonds, municipal bonds, and emerging market
bonds.
Currency ETFs
You can use ETFs to wager on the direction of theye n, euro, dollar, and about a dozen other
currencies.
Bear Market ETFs
These ETFs gain popularity when markets start to go down. They make gains when the index
they cover loses value. For example, if the S&P 500 falls in price, ETFs that directly track it like
the SPDR S&P 500 will suffer losses, while ETFs likeUltraShort
S&P500 ProShares that short the index will make gains

Active Exchange Traded Funds
The exchange traded fund (ETF) universe has officially been infiltrated by active managers.
Once exclusively hailed as a type of index-based, passive vehicle, ETFs are now exploring the
active side of portfolio management. There are many ETFs to choose from, and the choices no
longer only appeal to traditional indexers. In this article, we'll take a look at the inception of
actively traded ETFs and what this could mean for investors.
What Are Active ETFs?
Active ETFs combine the benefits of ETF investing with the investment process of active
management. Despite the strong track record that indexing strategies have demonstrated, many
investors are simply not content to settle for average returns. The ETF structure, by design,
provides investors with lower expenses, tax efficiency, fund transparency, liquidity and trading
flexibility. Until active ETFs came to market, most ETFs were designed to track a specific index
or industry sector.
Active ETFs are managed by investment teams relying on traditional portfolio management
methods (research, managed risk, active trading) with the specific goal of outperforming a
relative benchmark. Of course, whether you choose to believe that is possible on a consistent
basis is another matter altogether, and beyond the scope of this article.

Passively Managed ETF's
From an investment strategy standpoint, traditional exchange-traded funds (ETFs) are designed
to track indexes. Active ETFs, by contrast, are designed to beat an index. Both passive and active
ETFs attempt to minimize shareholders costs, but actively managed ETFs might not be as tax
efficient as ETFs that track indexes due to increased turnover. Still, active ETFs, as previously
discussed, are likely more tax efficient than their mutual fund counterparts.

Conclusion
ETFs, both active and passive, allow investors to access global markets at a reasonable cost. The
tax efficiency and transparency benefits are also obvious. It may take years for active ETFs to
proliferate to a size that competes head-to-head with actively managed funds in sheer numbers
and choices. But, in terms of what type of ETF you decide to employ (passive or active) the
decision will ultimately boil down to one issue: do you believe that active management adds
enough value to justify investing outside of an index? That verdict rests solely on the investor.

Comparison of ETFs with other mutual funds
In essence, ETF's trade like stocks and therefore offer a degree of flexibility unavailable with
traditional mutual funds. Specifically, investors can trade ETFs throughout the trading day as in
stocks. In comparison, in a traditional mutual fund, investors can purchase units only at the
fund’s NAV, which is published at the end of each trading day. In fact, investors cannot purchase
ETFs at the closing NAV. This difference gives rise to an important advantage of ETFs over
traditional funds: ETFs are immediately tradable and consequently, the risk of price differential
between the time of investment and time of trade is substantially less in the case of ETFs.
ETFs are cheaper than traditional mutual funds and index funds in terms of fees. However, while
investing in an ETF, an investor pays a commission to the broker. The tracking error of ETFs is
generally lower than traditional index funds due to the “in- kind” creation / redemption facility
and the low expense ratio. This “in-kind” creation / redemption facility ensures that long-term
investors do not suffer at the cost of short-term investor activity. ETFs can be bought / sold
through trading terminals anywhere across the country.

ETFs compared to mutual funds

[edit] Costs

Because ETFs trade on an exchange, each transaction is generally subject to a brokerage
commission. Commissions depend on the brokerage and which plan is chosen by the customer.
For example, a typical flat fee schedule from an online brokerage firm in the United States range
from $10 to $20, but can be as low as $0 with discount brokers. Due to this commission cost, the
amount invested has a great bearing; someone who wishes to invest $100 per month may have a
significant percentage of their investment destroyed immediately, while for someone making a
$200,000 investment, the commission cost may be negligible. Generally, mutual funds obtained
directly from the fund company itself do not charge a brokerage fee. Thus when low or no-cost
transactions are available, ETFs become very competitive.[39]

ETFs have a lower expense ratio than comparable mutual funds. Not only does an ETF have
lower shareholder-related expenses, but because it does not have to invest cash contributions or
fund cash redemptions, an ETF does not have to maintain a cash reserve for redemptions and
saves on brokerage expenses.[40] Mutual funds can charge 1% to 3%, or more; index fund
expense ratios are generally lower, while ETFs are almost always in the 0.1% to 1% range. Over
the long term, these cost differences can compound into a noticeable difference.[41]

The cost difference is more evident when compared with mutual funds that charge a front-end or
back-end load as ETFs do not have loads at all. The redemption fee and short-term trading fees
are examples of other fees associated with mutual funds that do not exist with ETFs. Traders
should be cautious if they plan to trade inverse and leveraged ETFs for short periods of time.
Close attention should be paid to transaction costs and daily performance rates as the potential
combined compound loss can sometimes go unrecognized and offset potential gains over a
longer period of time.[42]

[edit] Taxation

ETFs are structured for tax efficiency and can be more attractive than mutual funds. In the U.S.,
whenever a mutual fund realizes a capital gain that is not balanced by a realized loss, the mutual
fund must distribute the capital gains to its shareholders. This can happen whenever the mutual
fund sells portfolio securities, whether to reallocate its investments or to fund shareholder
redemptions. These gains are taxable to all shareholders, even those who reinvest the gains
distributions in more shares of the fund. In contrast, ETFs are not redeemed by holders (instead,
holders simply sell their ETF shares on the stock market, as they would a stock, or effect a non-
taxable redemption of a creation unit for portfolio securities), so that investors generally only
realize capital gains when they sell their own shares or when the ETF trades to reflect changes in
the underlying index.[5]

In most cases, ETFs are more tax-efficient than conventional mutual funds in the same asset
classes or categories.[43] Since Vanguard's ETFs are a share-class of their mutual funds, they
don't get all the tax advantages if there are net redemptions on the mutual fund shares.[44]
Although they do not get all the tax advantages, they get an additional advantage from tax loss
harvesting any capital losses from net redemptions.[45][46]

In the U.K., ETFs can be shielded from capital gains tax by placing them in an Individual
Savings Account or self-invested personal pension, in the same manner as many other shares.[47]

[edit] Trading

Perhaps the most important benefit of an ETF is the stock-like features offered. Since ETFs trade
on the market, investors can carry out the same types of trades that they can with a stock. For
instance, investors can sell short, use a limit order, use a stop-loss order, buy on margin, and
invest as much or as little money as they wish (there is no minimum investment requirement).[48]
Also, many ETFs have the capability for options (puts and calls) to be written against them.
Covered call strategies allow investors and traders to potentially increase their returns on their
ETF purchases by collecting premiums (the proceeds of a call sale or write) on calls written
against them. Mutual funds do not offer those features.[49]

								
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