Mutual Funds

1. Mutual Funds vs. Exchange Traded Funds

2. MUTUAL FUNDS

3. WHAT ARE MUTUAL FUNDS? A mutual fund is an investment company that invests its shareholders’ money in a diversified portfolio of securities. • A mutual fund can be considered a financial product sold as ownership interests (shares of stock) to the public by an investment company. • When investing in a mutual fund, investors are becoming part owners of a widely diversified portfolio of securities. • The fund is built and managed by the investment company for the investor. • This management comes at a charge for the investor.

4. TYPES OF MUTUAL FUNDS Open-End Funds • Most common • No limit to the amount of growth • Purchased from the mutual fund company directly and redeemed likewise • Net Asset Value (NAV) is based on price of underlying securities • Ordered at the future NAV Closed-End Funds • Less common but gaining in popularity • There is a limit to the amount of growth • Once issued they are bought and sold on the major exchanges just like stocks • Price is related to underlying securities, but determined by market demand • Traded at current market price throughout the day

5. ADVANTAGES • Instant diversification • Asset allocation • Variable transaction costs (shop around/compare) • Dollar-cost averaging • Liquidity • Professional management DISADVANTAGES • Returns are notguaranteed • Must actively evaluate fund’s performance against other funds • Shareholder fees • Annual management fees 1-3% • Misleading advertisements

6. EXCHANGE TRADED FUNDS (ETFs)

7. WHAT ARE EXCHANGE TRADED FUNDS? An Exchange Traded Fund (ETF) is a basket of securities that tracks the performance of a stock, bond, or commodity index -- yet trades like a stock. It has a ticker, is marginable, can be sold short, and is traded on a stock exchange such as: • American Stock Exchange • New York Stock Exchange • NASDAQ The basket of securities is generally called a “trust” or “fund” and is held and managed by a financial institution.

8. CLASSIFICATIONS OF ETFs • Unit Investment Trust • Dividends do not reinvest immediately, but accumulate as cash in order to purchase additional creation units • Creates slight cash drag on overall performance • Examples: SPDR Trust Series I, Diamond Trust Series I • Open-Ended Fund • Fund will reinvest dividends immediately • Little or no cash build up • Examples: iShares, Select Sector SPDR’s

9. HISTORY AND GROWTH OF ETFs • The first Exchange Traded Fund traded in 1990 on the Toronto Stock Exchange. • State Street Global Advisors started the first U.S. ETF in 1993; it is still being traded today on the American Stock Exchange. • The SPDR (Standard & Poor’s Depository Receipt) S&P 500 ETF tracks the S&P 500 stock index and is the largest ETF on the market. • ETFs grew in popularity and began to be seen on all the major markets. Today, there are more than 1,100 ETF’s* traded amongst all of the major exchanges and are still growing in number.

10. TYPES OF EXCHANGE TRADED FUNDS • Since ETFs strive to track indexes, they vary according to which type of index is being used. The many different categories include: • Market Cap – track a variety of market indexes including each of the major U.S. market indexes: • Dow Jones Industrials (DIA) “Diamonds” • S&P 500 Index (SPY) “Spiders” • NASDAQ 100 (QQQ) “Qubes” • International/Regional – track a specific world emerging markets: DJ EURO Stoxx 50 ETF

11. TYPES OF EXCHANGE TRADED FUNDS Sector/Industry : track a given sector of the market such as Financial (XLF) or Technology (XLK). There are nine Select Sector SPDRs that represent the S&P 500 as a whole. Consumer Discretionary XLY Consumer Staples XLP Energy - XLE

12. TYPES OF EXCHANGE TRADED FUNDS • COMMODITY:track a given commodity such as gold and silver (SLV): streetTRACKS Gold Shares (GLD) • FIXED INCOME: track bonds: Municipal Bonds Fund (TFI)

13. CREATING AN ETF • A financial institution will formulate a “Creation Unit,” which is a collection of stocks, perhaps 50,000 shares, that serve as the underlying investment of the ETF. • The ETF trust portfolio will consist of many Creation Units that are split up to provide shares of the ETF. • Each ETF share represents a tiny faction of the trust. • These individual ETF shares can then be traded like shares of stock on the open market.

14. HOW THE PRICE OF AN ETF IS DETERMINED? • Market Price is based on the Net Asset Value (NAV) • Market value of the underlying securities • Any cash in the portfolio • Management fees are deducted as expenses. • However, Supply and Demand forces impact the price causing it to fluctuate from the NAV. • A market price that differs from the NAV is either bought or sold at a premium or discount to the NAV.

15. ADVANTAGES • You can apply limit, stop, and trailing stop orders • Can be a more diversified short-term investment and more flexible long-term investment. • No minimum balance requirement. • Lower distributions for tax purposes can be good. • You can narrow in on a tighter sector. • DISADVANTAGES • They are not exactly like the index that they track since price fluctuates with market demand • Passively managed • Commission charged to buy and sell • Lower distributions for tax purposes may not be appealing if you have an IRA or other tax sheltered investment • May include many bad stocks that exist in a sector

16. ETF FUNDS AT A GLANCESPDR S&P 500 ETF

17. ALLOCATION

18. FUNDS AT A GLANCE Fund sells/buys at nearly NAV Price Low Expense Ratio Large Net Assets Large Exchange Volume As of 04/24/2013

19. WHO ARE THE MAJOR PLAYERS? SPDRS There are more than 30 “SPDR” ETFs but not all are linked to any Standard & Poor's Index. Any ETF associated with State Street Bank and Trust Company is grouped as “SPDR.” Other SPDRs include: Select Sector SPDRs and streetTracks Other groupings of ETFs based on sponsoring financial institution which hold the underlying securities: VIPERSare marketed by Vanguard. iShares group is marketed by Barclays Global Investors. HOLDRs (Holding Company Depository Receipts) are marketed by Merrill Lynch.

20. OTHER MAJOR PLAYERS

21. SIMILARITIES BETWEEN MUTUAL FUNDS AND ETFs • A managed portfolio of securities • Portfolio of varying securities • Striving to provide diversification among different companies • Closed-end fund and ETFs are traded at the normal stock exchange

22. COMPARING ETFs TO INDEX MUTUAL FUNDSSPDR S&P 500 ETF * AS OF 04/22/2013 • Less money is required to start investing in the ETF over the Mutual Fund • The ETF has a lower expense ratio • The ETF has billions of dollars of more assets

23. COMPARING ETFs TO INDEX MUTUAL FUNDSSPDR S&P 500 ETF Over a 10 year span, the ETF out performed the Index Mutual Fund. Neither the Mutual Fund nor the ETF was able to perfectly track the actual Market Index.

24. Advantages of An ETF Over a Traditional Index Fund(SPDR S&P 500 ETF) • ETF is both diversifiable like mutual funds and tradable like stock • Lower expense ratios than the lowest-cost index mutual funds • Lower minimum investments (can buy one share instead of having to invest $2500 or more – some index funds require $10,000) • More accessible since can trade them with any broker • No surprise in price since traded all throughout the day

25. WORD OF CAUTION IMPORTANT!!! You must assess your risk tolerance and decide whether these would be a wise investment vehicle for your portfolio. When properly used, they can greatly compliment many portfolios. Mutual Funds ETF’s

26. CONCLUSION ETFs are constantly growing in popularity and availability and can be added to a 401k plan. Possible alternatives to traditional mutual funds while still providing diversification.