ETF Funds - All You Need to Know About Investing in ETFs

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ETF Funds - All You Need to Know About Investing in ETFs. ETF picks and newletter from published ETF expert trader Deron Wagner and Morpheus Trading.

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ETF Funds - All You Need to Know About Investing in ETFs

  1. 1. ==== ====Since 2002, Morpheus Trading & Published ETF Expert Deron Wagner has been tracking andpublishing the results of every ETF & stock pick in our daily newsletters, which have generated aFully Invested Annualized Return of approx. 56%www.morpheustrading.com/?ca==== ====What is an ETF fund?Exchange traded funds (ETFs) have only been around since 1993, when the first ETF fund wasintroduced. That original ETF (SPY, by State Street Global Advisors), tracking the S&P 500 index,is still one of the most popular ETFs today. In recent years ETFs became increasingly popular asan alternative to mutual funds.ETFs are low cost index funds that are listed and trade on major stock exchanges, just like stocks.They are made up of a basket of securities, similarly to mutual funds. However, an ETF has itsown ticker symbol and can be bought and sold, during market hours - like an individual stock -through your broker (including discount online broker). (A standard brokerage commission to buyor sell will apply.)ETFs track a variety of stock, bond, commodity and currency indices. Some ETFs track theperformance of a broad index, (eg. the S&P 500 or FTSE 100, etc); others are more narrowlyfocused on a specific sector, company size, or even a country or region.Why invest in ETFs?ETFs have become increasingly popular with both individual and institutional investors, as well astraders and other financial professionals. Despite the jump in investments into ETFs, they are stillsmall compared to the money invested in mutual funds.What are the main advantages of ETFs?* low expenses* tax efficiency* diversification -> reduced risk* transparency, trading flexibility and liquidity* instant, low cost exposure to global markets* exposure to specific sectors, industries, investing styles etc* access to long/short strategiesWhile mutual fund managers try to beat a benchmark index each year, ETFs aim to mirror it.Which is not a bad thing considered that a vast majority of fund managers under-perform themarket averages, and even top managers rarely sustain their excellent returns over time. Trying to
  2. 2. outperform the market - especially after fees - is difficult, and most managers dont succeed.Most investors tend to be better off buying an index ETF, which is low cost and will ultimatelyoutperform most active managers.One of the most important decisions for an investor is the right asset allocation for his portfolio.ETFs are well suited here, allowing active investors to easily adjust their asset allocation asmarkets (and risks) change, increasing or cutting exposures fast.Since ETFs trade on exchanges, you have the advantage of the same types of trades (long, short)and orders (incl. limit, stop, stop loss, etc) as with an individual stock. You can also buy on margin.Many ETFs also have the capability for options (puts and calls) to be written against them.The diversification of most ETFs reduces investment risk. Every individual stock is only part of abasket; hence ETFs are less volatile than individual stocks.Importantly, there is no minimum investment requirement, so you can buy as much or as little asyou wish.Expense ratiosBuying and selling feesETFs - standard brokerage commissionMutual funds - between 0 and 5% (on purchase)Management feesETFs tend to have a significantly lower expense ratio than mutual funds.ETFs - annual fees of 0.2 - 1%Mutual funds - 1-3% p.a.You would not believe how much this saving adds up over the long term!(Expense ratios of ETFs vary, so make sure to check the fund prospectus.)Often investors dont realize that costs play a huge role in reducing their returns. Commissions,load fees, advisory fees, management fees, taxes, etc... when added up, they will reduce overallinvestment returns very significantly.Tax advantagesOne often overlooked issue is the high amount of taxable transactions in most mutual funds.Actively managed mutual funds have high turnover of their portfolio, and more trades result inadditional taxation. (The tax is deducted from the investors in the fund, even when they dont selltheir shares.) This, along with all the other costs and fees means a huge reduction in a fundsreturn.
  3. 3. ETFs are usually more tax efficient than mutual funds. They are generally designed to trackbenchmark indices, and as such make fewer trades. The low portfolio turnover reduces thefrequency of tax gain distributions.(In the US, whenever a mutual fund realizes a capital gain that is not balanced by a realized loss,the fund must distribute capital gains to its shareholders. These gains are subject to taxes, even ifyou reinvest the distributions in more shares of the fund. ETF investors only realize capital gainswhen they sell their shares in the ETF, when the ETF changes holdings in its underlying index orwhen stocks are removed from and added to the index.)So instead of looking at the reported pre-tax returns of actively managed funds, compare after-taxreturns of available investments before you decide where to put your cash.(Note that US taxation of commodity ETFs varies depending on their structure. Some commodityETFs own the physical commodity and are taxed at a long term capital gains rate. Others usefutures contracts to gain their commodities exposure; these are taxed every year, even if you dontsell, at a hybrid rate - 60% of your gains are taxed at the long term capital gains rate and 40% aretaxed as short term capital gains.)Please note that this is not meant as tax advice and may not be correct at the time of reading.Speak to your tax adviser before making any investment decision.Who issues ETFs?There are a number of companies providing ETFs. Among the best known are Barclays GlobalInvestors, Vanguard, State Street Global Advisors, Fidelity Investments, Deutsche Bank, CreditSuisse, Lyxor, and many others.We will look at the various types of ETFs available to investors, and the benefits and risksassociated with each of them, in part II and III of this ETF series.Want to learn more about the stock market? For free information, how-to-guides and resources onstock market investing, trading, financial spread betting, as well as financial and economicanalysis, news and opinion visit Money Honey Blog.Article Source:http://EzineArticles.com/?expert=Petra_Gajdosikova
  4. 4. ==== ====Since 2002, Morpheus Trading & Published ETF Expert Deron Wagner has been tracking andpublishing the results of every ETF & stock pick in our daily newsletters, which have generated aFully Invested Annualized Return of approx. 56%www.morpheustrading.com/?ca==== ====

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