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ETFs and ETPs

ETFs and ETPs. Colgate Finance Club. What is an ETF/ETP. An ETF/ETP is an exchange-traded fund or exchange-traded product that is traded on stock exchanges. I t is a security that tracks an index or commodities basket like an index fund . Index Fund vs. Exchange Traded Fund

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ETFs and ETPs

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  1. ETFs and ETPs Colgate Finance Club

  2. What is an ETF/ETP • An ETF/ETP is an exchange-traded fund or exchange-traded product that is traded on stock exchanges. • It is a security that tracks an index or commodities basket like an index fund. • Index Fund vs. Exchange Traded Fund • Index Fund – A type of Mutual Fund that is structured to follow a Market Index (S&P 500, NASDAQ, etc.) • ETF – Trades like a Mutual Index Fund, but it trades on a stock exchange and experiences price changes throughout the day as they are bought and sold. • ETFs do not have an Net Asset Value (NAV) calculated every day like an Index Fund.

  3. Benefits of an ETF • Diversification • Is a basket of stocks, bonds, and commodities rather than tracking a single company. • Trades as a Stock • Because it trades on a stock exchange investors can sell short, buy on the margin, and own single shares rather than blocks of shares. • Low Expense Ratios • Overhead or management expense ratio (MER) is lower and therefore returns to the investor are higher. • Commissions are the same as any stock.

  4. ETF Sponsors • ETF Sponsors are financial institutions that create ETFs. • Process to creating an ETF: • Create the underlying index for the fund. • Securities for the fund are then delivered to the sponsor from other financial institutions. • In return, the sponsors issue them creation units – blocks of 100,000 shares – to distribute to investors through the stock exchanges. • The sponsor is responsible for managing the fund (passively) and for updating it when changes occur in the underlying index.

  5. Types of ETFs • Index ETF • Fund that tracks a Market Index • Bond ETF • Fund comprised of a basket of bonds • Currency ETF • Funds that contain currency-debt instruments • Leveraged ETF • Funds that contain derivatives and debt in order to amplify changes in the underlying markets (theoretically) – 2:1 and 3:1 ratios. • Works both ways – so returns and losses are amplified (dangerous?). • Inverse ETF • Comprised of derivative meant to create a put position against an underlying market.

  6. Popular ETFs • Ultra ETFs – a Leveraged ETF with a 2:1 ratio. • Spider (SPDR) - tracks the S&P 500 and is traded under the symbol SPY – each share is worth 1/10 of the NAV of the S&P 500. • ProShares – ETFs designed as Leveraged ETFs for investors who want to hedge positions without entering the derivatives market. • iShares –BlackRock ETFs • Vipers -Vanguard ETFs

  7. Chris Quick ‘06 and Kevin WalshETFs and iShares • September 28 @ 6:30 pm • Colgate Inn • Presented by The Investor Studies Program and the Colgate Finance Club. • More information to come.

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