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If you are a person who has just been introduced to ETF Trading (Exchange-Traded Funds), then this introduction may be helpful. ETF is very complex and there are many moving parts to trading so this is a broad brush stroke of some basic information and the advantages of ETF trading. The first thing to be aware of with ETF is that when anyone talks about the "history" of ETF, they are not talking about Wall Street. ETF has been around a very short time and actively-managed since 2008. There are some very large financial firms involved in ETF and that is where the history comes in. One can look at the history of a financial firm or company and see how they have done in other areas of stocks and get a fairly good idea of their record of success. ETF is growing rapidly. There are many financial advisors who are not knowledgeable of all the aspects of the market because of its rapid growth. In 2008 there were 628 ETFs with $562 billion dollars. By August, 2009, there were 858 with $674 billion. This type of growth, in a volatile market, makes ETFs were looking at seriously. ETFs are a lot like stocks in terms of ETF trading and have some distinct advantages. They are normally low cost and not actively-managed. There is no buying and selling of securities to accommodate shareholders. There are lower marketing, distribution and accounting expenses. And, most don't have 12b-1 fees. There is a tremendous amount of buying and selling flexibility. ETFs can be bought and sold at any time during the trading day. A person can purchase shares on margin and sell short which allows hedging strategies to be used. Most of the benefits of stock trading are included in ETF trading. A person can use stop order, limit orders, use stop-loss orders, and buy on margin options (puts, calls, etc). ETFs generate relatively low capital gains so have the same tax efficiency as that found in mutual funds. This is because of the low turnover in portfolio securities that ETFs have. A trader can balance their portfolio allocations more economically because of the market exposure and diversity of the trading. And, whether the ETF is actively-managed or indexed, there is transparency. Each day the ETF website posts the net asset value and other information that the trader will want to know for the day before. One is never left in the dark about trading or asset management. In order to be structured an ETF must get an exemption from the SEC. Most ETFs are structured as open-end management investment companies the same as mutual and money market funds so have greater flexibility in constructing a portfolio. They can participate in lending programs and can use futures and options to achieve investment objectives. The SEC has proposed a category for ETFs that will make them open-end management investment companies. When the proposal is approved ETFs will no longer have to get an exemption. When considering ETF trading it is important to talk to a professional who has knowledge about ETF trading and the intricacies of the market. There are many complex details that one should have a solid knowledge in before entering trading. A professional will be able to assist and advise an individual in the best strategy to be successful when they begin trading.
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