Exchange-Traded Funds

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  • ETF’s Known as exchange-traded funds, is a basket of securities. These securities are traded on an exchange just like stocks.
  • ETF share prices rise and fall all day as the ETF is bought and sold, mutual funds are different they only trade once a day after the market closes.
  • ETFs have all types of investments for example stocks, commodities, and bonds, some offer U.S. holdings, others are international.
  • ETFs have low expense ratios and lower broker commissions other than buying stocks individually.

How does it work?

ETFs contain a pool of assets (stocks, bonds, commodities, and other assets) traded sort of stock. When an investor buys an ETF share, he’s buying a proportional interest within the pool of assets hence permitting investment to a specific segment of the market.

What's in the Basket?

An example of an ETF is:

OIH: Represents an index of 25 of the largest US-listed publicly traded oil companies and the ETF is managed by VanEck Vectors Oil Services.

OIH is compromised of the following top holding companies:

Company

Percentage Asset

Schlumberger Ltd

21.39%

Halliburton Co

15.22%

National Oilwell Varco Inc

5.45%

TechnipFMC PLC

5.29%

Transocean Ltd

4.94%

Tenaris SA ADR

4.65%

Core Laboratories NV

4.52%

Helmerich & Payne Inc

4.40%

Patterson-UTI Energy Inc

4.27%

Baker Hughes, a GE Co Class A

3.57%

As seen above the OIH top holdings are set in percentages, in which the ETF company percentage allocation is adjusted annually depending on the trading activity.

Advantages

  • Access to many stocks across various industries
  • Low expense ratios and fewer broker commissions
  • Risk management through diversification
  • ETFs exist that focus on targeted industries

Disadvantages

  • Actively managed ETFs have higher fees
  • Single-industry-focus ETFs limit diversification
  • Lack of liquidity hinders transactions

ETFs provide lower costs because to buy all the stocks held in an ETF would be expensive. With only one transaction to buy and or sell, there are only a few trades being done by investors which leads to fewer broker commissions.

Brokers charge a commission for each trade. There are some brokers that offer noncommission trading on certain low-cost ETFs this will reduce costs even further for investors.

 

The expense of ETFs is the cost to manage and operate the fund.

ETFs track an index that gives them low expenses. Not all ETFs track an index.

Tell me more...

  • ETF VS Stocks
  • Smart Allocation Strategy
  • Smart Beta Strategy
  • ETF & Mutual Funds

Both Stocks and ETF's are traded in a similar manner, however, their variables and attributes somewhat differ. An ETF can have held of several Stocks, however, the other way around isn't applicable

Smart Allocation Strategies are often applied to ETF’s trading. during this strategy, allocation is increased on the expected over-performing ETF’s and decreased allocation is performed to the expected underperforming ETF’s.

In this Strategy, the danger is adjusted and matched to the equivalent ETF. For example:

60% SPY (SPDR S&P 500 ETF) – Over performing ETF (13.96% return in 5 Years)

40% AGG (The iShares Core U.S. Aggregate Bond ETF) – Under Performing ETF (2.02% return in 5 Years)

Hence with this strategy, we reallocate our risk to the upper earning ETF, while still spreading the danger to an underlining ETF.

This measures the volatility of an individual portfolio,

The stock market, which will often use S&P 500 index. Stocks that are Individual are ranked according to how much they deviate from that beta.

A beta strategy adds value by rebalancing the businesses built into an index based upon objective factors.

In this economic state, investors are turning away from the usual capitalization strategies and looking towards better returns and lower cost strategies and this is Smart Beta Strategies come into play.

Smart Beta strategies deliver a methodology of trading by applying more weights (importance via value) based on measures of volatility and dividends rather than the traditional value set for an asset.

Smart Beta attempts to deliver a better risk and return ratio.

Pros

Enhanced portfolio returns

Reduced portfolio risks

Increased dividend income

More efficient exposure to the

equity risk premium

ETFs behaves almost like mutual funds, however, because the name suggests, they're traded on the exchange and maybe traded throughout the day. Mutual Funds on the opposite hand can only be traded once each day, at the top of the trading day making them less accessible and liquid.

Moreover, Mutual Funds trading commission costs are above ETF’s. Traders that wish to enter an open-end fund trade pay a better percentage thanks to the value of adopting the trade (internal procedures and manual steps to shopping for or sell the fund).

With ETF’s it’s as simple and buying or selling the funds with no hassle of procedures or documentation. Since ETF’s require fewer steps to enter an investment, they supply a hassle-free trading environment with higher benefits and lower costs.

ETFs vs. Mutual Funds vs. Stocks

Exchange Traded Funds

1. ETFs are a type of index
funds that track a basket of
securities.
2. ETF prices can trade at a
premium or at a loss to the
the net asset value of the fund.
3. ETFs are traded in the
markets during regular
hours just like stocks are.
4. Some ETFs can be
purchased commission-free
and are cheaper than
mutual funds because they
do not charge marketing
fees.
5. ETFs do not involve actual
ownership of securities.
6. ETFs diversify risk by
tracking different
companies in a sector or
industry in a single fund.
7. ETF trading occurs in-kind,
meaning they cannot be
redeemed for cash.
8. Because ETF share
exchanges are treated as
in-kind distributions, ETFs
are the most tax-efficient
amongst all three types of
financial instruments

Mutual Funds

1. Mutual funds are pooled
investments into bonds,
securities, and other
instruments that provide
returns.
2. Mutual fund prices trade at
the net asset value of the
overall fund.
3. Mutual funds can be
redeemed only at the end
of a trading day.
4. Some mutual funds do not
charge load fees, but most
are more expensive than
ETFs because they charge
administration and
marketing fees.
5. Mutual funds own the
securities in their basket.
6. Mutual funds diversify risk
by creating a portfolio that
spans multiple assets
classes and security
instruments.
7. Mutual fund shares can be
redeemed for money at the
fund’s net asset value for
that day.
8. Mutual funds offer tax
benefits when they return

Stocks

1. Stocks are securities that
provide returns based on
performance.
2. Stock returns are based on
their actual performance in
the markets.
3. Stocks are traded during
regular market hours.
4. Stocks can be purchased
commission-free on some
platforms and generally do
not have charges
associated with them after
purchase.
5. Stocks involve physical
ownership of the security.
6. Risk is concentrated in a
stock’s performance.
7. Stocks are bought and sold
using cash.
8. Stocks are taxed at
ordinary income tax rates
or at capital gains rates.