Exchange Traded Funds

The Advantage of Funds

Funds provide a means of pooling capital with others in order to lower overall transaction costs and effectively spread risk across many firms or markets. These collective investment schemes come in several forms: managed funds, mutual funds, and hedge funds, to name a few.  These funds account for a substantial portion of all trading on major stock exchanges.          

New Shares ETFs and Global Cosmopolitanism

Carl Delfeld gives independent ETF advice for the serious global Investor

ETFs generally have a limited number of shares that are issued before the fund is launched and shares are not redeemable for cash or securities until the fund liquidates.   This t ype of fund is traded as shares on most global stock exchanges.  Typically, ETFs try to replicate a stock market index such as the S&P 500 (SPY), a market sector, or a commodity.

While the structure of ETFs varies, some common features include:

A listing on the stock exchange and ability to trade continually

Index tracking, rather than active management (to lower fees) 

The‘value’ derives from the value of the underlying assets comprising the fund.

Exchange traded funds are promoted with a wide range of investment aims either targeting particular geographic regions or specified themes.  Funds are often selected on the basis of these specified investment aims. There are sector, market cap and regional (such as country specific SCI Indices) ETFs as well as fixed income ETFs which are broken down by duration and risk. 

Benefits to Investors

Trading the S&P through ETFs can prove to be beneficial to investors. Just by executing one trade, an individual is given access to a fully diversified basket of S&P stocks with tremendous liquidity, at very low transaction cost, as the bid/ask spread is only 1 penny. Therefore, even the most risk-averse trader can get in and out at a minimal rate. Investors, however, may not be impressed by the margin requirements, which can run as high as $5K per $10K/notional value, as well as the commissions and interest rate charges on leverage, which can have a negative impact on accumulated gains. Flexibility can further be limited by low liquidity outside of market hours, which can hurt execution even during important events. 

Benefits of a Broad market Index

Reams of academic research suggest a very low likelihood of very specialized equity trading strategies beating a diversified broad market index.  There is further evidence that funds with exposure to a broad market index outperform the majority of hedge funds. These qualities provide ETFs with some significant advantages compared with traditional collective investments.  The structure provides for a diversified, low cost, low turnover index investment.  This appeals to both institutional and retail investors for long term holding and hedging strategies.