Exchange Traded Funds (ETF)

An Exchange Traded Fund or ETF is very similar to a Closed End Fund.  The ETF is a much newer invention and has been taking the investing world by storm.  They originally started as cheap and convenient index funds.  Today, most of them are still index funds meaning they have lower costs and are managed by a computer which merely replicates an indexes holdings.  However, more and more actively managed ETF’s are being opened up today.

They are easily bought and sold in exactly the same way you would a stock and have a mechanism to keep the premium or discount to a minimum.  ETF’s offer its largest institutional investors the opportunity to arbitrage differences in price between the fund and NAV.  Funds can exchange shares for the underlying assets with the fund company which serves to keep the fund price tracking within a percent or two of the Exchange Traded Fund in most cases.

Today, many brokerage firms even offer a few ETF’s which are free to trade on their platform.  If you can find an ETF that matches all of your needs, they can be a great way to go.

Exchange Traded Notes: You should be aware that ETN’s are slightly different from an Exchange Traded Fund.  Because some Exchange Traded Products are structures as Notes, they are actually a liability of the firm who issues it.  This puts you the buyer of the note (investor) as a creditor of the bank issuing the ETN.  If the bank were to ever default or go into bankruptcy proceedings, you might end up in line with the rest of the creditors hoping to be made whole.  This is a remote possibility, but on the other hand, if you believe that we are going to live through very difficult times, this might be risk to avoid.

This is Part 5 in a series on professional money management and funds.  You can find the prior posts by following these links: Pt 1, Pt 2., Pt 3, & Pt 4.

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