Walker Capital Consulting Group, LLC

 

An exchange traded fund is an investment product designed to mimic or replicate an index. ETFs are essentially passive index funds similar to index mutual funds, which allow investors to invest in a basket of stocks at one time. These funds offer investors efficient trading of baskets of stocks covering investment styles, geographical locations and economic sectors located in both domestic and international markets. Additionally, they can focus on value as well as growth stocks. ETF transactions are executed the same way stocks are traded. All strategies associated with stocks also apply to ETFs such as market orders, limit orders, stop orders, short sales and more. In essence ETFs have the best features of both individual stocks and mutual funds.

 

The price of an ETF typically resembles, but is independent of the underlying assets. When demand exceeds supply, the market price at which the fund trades may be higher than its underlying net asset value. When there are more fund sellers, the price may be below its net asset value. This variance is limited by the unique nature of exchange traded funds.

 

There are several characteristics of exchange trade funds which can help investors meet their goals.

• Low Annual Expense Ratios - Due to the passive nature of indexing, there are reduced marketing, distribution and accounting fees. Expenses associated with ETFs are significantly lower than most traditional mutual funds.
• Tax Efficiency - Since ETFs are passively managed, they generally realize few, if any, capital gain distributions. At a certain investment size, ETF's can offer in-kind distributions, which can help investors better manage their overall capital gain liabilities.
• Continuous Pricing - Unlike mutual funds, which are priced at the end of the day, ETFs are priced constantly throughout the day allowing investors to buy or sell them at their discretion. There is no waiting until the end of the day to learn details about your transaction.
• Completion Strategies - During periods of rebalancing, ETFs make it extremely easy to enact style changes without having to analyze numerous stocks, various bonds and mutual funds, as may be found in standard portfolios.
• Trading Fees - ETFs are purchased and sold just like stocks and there is a commission associated with the transaction. Index ETFs typically do not impose annual 12b-1 fees.  
• Style Specific - ETFs are style specific and they don't waiver from that style. 

 

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