Exchange Traded Funds (ETFs) have been around since 1993 and have grown in popularity and number. There is now over $2 trillion invested in Exchange Traded Funds (ETFs). Since ETFs have become a mainstream investment choice by many individuals and professional advisors we are publishing a series of Worthwhile Views to give you a better understanding of these popular investments.

ETFs are marketable securities that are designed to provide investors exposure to different areas of the securities markets at minimal cost. ETFs contain attributes of both mutual funds and common stocks. Like mutual funds, each share of an ETF represents ownership in a portfolio of stocks or bonds designed to track a specific market segment, sector or benchmark such as the health care sector or the S&P 500 index. Like shares of individual stocks, ETFs are traded throughout the day on an exchange, thus the name “Exchange” Traded Funds. Mutual fund trades are processed one time a day after the stock market closes. ETFs are purchased, sold and/or held in brokerage accounts where mutual funds can be held in brokerage accounts or at the mutual fund company.

Why ETFs have grown to such an appealing investment tool:world

  • Index-based performance and diversification
  • Inter-day liquidity and flexibility
  • Low internal operating expenses and fees
  • Tax efficiency
  • Ability to enter stop-loss or limit orders
  • Portfolio transparency. Exchanges require ETF managers to disclose holdings daily. Mutual fund managers do so only quarterly.

Types of ETFs – ETFs allow the investor to easily diversify their portfolio by:

  • Indexes or benchmarks such as the S&P 500, S&P 400 Midcap, Dow Jones Industrial Average, NASDAQ 100, Russell 2000, Total Market Index as well as many more.
  • Fixed Income ETFs are available tracking a wide-range of taxable and tax-free bonds.
  • Asset Style ETFs that represent categories such as large cap growth, small cap growth, large cap value, etc.
  • Country or region ETFs that track equity and bond markets of specific countries or entire world regions.
  • Emerging Markets ETFs which track equities in emerging markets around the globe.
  • Sectors ETFs which track over 125 different economic sectors and sub-sectors such as financials, health care, biotechnology, energy, consumer staples, consumer discretionary, retail, real-estate and technology.
  • Commodity ETFs track different commodities such as gold, silver and base metals.
  • Specialty ETFs which hold a basket of stocks representing investments in dividend paying companies, low volatility companies, high yield bonds, hedging strategies and inverse funds (see our Worthwhile view on “What is an inverse exchange traded fund?”).

Although there are many benefits to owning ETFs there are some drawbacks such as trading commissions, market risk, spreads between bid and asked, premiums and discounts, composition risk, tax risk and counterparty risk. We will cover risks in more detail in another Worthwhile View

In our next segment we will look at the anatomy of an ETF.

Contact us if you would like to discuss your financial goals with a Worth Asset Management Advisor.

Keep in mind that past performance is not indicative of future results. In addition, there may be other Exchange Traded Products that offer exposure to the sectors mentioned and each has their unique perspectives and characteristics. It is important to determine if they are appropriate for your personal portfolio.

Disclosure: Worth Asset Management is a Registered Investment Adviser with the state of Texas. Jim Clark and/or his clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The comments and opinions offered herein are not personalized recommendations to buy, sell or hold securities.

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