The Exchange Traded Fund, or ETF
Exchange Traded Funds or ETFs are relatively new investment vehicles. In 1993 Standard and Poor's Deposit Receipt (SPDR, pronounced "Spider")1 was the first ETF to be traded. Since then ETFs have become very popular because they offer a number of benefits to investors. Not all ETFs are alike. Almost anything that can be done with normal stock can also be done with an ETF.
An individual's investment portfolio can include an ETF holding for various reasons. ETFs can serve different needs in order to fulfil strategies to reach specific financial goals. The Partners at StoneHouse Capital have a wide base of skills and experience when it comes to helping clients to use ETFs as part of their investment portfolios. The ways in which they are traded and the benefits accruing to investors are matters with which a professional investment advisor and Certified Financial Planner (CFP) are familiar.
ETF, ETP and Mutual Fund - The Differences
There are some similarities, but also some important differences between ETFs, Exchange Traded Products (ETPs) and Mutual Funds.
Saunders, Chief Executive of the IMA,2 poses the reason for the popularity of ETFs as a question: "Instead of giving money to the fund manager in exchange for units, why not buy or sell units directly through the market?" The administration cost is considerably less, and one gets the price on a continuous basis rather than once a day. ETFs are also popular because they provide access to global markets beyond the developed world.
ETFs are governed by regulations in most countries. ETPs are most often set up by brokers or financial institutions. The terms exchange-traded notes and exchange-traded commodities can be regarded as more accurate descriptions of what they are. They are more risky because the regulations applicable to ETFs do not apply to them. In the event that the bank can no longer fulfil its obligations, like Lehman Brothers in 2008, you also risk losing your investment. With ETFs, investors may still be able to be access or realise their shares in the original assets, which is less likely with an ETP.
ETFs are often confused with mutual funds. The main difference is that, unlike a mutual fund, ETFs are traded like shares on various exchanges. They can be bought and sold any time of the day. This also means their value fluctuates from moment to moment. In the case of actively managed funds they only disclose their holdings a few times a year.
Advantages of ETFs
Diversification
An ETF can track a broader range of stocks through exposure to a group of equities, market segments, or styles. It can also focus on a country or grouping of countries like BRICS (Brazil, Russia, India, China and South Africa).
Lower Fees Compared to Managed Funds
Passively managed ETFs have lower expense ratios compared to managed funds. Management fees, shareholder accounting expenses at the fund level, service fees, and load fees for sale and distribution tend to increase the expense ratio of a mutual fund.
Trades like a Stock
Some of the advantages of an ETF trading like a share are:
o Greater control over risk.
o Up to the minute information on ETFs is readily available.
o They can be purchased on margin and sold short.
There can be other advantages linked to tax benefits and timing related to dividends reinvested immediately.
Disadvantages
o Dividend Yields: With some dividend-paying ETFs, yields may not be as high as owning a high-yielding stock, or group of stocks.
o Costs Could Actually Be Higher: It might be more profitable to invest in specific shares than a low volume index.
o Intraday Pricing Might Be Overkill: Radical short term changes could induce fear and irrational investment decisions. Such emotional effects [http://www.stonehousecapital.co.za/Articles/Good] could lead an investor to deviate from a good investment strategy.
o Leveraged ETF Returns: Whereas the profit is leveraged, the same goes for loss. Speculative investments need to be carefully monitored and evaluated.
o ETFs May Be Limited to Larger Companies: Depending on what governs an ETF, it may be that it does not offer as much diversification as desired. This would vary between countries.
Like any investment, picking an ETF should be a considered choice. The holistic approach offered by the Partners at StoneHouse Capital can help investors to account for the critical factors which would influence such decisions. In this way an ETF with the probability of the best yield can be selected.
REFERENCES
1. Standard and Poor's Deposit Receipt (SPDR, pronounced "Spider") https://www.spdrs.com/product/fund.seam?ticker=XLY
2. Saunders, R (2012-06-27) What's an ETF? IN Daily Telegraph Comment.
Exchange Traded Funds or ETFs are relatively new investment vehicles. In 1993 Standard and Poor's Deposit Receipt (SPDR, pronounced "Spider")1 was the first ETF to be traded. Since then ETFs have become very popular because they offer a number of benefits to investors. Not all ETFs are alike. Almost anything that can be done with normal stock can also be done with an ETF.
An individual's investment portfolio can include an ETF holding for various reasons. ETFs can serve different needs in order to fulfil strategies to reach specific financial goals. The Partners at StoneHouse Capital have a wide base of skills and experience when it comes to helping clients to use ETFs as part of their investment portfolios. The ways in which they are traded and the benefits accruing to investors are matters with which a professional investment advisor and Certified Financial Planner (CFP) are familiar.
ETF, ETP and Mutual Fund - The Differences
There are some similarities, but also some important differences between ETFs, Exchange Traded Products (ETPs) and Mutual Funds.
Saunders, Chief Executive of the IMA,2 poses the reason for the popularity of ETFs as a question: "Instead of giving money to the fund manager in exchange for units, why not buy or sell units directly through the market?" The administration cost is considerably less, and one gets the price on a continuous basis rather than once a day. ETFs are also popular because they provide access to global markets beyond the developed world.
ETFs are governed by regulations in most countries. ETPs are most often set up by brokers or financial institutions. The terms exchange-traded notes and exchange-traded commodities can be regarded as more accurate descriptions of what they are. They are more risky because the regulations applicable to ETFs do not apply to them. In the event that the bank can no longer fulfil its obligations, like Lehman Brothers in 2008, you also risk losing your investment. With ETFs, investors may still be able to be access or realise their shares in the original assets, which is less likely with an ETP.
ETFs are often confused with mutual funds. The main difference is that, unlike a mutual fund, ETFs are traded like shares on various exchanges. They can be bought and sold any time of the day. This also means their value fluctuates from moment to moment. In the case of actively managed funds they only disclose their holdings a few times a year.
Advantages of ETFs
Diversification
An ETF can track a broader range of stocks through exposure to a group of equities, market segments, or styles. It can also focus on a country or grouping of countries like BRICS (Brazil, Russia, India, China and South Africa).
Lower Fees Compared to Managed Funds
Passively managed ETFs have lower expense ratios compared to managed funds. Management fees, shareholder accounting expenses at the fund level, service fees, and load fees for sale and distribution tend to increase the expense ratio of a mutual fund.
Trades like a Stock
Some of the advantages of an ETF trading like a share are:
o Greater control over risk.
o Up to the minute information on ETFs is readily available.
o They can be purchased on margin and sold short.
There can be other advantages linked to tax benefits and timing related to dividends reinvested immediately.
Disadvantages
o Dividend Yields: With some dividend-paying ETFs, yields may not be as high as owning a high-yielding stock, or group of stocks.
o Costs Could Actually Be Higher: It might be more profitable to invest in specific shares than a low volume index.
o Intraday Pricing Might Be Overkill: Radical short term changes could induce fear and irrational investment decisions. Such emotional effects [http://www.stonehousecapital.co.za/Articles/Good] could lead an investor to deviate from a good investment strategy.
o Leveraged ETF Returns: Whereas the profit is leveraged, the same goes for loss. Speculative investments need to be carefully monitored and evaluated.
o ETFs May Be Limited to Larger Companies: Depending on what governs an ETF, it may be that it does not offer as much diversification as desired. This would vary between countries.
Like any investment, picking an ETF should be a considered choice. The holistic approach offered by the Partners at StoneHouse Capital can help investors to account for the critical factors which would influence such decisions. In this way an ETF with the probability of the best yield can be selected.
REFERENCES
1. Standard and Poor's Deposit Receipt (SPDR, pronounced "Spider") https://www.spdrs.com/product/fund.seam?ticker=XLY
2. Saunders, R (2012-06-27) What's an ETF? IN Daily Telegraph Comment.
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