Exchange Traded Funds are just what their name implies – baskets of securities which are traded like stocks on an exchange. ETFs represent a fractional ownership in an underlying portfolio of securities which track a specific market index. The first ETF was introduced on the Toronto Stock Exchange in 1990 and the first U.S. ETF made its debut on the American Stock Exchange in 1992, following an SEC Order which authorized an S&P 500 index-based ETF as a unit investment trust. There are currently nearly 600 American ETFs including over $500 Billion of assets and they include well-recognized indices such as Cubes, HOLDRs, Spiders, iShares and Diamonds. ETFs now trade on the NYSE, ASE and on the Chicago Board Options Exchange. ETF-like instruments now also trade on the London Stock Exchange and the German Bourse, as well as elsewhere in the European Union.

 

ETFs have rapidly become an investment preference of knowledgeable individual and institutional investors, as they can combine the best characteristics of both stocks and open-end mutual funds. They multiple benefits:

 

• ETFs require no investment minimums and have lower expense ratios
• ETFs May be margined and sold short and also utilized in non-traditional long-short arbitrage programs
• Continuous intra-day trading of ETFs enhances liquidity and more closely tracks their net asset value (NAV)
• ETFs utilize a ‘tax-friendly’ operational structure and in-kind redemption process which allows them to substantially mitigate and/or defer capital gains taxes
• ETFs provide a diversified means to gain precise strategic and tactical market exposure in a given sector:

           

1.      Small-, mid- and large-capitalization sectors

2.       Global and domestic (single country or sector)

3.      Growth, value and core

4.       Currencies and commodities

5.       Fixed income sectors

 

• Avoid ‘single stock risk’ through liquid baskets of stocks
• Transparency – ETF Index providers publish daily changes to benchmarks