ETF Analyst Reports
New regulations were put in place following the Flash Crash , when prices of ETFs and other stocks and options became volatile, with trading markets spiking :
UNDERLYING Fund Highlights
Over the long term, these cost differences can compound into a noticeable difference. Because ETFs trade on an exchange, each transaction is generally subject to a brokerage commission. Commissions depend on the brokerage and which plan is chosen by the customer.
Generally, mutual funds obtained directly from the fund company itself do not charge a brokerage fee. Thus, when low or no-cost transactions are available, ETFs become very competitive.
The cost difference is more evident when compared with mutual funds that charge a front-end or back-end load as ETFs do not have loads at all. The redemption fee and short-term trading fees are examples of other fees associated with mutual funds that do not exist with ETFs.
Traders should be cautious if they plan to trade inverse and leveraged ETFs for short periods of time. Close attention should be paid to transaction costs and daily performance rates as the potential combined compound loss can sometimes go unrecognized and offset potential gains over a longer period of time.
ETFs are structured for tax efficiency and can be more attractive than mutual funds. This can happen whenever the mutual fund sells portfolio securities, whether to reallocate its investments or to fund shareholder redemptions. These gains are taxable to all shareholders, even those who reinvest the gains distributions in more shares of the fund.
In contrast, ETFs are not redeemed by holders instead, holders simply sell their ETF shares on the stock market, as they would a stock, or effect a non-taxable redemption of a creation unit for portfolio securities , so that investors generally only realize capital gains when they sell their own shares or when the ETF trades to reflect changes in the underlying index. In most cases, ETFs are more tax-efficient than conventional mutual funds in the same asset classes or categories.
An important benefit of an ETF is the stock-like features offered. A mutual fund is bought or sold at the end of a day's trading, whereas ETFs can be traded whenever the market is open. Since ETFs trade on the market, investors can carry out the same types of trades that they can with a stock. For instance, investors can sell short , use a limit order , use a stop-loss order , buy on margin , and invest as much or as little money as they wish there is no minimum investment requirement.
Covered call strategies allow investors and traders to potentially increase their returns on their ETF purchases by collecting premiums the proceeds of a call sale or write on calls written against them.
Mutual funds do not offer those features. New regulations were put in place following the Flash Crash , when prices of ETFs and other stocks and options became volatile, with trading markets spiking : These regulations proved to be inadequate to protect investors in the August 24, flash crash,  "when the price of many ETFs appeared to come unhinged from their underlying value".
ETFs were consequently put under even greater scrutiny by regulators and investors. A non-zero tracking error therefore represents a failure to replicate the reference as stated in the ETF prospectus.
The tracking error is computed based on the prevailing price of the ETF and its reference. Tracking errors are more significant when the ETF provider uses strategies other than full replication of the underlying index. Some of the most liquid equity ETFs tend to have better tracking performance because the underlying is also sufficiently liquid, allowing for full replication. ETFs that buy and hold commodities or futures of commodities have become popular.
The commodity ETFs are in effect consumers of their target commodities, thereby affecting the price in a spurious fashion. A synthetic ETF has counterparty risk, because the counterparty is contractually obligated to match the return on the index. The deal is arranged with collateral posted by the swap counterparty. A potential hazard is that the investment bank offering the ETF might post its own collateral, and that collateral could be of dubious quality. Furthermore, the investment bank could use its own trading desk as counterparty.
ETFs have a wide range of liquidity. Some funds are constantly traded, with tens of millions of shares per day changing hands, while others trade only once in a while, even not trading for some days. There are many funds that do not trade very often. This just means that most trading is conducted in the most popular funds.
In these cases, the investor is almost sure to get a "reasonable" price, even in difficult conditions. With other funds, it is worthwhile to take some care in execution. This does not mean that less popular funds are not a quality investment.
This is in contrast with traditional mutual funds, where everyone who trades on the same day gets the same price. Bogle , founder of the Vanguard Group , a leading issuer of index mutual funds and, since Bogle's retirement, of ETFs , has argued that ETFs represent short-term speculation, that their trading expenses decrease returns to investors, and that most ETFs provide insufficient diversification.
He concedes that a broadly diversified ETF that is held over time can be a good investment. ETFs are dependent on the efficacy of the arbitrage mechanism in order for their share price to track net asset value. The trades with the greatest deviations tended to be made immediately after the market opened. The tax advantages of ETFs are of no relevance for investors using tax-deferred accounts or indeed, investors who are tax-exempt in the first place. In a survey of investment professionals, the most frequently cited disadvantage of ETFs was the unknown, untested indices used by many ETFs, followed by the overwhelming number of choices.
Some critics claim that ETFs can be, and have been, used to manipulate market prices, including having been used for short selling that has been asserted by some observers to have contributed to the market collapse of From Wikipedia, the free encyclopedia. List of American exchange-traded funds. List of exchange-traded funds. Archived from the original on June 10, Securities and Exchange Commission. Archived from the original on November 11, Retrieved November 8, ETFs are scaring regulators and investors: Here are the dangers—real and perceived".
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