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Electronically Traded Funds ( E xchange T raded Funds)

Electronically Traded Funds ( E xchange T raded Funds). First…what is an Index?. A stock index is a compilation of stocks constructed in such a manor to track a particular market, sector, commodity, currency, bond, or other asset.* (Examples include tech, healthcare, & commodities)

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Electronically Traded Funds ( E xchange T raded Funds)

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  1. Electronically Traded Funds(Exchange Traded Funds)

  2. First…what is an Index? • A stock index is a compilation of stocks constructed in such a manor to track a particular market, sector, commodity, currency, bond, or other asset.* (Examples include tech, healthcare, & commodities) • E.g., Gold and Precious Metals- XAU http://www.investopedia.com/terms/m/marketcapitalization.asp

  3. Examples of Indexes • S&P 500 • Dow Jones Industrial Average • Nasdaq • An Index is just a list of stocks. Anyone can create one.

  4. How is the Index valued? • Ideally, a change in the price of an index represents an exactly proportional change in the stocks included in the index. • Average of the overall portfolio….sort of. • Weighted average based on Market Capitalization. http://www.investopedia.com/university/indexes/index1.asp

  5. How is the Index valued? • Each company in the index is weighted based on it’s value or “market capitalization.” • If a company has 35 million shares outstanding, each with a market value of $100, the company's market capitalization is $3.5 billion (35,000,000 x $100 per share).* *http://www.investopedia.com/terms/m/marketcapitalization.asp

  6. What is an ETF? Exchange Traded Fund(ETF) • Acts like an individual stock (this stock value follows value of index its based on) • Purchased directly on the market • Price is managed by arbitrageur to match index price • Traded any time of day Mutual Fund • Multiple individuals as owners of a “mutual” fund • Purchased from a broker • Usually actively managed; stocks might be moved in an out of the fund • Traded at evening only

  7. Benefits of ETFs • Low fees • One purchase of an index based stock, not multiple purchases • Tax treatment • Typically don’t pay out capital gains distributions • No need to constantly buy and sell multiple stocks • Diversification • Can invest in any index (energy, commodity, S&P) • You know exactly what’s in it • great for lump-sum investors, but you should use a traditional index fund if you’re buying a little bit at a time. http://guides.wsj.com/personal-finance/investing/how-to-choose-an-exchange-traded-fund-etf/

  8. Review • ETFs combine the range of a diversified portfolio with the simplicity of trading a single stock • Price of the ETF is closely matched with Net Asset Value (NAV) of index by arbitrageur • Cost-efficiency, tax-efficiency, flexibility http://www.nasdaq.com/investing/etfs/what-are-etfs.aspx#.UXbTVGu_gYM

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