There is no doubt that ETF trading is becoming an interesting topic for many people. The Exchange-Traded Funds market is very detailed. There are many different types of trading in this market and there are many moving parts when one starts ETF trading. This is a very brief look at the advantages of ETF trading and some information that may be helpful to a person who is just being introduced to ETF.
The first thing to be aware of with ETF is that when anyone talks about the “history” of ETF, they are not talking about Wall Street. ETF has been around a very short time and actively-managed since 2008. There are some very large financial firms involved in ETF and that is where the history comes in. One can look at the history of a financial firm or company and see how they have done in other areas of stocks and get a fairly good idea of their record of success.
The next important item to know is that this industry is growing like crazy. In 2008 there were 628 ETFs with $562 billion, in August of 2009 there were 858 ETFs with $674 billion. With the growth has come many different types of ETFs that range from minimally risky to very risky.
There are numerous advantages to ETF trading. It has many of the benefits that stock provide. However, ETFs are usually very affordable when they are not actively-managed. Most ETFs do not have 12b-1 fees. There are lower accounting, distribution, and marketing costs. And, there is not forced purchase or sales of securities to pay shareholders.
There is a tremendous amount of buying and selling flexibility. ETFs can be bought and sold at any time during the trading day. A person can purchase shares on margin and sell short which allows hedging strategies to be used. Most of the benefits of stock trading are included in ETF trading. A person can use stop order, limit orders, use stop-loss orders, and buy on margin options (puts, calls, etc).
There is the same tax efficiency that is found with mutual funds. They generate relatively low capital gains because there is low turnover in portfolio securities. ETF trading provides market exposure and diversity that allows an investor an economical way to balance portfolio allocations. And, finally, whether the ETF is indexed or actively-managed there is transparency.
In order to be structured an ETF must get an exemption from the SEC. Most ETFs are structured as open-end management investment companies the same as mutual and money market funds so have greater flexibility in constructing a portfolio. They can participate in lending programs and can use futures and options to achieve investment objectives. The SEC has proposed a category for ETFs that will make them open-end management investment companies. When the proposal is approved ETFs will no longer have to get an exemption.
If a person is considering ETF trading, it is very important to talk to a professional who has expertise in ETFs. This person will be able to discuss the many complex and intricate details involved in trading. They will also be able to answer any questions that one may have about how to make knowledgeable decisions in the ETF market.
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