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  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. 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. 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. 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.  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. In most cases, ETFs are more tax-efficient than conventional mutual funds in the same asset classes or categories. 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. Although they do not get all the tax advantages, they get an additional advantage from tax loss harvesting any capital losses from net redemptions. 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.  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). 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.
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