What Are Exchange Traded Funds?

ETFs are securities that mainly mirror indexes. They are pooled baskets of securities that trade like stocks intraday so they are transparent to investors, have low expense ratios, manage risk through diversification, and in taxable portfolios have a tax advantage as they do not force distribution of capital gains.

The key advantage of ETFs to portfolio managers is the ease and flexibility they give the manager to upgrade and rebalance the allocations in the portfolio to maximize return and manage risk. And with so many ETFs available covering a broad spectrum of investments, a manger can be more precise in allocating the best performing ETFs within each major and sub allocation or sector.

Features of ETFs

1. Operational simplicity-with a single trade an investor can gain exposure to thousands of stocks (e.g. The Russell 3000-IWV). One settlement, with one booking entry, results in an exposure to a diversified portfolio
2. Reduced portfolio expense
1. Trading a handful of ETFs versus many stocks helps achieve a more enhanced and precise diversification with lower trading expenses.
2. Expense ratios for ETFs are very low (e.g. .35 to .79 basis points on average)
3. ETFs enable close tracking to a benchmark. Benchmark changes are immediately reflected in the related ETF, helping to manage the risk of tracking to the index.
4. ETFs are transparent-they trade intraday like stocks so results can be monitored closely during the day.
5. ETFs provide tax efficiencies-they are funds that incur little to no capital gains distributions while they are being held in the portfolio. They do include dividend distributions.

The Global Scope of ETFs

Today there are over 400 primary ETF listings on 28 exchanges throughout the world with assets totaling $400 billion. The first U.S. ETF began trading in January 1993 and was named S&P Depository Receipts (SPDRS) tracking the S&P 500 Index.

Today ETF coverage includes:

• Sectors and industries in the S&P 500 Index (e.g. Technology-XLK; Health Care-XLV; Semiconductors-IGW, etc.)
• Style type (e.g. Large Cap Growth-IWF; Mid Cap Value-IWS; Small Cap Blend-IWM. etc.)
• Fixed income (e.g. Lehman 1-3 year Treasury Bond-SHY; Lehman Aggregate Bond-AGG, etc.)
• Commodities (e.g. Gold-GLD; Silver-SLV, etc.)
• Currencies (e.g. British Pound Sterling-FXB, etc.)
• Global sectors (e.g. Global Energy-IXC, etc.)
• International Indexes (e.g. MSCI EAFE Index-EAFE, MSCI Emerging Markets Index-EEM, etc.)