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The power of the Exchange
Traded
Fund
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Free
membership gives you access to all sites Monthly market view,
all portfolio details, past and present ETF holding lists as well as
other ETF listed
options and information links located on the members only page. |
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Exchange Traded Fund (ETF)
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ETF's are similar to mutual funds in that they allow
investors to hold a large number of securities in a
single instrument. However they are traded exactly the
same as any commonly held stock. Index ETF's offer
retail and institutional investors efficient trading of
style-specific exposure to domestic indexes such as the
S&P, Russell, Dow Jones and various international
indexes. The specific investment style of an ETF can
reflect a specific sector or industry such as consumer
goods, a broad market index such as the S&P 500, or a
specific basket of stocks. In addition, various funds
may focus on differing investment styles such as value
or growth. |
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Closed-End Exchange Traded Fund (ETF)
A Closed-End ETF is a
publicly traded investment company that invests in a
variety of securities such as stocks and bonds. Capital
is mainly raised through an initial public offering and
the proceeds are invested according to the fund
investment objectives. Like a traditional mutual fund, a
Closed-End ETF has a board of directors elected by the
shareholders, and the board appoints an investment
advisor and a portfolio manager.
While traditional open-end mutual funds issue and redeem
shares directly with investors at net asset value, a
Closed-End ETF is listed on a national exchange, where
its shares are purchased and sold in transactions with
other investors, not with the Closed-End ETF itself. An
open-end mutual fund creates new shares every time that
an investor invests in the fund, and redeems the shares
when an investor redeems the fund shares. Therefore, the
number of shares and the total assets fluctuate in an
open-end fund as a result of purchases and redemptions.
On the other hand, when an investor wishes to purchase
or sell shares of a Closed-End ETF, the investor
purchases shares on an exchange such as the New York
Stock Exchange (NYSE). Although the outstanding shares
of a Closed-End ETF remain relatively constant,
additional shares can be created through secondary
offerings, rights offerings or the issuance of shares
for dividend reinvestment.
Note: High yield Closed End ETF's often posses
volatility that can cause particular ETF's or groups of
closed end ETF's to temporarily trade into down trends
or up trends causing a rapid price move that will not be
a reason to sell or buy. However many downtrends can
result in higher discount pricing, resulting in a buying
opportunity. This price change volatility is best shown
with previous historical chart analysis over a one to
three year period. |
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Net Asset Value
The net asset value (NAV), which is the value of all the fund
assets minus the value of the liabilities, all divided
by the number of shares outstanding, determines the
value at which open-end funds (such as mutual funds) are
purchased and sold. However, Closed-End ETFs are
purchased and sold at market prices, which are
determined by supply and demand forces on national
exchanges.
When demand for fund shares exceeds supply, the market
price at which a Closed-End ETF trades may be higher
than its underlying net-asset-value. When there are more
fund sellers than buyers, the market price may be lower
than its net-asset-value. For example, if the net asset
value of a fund is $20, and the fund is selling for $18
on an exchange, the fund is said to be at a 10% discount
to net asset value. If the same fund is selling for $22
on an exchange, the fund is said to be at a 10% premium
to net asset value. |
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Discount / Premium
| Many closed-end actually trade at
discounts to their net-asset-value for a variety of
fundamental and subjective reasons. However, this
discount may create an attractive purchase opportunity
for investors, as they are purchasing a dollar's worth
of assets for less than a dollar. Fundamentally, the
perceived value of a fund's shares may be less than the
reported value of the fund's underlying assets. In
addition, poor performance, illiquid securities, poor
name recognition, and large unrealized gains may prompt
a fund to trade at a discount. There are several
mechanisms that the board of directors uses to minimize
this price to net asset value gap. The fund can
repurchase its own shares (much like a share buyback)
and try to narrow the gap. The fund can open-end, which
will subject the fund to the normal share
purchase/redemption cash flows of mutual funds. This is
difficult to do, and often requires majority approval by
the shareholders. In summary it is the differential of
the fund Share selling Price compared to the NAV (Net
Asset Value) of each share in dollars. |
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Volatility
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Volatility sometimes referred to as Beta, is the Price
variance compared to the amount of time it takes to
makes that change. If a stock moves allot over a short
period of time it is said to have high Volatility and
higher volatility means higher risk 'if it can go up it
can go down'. |
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Risk Ranking Index 1 to 10
| Risk Ranking is performed solely by
measuring the historical volatility of any given
holding. As an example, the price of the QQQQ (Nasdaq
100) tends to change more quickly then say the DIA (Dow
Jones Industrial Average) therefore the QQQQ is assigned
a higher risk ranking. Bond ETF's are typically less
volatile then stock indexes, therefore they have even a
lower Risk Rank and so on. Risk Ranks are assigned by
YourETF. |
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Recommended ETF Reading
The Exchange-Traded
Funds Manual
by
Gary L. Gastineau
"Exchange-traded
funds are the hottest finance innovation
of the past decade. Gary Gastineau, who
played a critical role in their
development, demystifies the working of
these instruments, lucidly describes
their advantages and disadvantages, and
guides investors on their use. This gem
of a book will be the ETF bible for
years to come."
–Burton Malkiel, Chemical Bank
Chairman’s Professor of Economics,
Princeton University
"This is the first comprehensive book on
exchange-traded funds. The author
displays an institutional and practical
knowledge of exchange-traded funds that
makes this book necessary reading for
not only the knowledgeable investor but
for the professional researcher seeking
to understand these relatively new
investment vehicles."
–Martin J. Gruber, Nomura Professor of
Finance
Stern School of Business, New York
University
"Gary Gastineau is a national treasure.
Exchange-traded funds are the wave of
the future, and Gary has been
instrumental in their development from
day one. His knowledge is encyclopedic,
and his style and subtle humor make it
all accessible to the reader."
–Wayne H. Wagner, Chairman, Plexus
Group, Inc.
"In Gary Gastineau’s brilliant work in
illuminating the reader on
exchange-traded funds, he provides rich
insights into the process and
methodology of adding value and cites a
convergence of market forces that
creates a compelling story for the use
of ETFs for those who choose to add
value."
–Stephen C. Winks, Publisher, Senior
Consultant
"The introduction of exchange-traded
funds was one of the success stories of
Wall Street in the 1990s. Gary Gastineau
was a key contributor to this success,
and his book is an important benchmark
on both the current status of this
important new category and the vast
potential of its next-generation
products."
–Salvatore Sodano, Chairman and Chief
Executive Officer
American Stock Exchange
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