A Comprehensive Guide To Exchange-Traded Funds (ETFs)

Introduction: Why the Growth in Exchange-Traded Funds?

The purpose of this book is to help investors understand and use exchange-traded funds (ETFs).5 Introduced just some 25 years ago, ETFs are now one of the fastest-growing segments of the investment management business. This book covers the details of how ETFs work, their unique investment and trading features, and how they fit into portfolio management. It also covers how best to evaluate ETFs to identify the right funds to fit any particular investment or trading objective.

Exchange-traded funds provide liquid access to virtually every corner of the financial markets, allowing investors big and small to build institutional-caliber portfolios with management fees significantly lower than those typical of mutual funds. High levels of transparency for both holdings and the investment strategy help investors easily evaluate an ETF’s potential returns and risks.

At their core, ETFs are hybrid investment products, with many of the investment features of mutual funds married to the trading features of common stocks. Like a mutual fund, an investor buys shares in an ETF to own a proportional interest in the pooled assets. Like mutual funds, ETFs are generally managed by an investment adviser for a fee and regulated under the Investment Company Act of 1940. But unlike mutual funds, ETF shares are traded in continuous markets on global stock exchanges, can be bought and sold through brokerage accounts, and have continuous pricing and liquidity throughout the trading day. Thus, they can be margined, lent, shorted, or subjected to any other strategy used by sophisticated equity investors.

Although some other kinds of mutual funds—traditional closed-end funds, in particular—also trade on an exchange, today’s ETFs are different. They typically disclose their holdings at the start of every trading day, so potential buyers and sellers can evaluate the traded ETF price versus the price of the underlying holdings. Specialized traders can create and redeem shares at the end of the day for net asset value, a feature that helps keep ETF market prices aligned with “fair value.”

Read more or don't ...

#finance