Exchange Traded Funds
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- Date Submitted: 03/23/2011 11:57 PM
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Exchange Traded Funds
An exchange-traded fund (EFT) is an investment vehicle which allows investors to invest into a basket of securities through a single security. ETF’s track and aim to replicate results of a particular stock index or some ETFs are based on specific themes such as industries, geographies or commodities.(1) In Canada investors can buy into ETFs that replicate S&P/TSX and in U.S all major stock indexes such as Dow Jones industrial average, Standard & Poor’s 500 index and the Nasdaq composite have ETFs based on them.
According to the Toronto Stock Exchange, it listed the first ETF fund in 1990 and now has over 70 ETFs trading on the TSX. (1). In United States, the first ETF was introduced in 1993 with the arrival of Standard & Poor’s Depositary receipts (Amex:Spy) and today there are over 780 ETFs trading in the United States.
From the surface there are many similarities between mutual funds and exchange-traded funds as they both invest is a basket of securities that are available to an investor via a single security. However, both investment vehicles have some considerable differences in the way they are traded in the market and costs associated with the funds. Majority of the mutual funds are that are available in the market can only be traded once a day at their Net asset value at close of business day. Hence, an investor needs to wait until the end of the trading day to find out the unit cost of a specific mutual fund. ETFs; like stocks, can be traded throughout the day at the value which is close to their net asset value. Also since ETFs track a specific index or an industry the cost of managing these funds are quite a bit lower than mutual funds where the management expense ratio’s tend to be between 1- 4 % of the total return. ETFs expense ratio average 0.55% around the entire ETF market(2). Based on the lower costs ETFs tend to be suitable for both a passive investor who is looking to invest for a long term basis as well as an...
An exchange-traded fund (EFT) is an investment vehicle which allows investors to invest into a basket of securities through a single security. ETF’s track and aim to replicate results of a particular stock index or some ETFs are based on specific themes such as industries, geographies or commodities.(1) In Canada investors can buy into ETFs that replicate S&P/TSX and in U.S all major stock indexes such as Dow Jones industrial average, Standard & Poor’s 500 index and the Nasdaq composite have ETFs based on them.
According to the Toronto Stock Exchange, it listed the first ETF fund in 1990 and now has over 70 ETFs trading on the TSX. (1). In United States, the first ETF was introduced in 1993 with the arrival of Standard & Poor’s Depositary receipts (Amex:Spy) and today there are over 780 ETFs trading in the United States.
From the surface there are many similarities between mutual funds and exchange-traded funds as they both invest is a basket of securities that are available to an investor via a single security. However, both investment vehicles have some considerable differences in the way they are traded in the market and costs associated with the funds. Majority of the mutual funds are that are available in the market can only be traded once a day at their Net asset value at close of business day. Hence, an investor needs to wait until the end of the trading day to find out the unit cost of a specific mutual fund. ETFs; like stocks, can be traded throughout the day at the value which is close to their net asset value. Also since ETFs track a specific index or an industry the cost of managing these funds are quite a bit lower than mutual funds where the management expense ratio’s tend to be between 1- 4 % of the total return. ETFs expense ratio average 0.55% around the entire ETF market(2). Based on the lower costs ETFs tend to be suitable for both a passive investor who is looking to invest for a long term basis as well as an...