Exchange traded funds (ETF's) are investment companies that invest in a specific pool of securities. Designed to follow an index, an ETF will only buy or sell investments in proportion to their tracking index. Exchange traded funds shares are created or destroyed by a specialist on an exchange. As an investor purchases shares of a fund, the specialist creates the shares and invests the proceeds into the prescribed pool of investments. When shares are redeemed, the specialist will sell shares of the investments to meet the redemptions.
ETF's represent a great, low-cost, way to invest in many capital markets. They were originally created in response to statistics showing that the majority of actively managed indices underperform unmanaged indices; therefore ETF's buy and sell securities to mimic the performance of an index. This unmanaged aspect of an ETF keeps on-going management fees on many ETF's very reasonable. Also, since the indices do not adjust often, ETF's can be very tax efficient compared to actively managed funds. However, the purchase and sale of ETF shares does involve brokerage commissions.
Similar to closed end funds (Mutual Funds), a disconnect can occur between the net asset value and the ETF share price. These disconnects are typically small as ETF's have features allowing an arbitrager to generate a profit and bring the EFT share price and the Net Asset Value back in sync.
ETF's come in many varieties as companies create indices and instruments that allow investors to participate in different sectors and different markets. ETF's can be very broad-based, such as the SPDR's S&P 500 (SPY) fund to very specific, such as the SPDR's Oil and Gas services ETF (XES). ETF's can also be used to participate in commodities such as gold and silver and currencies such as the Yen and the Euro.
RSA's advisors have a full understanding of ETF's and their application within investment portfolios. Our experienced brokers spend time searching out those sectors poised to outperform so your investment portfolio can benefit.