Tuesday, August 30, 2016

Exchange Traded Funds (ETFs)

introduction

What are Exchange Traded Funds (ETFs)?
Exchange Traded Funds (ETFs) are open-ended investment funds listed and traded intraday on a stock exchange. They aim to track the performance of an index and provide access to a wide variety of markets and asset classes. ETFs are not mutual funds, yet they offer all of the benefits of diversification that you would expect from a mutual fund.

Quick Facts:
  • ETFs are the most innovative and rapidly growing investment vehicles.
  • The first ETF ever issued was the Standard and Poor's Deposit Receipt, or the SPDR S&P 500 (SPY), which began trading in 1993.
  • Like stocks, ETFs trade on an exchange. Unlike regular mutual funds, ETFs can be bought and sold throughout the trading day. They can also be sold short and bought on margin. Anything you might do with a stock, you can do with an ETF. 
  • There are a number of different ETFs on the market, including Qubes, SPDRs, sector SPDRs, MidCap SPDRs, HOLDRs, iShares, and Diamonds.
  • Most ETFs are passively managed, which means that each tracks a sector-specific, country-specific, or broad-market index. A manager isn't actively choosing which stocks to buy and sell.
  • There are 894 ETFs with assets of $887.2 billion from 28 providers on two exchanges (Dec 2010). There are $12 trillion in mutual funds, but the momentum is shifting. In fact, seven of the 10 best-selling funds are ETFs.
Why invest in ETFs?
Exchange-traded funds offer the following advantages:
Lower investment cost : ETFs have lower expense ratios than index and mutual funds, generally less than 1%.
Transparency: Investors have access to the component securities represented in an ETF. Moreover, market prices are published real-time throughout the trading day.
Flexibility & liquidity: An investor can buy and sell ETFs anytime during trading hours and may employ the traditional trading techniques including stop orders, limit orders, margin purchases, and short sales. In today's markets with increased volatility, the ability to capture short-term movements can make the difference between a good day and a bad one.
Diversification: ETFs provide instant diversification in an industry you might know little about. ETFs give traders a way to make smart plays in a sector, rather than trying to pick individual stocks and hoping to choose the right ones.
Commodities and currencies: ETFs allow investing in commodities (such as oil, gold or agricultural products) and currencies (euro, yen, etc). These products required access to futures and forex trading before ETFs were created.
Options: ETFs function just like a stock, because they represent a collection of individual stocks in a single sector. Accordingly, you can trade calls and puts on them to take advantage of movements in that particular sector.
What are Exchange-traded notes (ETNs)?
ETNs are structured products that are issued as debt securities by banks and are based on the performance of various assets, indexes and strategies. ETNs are not investments funds.

When you buy an ETN, instead of putting your money into a fund that acutally buys and holds assets, you are buying debt from the ETN issuer — much like a bond investor would. Instead of being backed by the assets that are in the investment fund like ETFs are, ETNs are simply backed by the full faith and credit of the issuer.

ETNs have maturity dates. When you hold an ETN until the maturity date, you receive a one-time payment based on the performance of the underlying asset, index or strategy.

For instance, if you buy an ETN covering oil and the value of oil appreciates during the time you are holding the ETN, you will receive a higher payment at maturity than you will if the value of oil depreciates during the time you are holding the ETN.

Of course, you do not have to hold an ETN until maturity if you don't want to. You can sell your ETN at any time on the open market.
 

What's wrong with mutual funds?
Lack of transparency.
High expense ratios and hidden fees.
In a mutual fund, you're trapped because you can't leave the stock intraday. The NAV of the fund is calculated at the end of the business day, so you are stuck with that price and the implications of whatever movements occurred during the session.

What are the risk considerations before investing in ETFs?
  • Market risk: Since ETFs usually target one specific sector, investors can focus on one hot sector. However, this makes them prone to greater risk and market volatility.
  • Tracking error: An ETF may not be able to exactly replicate the performance of the underlying index due to management fees, timing differences and other factors.
  • Foreign exchange risk: Investors whose base currency is other than the currency denomination of the ETF will be subject to the risk of fluctuations in currency values.

Risks Associated with Exchange-Traded Notes (ETNs)
ETNs, just like any other investment, carry risk. However, ETNs carry the following two risks that ETFs don't:
1. Credit Risk: Credit risk is the risk that the institution that has issued the ETNs will default on the notes. Remember, ETNs are issued as unsecured debt securities — meaning there are not specified assets that serve as collateral for the ETNs. Instead, ETNs are only backed by the full faith and credit of the issuer.
In good times, this isn't typically a problem. But during a financial crisis when banks and other large financial institutions — the main issuers of ETNs — are at risk of collapsing, it can be a big problem.
2. Call Risk: Call risk is the risk that the issuer of the ETN may call the ETNs back before maturity.

If an issuer calls an ETN back, the issuer will compensate you for the ETN according to the call provision in the ETN, but you will lose the right to hold the ETN until maturity.


Most popular ETFs, sorted by daily volume:
 (*) click on the symbol to view a chart on Yahoo Finance:
Fund Name (*)Ticker (*)CategoryFund FamilyVolume(3 mo Avg) 
SPDRsSPYLarge BlendSPDR TRUST SERIES 1464,318,000
PowerShares QQQQQQQLarge GrowthPowerShares QQQ Trust, Series 1257,981,000
Financial Select Sector SPDRXLFSpecialty-FinancialSelect Sector Spdr Trust248,355,000
Ultra Financials ProSharesUYGSpecialty-FinancialProShares Trust133,993,000
iShares MSCI Emerging Markets IndexEEMDiversified Emerging MktsiShares Trust130,117,000
iShares Russell 2000 IndexIWMSmall BlendiShares Trust119,126,000
Ultra S&P500 ProSharesSSOLarge BlendProShares Trust75,148,600
UltraShort S&P500 ProSharesSDSBear MarketProShares Trust58,467,000
Energy Select Sector SPDRXLESpecialty-Natural ResSelect Sector Spdr Trust51,229,100
UltraShort QQQ ProSharesQIDBear MarketProShares Trust48,390,700
iShares FTSE/Xinhua China 25 IndexFXIPacific/Asia ex-Japan StkiShares Trust48,242,700
Ultra QQQ ProSharesQLDLarge BlendProShares Trust43,846,500
DIAMONDS Trust, Series 1DIALarge ValueDIAMONDS TRUST SERIES I39,953,600
iShares MSCI Japan IndexEWJJapan StockiShares, Inc.37,235,400
iShares MSCI EAFE IndexEFAForeign Large BlendiShares Trust33,924,300
UltraShort Financials ProSharesSKFBear MarketProShares Trust29,917,300
iShares Dow Jones US Real EstateIYRSpecialty-Real EstateiShares Trust27,311,000
iShares MSCI Brazil IndexEWZLatin America StockiShares, Inc.24,989,300
UltraShort Oil & Gas ProSharesDUGBear MarketProShares Trust21,408,200
iShares MSCI Taiwan IndexEWTPacific/Asia ex-Japan StkiShares, Inc.18,733,700
SPDR Gold SharesGLDSpecialty-Precious MetalsstreetTRACKS Gold Trust18,300,400
Ultra Dow30 ProSharesDDMLarge BlendProShares Trust16,452,000
Industrial Select Sector SPDRXLILarge BlendSelect Sector Spdr Trust15,273,700
Ultra Oil & Gas ProSharesDIGSpecialty-Natural ResProShares Trust15,207,100
UltraShort Dow30 ProSharesDXDBear MarketProShares Trust14,847,000
Materials Select Sector SPDRXLBSpecialty-Natural ResSelect Sector Spdr Trust14,790,800
Semiconductor HOLDRsSMHSpecialty-TechnologyMerrill Lynch, Pierce, Fenner & Smith14,456,700
Technology Select Sector SPDRXLKSpecialty-TechnologySelect Sector Spdr Trust13,822,300
United States OilUSOSpecialty-Natural ResUnited States Oil Fund, LP12,710,700
Oil Services HOLDRsOIHSpecialty-Natural ResMerrill Lynch, Pierce, Fenner & Smith11,921,900
MidCap SPDRsMDYMid-Cap BlendMIDCAP SPDR TRUST SERIES 111,549,100
iShares Dow Jones US Financial SectorIYFSpecialty-FinancialiShares Trust10,543,000
Vanguard Total Stock Market ETFVTILarge BlendVanguard Index Funds10,500,700
SPDR KBW BankKBESpecialty-FinancialSpdr Series Trust10,427,500
iShares S&P 500 IndexIVVLarge BlendiShares Trust10,018,100
UltraShort Russell2000 ProSharesTWMBear MarketProShares Trust9,480,380
Utilities Select Sector SPDRXLUSpecialty-UtilitiesSelect Sector Spdr Trust9,455,430
Consumer Discretionary SPDRXLYLarge BlendSelect Sector Spdr Trust8,983,240
Retail HOLDRsRTHLarge BlendMerrill Lynch, Pierce, Fenner & Smith8,631,490
SPDR S&P RetailXRTMid-Cap GrowthSpdr Series Trust8,395,960
UltraShort Real Estate ProSharesSRSBear MarketProShares Trust8,071,950
SPDR S&P HomebuildersXHBMid-Cap BlendSpdr Series Trust7,296,880
Market Vectors Gold Miners ETFGDXSpecialty-Precious MetalsMarket Vectors ETF Trust7,293,970
iShares Silver TrustSLVSpecialty-Precious MetalsiShares Funds7,287,590
Consumer Staples Select Sector SPDRXLPLarge BlendSelect Sector Spdr Trust7,213,680
Health Care Select Sector SPDRXLVSpecialty-HealthSelect Sector Spdr Trust7,126,010
iShares MSCI Hong Kong IndexEWHPacific/Asia ex-Japan StkiShares, Inc.7,054,720
iShares Russell 1000 Growth IndexIWFLarge GrowthiShares Trust6,470,470
Ultra Russell2000 ProSharesUWMSmall BlendProShares Trust6,004,940
Ultra Basic Materials ProSharesUYMSpecialty-Natural ResProShares Trust5,880,180
iShares MSCI South Korea IndexEWYPacific/Asia ex-Japan StkiShares, Inc.5,861,920
SPDR KBW Regional BankingKRESpecialty-FinancialSpdr Series Trust5,610,040
iShares Russell 1000 IndexIWBLarge BlendiShares Trust5,505,420
iShares Russell 1000 Value IndexIWDLarge ValueiShares Trust5,301,790
Vanguard Emerging Markets Stock ETFVWODiversified Emerging MktsVanguard International Equity Index Fund5,233,610
United States Natural GasUNGSpecialty-Natural ResUnited States Natural Gas Fund, LP4,924,020
Ultra Real Estate ProSharesURESpecialty-Real EstateProShares Trust4,721,780
iShares MSCI Mexico Investable Mkt IdxEWWLatin America StockiShares, Inc.4,202,420
UltraShort Basic Materials ProSharesSMNBear MarketProShares Trust4,133,600
Vanguard REIT Index ETFVNQSpecialty-Real EstateVanguard Specialized Funds3,974,190
UltraShort MSCI Emerging Mrkts ProSharesEEVBear MarketProShares Trust3,795,870
iShares S&P 100 IndexOEFLarge BlendiShares Trust3,716,750
iShares MSCI Singapore IndexEWSPacific/Asia ex-Japan StkiShares, Inc.3,693,220
iShares MSCI Australia IndexEWAPacific/Asia ex-Japan StkiShares, Inc.3,407,150
iShares Russell 2000 Growth IndexIWOSmall GrowthiShares Trust3,317,750
iShares S&P 500 Growth IndexIVWLarge GrowthiShares Trust3,296,030
iShares S&P Latin America 40 IndexILFLatin America StockiShares Trust3,270,650
iShares Russell 2000 Value IndexIWNSmall ValueiShares Trust3,204,540
UltraShort FTSE/Xinhua China 25 ProshareFXPBear MarketProShares Trust3,178,210
iShares S&P SmallCap 600 IndexIJRSmall BlendiShares Trust3,089,650
Regional Bank HOLDRsRKHSpecialty-FinancialMerrill Lynch, Pierce, Fenner & Smith2,989,250
iShares Russell Midcap IndexIWRMid-Cap BlendiShares Trust2,810,560

All symbols listed above (cut & paste to your watch list):

SPY QQQQ XLF UYG EEM IWM SSO SDS XLE QID FXI QLD DIA EWJ EFA SKF IYR EWZ DUG EWT GLD DDM XLI DIG DXD XLB SMH XLK USO OIH MDY IYF VTI KBE IVV TWM XLU XLY RTH XRT SRS XHB GDX SLV XLP XLV EWH IWF UWM UYM EWY KRE IWB IWD VWO UNG URE EWW SMN VNQ EEV OEF EWS EWA IWO IVW ILF IWN FXP IJR RKH IWR
Read more on different types of ETFs:



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