What is an Exchange Traded Fund?
An Exchange Traded Fund, or ETF, is a security that tracks an index or a bundle of assets1, S&P 500, Nasdaq 100, the Dow Jones Industrial Average or the Lehman Treasury Index. An ETF may also represent a particular industry sector.
Unlike traditional mutual funds, ETFs can be traded like a stock on an exchange. That means they may be bought or sold throughout the day. Their price will fluctuate from moment to moment, just like a stock, and investors can do just about anything with an ETF that they would do with a stock.
ETFs aren’t a new phenomenon; they were first traded in 1993. But their appeal continues to grow. Total ETF assets totaled $410 billion by the end of 2006, according to the Investment Company Institute.
Here are a few reasons investors are attracted to ETFs:
- They tend to cost less. We believe there is a clear cost ratio advantage over mutual funds. There are no sales loads or investment minimums required to purchase an ETF.
- They may be more “tax efficient” than mutual funds. That’s primarily due to the reduction in portfolio turnover that goes hand-in-hand with active management and individual shareholders.
- They are flexible, starting with the fact they are traded on an exchange.
- They are available in a range of asset classes and sectors. For example, ETFs can help investors make a tactical investment in a particular industry sector.
- They are a globally available product. They can be bought and sold virtually anywhere.
- They are designed to directly track their index, specific sectors or custom groups, which promotes style consistency and lower operating and transaction costs.
- They make it easy to diversify while reducing the risk associated with owning individual stocks.
- They complement other investment strategies, such as hedging and tax-loss strategies.2
- They embody the philosophies of indexing and passive versus active investment strategies.
Exchange traded funds are sold by prospectus. Please consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.
(1) Exchange traded funds seek investment results that, before expenses, generally correspond to the price and yield of a particular index. There is no assurance that the price and yield performance of the index can be fully matched and investors can not invest directly in an index. ETF’s are subject to risks similar to those of stocks. Investment returns may fluctuate and are subject to market volatility, so that an investors shares, when redeemed or sold, may be worth more or less than their original cost.
(2) Neither Walnut Capital Management or Wachovia Securities Financial Network are tax advisors.