Exchange Traded Funds Trading System

Etf Cash Trading System

The Etf Trading System is the single most amazingly simple trading system that you've ever come across. Etfs are sort of a new trading vehicle. Etfs are electronically traded funds that represent underlying securities or commodities or indexes. There are thousands of different Etfs available today. They are very popular with big investors. If you can get a stock trading account, you can easily follow the Etf trading system! If you have an option enabled stock trading account, you can follow the Etf Trading System get even better results. We discuss how this works in the advanced section of the system.

Etf Cash Trading System Overview


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A brief history of ETFs

Well established now, ETFs have evolved into highly liquid and efficient investment vehicles, firmly embedded into the financial tool kits of an increasing number of market participants. However, it seems like it was almost overnight that they became recognized as popular products. Initially, ETFs met a reception strangely reminiscent of that of index mutual funds Subsequently, the business media's focus on how passive portfolio managers routinely outperformed active portfolio managers during the same period has helped ETFs gain significant market momentum. ETFs also received a significant boost from market speculators and hedge funds managers, who found their pricing and trading characteristics ideal for gaining exposure to both markets and sectors. Indeed they are more easily purchased and sold than most mutual funds. In addition, since they trade like stocks, there are no cumbersome fees or penalties to deal with.

ETFs and diversified portfolios

Given their growing popularity, ETFs have become sophisticated instruments of diversified portfolios. They increasingly are providing more and more liquid products that offer opportunities for domestic and international diversification. Not only do they track their respective market indicators with great accuracy, but there now are versions that replicate specific sectors and commodity indexes based on gold and other precious metals. Gold ETFs are currently being offered in South Africa, Australia, and the US. International ETFs target foreign market indexes. iShares, initially known as World Equity Benchmark Shares (WEBS), specialize in foreign securities they were created by Morgan Stanley and mostly track an index of a country's stock market. Each member of these international iShares series attempts to match the return on a MSCI Index for a particular country, region, or a group of emerging markets, such as the iShares MSCI Emerging Markets (EEM). The iShares S& P Europe 350,...

ETFs started as unit investment trusts

When the US ETF industry began in 1993, ETFs were registered with the Security Exchange Commission (SEC) as unit investment trusts (UITs). As such, they fall under the provisions of the Investment Company Act of 1940, which also regulates open-end and closed-end funds. ETFs are often likened to closed-end funds in that, shares are purchased on an exchange however, there is the significant difference that a closed-end fund cannot exchange shares for a basket of the underlying stocks. Simply put, ETFs are index funds that trade like stocks. As such, individual shares of ETFs trade in the secondary market throughout the day. In a manner akin to that of stocks of publicly listed companies, investors can purchase them on margin or sell them short. Mutual fund investors, on the other hand, can only buy or sell at the market close, which subjects them to potential adverse market moves during the trading day as they wait for the close. In reality, ETFs constitute hybrid products, as they act...

But most newer ETFs are organized as openend funds

Having been allowed by the SEC to organize as open-end funds in 1996, most of the newer ETFs, such as the Barclays' iShares and State Street's streetTRACKS, are organized with an open-end mutual-fund structure. As such, they can be formed as different series of a single trust or even as a different class of shares of an existing fund, as the SEC allowed with the Vanguard VIPERs product. Also, open-end ETFs can reinvest cash dividends as often as on a daily basis, just like open-end mutual funds. In contrast, ETFs with a UIT structure must accrue cash dividends for the stocks in the trust and pay dividends only on a quarterly basis. This has created what is known in the industry as a cash drag on the performance of UIT-type ETFs

Openend ETFs can chose to use sampling techniques

Finally, whereas Uit-type ETFs must hold all the stocks in their relative weighting in the underlying index, open-end ETFs can chose to use sampling techniques to track their index. This feature can be especially useful for ETFs tracking indexes where certain stocks may pose issues with respect to liquidity, such as in the Russell 3000 or Wilshire 5000. Being excluded from the requirement to buy all stocks within the index, optimization filters out the less liquid stocks that could lead to higher bid ask spreads and significant invisible trading costs. Another significant feature of exchange traded funds organized as open-end funds is that they can still claim that they replicate the performance of the underlying index without holding all the securities that replicate the index. The ability to use sampling techniques is particularly useful for exchange traded funds that track foreign indexes because certain foreign securities in an index may pose issues with respect to foreign...

Difference in costs between ETFs and actively managed mutual funds

Difference in costs shown in Table 3.2 can be sensibly higher if ETFs are compared to actively managed mutual funds, which constitute the bulk of the mutual-fund industry. Technically, these additional fees, which can be quite significant, are levied to compensate managers for actively managing the portfolio, such as providing their skills in interpreting market information. According to the fund-tracking firm Lipper Inc., expense ratios for all equity mutual-funds average 1.5 . For a more detailed picture of the cost of owning ETFs, Table 3.3 shows expenses associated with the ten largest ETFs, ranked by asset category. While it shows that the SPY remains the largest ETF to-date, from an expense ratio perspective it comes in second, after the IVV (0.10 bps versus 0.09 bps), another ETF that tracks the S& P 500. For funds tracking the same index, even minor differences in expense ratios can be perceived as giving an automatic advantage to their counterparts. If one thinks that...

Trading ETFs result in brokerage fees

While fees are undeniably lower, as ETFs that track the major benchmark indexes clearly have targeted the low expense rates of the mutual-fund leaders such as Vanguard, the cost advantage is really the vintage of the buy-and-hold ETF investors. Since they trade like stocks, investing in ETFs will unquestionably result in higher brokerage commissions. In fact, critics of ETFs argue that these flexible trading rules create an environment that fosters a short-term trading mentality, using indexed instruments that were designed for long-term investments. Hence, those who trade repeatedly, such as fund managers who use ETFs as market-timing instruments, can only hope that the savings from annual management fees can help to offset some of the costs born of their frequent trading. In fact, investors who make regular trades may be better off with traditional mutual funds because they can also be purchased directly from the fund company at no cost. Note, however, that repeated buying or...

Dollarcost averaging and ETFs

This issue is important for small investors who make systematic investments such as dollar-cost averaging. These are investors who purchase regularly a few hundred shares at a time. Their return can be seriously reduced by brokerage fees in the case of ETFs. Imagine the impact of a 30 commission on a monthly investment of a few hundred dollars. Of course, the commission paid is determined by whether the broker is full service or discount, and on the amount and timing of the transactions. Nevertheless, the zero transactions costs of indexed mutual funds such as the Vanguard Index 500 create a significant cost advantage for the passively managed Mutual-fund industry versus ETFs.

How Do Etfs Work In Risk Management Applications

Existing ETFs are all based on benchmark indices. While there are important benchmarks and there are unimportant benchmarks, benchmark index derivatives are widely used in risk management applications. For example, an investor with an actively managed small-cap portfolio might feel that superior stock selection reflected in the portfolio will provide good, relative returns over the period ahead, but that most small-cap stocks might still perform poorly. The investor can hedge the portfolio's exposure to small-caps while capturing its stock selection advantage by hedging the small-cap risk with a short position in a financial instrument linked to the Russell 2000 small-cap benchmark index. Available risk management tools for this application range from futures contracts and equity swap agreements to the shares of a small-cap exchange-traded fund.

Unit investment trusts ETFs

The first unit investment trusts ETFs were launched in the US markets in 1993, with the introduction of the Standard & Poor's 500 Trust Series 1 (SPDR 500, ticker symbol SPY). Sponsored by State Street Global Investors (SSgA), the SPDR 500 tracks the S& P 500 index, a widely followed index of market behavior. The stock market effervescence of the 1990s was seen as the ideal situation in which to introduce a new financial vehicle to investors seeking new investment products. Despite positive reactions to the concept, however, the initial reception of ETFs was disappointingly lukewarm. Assets under management (AUM) after their first year of operation were well below expectations, totaling less than half a billion dollars (see Table 6.1). The following year was hardly better. In fact, US equity ETFs lost ground in terms of both AUM and net issuance, as the value of all ETF shares redeemed exceeded that of shares issued by 28 million. ETFs started to really catch on with investors...

ETFs should continue to grow but

On the other hand, this growth is expected to be far from perfect as there is no indication that the filing process for new ETF products with the SEC will speed up from its notoriously slow pace. To date, the SEC has painstakingly evaluated each application, taking from six months to two years depending on the structure of the ETF, before passing approval for a new product. The more financially endowed players, herein the larger ones, are expected to continue to dominate the ETF market in the United States because they are financially able to wait through a time-consuming regulatory process, and to hire the undoubtedly expensive financial engineers capable of handling product structuring and design, as well as the specialized legal experts required to successfully navigate SEC's intricate regulatory requirements. Other product developers will perhaps be comprised of a few nimble niche players whose focus and agility will allow them to be profitable. Brand recognition is also important...

Actively managed ETFs

As to potential new ETF products, attention will continue to focus on actively managed ETFs. As was noted in Chapter 1, in spite of academic challenges to the true profitability of actively managed funds, the latter continue to dominate the attention of the general investing marketplace. Often it is excessive management fees, cutting deeply into the returns that prevent these funds from consistently beating their respective benchmarks. Table 6.5 AMEX - Listed Industry Sector ETFs (as of June 22, 2004) In spite of the technical challenges presented by actively managed ETFs, many market experts expect this breakthrough to happen mainly because of the money to be made by assets managers. Of course, even if the demanding structural and technical challenges are overcome, developers still have to face the arduous regulatory hurdles that basically consist of convincing the SEC that a new product is beneficial to the investing public. In light of these substantial difficulties, and yet fully...

Fixedincome ETFs designed to appeal to investors with low tolerance of risk

The first four ETFs, launched in July 2002 (see Table 7.2), follow indexes based on subclasses of the bond market. These subclasses are based on criteria such as credit risk, maturity, and issuer. The choice of these four ETFs clearly was guided by the need to minimize credit risk. Three of them track indexes of U.S Treasuries whereas the fourth mimics an index of investment-grade bonds. These ETFs were designed to appeal to investors with a low tolerance of risk, including those institutional investors that are legally restricted to investment-grade bonds. Within this risk category, investors can also select the ETFs that satisfy their chosen investment horizon, as the Treasury market is divided by maturity. This strategy certainly has met with some Table 7.2 Characteristics of fixed-income ETFs (as of May 31, 2005) measure of success in just over one month of trading, assets pulled in were over 1.2 billion for the Goldman Sachs corporate bond ETF, and about 600-700 million for each...

ETFs tracking corporate bond indexes

Because any meaningful diversification into fixed income should also include corporate bonds, ETFs also include two linked to corporate bond indexes AGG tracking the Lehman US Aggregate Index and LQD tracking the Goldman Sachs InvesTop Corporate Bond Index. The content of these ETFs, as represented by their respective top five holdings, is shown in Table 7.2. The LQD, tracking an index of quality corporate bonds, was among the first ETFs introduced in order to make the initial suite of ETFs even more attractive to investors who are conscious of the level of diversification of their portfolios. Because default risk, usually called credit risk, is a real issue in the purchase of corporate bonds, LQD should be of particular appeal to investors seeking less uncertainty in their investments. Indeed, the index tracked by this ETF is composed of bonds rated, on average, BBB + by Standard & Poor's. This rating means that the bonds comprising LQD's index demonstrate more than an adequate...

Characteristics of fixedincome ETFs

One of the most attractive features of ETFs that track government securities is that the underlying US Treasury obligations are of the highest quality and are backed by the full faith and credit of the US government. The safety of principal is unquestionable, because the federal government has the capacity to refund or retire its debt by virtue of its power to tax and control money supply. This backing, along with their liquidity, makes them a welcome addition to investors' tool box. The fact that US Treasuries are frequently traded in the major international markets certainly adds to their overall liquidity. Moreover, fixed-income ETFs have many of the desirable characteristics that have made their equity-based cousins successful with the investing public. The core benefit is that they enable investors to purchase an entire portfolio with one transaction. However, unlike traditional open-ended mutual funds, they can be bought and sold throughout the day at market price. They are not...

Washsale rule and ETFs

This is especially true when the financial product under consideration is relatively new. Indeed, much has been written about how the wash-sale rule applies to stocks, bonds, and even mutual funds, including the availability of a number of landmark court rulings to supplement the existing tax code. However, for relatively new products such as exchange-traded funds (ETFs) - which literally sprang to life in the early 1990s and only started experiencing success in the late 1990s - much remains to be

Taxloss Offset Strategies As They Apply To Investment Products Other Than Etfs

The pass through of investment income has one important disadvantage for investors it forces them to engage in tax management. Investors who manage their own portfolios must decide when to realize capital gains and losses on the securities they own to efficiently manage their tax liabilities. This task is even more daunting for those who invest through mutual funds their ability to engage in tax management is severely curtailed, since the timing of the sale of securities from their portfolios is completely out of their hands. This, along with the fact that substantially identical might mean different things for different investments, makes necessary an overview of how the Wash-sale rule applies to selected investment products other than ETFs.

High Probability ETF Trading Important Terms

For making high probability short term ETF trades, we never buy ETFs below the 200-day moving average and never sell short ETFs above the 200-day moving average. This is one of the most consistent findings in our ETF research going back to 1995. The RSI is generally set for 14-periods. However, for short term ETF trading, we have found that a shorter time period is much more effective. See 2-day RSI, RSI(4)

Exchange Traded Funds

Exchange traded funds, sometimes called exchange listed portfolios, exchange index securities, exchange shares, or listed index securities, are like closed-end mutual funds in that they are based on a portfolio of securities representing a category or an index and are traded like stocks on organized stock exchanges. In the recent years a new product has hit the market that has distinct advantages over index mutual funds. They are exchange traded funds, or ETFs. Exchange traded funds are similar to index mutual funds. The key difference is that ETFs, instead of pricing once a day after the market closes, are traded throughout the day as if they were regular stocks. If you want to buy shares in an ETF, you buy them as you would buy a stock - namely, from someone else who sells them to you on a stock exchange (thus the name exchange traded funds). Investors can calculate the value of ETFs during the day because the composition of the underlying portfolio - normally a published index -...

Advantages of ETFs over Index Mutual Funds

A typical goal of an investor is to build and manage a diversified portfolio of stocks and bonds with the lowest possible fees and the greatest possible tax efficiency. ETFs offer several advantages over index mutual funds Lower cost ETFs can have lower expense ratios than the lowest-cost index mutual funds. The Barclays i-shares S& P 500 ETF, for example, charges 0.09 a year in fees, compared to about double that for the Vanguard 500 Index Fund. A diversified portfolio of index funds with a common asset allocation costs about 18 less in annual expenses using ETFs than using Vanguard index funds. A key advantage of ETFs is that since an investor buy them like a stock in a brokerage account, one can pick the cheapest ETFs from all those available. With index mutual funds, in contrast, the investor tends to be locked into a singe family of products. Vanguard, for example, does not offer its index funds via the fund supermarkets such as Schwab OneSource if one wants to avoid...

Forex Exchangetraded Funds Etfs

ETFs allow small investors to perform transactions in the stock markets worldwide, for example, in countries such as china, India, Mexico, or Brazil, and profit from their strong economic potential, thanks to the present market globalization. These are funds that can be bought or sold on the market exactly as if they were stock shares. Their cost is much smaller than investing directly in the stock markets and without all the administrative obstacles that could arise if a trader were to transact directly on site. The offer of ETFs is presently limited, and few entities commercialize them. They can be transacted through any financial intermediary such as online brokerage firms or other entities that offer investment services. This kind of instrument is very similar to an index and is the most attractive option to invest in foreign markets that are difficult access. As with stocks, the prices of ETFs are constantly changing throughout the day based on supply and demand. The investor...

High Probability ETF Trading The Seminar

The High Probability ETF Trading Seminar is a 2Vi day course on trading ETFs. You'll walk away from this online seminar knowing more about ETFs than 99 of professional traders. Country Based ETFs See why they are better to trade than commodity ETFs and why they can be safer and more reliable than other ETFs. Inverse and Leveraged ETFs The rise of 2X and 3X ETFs, which ones to trade and which to avoid (and there are many to avoid). For more information about High Probability ETF Trading The Seminar, call us directly at 1-888-484-8220 ext. 1 or for international direct dial (X)l-213-955-5858 ext. 1. You can also contact us at www.High-Probability to purchase or register for the next live seminar.

ETFs by index category

Beyond issuer or exchange differences, it is telling to look at ETF growth broken down by investment coverage. In Table 9.5, ETFs' assets under management (AUM) are divided into eight distinct investment categories reflecting the dynamics underlying Europe's current business environment. No. of ETFs The difference between regional Europe and the eurozone is that the constituents in the latter comprise only those countries in the EU that have joined the euro, whereas the former can be made up of ETFs from any country located in Europe regardless of its monetary denomination.9 As to country benchmarks, they are based on established local indexes that investors readily recognize, such as the CAC 40 in France, the DAX 30 in Germany, and the FTSE 100 in the United Kingdom. In spite of a 4.7 market loss since June 2003 (as shown in Table 9.5), ETFs tracking country benchmarks, with 33.3 of ETF AUM, remain among the most desired type of exposure for European investors, because they have a...

Issues surrounding actively managed ETFs

In spite of serious issues surrounding the concept of actively managed ETFs, they nevertheless were launched in Europe. They were rolled out in November 2000 by DWS Group, the asset-management unit of Deutsche Bank AG of Germany. These 11 new ETFs began trading on Xetra, the electronic trading platform of Germany's Deutsche Borse. At the last count there were 14 diversified actively managed ETFs, consisting of broad European funds as well as global, sector and gold funds. One of the most serious issues surrounding these relatively new financial products arises from the fact that by its very nature, an ETF is transparent. As such, anyone can see the basket's holdings at any time. But because this new breed of ETFs is actively managed, it's only natural that their managers would prefer to keep the content of a fund hidden from their competitors, from fear that copying it might undermine their trading strategies and adversely affect the price of the constituent securities. This, in turn,...

ETFs on American Stock Exchange

Claymore Exchange-Traded Fund Trust Claymore Exchange-Traded Fund Trust Claymore Exchange-Traded Fund Trust Claymore Exchange-Traded Fund Trust Claymore Exchange-Traded Fund Trust First Trust Exchange-Traded Fund First Trust Exchange-Traded Fund First Trust Exchange-Traded Fund First Trust Exchange-Traded Fund First Trust Exchange-Traded Fund First Trust Exchange-Traded Fund First Trust Exchange-Traded Fund PowerShares Exchange-Traded Fund Trust PowerShares Exchange-Traded Fund Trust PowerShares Exchange-Traded Fund Trust PowerShares Exchange-Traded Fund Trust PowerShares Exchange-Traded Fund Trust PowerShares Exchange-Traded Fund Trust PowerShares Exchange-Traded Fund Trust

Reasons for holding foreigntraded ETFs

The study of the performance of US-traded international ETFs by Pennathur, Delcoure, and Anderson (2002) expressed mixed results.17 These authors showed that the true diversification virtues from April 1996 to December 1999 of these ETFs depend on whether a single-index model or a two-factor model is used. Whereas the first model shows that iShares provide some potential for diversification, the second demonstrates that they maintain considerable exposure to the US market, which is not exactly what the author of portfolio theory had in mind when describing the risk-reducing benefits of international diversification. This study along with several others shows why many investors who have considered the relative advantages and disadvantages of US-traded international ETFs as a means of international diversification could think of them as less likely to provide the same risk-reducing benefits as ETFs traded outside the US they may conclude the latter are likely to provide more complete...

The premium and discount issue of international ETFs

Due to their hybrid nature, ETFs present portfolio managers with additional risks. Generally speaking, as discussed in chapter 3, the market price is determined by supply and demand for these funds because they trade like securities. As such, a specialist can create or redeem ETFs through creation units new shares are created to meet demand or terminated to control supply. Yet, although it is true that the market price of any ETF is largely driven by the underlying value of the portfolio, they do not always trade at the net asset values of their underlying holdings. Their prices can depart from NAV as it is quite possible for an ETF to trade at prices above (premium) or below (discount) the value of its underlying portfolio. What typically happens is that by permitting large market participants to buy or redeem shares in-kind, the fund companies behind ETFs create a mechanism that should help prevent sustained discounts or premiums. In other words, if the market maker is not keeping...

High Probability ETF Trading Tools

High Probability ETF Trading The Software Our High Probability ETF Software helps you apply the tested strategies from High Probability ETF Trading to your ETF trading each day. The tool runs in your Web browser and enables you to access our proprietary strategies for ETF analysis and strategy evaluations. The Software also shows you the trading strategies presented in High Probability ETF Trading including the R3 Strategy, b Strategy, RSI 25 Strategy along with other strategies including TPS, Connors Research's proprietary method of scaling-in to the high-probability trading opportunities. When you begin, you see the ETFs with the most volume and the corresponding signals based on each of the seven strategies presented in High Probability ETF Trading. You are then able to further analyze an ETF based on your specific trading goals. For instance, if you are looking specifically to trade the R3 Strategy, you can sort the ETFs to see only R3 signals. If you find a combination of the R3...

What happens when many ETFs are overbought or oversold in a day How do I choose which ones to trade

Choose Country Fund ETFs over Sector ETFs. Choose Sector Fund ETFs over Commodity Currency Bond Fund ETFs. Also, the daily signals, along with the updated historical results for every actively traded ETF can be found in our High Probability ETF Trading Software available at

High Probability ETF Trading Addon Modules

If you are a TradeStation user and would like to find a way to trade the strategies in the High Probability ETF Trading book quickly and efficiently, you can order the official add-on module for the High Probability ETF Trading book. These indicators will allow you to scan your custom selected list of ETFs for potential setups within seconds every night. Additionally, you will receive suggested entry and exit levels with each signal. If you are an AmiBroker user and would like to find a way to trade the strategies in the High Probability ETF Trading book quickly and efficiently you can order the official add-on module for the High Probability ETF Trading book. This module was programmed by co-author of High Probability ETF Trading, Cesar Alvarez to ensure that the results you receive from these indicators and scanners are accurate. The add-on module will take less than a minute to install. It contains an exploration that will scan the universe of ETFs for signals on the following...

High Probability ETF Trading Courses TPS

The High Probability ETF TPS Trading course will expand on the strategies in High Probability ETF Trading so that you can see the benefits of making TPS the core of your trading portfolio. Reversion to the Mean Shown to be successful in trading ETFs, we look for ETFs that are likely either oversold or overbought and due for a correction. Reversion to the mean also explains why country-based ETFs are preferred over equity, currency and bond related ETFs. 4 Strategies for ETF Options This portion will include strategies for credit spreads and ratio spreads, rolling SPYs, RSI 30-70 for ETFs, covered calls on Ultra-ETFs. Build your ETF Portfolio Maintaining a balanced portfolio enables you to trade ETFs not only on the long and short side, but also includes leveraged and inverse ETFs while minimizing your risk exposure.

Strategy 4 Many ETFs are considered similar yet are certainly not identical

However, the loss on the sale of the IYW could be claimed without violating the wash-sale rule if proceeds are used to buy shares in either the Select Sector SPDR Technology (XLK) or the Vanguard Information Technology VIPERS (VHT), two ETFs that also track the technology sector. Because these sector ETFs are issued by different management companies (BGI, State Street, and Vanguard, respectively), and track indexes compiled by different providers, a violation of the wash-sale rule would be hard to validate. In fact, as shown in Table 8.2, many sector ETFs have equivalent ETFs that share similar investment characteristics. A sample of sector ETFs that unequivocally show their equivalency has been chosen. Correlation analysis might yield others that produce similar returns. For example, a quick perusal of the holdings of Select SPDR Consumer Staples (XLP) and the iShares Dow Jones US Consumer Cyclical (IYC), two ETFs not included in Table 8.2, will show that the two sectors they...

ETFs mass appeal in Europe is still doubted

In spite of the many common features of European offered ETFs and US ETFs, doubts remain as to the ability of the former to mirror the latter's 1 Morgan Stanley, Exchange-Traded Funds Strategies, August 19, 2004. Table 9.1 Europe's iShares MSCI ETFs change in TER (bps) Table 9.1 Europe's iShares MSCI ETFs change in TER (bps) success. Critics believe that it is one thing to rival the United States in terms of the number of traded ETFs, but quite another to match the success in terms of AUM. For now, total ETF assets in Europe are only a sliver of the US numbers. Many reasons are advanced as to why the two figures will not converge any time soon, including competition from the futures market and market fragmentation. European investors are generally considered more comfortable with futures than their American counterparts. For example, it is only recently that the ban on trading single stock futures has been lifted in the United States. Regulators justified the ban by arguing that just...

The Birth of ETFs

The more actively traded and by far more popular ETF came with the QQQs, which directly correspond with the Nasdaq 100. Then there are the Diamonds, which move in correlation to the Dow Jones Industrial Average. ETFs have since expanded, and there is now a new breed of investment vehicles to capture opportunities in sectors known as HOLDRs. These trading vehicles are based on certain stocks in a certain sector, known as a basket of diversified stocks in a specific sector. Just as the examples comparing the U.S. Real Estate Trust (IYR) shown in Figure 1.14 to Toll Brothers, ETFs can offer investors a relationship to overall sector performance that is better than outright exposure in just one stock if you are wrong in your investment decision. As we go forward in the book, I will show you a technical analysis method such as pivot points using a longer-term time frame and how it can help you determine entry and exit targets, such as targeting almost the exact high in Toll Brothers, as...

Currency ETFs

The ETF has a 0.4 percent annual fee. Investors generally pay commissions to buy and sell ETFs, which trade daily on exchanges as stocks do. Initially, the trust registered 17 million Euro Currency shares, for a total offering price of about 2 billion. Shares of the ETF can be sold short and are eligible for margin, as most ETFs are. Notice the correlation of price movement in the ETF shown in Figure 1.17 with the euro FX currency futures contract shown in Figure 1.18.

Indexing and ETFs

ETFs are an outgrowth of index funds. Like with index funds, investors can take a position in the market without selecting individual securities. ETFs represent a basket of securities based on a particular index. Purchases or redemptions of an index fund, however, only occur at the end of the day when the fund's net asset value is calculated. ETFs overcome this limitation since they trade continuously on the major stock exchanges like ordinary stocks. Hence ETFs offer investors the benefits of both stocks and mutual funds. Furthermore, they offer institutional and individual investors alike extremely low costs, flexible trading, and more control over taxes. They are increasingly hailed as the cornerstone of index products.

ETFs and arbitrage

Investors are able to redeem ETFs for a portfolio of stocks comprising the underlying index, or to exchange a portfolio of stocks for shares in the corresponding ETF throughout the trading day. This ensures that the price of an ETF cannot depart significantly from the NAV of that index-based portfolio. Indeed, if ETFs were selling, say, at discount from net asset value, large investors would quickly seize the opportunity by buying the ETF's shares and exchanging them for shares in the underlying index. Simultaneously, they would sell the exchanged shares in the secondary markets and make the difference between the cost of the ETF shares and proceeds from the sale of the underlying index. Any meaningful discrepancy would clearly offer arbitrage opportunities for these large traders, which would quickly close the disparity. A third opportunity for arbitrage exists because index-based futures trading on the Chicago Mercantile Exchange allow exchange for physicals. This means that baskets...

Broadbased ETFs

As of December 2004, US domestic broad based ETFs comprise 69 of the total, down from 81 in December 2002. This does not mean, however, Number of ETFs Number of ETFs Number of ETFs that US investors are losing interest in broad-based ETFs on the contrary, Table 6.3 shows that net assets grew by a significant 32 in 2004. This shift simply means that with new capital coming into the industry, more of it is going to other types of ETFs such as sector and industry ETFs, as asset managers and other investors begin to realize that these instruments can enhance their portfolios' asset allocations. This is illustrated by a 79 increase in assets under management in sector industry ETFs in 2004 compared to a relatively lower growth of 13 over the 2003 period. To add more detail to the picture, Table 6.4 lists most of these broad-based ETFs as of June 2004 along with some of their most interesting characteristics such as, issuer, sale price, shares outstanding, assets under management, expense...

Sectorbased ETFs

Sector ETFs, in particular, have been among the hottest products on Wall Street in 2004. The indexes they track are concentrated in one or more industries that make up the sector targeted. For example, The Health Care Select Sector SPDR Fund (IIV) tracks an index that focuses on such industries as drug companies, hospital management firms, medical suppliers, and biotech concerns. In fact a popular investment strategy based on sector rotation consists of shifting the portfolio more heavily into industry or sector groups that are expected to outperform based on the manager's assessment of the state of the business cycle. Among the more popular ETFs in 2004 are those that track sector indexes that concentrate on the stocks of financial, real estate, energy or technology companies (especially before the technology let down of the early 2000s). The idea of shifting a portfolio more heavily into industries or sector groups that are expected to outperform is certainly an interesting notion...

Disadvantage of ETFs

There is one disadvantage of ETFs investors have to pay to purchase and sell them, just as they do with individual stocks. Mutual funds, in contrast, are purchased and sold after the market closes with no fees. The cost to purchase or sell ETFs is (1) the cost of a stock trade (or multiple trades if an investor is buying multiple ETFs) and (2) the difference between the buying price and selling price (the spread) at any given moment. The cost of stock trades - namely of trading commissions - is entirely in the investor's control one just has to select a brokerage firm that offers low-cost trades. Buying ETFs at 7-20 a trade in an online brokerage account generally makes sense. Buying ETFs at 200 a trade generally does not, because the transaction costs can easily outweigh the lower annual fees and convenience. So the ideal product is to combine ETFs with low-cost online trading. The spreads on ETFs depend on their liquidity and trading volumes. A Smith Barney study based on January...

Fixedincome ETFs

No ETFs in Europe, however, have gained as much attention as the fixed-income ETFs. Indeed, they added no less than 6.9 to their modest market share of June 2003 and stand now at 7.9 of the total. This success might have been the direct result of several attributes. In addition to being an essential part of any asset mix of ETFs, and providing instant diversification in a single transaction, this new class also benefits from the same core attributes that have driven the success of equity-based ETFs. Moreover, as in the United States, investors have been seeking them due to the volatility of the equity markets. Since their introduction in Europe in 2001, the total now stands at 12 fixed-income ETFs. Table 9.5 also shows that fixed-income ETFs have by far the lowest total expense ratio of all types of ETFs. They report an average total expense ratio (TER) of 17 basis points, followed far behind by regional eurozone and European country benchmarks, with 41 basis points each.

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Bickford Getting Started in Rental Income by Michael C. Thomsett Getting Started in Exchange Traded Funds by Todd Lofton Getting Started in Fundamental Analysis by Michael C. Thomsett Getting Started in REITS by Richard Imperiale Getting Started in Swing Trading by Michael C. Thomsett Getting Started in Property Flipping by Michael C. Thomsett

The Frank J Fabozzi Series

Abate Handbook of Global Fixed Income Calculations by Dragomir Krgin Managing a Corporate Bond Portfolio by Leland E. Crabbe and Frank J. Fabozzi Real Options and Option-Embedded Securities by William T. Moore Capital Budgeting Theory and Practice by Pamela P. Peterson and Frank J. Fabozzi The Exchange-Traded Funds Manual by Gary L. Gastineau Efstathia Pilarinu Handbook of Alternative Assets by Mark J. P. Anson The Exchange-Traded Funds Manual by Gary L. Gastineau The Global Money Markets by Frank J. Fabozzi, Steven V. Mann, and

The Global Powerhouse

Large institutions can invest directly in China. Retail investors have other ways to get into the game as well. Part III describes the major vehicles investors use to indirectly invest in China by way of investing in Chinese stocks and funds traded outside China. Many Chinese companies list their shares in Hong Kong, London, and New York. Mutual fund companies have also established funds to specifically invest in China. Furthermore, exchange-traded funds representing the Chinese stock market or sector indexes provide foreign investors an efficient and liquid means to access the Chinese stock markets.

The Case for Indexing

A multitrillion-dollar industry is now based on investing in or benchmarking to cap-weighted indexes.2 As of year-end 2006, nearly 5 trillion in stock and bond assets were tied to cap-weighted indexes worldwide. Assets invested in index funds replicating the S& P 500 alone neared 1.3 trillion (Pensions & Investments, 2007). The Vanguard Group offers four S& P 500 mutual funds, with a combined 200 billion in assets, for various account minimums. The world's largest exchange-traded fund, S& P Depositary Receipts (SPDRs, or Spiders), managed by State Street Global Advisors, has another 50 billion.

Indiana University Kelley School of Business Indianapolis

In Chapter 4, Gary Gastineau describes how short selling exchange-traded funds (ETFs) can mitigate the risks associated with shorting individual stocks. For example, it is essentially impossible to suffer a short squeeze in ETF shares because the number of shares in an ETF can be increased on any given trading day. A second advantage is that the uptick rule does not apply to ETFs. On the NYSE exchange, this rule means that a short sale may only be done on an uptick or a zero-plus tick that is, a price that is the same price as the last trade, but higher in price than the previous trade at a different price. On the NASDAQ, you cannot short on the bid side of the market when the current inside bid is lower than the previous inside bid (a downtick). A third advantage that Gastineau discusses relates to hedging with ETF shares instead of derivative contracts. Derivative contracts have limited lives. The most active contracts in any futures market are the near month and the next settlement...

The Secondary Markets

3Amex merged with the Nasdaq market in 1998 but still operates as an independent exchange. Amex is home as well to considerable trading in exchange-traded funds, which are securities that represent claims to entire portfolios of stock and which today account for a large share of total trading on the exchange. These products are described in greater detail in the following chapter.

Passive investment strategies old versus new

With ETFs, investors now have at their disposal a relatively new instrument of passive-style portfolio management. Because ETFs offer extremely low operating costs, flexible trading, and more control over taxes to both institutional and individual investors, they increasingly are hailed as the cornerstone of passive investment strategy.

What youll get from this book

Getting the market direction right over the period you are trading is vital to making good trading decisions. This is true not only if you are trading market instruments like index futures and options, index-tracking mutual funds or exchange traded funds, but also if you are trading individual stocks. Even the cheapest of stocks is unlikely to respond if the market is crashing at the time. There is a software package that can help you to look at the underlying technical condition of the U.S. market - the most important in the world - through examining a wide range of proven technical indicators.

Personalized Mini Mutual Fund

Instead of agonizing over which stock will outperform in a certain sector, you can use ETFs as an investment vehicle that has certain stocks in a basket as one unit, listed as a sector fund. This allows individual investors to invest in a group of stocks in a sector, rather than relying on a mutual fund to do it for them. Moreover, many mutual funds charge management fees and at times do not fully invest all an investor's cash in the market. Because ETFs trade like a stock, the price of which fluctuates daily, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund. By owning an ETF, you get the diversification of an index fund plus the ability to sell short, buy on margin, and purchase as little as one share. Another advantage of an ETF is that the expense ratios for most ETFs are lower than that 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. ETFs allow...

Trading Currency Stocks

Foreign currency trading is not just for gamblers or hungover commodity traders. It really has become a respected asset classification and is extremely popular with professionally managed trading entities and hedge funds. Foreign currency is so hot that major players are taking it to the extreme. How so Well, there is now what is called exchange traded funds (ETFs) on foreign currencies. The first to be introduced was the Euro Currency Trust (FXE). On the first day of trading, the Euro Currency Trust had over 600,000 shares trading hands.

Advantages and Disadvantages

As with any product, there are advantages and disadvantages to ETFs. One is that this vehicle has an annual expense of 0.4 percent of assets. If that amount is not enough (the interest rate is below the 0.4 percent expense ratio), then the sponsor can withdraw deposited euros as needed, which could diminish the amount of euros each ETF share represents. The currency ETFs are linked to the spot price versus the U.S. dollar. The obvious strategy to make money in these vehicles is to see the value move in the desired trade direction (you can buy and sell short) and to cover the interest charge less the trust expenses. ETF so it will lock in a profit. The bank is in the business of making money. The best feature for individual investors for using an ETF is that it allows one to accumulate exposure without excessive leverage in the euro currency for a long-term position play. It can also be used as another means to hedge forex transactions. Each share of the ETF will represent 100 euros...

Diversifying your investments

I Don't put all your money in just one type of investment. Stocks may be a great investment, but you need to have money elsewhere. Bonds, bank accounts, treasury securities, real estate, and precious metals are perennial alternatives to complement your stock portfolio. Some of these alternatives can be found in mutual funds or exchange traded funds (ETFs).

Diversification Through Trading Periods

So far, we have introduced you to various products to take advantage of foreign currency markets through the spot forex and futures and now through exchange traded funds via the stock market. Many traders and investors need to incorporate diversification into their arsenal of investments. Many believe the best means to diversify is through investments that have little to no correlation with each other with reserve cash balance, such as stocks, bonds, real estate, commodities, forex, and cash parked in a certificate of deposit (CD) or government Treasury bill (T-bill). Day traders can use the forex or futures markets for small price swings. Swing traders can also use the forex and futures markets but can also implement an option strategy, such as a long call or a long put. This is a good consideration if you want to take advantage of establishing a position ahead of a major economic report, such as the Monthly Jobs number or a central bank meeting where you expect an interest rate...

Figure 610 Sample Mutual Fund Accounting Format

Dends are distributed, there is very little income left, if any, after the fund uses it to offset expenses. The groups of shareholders receiving almost all o f the b enefit o f the favorab le tax l egisl at i o n are thos e investe d in low-fe e ind ex-orien ted mutual or exchange-traded funds. For a shareholder in a fund with a fee of 0.2 percent, the lower tax on dividends resulted in an enhancement in after-tax return of 0.33 percent ( 1.6 - 0.2 x 38.5 - 15.0 ) annually versus 0.02 percent ( 1.6 - 1.5 x 38.5 15-0 ), or almost nothing for the average actively managed equity fund. Once again, this example shows how important fees and a basic understanding of the tax code can be. When this legislation came about, the author was interviewed by a major financial services magazine and made this his number one point. Do you think it was included when the s tory went to press Of course not, because low-fee funds don't support advertising budgets This occurrence supports the premise that...

Beyond Fib Retracements

I have taught this approach for almost two decades to all types of traders, from day traders to position traders and for all types of markets, including Forex, futures, stocks, exchange-traded funds (ETFs), and even mutual funds. I call this approach to price Dynamic Price Strategy. Why not just call it Fibonacci price strategies For two reasons. One, we use some ratios that are not a direct part of the Fibonacci series but are just as important as the typical Fib ratios. And two, we use the ratios in ways other than the typical retracement approach usually taught.

The Capital Asset Pricing Model

The recommendation in CAPM is that an investor should invest in an asset class only through an index fund. While this was difficult in the early years of CAPM's development, it is easy today. Numerous index funds exist in both traditional open-end mutual funds and in the recently developed exchange-traded funds. An investor can purchase broad-based U.S. stock index funds as well as funds tracking various sectors and subsets of the U.S. stock market. An investor also can invest in international stocks by purchasing a fund that tracks a broad international stock index or through different funds that track the indexes of separate countries or regions. Index funds also have been developed for other assets such as bonds and commodities.

The Commodities Connection

Gold price action can also be a misleading guide to the currency trader. In recent years, Gold has attracted a great deal of investment demand from exchange-traded funds (ETFs). In 2003, ETFs were buying 20 tons of gold, and this rose to 500 tons in 2005. The trader who looks at gold prices rising may interpret it as a reaction to the dollar, when it actually can be reacting as a function of investment demand. Figure 5.1 shows gold versus the U.S. Dollar Index (USDX).

Fund Level Shareholder Accounting

ETF shares and ETF share classes are fully Depository Trust Company-eligible securities, which means there are no shareholder accounting costs at the fund level for these shares. All funds are required to furnish periodic reports to their beneficial shareholders, but ETFs have a single registered shareholder, the Depository Trust Company's nominee, Cede & Co.

Investing in Investment Funds

* It is a violation of Federal law for an open-end mutual fund, a closed-end fund, or an exchange-traded fund to sell shares to the public unless it has registered (or made mandatory financial filings) with the SEC. t The fund industry has gone from very large to immense. At year-end 2002, there were 8,279 mutual funds holding 6.56 trillion 514 closed-end funds with 149.6 billion in assets and 116 exchange-trade funds or ETFs with 109.7 billion. These figures exclude such fund-like investments as variable annuities and unit investment trusts.

Sources of investment performance

The first three sources can be accessed easily and inexpensively by anyone, through direct holdings of government securities. Equity market risk can be accessed inexpensively through index funds or exchange traded funds. Some investment markets and some aspects of market risk premiums (for example, private equity) can be accessed only if the investor is willing to take a view on investment manager skill. The sources of hedge fund performance are discussed in Chapter 9.

Investing in smallcap stocks requires analysis

Small-cap stocks may have more potential rewards, but they also carry more risk. No investor should devote a large portion of his capital to small-cap stocks. If you're considering retirement money, you're better off investing in large-cap stocks, Exchange-Traded Funds (ETFs), investment-grade bonds, bank accounts, and mutual funds. For example, retirement money should be in investments that are either very safe or have proven track records of steady growth over an extended period of time (five years or longer).

Holding company depositary receipts

Like other ETFs, HOLDRS shares trade throughout the course of the day. However, investors can buy them only in round lots of 100 shares. Like UITs, they are also unmanaged portfolios. But, whereas UITs have finite lives, portfolios of HOLDRS can carry a variety of maturity periods. Finally, both HOLDRS and UIT shares are redeemed in kind with HOLDRS, however, redemptions are also done in round lots of 100 shares. A 10 fee per round lot goes to the HOLDRS trustee, which in this case is the Bank of New York. There are also certain tax benefits to HOLDRS in that capital gains accrue only after investors buy the shares.

Figure 93 Traditional Mutual Fund Process

Like index funds, ETFs have very low expense ratios. Unless the buyer is an authorized participant, ETFs are purchased in the secondary market through a b roker, who receives a commission. Since ETFs are traded intraday, the underlying securities need to be somewhat liquid. Although there are more than 100 ETFs available to investors and new ETFs are being launched almost weekly, the structure is not suitable for all asset class es . Unfortunately, as a result of challenges with liquidity and pricing, none of the providers have been willing to undertake a municipal bond ETF, eventhoughthere is tremendousdemandforsuch a product. Some advisers are fans of ETFs, while others prefer tax-managed open-end mutual funds. Unfortunately, neither ETFs nor tax-managed funds are the right choice or perfect solution for all situations. Therefore, tax-w e n w e n u n FIGURE 9.4 builds on a schematic utilized by Gary Gastineau in The Exchange-Traded Funds Manual to compare a typical mutual fund, ETF,...

Appendix Core and Satellite A Live Example

Evensky, Brown & Katz has implemented C& S portfolios for its clients. The following is an example of the policy now implemented for an all-equity allocation. The primary investment vehicles for core allocations are exchange-traded funds (for example, the Barclay Russell 3000 iShare for the Broad Domestic Core). In larger taxable portfolios, the firm has directly employed a quant-based tax manager. This appendix is included not as a recommendation but solely as an example of how a C& S policy might be implemented.

Liquidity is determined by the transparency of the fund

Liquidity also is determined by the degree of transparency of the fund. The transparency issue has become especially important following the fallout from the mutual-fund scandals over after-hours trading practices and market timing. Generally, there is greater transparency in ETFs and mutual funds that try to match indexes than in funds that try to outperform them. As noted, in proportion to mutual funds that largely remain actively managed, ETFs are still overwhelmingly passively managed. Hence, because they are more likely to track an index, one can assume that the composition of ETFs is better known overall than that of their mutual-fund counterparts. In the case of closed-end mutual funds, one of the major difficulties in analyzing them is that closed-end fund companies are required to report what is in a portfolio only twice a year, as opposed to ETFs which publish their complete holdings every day. The overall transparency of ETFs logically should play to their advantage,...

The New York stock exchange

The relatively recent addition of ETF products to the New York Stock Exchange could further enhance their appeal. The NYSE appears to have recognized that by opening its floor to ETF products, it will become part of a growing business, and by the same token further enhance the global liquidity of its listed companies, many of which happen to be the components of the standard baskets of these ETFs. This strategic choice certainly will open ETFs to a larger pool of investors, which should have a positive impact on their liquidity and pricing. Indeed, although the AMEX is the original birth place of ETFs5 and still accounts for a high fraction of total ETF trading, the volume of trading and relative stature of the NYSE could make ETFs even more liquid than they currently are. With the addition of more specialists, dual trading between the two exchanges could further reduce bid-ask spreads and improve pricing. Others predict that the opening of the NYSE to ETF trading has the potential,...

The Closed World Of Clos E De N D Funds

The new breed of exchange-traded index funds can be worth exploring as well. These low-cost ETFs sometimes offer the only means by which an investor can gain entr e to a narrow market like, say, companies based in Belgium or stocks in the semiconductor industry. Other index ETFs offer much broader market exposure. However, they are generally not suitable for investors who wish to add money regularly, since most brokers will charge a separate commission on every new investment you make.13 13 Unlike index mutual funds, index ETFs are subject to standard stock commissions when you buy and sell them-and these commissions are often assessed on any additional purchases or reinvested dividends. Details are available at and

For the 10Year Period Ending December 31 2004

Do the results of these three funds mean tax-aware investors should not own ETFs Absolutely not ETFs are an innovative solution that taxaware investors can add to their arsenal of weapons, and there are many cases where they in fact offer the optimal tax-efficient solution. Moreover, i t has only been since about 2000 that the managers of ETFs have come to fully recognize how important the tax advantage of the in-kind transfer is to their taxable investors. Now investors and advisers need to determine when it is best to apply them. Barclays has been extremely proactive in the market by offering investment seminars that emphasize general education o n ETFs rather than emphasizing how their products may be superior to the competition. As a result, more advisers are beginning to understand the tax benefits of ETFs and applying them in innovative ways. Most important, once investors become comfortable using tax-efficient products and see the favorable result when their taxes are due, they...

The mutualfund industry

ETF liquidity could also be improved by the mutual-fund industry itself, for long a powerful foe pride has for many years come ahead of the bottom line. As a result of recent regulatory changes, an increasing number of large mutual-fund companies are starting to introduce their own class of ETFs. For example, in March 25, 2001, Vanguard launched its first ETF (VTI), based on the Wilshire 5000 Total Market Index. Including the three ETFs it launched in March 4, 2005, it has now a total of 23 ETFs that are a share class of its index funds, known as Vanguard Index Participation Equity Receipts, or VIPER Shares (see Table 3.1). In addition to its Total Stock Market VIPERs (VTI) Vanguard's other ETFs reflect investment styles such as value and growth (Value VIPERs, VTV, and Growth VIPERs, VUG) and sectors such as Financials VIPERs (VFH) or Health Care VIPERs Table 3.1 Vanguard's ETFs (as of May 16, 2005) Table 3.1 Vanguard's ETFs (as of May 16, 2005) (VHT). Vanguard has also added as of...

ETF liquidity and pricing from an academic perspective

Academic studies have investigated the liquidity and pricing of ETFs with mixed results. For example, Ackert and Tian (2000) have found that the SPDR experiences a low degree of mispricing.6 According to the authors, its low arbitrage costs suggest that market makers successfully arbitrage any discrepancies in demand and supply. Their results, however, seem quite different for the mid-cap SPDR (MDY), which was found to have much higher arbitrage costs. They conclude that arbitrage costs associated with the MDY are high enough to indicate that pricing errors are insufficient to cover trading costs. A study by Engle and Sarkar (2002) of a larger sample of ETFs tracking US indexes has determined that, on average, they are priced efficiently, except for minor deviations from their NAV during intraday trading.7 These deviations, however, were found to be much more persistent for ETFs tracking foreign indexes. This study attributes these pricing differences to the larger transaction costs...

Lower Management Fees

Management fees are fees levied for professional services provided. This is the compensation paid to the professional managers for administering the portfolio they are paid regardless of the performance of the fund. Because ETFs are relatively cheaper to manage than equivalent index mutual funds, this translates into overall, lower expense ratios as shown in Table 3.2. 7 Engle, Robert F. and Debojyoti Sarkar, Are exchange-traded funds fairly priced , 2002, Working Paper, New York University. Table 3.2 Aggregate costs of buying and owning ETFs Table 3.2 Aggregate costs of buying and owning ETFs

Other significant ETF advantages

In addition to being cheaper and easier to trade than comparable mutual funds, ETFs offer other advantages to their holders, such as selling them short through a brokerage account, or buying them on margin, which is not possible with mutual funds. These advantages are listed in Table 3.4, a summary table of ETF advantages and drawbacks (the latter is described in the next section) in relation to mutual funds. As noted, active traders might move in and out of an ETF several times in a single day just as they do with individual stocks. (ETFs account for a high fraction of total trading on the Amex.) Hence, like stocks, ETFs have become a tool for short sellers. Mutual funds cannot be sold short since there are limits on the frequency and size of trades that can be made. Both academic and legal regulatory literature generally agrees that mutual funds are marginable, but unlike ETFs, they can be used as collateral to a margin account only after they have been fully paid for and held over...

What Are The Most Important Safety Features Protecting Etf Short Sellers

Exchange-traded funds are a unique hybrid of closed-end and open-end investment companies. ETF shares trade like common stocks or closed-end funds during market hours and can be purchased or redeemed like open-end funds with an in-kind deposit or withdrawal of portfolio securities at each day's market close. In the United States, ETFs offer a unique level of capital gains tax efficiency and in most markets they offer a high level of intra-day liquidity and relatively low operating costs. The trading flexibility and open-endedness of ETFs offer unusual protection to short sellers. 1. It is essentially impossible to suffer a short squeeze in ETF shares. In contrast to most corporate stocks where the shares outstanding are fixed in number over long intervals,1 shares in an ETF can be greatly increased on any trading day by any Authorized Participant.2 Creations or redemptions in large ETFs like the S& P 500 SPDRs and the NASDAQ 100 QQQ's are occasionally worth several billion dollars...

Bearish belt hold Working out

For a nice bearish belt hold scenario, look at Figure 6-23. This chart of exchange traded funds represents a basket of biotech stocks also known as the Biotech Holders (BBH). The BBH bears had been overtaken by the bulls, but the short belt hold reveals that the bears are clawing their way back into the action.

Potential departure from NAV

Because ETFs trade like securities, there is also the possibility that their prices can depart from net asset value. We noted earlier that this departure cannot be too large without giving rise to arbitrage opportunities for large traders. If, however, this is true for widely held and actively traded ETFs such as the SPY, it is not always the case for ETFs that are thinly traded, such as some sector iShares. Still, one cannot deny the possibility that incurring frequent commissions and bid ask spreads, no matter how small the deviation from net asset value, cannot be overcome by relatively small differences in expense ratios. This is especially true when these ETFs are compared to passively-managed mutual funds, considering that the cost differential between the two categories is quite small to begin with, as shown in Table 3.2. Finally, unlike mutual funds, most ETFs currently do not offer dividend reinvestment or monthly investment programs. And, whereas traditional mutual funds can...

ETF as a nontaxing entity

In other words, a regulated investment company can avoid corporate income tax as long as it distributes sufficient income to its shareholders. The required distribution is actually 98 of the taxable income.4 If the required distribution is not met, the difference between the required distribution and the actual distribution will be subject to federal income tax, plus 4 excise tax.5 Therefore, an ETF can qualify as a regulated investment company by meeting the 98 distribution requirement. Actually, all current ETFs are treated as regulated investment companies and pay no federal income tax. In essence, if managed well, an ETF is practically a tax-free entity.

Using the bullish engulfing pattern for savvy trading

If you're vigilant and lucky enough to spot a bullish engulfing pattern, trading on it can yield some very appealing results. Figure 7-2 is a real-world example of the bullish engulfing pattern on a chart of the ETF that represents the members of the Dow Jones Industrial Average (DJIA), which is known as the Diamonds because its symbol is DIA. (An ETF or exchange traded fund is a security that trades like a stock, but represents a basket of stocks or an index.)

Redemption In Stock Or In Cash

On the other hand, when the ETF shareholders request redemption of their creation units, they receive in exchange a basket of the underlying securities. Because this is a physical exchange of stocks, the ETF managers do not have to sell stock and thus no capital gains are realized. Therefore, ETFs are far more advantageous than mutual funds in that ETFs can distribute stock (in-kind redemption), not cash, in the event of redemption, while mutual funds must distribute cash.

Will It Always Be Possible To Borrow Etf Shares At Lowcost For Risk Management Applications

Clearly, when short-term interest rates increase from 2003 levels, the attractiveness of securities lending should increase for dealers who create and hold hedged positions in ETFs while lending the ETF shares to short sellers. Their activity should assure a supply for ETF share borrowers. However, an interesting change in the U.S. Federal Tax Code will certainly change the dynamics of ETF securities lending and short selling even if it does not change the economics very much. The 2003 Tax Act, formally the Jobs and Growth Tax Relief Reconciliation Act of 2003, cut the tax rate for individual investors on qualified dividends from certain equity securities (including most ETFs) to 15 . The Internal Revenue Code distinguishes between various kinds of dividend and interest income, on the one hand, and payments in lieu of such dividend and interest income, on the other hand. This distinction can be significant for municipal bonds, for example, where payments in lieu of municipal interest...

Income and capital gains distributions over time

The tax comparison of these two investment vehicles is based on empirical data of annual taxable income per share from 1993 to 2003. Indeed, tax advantage findings for ETFs should be grounded on a time series of data it simply is not enough to review this tax efficiency at one specific point in time. If investors were to be convinced of the tax benefits of ETFs over competing products, reviewing tax efficiency over time would indisputably provide a much more compelling argument. But more importantly, without a long history of transactions, ETFs cannot as easily incur capital losses to offset capital gains for tax purposes as noted in Chapter 4. It is also possible that recently launched ETFs may be more likely to make capital gains distributions, a risk that should improve as they mature.

Are Risk Management Applications And Heavy Etf Share Trading Desirable For Fund Shareholders And Fund Advisors

From the viewpoint of a fund shareholder who might want to trade fund shares from time to time,15 the tighter the market spread and, other things being equal, the more active trading in the fund shares becomes, the easier and cheaper it will be to trade shares in the fund. However, significant effects of a fund's membership in an index arbitrage complex and trading in different market centers competing to tighten trading spreads are still confined to two funds the S& P 500 SPDRs and the QQQs. Shareholders in funds with at least 100 million in assets and a conscientious exchange specialist are not likely to be at a significant trading cost disadvantage to multibillion dollar funds with more trading activity, but no active futures contract. Trading has to expand very dramatically before trading activity per se has a significant effect on ETF trading costs.16 Great popularity in the market for risk management instruments is not necessarily an advantage to an ETF's investment advisor....

The SPDR 500 offers tax benefits

With ETFs, capital gains distributions are less likely, but can still happen, specifically when adjusting holdings to better track the movement of the underlying index, shares are sold at a gain. In the case of the SPDR 500, for all eleven years from 1993 to 2003, the average tax savings per dollar invested amount to 10.18 over the Vanguard 500 0.00076 0.00742 , as shown in Panel C of Table 5.5. This means that if in 1993 two investors had invested the same amount of money, one in the SPDR 500 and the other in the Vanguard 500, the former who would have paid an average of 10.18 less in taxes during this period.

What Is The Significance Of The Short Interest For Growth In Etf Assets

An interesting aspect of fluctuations in ETF shares outstanding and fluctuations in the short interest, is the fact that growth in assets committed to ETFs reflects an entirely different process than growth in assets committed to conventional mutual funds. With trivial exceptions, it is not common practice to sell shares in conventional mutual funds short.17 If Aggregate ETF net investment and redemption data reflecting the value of changes in shares outstanding is published monthly by the Investment Company Institute (ICI). These reports translate share changes into net purchases and sales at the prices of the actual purchases (creations) and sales (redemptions). The ICI data compilation shows and prices the changes in shares outstanding appropriately, but it cannot take into account the fact that changes in an ETF's short interest substitute for shares purchased or redeemed with the fund.19 In Exhibit 4.3, we average the sums of the shares outstanding and the short interest for each...

Tax benefits mostly stem from longterm capital gains

At least from the perspective of ETFs organized as unit investment trusts (UITs) such as the SPDR 500, there is a clear tax advantage favoring ETFs over mutual funds, but only for those investors whose goal is to make money over a longer period of time. For those who consider ETFs only useful as short-term investments, the advantage has to do with picking their battles the ability to time the market, a flexibility that apparently is very important, versus true tax-efficiency in the long term. It is not clear that short-term holders, including market timers, could derive enough return form their trades to offset the lost opportunity to gain real tax advantages stemming from long-term investing and or the higher costs born of more frequent trading.

How to Invest in Publicly Listed Private Equity

Private Equity ETFs There have been some private equity ETFs and a private equity mutual fund that have launched recently. The idea of a U.S.-listed fund is not Both ETFs include more than 30 publicly listed companies with direct investments in more than 1,000 private businesses. The indexes are rebalanced and reconstituted quarterly and fund holdings are disclosed every day, giving investors a much higher level of transparency than is often available in traditional private equity funds. Hypothetical index returns are available since 1995, but real-time trading in PowerShares Listed Private Equity (PSP) and PowerShares International Listed Private Equity (PFP) didn't begin until 2006 and 2007, respectively. Unfortunately their launch may have coincided with the top in the private equity market in 2008 the ETFs are down substantially from their highs. Some of the benefits of the ETFs are that they are accessible to all investors (no minimums), easily tradable, liquid, marked-to-market...

Portfolio Rebalancing Tools

For example, a desire to rebalance an allocation to venture capital may be accomplished through a surrogate to the Russell 2000. Moreover, these exposures can be positive or negative in direction. For instance, a desire to increase a venture exposure could be accomplished through a purchase of a Russell 2000 index fund, and a desire to reduce the exposure to venture capital could be accomplished through a short sale of an exchange-traded fund (ETF) that replicates the Russell 2000. Not only is this approach more convenient, but it also in some cases could be achieved through the use of futures contracts, and therefore require less in the way of utilized capital.

Dividends are reinvested daily under the openend structure

The first reason can be found in the differences in their structures. The open-end structure allows mutual funds to reinvest their dividends on a daily basis, whereas the UIT structure requires that ETFs hold dividends in cash and only pay them out to investors on a quarterly basis. This, of course, could have important ramifications on the performance of the funds under different market cycles.

Fair pricing and liquidity

ETF pricing and liquidity stem from three main sources the creation and redemption process the trading of shares on the secondary market and transparency. ETFs do not have a fixed number of shares.2 Authorized participants or market makers can issue and redeem shares of the ETF fund at any time, in large blocks of the fund's shares, called creation units or a standard basket, these replicate the underlying index. Authorized participants are those broker dealers, institutional investors, or trading houses who have been approved by the ETF provider to exchange stock portfolios for ETFs. The ETF market provides liquidity for ETF shares through the process schematically represented in Figure 3.1. Any supply-demand mismatch that might arise is effectively bridged as follows. In the event there are more buyers than sellers, market makers who have the contractual obligation to supply the liquidity needed will issue more shares (within a spread imposed by the exchange) to meet the higher...

Market losses under a UIT structure

Conversely, because ETF managers cannot be tempted to time the market due to this restriction, if the market turns out to be less promising than initially expected, ETFs are less likely to experience market losses similar to those incurred by an open-end structure. Under such an unfavorable scenario, mutual fund investors will not see the same level of income as those who invested in a UIT-ETF, assuming dividends received from the underlying basket of stocks were all, or in part, reinvested. This should be simple to verify using the bear market distributions of 2000, 2001, and 2002. This task is even made easier by the fact than neither SPDR 500 nor Vanguard 500 (as already noted) distributed long- or short-term capital gains during those specific years. All distributions were income distributions.

IShares On Benchmark Sp 500

Although investing in ETFs has been made as simple as possible by now, as for any investment vehicle, investors should have a clear understanding of what they are getting into. From a tax perspective, it's essential that investors be aware of the different organizational structures of ETFs, particularly with regard to unit investment trust and in comparison to open-end funds.

Trading on the bearish engulfing pattern

For a real-world example of a bearish engulfing pattern that can be used for a profitable trade, have a look at Figure 8-2. Here you see the pattern appear on a chart of the exchange-traded fund (ETF) that represents the 30 stocks that trade in the Dow Jones Industrial Average (DJIA).

Important for Bulls Bears

Once you choose a promising sector, just select large-cap companies that are financially strong, are earning a profit, have low debt, and are market leaders. This entire book shows you how to do just that. However, you may not like the idea of buying stocks directly. Consider either sector mutual funds or ETFs. That way you can choose the industry and be able to effectively buy a basket of the top stocks in that area. ETFs have been a hot item lately, and I think that they're a great consideration for most investors because they offer some advantages over mutual funds. For example, you can put stop loss orders on them or borrow against them in your stock portfolio. Check with your financial advisor to see whether ETFs are appropriate for you.

Special Report Gold

Exchange Traded Funds (ETFs) Enormous Due to the market turbulence the inflow into gold ETFs covered by physical gold was enormous demand for in 2008, amounting to a total of 318 tonnes. At the end of 2008, gold ETFs were holding 1,190 gold ETFs tonnes (+37 ). During the historically volatile and turbulent trading days around the collapse of Lehman Brothers (11 September to 16 October), ETFs bought 188 tonnes of gold. This trend seems to have accelerated in 2009. Buying the dip approach of ETFs smoothes the demand side

Gold ETF holdings in tonnes

Sources Zurich Kantonalbank Global Insight Chart World Gold Council, World Gold Council, Sources Zurich Kantonalbank Global Insight Chart World Gold Council, World Gold Council, The aggregate volume of all ETFs totals USD 50bn at the moment. In relative terms, this seems rather small. USD 50bn equals about a quarter of the market capitalisation of companies such as Wal Mart or Microsoft, or exactly the one of Research in Motion10. This means that this is by no means a gold bubble.

Exchangedtraded Funds

An ETF is an index fund or trust that is listed on an exchange and can trade like a listed stock during trading hours.6 Investors can trade shares in ETFs as a single security. The American Stock Exchange listed the first ETF, the Standard & Poor's depositary receipt (SPDR), in 1993. Since the first listing, the ETF market has experienced a tremendous growth. The number of ETFs increased from just 7 in 1997 to 190 in August 2005 and to 298 by August 2006. The total assets in ETFs were 19 billion in 1997, and increased to 227 billion in 2004 and to 358 billion by August 2006.7 There are a wide variety of mutual funds, with investment objectives ranging from sector to country to index. Many are actively managed, while some are passive, index type of funds. ETFs are mostly index type covering broad stock market, industry sector, international stock, and U.S. bond indexes. These ETFs add the ease and liquidity of trading to the benefits of traditional index investing. Examples of ETFs...

Supplemental Tax Related Questions for a Domestic Equity Manager Search Questionnaire

14 How much alpha do you derive from the traditional measures (sector allocation, security selection, etc.), and how much tax alpha, if any, do you believe is reasonable (Explainindetail and highlight with numerical examples, if possible.) How would you demonstrate the value added (net of tax and fee alpha) against an appropriate benchmark, mutual fund, or exchange-traded fund on an after-tax basis over an exte nded period when taxes and fees are accounted for by utilizing both the pre- and post-liquidation after-returncalculation methodologies

General Considerations

The prices of the pair of securities traded often will be related in some fashion or other, but they can nevertheless span a variety of asset classes and individual names. In equities, the companies issuing securities may belong to the same industry and will therefore respond similarly to changes in the broad market. Alternatively, the securities may actually be issued by the same company. Companies often issue more than one class of shares, and the shares typically differ by voting rights. Even shares of the same class issued by the same company but trading on different exchanges may have profitable intra-day deviations in prices. In foreign exchange, the pair of securities chosen can be a foreign exchange rate and a derivative (e.g., a futures contract) on the same foreign exchange rate. The same underlying derivative trading strategy may well apply to equities and fixed-income securities. Passive indexes, such as infrequently rebalanced ETFs, can be part of profitable trades when...

Toronto stock exchange index participations

Because these Canadian products undeniably have more of the characteristics of exchange-traded funds than the defunct basket products traded in the New York and Philadelphia Stock Exchanges in 1989, Canada is considered by many as the true birthplace of exchange-traded funds.

Exchangetraded Funds By Asset Category

Studies have shown that the most important decision an investor can make is where to allocate his or her investment assets. For example, what portion of investors' assets should go to equity and what portion to debt instruments are key questions underlying portfolio decisions. Because asset allocation has been found to be a far more important determinant of total portfolio returns than individual security selection, the credibility and continuing success of the ETF industry ultimately rests on its ability to provide a variety of ETFs by asset category. In other words, just as mutual funds can be combined in a widely diversified portfolio, thus reducing risk, ETFs should also be able to offer the same benefits to investors if they want to continue expanding on their market share within indexed products. Although condensed, Table 6.3 indicates that ETFs might already have a broad variety of domestic and international investment products capable of meeting this objective it also suggests...