Exchange traded funds

What is an ETF?

An exchange traded fund (ETF) is an investment vehicle that combines key features of traditional mutual funds and individual stocks. Like index mutual funds, ETFs represent diversified portfolios of securities that track specific indexes. Like stocks, they can be bought and sold (long or short) on an exchange throughout the trading day. In addition to trading flexibility, key ETF benefits include instant diversification, tax efficiency, and transparency of cost and holdings.

 

Benefits of ETFs

Diversification

ETFs are designed to track market indexes that may contain hundreds or even thousands of securities. This can offer investors diversification of a typical index mutual fund with the trading flexibility of a stock. Any time during the trading day, an investor can execute a single ETF trade and obtain broad exposure to an entire asset class, country, region or sector.

 

Tax Efficiency

Because ETFs seek to track market indexes, their turnover is typically lower than that of actively managed funds. Lower turnover can result in tax efficiencies for investors when securities are sold at a gain. In addition, with traditional mutual funds, the buying and selling activities of some shareholders can trigger capital gains distributions for all the fund’s shareholders. For example, when the fund must sell securities to raise cash in order to meet redemptions, any related capital gains are distributed to all remaining investors in the fund.

 

In contrast, ETF shareholders buy and sell shares from one another on an exchange just like stocks; there is no fund company in the middle. Thus ETF investors are generally insulated from the tax consequences of their fellow shareholders’ actions and will primarily be affected when they decide to buy and sell an ETF.

 

Transparency

Unlike many investment vehicles that only disclose their holdings quarterly, most ETFs publish their exact holding on a daily basis, so you can always know what you own. The transparency of ETFs makes it easier to see exactly what you own and to respond according to market activity.

 

Why fixed Income?

Their high degree of modularity makes ETFs useful instruments for constructing fixed income portfolios to meet a wide range of risk/return profiles.
Investors have long looked to fixed income as an important component of a balanced portfolio that can provide stability and offset some of the volatility associated with the rest of their portfolio.
The fixed income market offers a wide spectrum of risk, return and credit quality characteristics to suit a number of portfolio applications and investor objectives.

 

Why ETFs for International Exposure?

Global exchange traded funds (ETFs) are cost efficient and capture a broad selection of the international investing universe.

International iShares ETFs typically have lower expense ratios than actively managed mutual funds. Since ETFs seek to closely track a benchmark index, they typically buy and sell securities less often than actively managed mutual funds, thereby decreasing the likelihood of capital gains distributions.