3WHAT ARE MUTUAL FUNDS?A mutual fund is an investment company that invests its shareholders’ money in a diversified portfolio of securities.A mutual fund can be considered a financial product sold as ownership interests (shares of stock) to the public by an investment company.When investing in a mutual fund, investors are becoming part owners of a widely diversified portfolio of securities.The fund is built and managed by the investment company for the investor.This management comes at a charge for the investor.
4TYPES OF MUTUAL FUNDS Open-End Funds Closed-End Funds Most common No limit to the amount of growthPurchased from the mutual fund company directly and redeemed likewiseNet Asset Value (NAV) is based on price of underlying securitiesOrdered at the future NAVClosed-End FundsLess common but gaining in popularityThere is a limit to the amount of growthOnce issued they are bought and sold on the major exchanges just like stocksPrice is related to underlying securities, but determined by market demandTraded at current market price throughout the day
5ADVANTAGES DISADVANTAGES Instant diversificationAsset allocationVariable transaction costs (shop around/compare)Dollar-cost averagingLiquidityProfessional managementDISADVANTAGESReturns are not guaranteedMust actively evaluate fund’s performance against other fundsShareholder feesAnnual management fees 1-3%Misleading advertisements
7WHAT ARE EXCHANGE TRADED FUNDS? An Exchange Traded Fund (ETF) is a basket of securities that tracks the performance of a stock, bond, or commodity index -- yet trades like a stock. It has a ticker, is marginable, can be sold short, and is traded on a stock exchange such as:American Stock ExchangeNew York Stock ExchangeNASDAQThe basket of securities is generally called a “trust” or “fund” and is held and managed by a financial institution.
8CLASSIFICATIONS OF ETFs Unit Investment TrustDividends do not reinvest immediately, but accumulate as cash in order to purchase additional creation unitsCreates slight cash drag on overall performanceExamples: SPDR Trust Series I, Diamond Trust Series IOpen-Ended FundFund will reinvest dividends immediatelyLittle or no cash build upExamples: iShares, Select Sector SPDR’s
9HISTORY AND GROWTH OF ETFs The first Exchange Traded Fund traded in 1990 on the Toronto Stock Exchange.State Street Global Advisors started the first U.S. ETF in 1993; it is still being traded today on the American Stock Exchange.The SPDR (Standard & Poor’s Depository Receipt) S&P 500 ETF tracks the S&P 500 stock index and is the largest ETF on the market.ETFs grew in popularity and began to be seen on all the major markets. Today, there are more than 1,100 ETF’s* traded amongst all of the major exchanges and are still growing in number.
10TYPES OF EXCHANGE TRADED FUNDS Since ETFs strive to track indexes, they vary according to which type of index is being used. The many different categories include:Market Cap – track a variety of market indexes including each of the major U.S. market indexes:Dow Jones Industrials (DIA) “Diamonds”S&P 500 Index (SPY) “Spiders”NASDAQ 100 (QQQ) “Qubes”International/Regional – track a specific world emerging markets:DJ EURO Stoxx 50 ETF
11TYPES OF EXCHANGE TRADED FUNDS Sector/Industry :track a given sector of the market such as Financial (XLF) or Technology (XLK). There are nine Select Sector SPDRs that represent the S&P 500 as a whole.Consumer Discretionary XLYConsumer StaplesXLPEnergy - XLE
12TYPES OF EXCHANGE TRADED FUNDS COMMODITY : track a given commodity such as gold and silver (SLV): streetTRACKS Gold Shares (GLD)FIXED INCOME: track bonds: Municipal Bonds Fund (TFI)
13CREATING AN ETFA financial institution will formulate a “Creation Unit,” which is a collection of stocks, perhaps 50,000 shares, that serve as the underlying investment of the ETF.The ETF trust portfolio will consist of many Creation Units that are split up to provide shares of the ETF.Each ETF share represents a tiny faction of the trust.These individual ETF shares can then be traded like shares of stock on the open market.
14HOW THE PRICE OF AN ETF IS DETERMINED? Market Price is based on the Net Asset Value (NAV)Market value of the underlying securitiesAny cash in the portfolioManagement fees are deducted as expenses.However, Supply and Demand forces impact the price causing it to fluctuate from the NAV.A market price that differs from the NAV is either bought or sold at a premium or discount to the NAV.
15ADVANTAGES DISADVANTAGES You can apply limit, stop, and trailing stop ordersCan be a more diversified short-term investment and more flexible long-term investment.No minimum balance requirement.Lower distributions for tax purposes can be good.You can narrow in on a tighter sector.ADVANTAGESDISADVANTAGESThey are not exactly like the index that they track since price fluctuates with market demandPassively managedCommission charged to buy and sellLower distributions for tax purposes may not be appealing if you have an IRA or other tax sheltered investmentMay include many bad stocks that exist in a sector
16ETF FUNDS AT A GLANCE SPDR S&P 500 ETF TOP HOLDINGSFUND WEIGHTExxon Mobil Corp2.85%Apple Inc.2.71%Microsoft Corp1.70% Johnson & Johnson1.68% Chevron Corp New1.63% General Electric Co1.62% Pfizer Inc.1.56%Google Inc.1.54%Procter & Gamble Co1.50%AT&T Inc.1.45%
18FUNDS AT A GLANCE Fund Characteristics Net Asset Value Market Price Dividend Yield2.02%FY1 P/E Ratio14.33Number of Holdings502Price/Book Ratio2.28Weighted Average Market Cap ($M)$105, MFund InformationTicker SymbolSPYGross Expense Ratio0.1102%Net Expense Ratio♦0.0945%Inception Date01/22/1993Primary BenchmarkS&P 500Investment ManagerState Street Global AdvisorsFUNDS AT A GLANCENet Asset ValuePrice$157.85Shares OutstandingMTotal Net Assets$129, MMarket PriceClosing Price$157.90Bid/Ask$157.88Premium/Discount0.02%Day High$158.29Day Low$157.54Exchange Volume (shares)17,266,303Fund sells/buys at nearly NAV PriceLow Expense RatioLarge Net AssetsLarge Exchange VolumeAs of 04/24/2013
19WHO ARE THE MAJOR PLAYERS? SPDRSThere are more than 30 “SPDR” ETFs but not all are linked to any Standard & Poor's Index.Any ETF associated with State Street Bank and Trust Company is grouped as “SPDR.”Other SPDRs include: Select Sector SPDRs and streetTracksOther groupings of ETFs based on sponsoring financial institution which hold the underlying securities:VIPERS are marketedby Vanguard.iShares group ismarketed byBarclays GlobalInvestors.HOLDRs (HoldingCompany DepositoryReceipts) are marketedby Merrill Lynch.
21SIMILARITIES BETWEEN MUTUAL FUNDS AND ETFs A managed portfolio of securitiesPortfolio of varying securitiesStriving to provide diversification among different companiesClosed-end fund and ETFs are traded at the normal stock exchange
22COMPARING ETFs TO INDEX MUTUAL FUNDS SPDR S&P 500 ETF Type Of FundSymbolAcct MinIRA MinAssetsExp. RatioDreyfus S&P 500 Index FundPEOPX$2,500$100$2.52 B0.51%SPDR S&P 500 ETFSPY1 Share*--$ B0.0945%* AS OF 04/22/2013Less money is required to start investing in the ETF over the Mutual FundThe ETF has a lower expense ratioThe ETF has billions of dollars of more assets
23COMPARING ETFs TO INDEX MUTUAL FUNDS SPDR S&P 500 ETF Average Annual Total Returns (%) Before Taxes1 YR3 YR5 YR10 YRDreyfus S&P 500 Index Fund13.44%12.15%5.36%8.05%SPDR S&P 500 ETF13.78%12.50%5.73%8.42%Over a 10 year span, the ETF out performed the Index Mutual Fund.Neither the Mutual Fund nor the ETF was able to perfectly track the actual Market Index.
24Advantages of An ETF Over a Traditional Index Fund (SPDR S&P 500 ETF) ETF is both diversifiable like mutual funds and tradable like stockLower expense ratios than the lowest-cost index mutual fundsLower minimum investments (can buy one share instead of having to invest $2500 or more – some index funds require $10,000)More accessible since can trade them with any brokerNo surprise in price since traded all throughout the day
25WORD OF CAUTION ETF’s Mutual Funds IMPORTANT!!!You must assess your risk tolerance and decide whether these would be a wise investment vehicle for your portfolio. When properly used, they can greatly compliment many portfolios.ETF’sMutual Funds
26CONCLUSIONETFs are constantly growing in popularity and availability and can be added to a 401k plan. Possible alternatives to traditional mutual funds while still providing diversification.