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There is no doubt that ETF trading is becoming an interesting topic for many people. The Exchange-Traded Funds market is very detailed. There are many different types of trading in this market and there are many moving parts when one starts ETF trading. This is a very brief look at the advantages of ETF trading and some information that may be helpful to a person who is just being introduced to ETF.
Usually when someone talks about the “history” of a company, business, or market, people automatically think a long time. This is not the case with ETF. ETF became actively-managed in 2008. The “history” that ETF has is the relationship with the financial firms that are the major financial firms with a long history who are ETF leaders. By looking at these firms history with stocks, one can surmise that ETF will have a solid growth.
ETF is growing rapidly. There are many financial advisors who are not knowledgeable of all the aspects of the market because of its rapid growth. In 2008 there were 628 ETFs with $562 billion dollars. By August, 2009, there were 858 with $674 billion. This type of growth, in a volatile market, makes ETFs were looking at seriously.
ETFs are a lot like stocks in terms of ETF trading and have some distinct advantages. They are normally low cost and not actively-managed. There is no buying and selling of securities to accommodate shareholders. There are lower marketing, distribution and accounting expenses. And, most don’t have 12b-1 fees.
A person moving from stock trading to ETF trading will notice a distinct increase in the flexibility of buying and selling. ETFs are bought and sold at any time during the trading day. A trader can buy shares on margin and sell short to employ hedging strategies. Many of the stock trading benefits come with ETFs. A trader can use limit orders, stop-loss orders, buy on margin options, etc.
There is the same tax efficiency that is found with mutual funds. They generate relatively low capital gains because there is low turnover in portfolio securities. ETF trading provides market exposure and diversity that allows an investor an economical way to balance portfolio allocations. And, finally, whether the ETF is indexed or actively-managed there is transparency.
Most ETFs are structured as open-end management investment companies. They must get an exemption from the SEC for form the company and are structured the same as mutual and money market funds. This gives the ETF flexibility when constructing their portfolio. The ETF can use futures and options to achieve investment objectives and participate in lending programs. The SEC has a proposal to make ETFs open-end management investment companies which will alleviate the need to get an exemption.
If a person is considering ETF trading, it is very important to talk to a professional who has expertise in ETFs. This person will be able to discuss the many complex and intricate details involved in trading. They will also be able to answer any questions that one may have about how to make knowledgeable decisions in the ETF market.
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