Introduction to ETFs Fall 2012

What is an ETF? ETFs are “index funds or trusts that are listed on an exchange but trade like a single stock. They hold an underlying basket of stocks or other types of securities, and are based on indexes that track different parts of the market.” -The Wall Street Journal “A Focus on ETFs”

Morningstar Style Box ValueBlendGrowth Large Medium Small

ETF vs. Mutual Fund Passively Managed: track an index instead Lower Costs: lower expense ratios than traditional mutual funds Higher Tax Efficiency: lower turnover=lower capital gains tax Actively Managed: portfolio managers hand pick each investment Higher Costs: more expenses to pay the active managers Lower Tax Efficiency: higher turnover=higher capital gains taxes

ETF v. Mutual Fund High Transparency: required to continually disclose all holdings on a daily basis High Flexibility: no restrictions on buying or selling, trade like stocks Low Transparency: Mutual Funds are not required to disclose their holdings on a daily basis Low Flexibility: may be fees for entering or leaving a Mutual Fund, priced only once at close of market Why does anyone invest in mutual funds? Actively managed accounts can outperform the market, but they can also underperform the market.

History 1993: First ETF – SPDR (“spider”) that tracks the Standard & Poor’s 500 stock index 2002: 102 ETFs available on the market 2009: nearly 1,000 ETFs available on the market 2011: grown to about a $1 trillion market under 1,400 funds

Sources/Links The Wall Street Journal Online- “A Focus on ETFs”: ETF Guide- “The History of Exchange-Traded Funds”: Investopedia- “A Brief History of Exchange-Traded Funds”: /12/brief-history-exchange-traded-funds.asp#axzz22ss9m4AM /12/brief-history-exchange-traded-funds.asp#axzz22ss9m4AM