Exchange Traded Funds

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  1. Where and how do I buy ETFs?

Exchange-traded funds are purchased or sold in share amounts (like an individual stock) rather than dollar amounts that are common in the mutual fund world. You can buy or sell an ETF at any brokerage firm that offers access to these investment vehicles. Many brokerage companies now offer a select menu of “transaction-free” funds that are available to be purchased without an embedded trading costs. This can be advantageous for smaller accounts or investors that tend to trade more frequently. Keep in mind that these transaction-free funds are typically subject to minimum holding periods that are determined by the brokerage company.

  1. Do any ETFs try to beat the market?

Quite a few fundamental (or enhanced, semi-active) ETFs try to beat a passive index by tweaking its definition. But the result is still a methodical index with rules-based construction criteria.
There are a limited number of active ETFs that allow a fund manager the leeway to subjectively choose individual stocks or bonds in the underlying portfolio. While no doubt some managers are better than others at stock picking, in practice it is difficult to tell the talented from the merely lucky. Furthermore, actively managed ETFs often carry much higher fees relative to their passive counterparts, which eat into performance quickly.

  1. What are the pros and cons of ETFs?

The biggest advantages of getting into ETFs versus investing in mutual funds or stocks include:

  • Lower cost management fees
  • Low fixed transaction costs
  • Transparency
  • Flexibility
  • Convenience
  • Tax efficient
  • Instant pricing
  • Global investment menu

Nearly every type of investor will find ETFs more compelling than mutual funds.

On the other hand, some of the features which are advantages for most investors can be unattractive for certain others. Fixed transaction costs, which are low for investors buying large dollar amounts of ETFs, become relatively high for investors buying small dollar amounts at a time. Therefore, any investor buying less than $1,000 worth of ETFs at a time should consider buying a transaction-free ETF or mutual fund. Likewise, flexibility is good for some investors, but investors with poor judgment and discipline might outthink themselves by making too many moves, and there are fewer restrictions to owning or trading ETFs.

  1. Are ETFs only for stocks?

No. Any asset class that has a published index and is liquid enough to be traded daily can be made into an ETF. Bonds, real estate, commodities, currencies, and multi-asset funds are all available in an ETF format.

  1. Are ETFs guaranteed or insured?

There seems to be little risk of abuse in the ETF structure as an investment vehicle. In the United States, the Securities and Exchange Commission (SEC) thoroughly examines any application to create an ETF, and only large and closely watched firms are allowed in on the daily creation and redemption process of ETF shares. Furthermore, the same government agency (the Depository Trust Clearing Corporation) that ensures individual stock certificates end up in the right investor’s hands after a trade also ensures ETF certificates are assigned correctly in a trade.
The risk of price changes in the underlying assets that make up the ETF index is quite another matter. Each asset class must be examined separately, and risk profiles of assets may change over time. Stocks have different risk characteristics than bonds, real estate, or cash. Investors must consider these nuances and risks before they decide to invest and should read the prospectus from the issuer prior to purchasing an ETF.

  1. Are there currency ETFs?

Yes, indeed, Guggenheim Investments CurrencyShares line of ETFs track the Euro, British pound, Canadian and Australian dollars and a few others. The funds earn modest short-term interest as well. We recommend that you visit our individual analysis area and search for the individual currency you are seeking for the latest information on this topic.