Exchange Traded Funds – ETFs


Exchange Traded Fund (ETF) shares are structured to trade with a share price that is linked to an underlying basket of securities, indexes, currencies or commodities. ETFs can be traded intraday like a stock which is different than mutual funds which trade at daily closing prices. Exchange traded funds utilize market makers who have the ability to exchange creation units with the underlying securities held in the ETF to provide liquidity to help ensure that their intraday market price of the ETF approximates the net asset value of the underlying assets which the ETF is designed to track. Individual investors using a retail broker can trade ETF shares based on the share prices quoted on the exchanges. ETFs are bought and sold at the market prices on the exchanges, which resemble the underlying NAV of the basket of securities, indexes, currencies or commodities but are independent of it. As a result of market efficiencies, arbitrageurs will ensure that ETF prices are kept very close to the NAV of the underlying securities that it tracks.

Exchange traded funds provide a unique investment vehicle that can provide immediate diversification to segments of the securities markets and exposure to securities traded on foreign exchanges. Exchange traded funds can provide exposure to asset classes with low to negative correlation to current portfolio holdings which can significantly reduce the overall risk of your investment portfolio. Exchange traded funds are available in the following investment categories:

  • Market Index;
  • Selection Style;
  • Market Capital Size;
  • Market Sector;
  • Commodity;
  • Currency;
  • Single Country;
  • Leveraged; and
  • Inverse Correlation.

Because exchange traded funds trade like stocks they provide many advantages over mutual funds including the ability to use:

  • Limit Orders;
  • Stop Loss Orders;
  • Good until Cancelled Orders;
  • Sell Short; and
  • Margin.

Exchange traded funds are a low cost alternative to index mutual funds which are passively managed. Exchange traded funds are now available as actively managed funds. Exchange traded funds are transparent, lower cost and more tax efficient when compared to mutual funds as investment vehicles.

It is important to determine what percentage of your investment portfolio should be invested in Exchange Traded Funds based on your investment objectives, risk tolerances and investment time horizon.

Investors are advised to seek competent financial, tax and legal advice concerning the decisions they make with their investments. Klayman & Toskes, P.A. can provide you with a free consultation concerning any securities industry violations related to the handling of your investments accounts by a full-service brokerage firm or registered investment advisor.

Information contained on this webpage is for educational purposes only
and should not be considered legal advice.
No Information contained on this website creates an attorney-client relationship.