Etf...

MRLX69

Hi All,


I've been reading some stuff on ETF's, like investment guides etc...
They keep mentioning how it's perfect for most investors and such...

Lower admin cost, tax benefits, etc...

But what exactly are they? - I'm still puzzled to as what's the benefits to as... buying shares directly?

I know they're created for a company which trades at near NAV... but what's the point of having additional shares? They're not exactly created by the company are they?


I'm just generally confused about them.....

I've tried searching on this forum about ETF but didn't get much.


Thanks all!


Mike

purch

An ETF (Exchange Traded Fund) is an open ended Fund traded on recognised Stock Exchanges

They typically are tracking funds which track a particular index or basket of securities

Being open ended they are able to create new shares to meet demand

They have low management charges, usually but not always slightly lower than Unit Trust/OEIC trackers

http://www.trustnet.com/help/etf/?leftnav

has some general info

jamesd

You'd use ETFs if you couldn't find an active fund manager in a sector that you thought could do better than just tracking the market's performance. If you can find a manager who consistently does better by more than the difference in cost then you'd want to go with that manager.

Since manager performances can change or managers can change funds you might also want to consider ETFs if you don't want to review what you hold once a year or so. Alternatively you might consider funds of funds for this situation.

They are very popular in the US because of quirks and disadvantages of the US system when it comes to active fund management, things like paying tax on the profits from a fund manager's trading in the year it happens instead of when you sell the fund and regardless of whether you held the fund for the whole time that produced the gain. Particularly appropriate in the US for those who want to hold mostly the largest and best researched companies with less room for fund managers to do well.

purch

trades at near NAV... but what's the point of having additional shares?

Oh yeah....and the point of the additional shares is that it is the Index the ETF tracks that provides the value, not the ETF itself, so the actual ETF does not fluctuate due to selling or buying demand, but due to the movement in the tracked index.

jamesd is perfectly correct in stating that ETF's were specifically created to cater for the U.S. Mutual Fund market where profits taken from trades within the Fund are taxable gains for the holder, which is not the case in the U.K. (yet:eek: )

P.S. Which is part of the reason why virtually all the research showing Trackers making as good or better returns that Active Managed Funds relates to the U.S.

tradetime

MRLX69 wrote: »

Hi All,


I've been reading some stuff on ETF's, like investment guides etc...
They keep mentioning how it's perfect for most investors and such...

Lower admin cost, tax benefits, etc...

But what exactly are they? - I'm still puzzled to as what's the benefits to as... buying shares directly?

An exchange-traded fund is basically like a mutual fund, but, that trades like a stock. Just like an index fund, an etf represents a basket of stocks that reflect an index such as the S&P 500. example SPY or a sector index such as Financials example XLF.
An etf, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its NAV calculated at the end of each trading day, an etf's price changes throughout the day,

So essentially etf's give the diversification of an index fund plus the flexibility of a stock. Because etfs trade like stocks, you can short sell them, buy them on margin and purchase as little as one share. Alledgedly another advantage is that the expense ratios of most etfs are lower than that of the average mutual fund, but I'm not 100% sure on that as I don't do mutuals.
Basically nowadays there practically an etf for just about any sector or index that is popular, plus there are now short etf's in many of the most active sectors which allow the average investor to get short by simply buying the etf. Similarly some providers have come up with leveraged etf's which will allow you to realise double the gains from a move in the underlying, or double the losses if you are wrong. Sorry most of my references are US, am not overly familiar with UK markets, but I think the principle is the same.