What
is an ETF?
An exchange-traded fund (or ETF) is an
investment vehicle traded on stock exchanges, much like stocks or bonds.
An ETF holds assets such as stocks, bonds, or futures. Institutional
investors can redeem large blocks of shares of the ETF (known as
"creation units") for a "basket" of the underlying assets or,
alternately, exchange the underlying assets for creation units. This
creation and redemption of shares enables institutions to engage in
arbitrage and causes the value of the ETF to approximate the net asset
value of the underlying assets. Most ETFs track an index, such as the
Dow Jones Industrial Average or the S&P 500.
An ETF combines the valuation feature of a
mutual fund or unit investment trust, which can be purchased or
redeemed at the end of each trading day for its net asset value, with
the tradability feature of a closed-end fund, which trades throughout
the trading day at prices that may be substantially more or less than
its net asset value. Closed-end funds are not considered to be
exchange-traded funds, even though they are funds and are traded on an
exchange. ETFs have been available in the US since 1993 and in Europe
since 1999. ETFs traditionally have been index funds, but in 2008 the
U.S. Securities and Exchange Commission began to authorize the creation
of actively-managed ETFs.
ETFs generally provide the easy
diversification, low expense ratios, and tax efficiency of index funds,
while still maintaining all the features of ordinary stock, such as
limit orders, short selling, and options. Because ETFs can be
economically acquired, held, and disposed of, some investors invest in
ETF shares as a long-term investment for asset allocation purposes,
while other investors trade ETF shares frequently to implement market
timing investment strategies. Among the advantages of ETFs are the
following:ETFs provide an economical way to rebalance portfolio
allocations and to "equitize" cash by investing it quickly. An index ETF
inherently provides diversification across an entire index. ETFs offer
exposure to a diverse variety of markets, including broad-based indexes,
broad-based international and country-specific indexes, industry
sector-specific indexes, bond indexes, and commodities.ETFs, whether
index funds or actively managed, have transparent portfolios and are
priced at frequent intervals throughout the trading day.Some of these
advantages derive from the status of most ETFs as index funds.
ETFs are structured for tax efficiency
and can be more attractive than mutual funds. In the U.S., whenever a
mutual fund realizes a capital gain that is not balanced by a realized
loss, the mutual fund must distribute the capital gains to its
shareholders. This can happen whenever the mutual fund sells portfolio
securities, whether to reallocate its investments or to fund shareholder
redemptions. These gains are taxable to all shareholders, even those
who reinvest the gains distributions in more shares of the fund. In
contrast, ETFs are not redeemed by holders (instead, holders simply sell
their ETF shares on the stock market, as they would a stock, or effect a
non-taxable redemption of a creation unit for portfolio securities), so
that investors generally only realize capital gains when they sell
their own shares or when the ETF trades to reflect changes in the
underlying index. In most cases, ETFs are more tax-efficient than
conventional mutual funds in the same asset classes or categories.
In the U.K., ETFs can be shielded from
capital gains tax by placing them in an Individual Savings Account or
self-invested personal pension, in the same manner as many other shares.
from Wikipedia
Gulag Wealth Fund Index: 661.34
209.28 -46.29%
