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— Index Fund, What Does Index Fund Mea n?-

A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard &

Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low

portfolio turnover.

KNOWLEDGEFINANCIAL.COM explains Index Fund

Indexing is a passive form of fund management that has been successful in outperforming most actively managed mutual

funds. While the most popular index funds track the S&P 500, a number of other indexes, including the Russell 2000 (small

companies), the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East)

Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management

expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes, such as the S&P 500, NASDAQ,

LONDON STOCK EXCHANGE, RUSSELL 2000, TORONTO STOCK EXCHANGE,

Exchange-Traded Funds: Introduction —-KNOWLEDGEFINANCIAL.COM

Exchange-traded funds (ETFs) can be a valuable component for any investor’s portfolio, from the most sophisticated

institutional money managers to a novice investor who is just getting started. Some investors use ETFs as the sole focus of

their portfolios, and are able to build a well-diversified portfolio with just a few ETFs.

Others use ETFs to complement their existing portfolios, and rely on ETFs to implement sophisticated investment strategies.

But, as with any other investment vehicle, in order to truly benefit from ETFs, investors have to understand and use them

appropriately.

Understanding most ETFs is very straightforward. An ETF trades like a stock on a stock exchange and looks like a mutual

fund. Its performance tracks an underlying index, which the ETF is designed to replicate.

The difference in structure between ETFs and mutual funds explains part of different investing characteristics. The other

differences are explained by the type of management style. Because ETFs are designed to track an index, they are

considered passively managed; most mutual funds are considered actively managed

From an investor’s perspective, an investment in an index mutual fund and an ETF that tracks the same index would be

equivalent investments. For example, the performance of the SPDR S&P 500 ETF and a low-cost index fund based on the

S&P 500 would both be very close to the to the S&P 500 index in terms of performance.

Although index mutual funds are available to cover most of the major indexes, ETFs cover a broader range of indexes,

providing more investing options to the ETF investor than the index mutual fund investor.

Exchange-Traded Fund — ETF

What Does Exchange-Traded Fund — ETF Mean?

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an

exchange. ETFs experience price changes throughout the day as they are bought and sold.

KNOWLEDGEFINANCIAL.COM explains Exchange-Traded Fund — ETF

Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.

By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase

as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average

mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you’d pay on any

regular order.

Bond ETF

What Does Bond ETF Mean?

A type of exchange-traded fund (ETF) that exclusively invests in bonds. Bond ETFs are very much like bond mutual funds in

that they hold a portfolio of bonds and can differ widely in strategies, ranging from U.S. Treasuries to high yields, from

long-term to short-term. Bond ETFs trade like stocks and are passively managed.

KNOWLEDGEFINANCIAL.COM explains Bond ETF

A bond ETF trades throughout the day and is therefore more liquid than a mutual fund, which only trades at one price a day

according to its net asset value. The drawback to this is that a broker fee is incurred when trading in an ETF, much like when

trading a stock.

Stock ETFWhat Does Stock ETF Mean?

A security that tracks a particular set of equities, similar to an index. A stock ETF is traded just as a normal share of stock is

traded on an exchange, but unlike a mutual fund it will have its price adjusted throughout the day rather than at market

close. This type of ETF is usually made up of stocks in a similar industry, such as energy, but can cover an index of equities

as well.

KNOWLEDGEFINANCIAL.COM explains Stock ETF

A stock ETF allows an investor to gain exposure to a basket of equities without having to purchase individual shares.

A stock ETF can be treated like a normal stock in that it can be shorted or purchased on margin. Like most ETFs, a stock ETF

often carries a management fee or other type of expense, but this is typically lower than those found in a mutual fund.

Currency ETFWhat Does Currency ETF Mean?

Exchange-traded funds (ETFs) invested in a single currency or basket of currencies. Currency ETFs aim to replicate

movements in currency in the foreign exchange market by holding currencies either directly or through

currency-denominated short-term debt instruments.

KNOWLEDGEFINANCIAL.COM explains Currency ETF

Currency ETFs are widely used by investors who wish to gain exposure to the foreign exchange market and would prefer not

to enter the futures or forex markets.

With the growing popularity of ETFs, investors have found it very easy and relatively inexpensive to trade currency ETFs in

order to take advantage of fluctuations between currencies.

Currency ETFs can be purchased to track most international currencies including the U.S. and Canadian dollars, the Euro,

British pound and Japanese yen.

International ETF

What Does International ETF Mean?

Any exchange-traded fund that invests in foreign-based securities. The focus may be global, regional (such as Latin

America, Asia-Pacific, etc.) or on a specific country.

International ETFs are invested passively around an underlying index, but the index may vary substantially from one fund

manager to the next. Some funds, especially those with a wide global footprint or those that invest in countries with

advanced economies, can provide strong diversification by investing in hundreds of companies.

KNOWLEDGEFINANCIAL.COM explains International ETF

ETFs that invest in a single foreign country may carry higher risks than international ETFs that spread their investments

among many countries.

If a single country undergoes a major recession or other financial hardship, an ETF that only invests in securities based

there could have a major performance shortfall.

International ETFs are becoming a widespread investment vehicle for U.S. investors, as many global economies are growing

at a faster rate and, thanks to rapid advances in globalization and financial regulation, their financial markets are opening to

outside investment.

In general, expense ratios for international ETFs tend to be higher than the averages because of the higher costs to invest

abroad.

It was State Street Global Advisors that launched the first exchange-traded fund (ETF) in 1993 with the introduction of the

SPDR. Since then, ETFs have continued to grow in popularity and gather assets at a rapid pace.

The easiest way to understand ETFs is to think of them as mutual funds that trade like stocks. Of course, trading like a stock

is just one of the many features that make ETFs so popular, particularly with professional investors and invdividual investors

who are active traders. Let’s go over these attractive features.

The Benefits of Trading Like a Stock

The easiest way to highlight the advantage of the ETF trading like a stock is to compare it to the trading of a mutual fund.

Mutual funds are priced once per day, at the close of business. Everyone purchasing the fund that day gets the same price,

regardless of the time of day their purchase was made.

Because, like traditional stocks and bonds, ETFs can be traded intraday, they provide an opportunity for speculative

investors to bet on the direction of shorter-term market movements through the trading of a single security.

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Low Expense Ratios ——-KNOWLEDGEFINANCIAL.COM

Everybody loves to save money, particularly investors who take their savings and put them to work in their portfolios. In

helping investors save money, ETFs really shine.

They offer all of the benefits associated with index funds — such as low turnover and broad diversification (not to mention the

often-cited statistic that 80% of the more expensive actively managed mutual funds fail to beat their benchmarks) — plus

ETFs cost a lot less.

Compare the Vanguard 500 Index Fund, often cited as one of the lowest of the low-cost index funds, and the SPDR 500 ETF.

The Vanguard fund’s expense ratio of 18 basis points is significantly lower than the 100+ basis points often charged by

actively managed mutual funds. KNOWLEDGEFINANCIAL.COM

But when compared to the SPDR’s 11-basis-point expense ratio, the Vanguard fund’s expense ratio looks quite high. In fact

the SPDR is 40% lower, which is tough to argue with.

Do keep in mind, however, that because ETFs trade through a brokerage firm, each trade incurs a commission charge. To

avoid letting commission costs negate the value of the low expense ratio, shop for a low-cost brokerage (trades under $10

are not uncommon) and invest in increments of $1,000 or more. ETFs also make sense for a buy-and-hold investor who is in

a position to execute a large, one-time investment and then sit on it.

Diversification ——KNOWLEDGEFINANCIAL.COM

ETFs come in handy when investors want to create a diversified portfolio. There are hundreds of ETFs available, and they

cover every major index (those issued by Dow Jones, S&P, Nasdaq) and sector of the equities market (large caps, small

caps, growth, value). There are international ETFs, regional ETFs (Europe, Pacific Rim, emerging markets) and

country-specific (Japan, Australia, U.K.) ETFs. Specialized ETFs cover specific industries (technology, biotech, energy) and

market niches (REITs, gold).

And ETFs cover also other asset classes, such as fixed income. While ETFs offer fewer choices in the fixed-income arena,

there are still plenty of options, including ETFs composed of long-term bonds, mid-term bonds and short-term bonds. While

fixed-income ETFs are often selected for the income produced by their dividends, some equity ETFs also pay dividends.

These payments can be deposited into a brokerage account or reinvested. If you invest in a dividend-paying ETF, be sure to

check the fees prior to reinvesting the dividends, as some firms offer free dividend reinvestment, while others do not.

Studies have shown that asset allocation is a primary factor responsible for investment returns, and ETFs are a convenient

way for investors to build a portfolio that meets specific asset allocation needs.

For example, an investor seeking an allocation of 80% stocks and 20% bonds can easily create that portfolio with ETFs. That

investor can even further diversify by dividing the stock portion into large-cap growth and small-cap value stocks, and the

bond portion into mid-term and short-term bonds. Or, it would be just as easy to create an 80/20 bond-to-stock portfolio that

includes ETFs tracking long-term bonds and those tracking REITs. The large number of available ETFs enables investors to

quickly and easily build a diversified portfolio that meets any asset allocation model.

Tax Efficiency —-KNOWLEDGEFINANCIAL.COM

ETFs are a favorite among tax-aware investors because the portfolios that ETFs represent are even more tax efficient than

index funds. In addition to offering low turnover — a benefit associated with indexing — the unique structure of ETFs enables

investors trading large volumes (generally institutional investors) to receive in-kind redemptions.

This means that an investor trading large volumes of ETFs can redeem them for the shares of stocks that the ETFs track.

This arrangement minimizes tax implications for the investor exchanging the ETFs since the investor can defer most taxes

until the investment is sold. Furthermore, you can choose ETFs that don’t have large capital gains distributions or pay

dividends (because of the particular kinds of stocks they track).

Conclusion

The reasons for the popularity of ETFs are easy to understand. The associated costs are low, and the portfolios are flexible

and tax efficient. The push for expanding the universe of exhange-traded funds comes, for the most part, from professional

investors and active traders. Nevertheless, long-term investors will find that the broad-market based ETFs can find a place

in their portfolios when they have an opportunity for occasional large-size purchases of securities.

Investors interested in passive fund management, and who are making relatively small investments on a regular basis, are

best advised to stick with the conventional index mutual fund. The brokerage commissions associated with ETF

transactions will make it too expensive for those people in the accumulation phase of the investment process.

What You Need to Know About Trading and Investing in Leveraged ETFs