ETFs—An Investment Option
Some students have had interest in Exchange-Traded Funds. It for this purpose I am writing to those students today. Many recognize my view on mutual funds. I feel strongly that are one of the greatest investment options available because of the diversification aspect within them. However, they can be expensive including fund fees, potential load fees, 12b-1 fees, and other fees. To remedy this I have proposed Index Funds because they can accomplish the objective of diversification and fulfill the concept of Modern Portfolio Theory, while reducing the cost of investing. Well, another option also exists; it is an Exchange-Traded Fund. The fund is cheaper than an Index Fund and still can satisfy all the required the objectives described.
An Exchange-Traded Funds are holdings of securities mirroring a market index, i.e., S&P 500. They are classified more like an open-end company or Unit Investment Trust (UIT) with a few exceptions:
• They trade exactly like a regular stock.
• They are sold in large blocks know as “Creation Units.”
• The Creation Units are generally purchased by instructional investors.
• The Creation Units are bought with baskets of securities that generally mirror the ETFs portfolio.
• After purchasing a Creation Unit, the investor has the option of splitting it up and selling the individual shares (i.e., equity or bond shares) on the secondary market.
• Investors have two options when selling the ETF: 1) Selling the individual shares to other investors on the secondary market, or 2) Retain the structure of the Creation Units and sell it back to the ETF.
• The redemption of Creation Units is generally provided with securities comprised within the portfolio.
• Because of the limited redeemability of ETFs, they are not considered to be a mutual fund.
Again an ETF can mirror an index, like the Dow Jones Industrial Average or the S&P 500. As a result they are powerful investment securities because they contain the elements of modern portfolio theory and diversification. ETFs may also be attractive because of their low costs, tax efficiency, and stock-like features.
Some popular ETF options include:
• S&P Depositary Receipts “Spiders,” which track the S&P 500 (Ticker Symbol SPY)
• “Cubes,” which tracks the Nasdq 100 (Ticker Symbol QQQ)
• Vanguard Index Participation Equity Receipts “VIPERs,” including Vanguard Energy VIPERs, Vanguard Financials VIPERs and Vanguard Mid-Cap VIPERs.
• Vanguard Total Market Index Fund (Ticker Symbol VTI)
For further information, please contact me at Prosper 800 748-5199 x6048.
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