Hola!!!
A bunch of papers rustle right beside the shallow ears of John, awakening him from the deep sleep, he opens his drowsy eyes to see Mike struggling with bunch of papers around him to determine which company is better than other to invest in, John immediately says why do you struggle with these papers every day and spoil my sleep. Mike responds back saying, even I wish there was someone who could do all this for me by allocating all my investments into broad spectrum of companies and pay me dividends every quarter. Immediately, John responds WTF, so, you really don’t know about ETF, and he starts explaining Mike as follows:
ETFs
John: What is an ETF?
Mike: It appears like a cousin of WTF, is it really that?
An ETF is an abbreviation of Exchange Traded Fund, which is an investment fund traded on stock exchanges, much like stocks. ETFs are a type of exchange traded investment product that must register with the SEC under the 1940 act as either an open-end investment company or a unit investment trust.
John: Do they take in any structure on how they manage funds?
Mike: Yeah, any model with proper structure is popular, it’s better these have too. Hehe!!!
An ETF owns assets like bonds, stocks, gold, etc., and divides ownership of itself into shares that are held by investors. ETFs are similar in many ways to traditional mutual funds, except that these can be bought and sold throughout the day like stocks.
John: What is the history of ETFs?
Mike: wow!!! they have a history, I thought these are new. Hmm!!!
ETFs had their genesis in 1989 with Index Participation Shares, an S&P 500 proxy that traded on the American Stock Exchange and the Philadelphia Stock Exchange. This product, however, was short-lived after a lawsuit by the Chicago Mercantile Exchange was successful in stopping sales in the United States.
A similar product, Toronto Index Participation Shares, started trading on the Toronto Stock Exchange (TSE) in 1990. The shares, which tracked the TSE 35 and later the TSE 100 indices, proved to be popular. The popularity of these products led the American Stock Exchange to try to develop something that would satisfy SEC regulation in the United States.
Nathan Most and Steven Bloom, under the direction of Ivers Riley, designed and developed Standard & Poor's Depositary Receipts (NYSE Arca: SPY), which were introduced in January 1993. Known as SPDRs or "Spiders", the fund became the largest ETF in the world.
John: What makes ETFs trading more promising?
Mike: Because there are more people regarded and they promise more. Simple
ETFs offer both tax efficiency as well as lower transaction and management costs. More than US$2 trillion* were invested in ETFs in the United States between when they were introduced in 1993 and 2015. By the end of 2015, ETFs offered "1,800 different products, covering almost every conceivable market sector, niche and trading strategy.
John: What are the various types of ETFs?
Mike: Maybe an ETF for each sector of the manufacture. Is that it??
Index ETFs: Most ETFs trading in the marketplace is index-based ETFs. These ETFs seek to track a securities index like the S&P 500 stock index and generally invest primarily in the component securities of the index.
Stock ETFs: These are the popular stock ETFs which allocate based on the market cap of certain companies, such as large-cap, small cap, growth, value and other stocks.
Bond ETFs: ETFs that invest in bonds are known as bond ETFs. These are known to thrive in economic recessions as investors get into bond markets as uncertainty looms around stocks.
Commodity ETFs: Commodity ETFs primarily invest in commodities, such as precious metals, agricultural products, or hydrocarbons. Gold ETFs are highly popular and widely accepted as they tend to keep reserve of gold reserves equivalent in vaults.
Currency ETFs: Currency ETFs offer investors exposure to a single currency or a basket of currencies. The fund is comprised of currency futures contracts.
Actively Managed ETFs: Actively Managed ETFs are not based on an index. Instead, they seek to achieve a stated investment objective by investing in a portfolio of stocks, bonds and other assets.
Inverse ETFs: Inverse ETFs are constructed by using various derivatives for the purpose of profiting from a decline in the value of the underlying benchmark. These usually work just opposite to market.
John: What are the most popular ETFs?
Mike: Yeah, I’m pumped up to invest in them right away. Come on say
• Standard & Poor's Depositary Receipts; SPDRs or "Spiders" (NYSE Arca: SPY)
• Dow Jones Industrial Average; "Dow Diamonds" (NYSE Arca: DIA)
• NASDAQ-100; "Cubes" (NASDAQ: QQQ)
John: What are the benefits and risks of ETFs?
Mike: I personally think, it’s not at all risky, since, I’m not using my intelligence. Thank god
There are numerous advantages to ETFs, especially when compared to mutual fund, which function in a similar fashion.
Diversification: One ETF can give exposure to a group of equities, market segments, or styles. An ETF can track a broader range of stocks, or even attempt to mimic the returns of a country or a group of countries.
Trades Like a Stock: ETFs can be purchased on margin and sold short. ETFs trade at a price that is updated throughout the day. ETFs also allow you to manage risk by trading futures and options just like a stock.
Lower Fees: ETFs, which are passively managed, have much lower expense ratios compared to actively managed funds.
Immediately Reinvested Dividends: The dividends of the companies in an open-ended ETF are reinvested immediately.
Limited Capital Gains Tax: when an ETF buys or sells shares, it's considered an in-kind redemption and does not result in a tax charge.
Lower Discount or Premium in Price: There is a lower chance of ETF share prices being higher or lower than their actual value. ETFs trade throughout the day at a price close to the price of the underlying securities, so if the price is significantly higher or lower than the net asset value, arbitrage will bring the price back in line.
Less Diversification: For some sectors or foreign stocks, investors might be limited to large-cap stocks due to a narrow group of equities in the market index.
Intraday Pricing Might Be Overkill: Longer-term investors could have a time horizon of 10 to 15 years, so they may not benefit from the intraday pricing changes.
Costs Could Be Higher: Most people compare trading ETFs with trading other funds, but if you compare ETFs to investing in a specific stock, then the costs are higher.
Lower Dividend Yields: There are dividend-paying ETFs, but the yields may not be as high as owning a high-yielding stock or group of stocks.
Leveraged ETF Returns Skewed: A leveraged ETF is a fund that uses financial derivatives and debt to amplify the returns of an underlying index.
Tidbit Wrap
ETFs is a registered trade, investment product which receives an exposure to a diversified number of companies in all sectors and brought into one unit to perform regular trading options or vest for a long term capital appreciation for to participate in the development of the whole sector instead of picking a few public companies from any financial market.
Opportunities are diversification, lower fees and trades like a stock
Obstacles are Intraday pricing, lower dividend yield
Who should invest here:
An investor who is positive about the development of a certain sector but has no willingness to pass time in analyzing individual companies to invest in and also wants to reduce the fees connected with trading individual companies would pick ETFs. ETFs also will be admired by the investor who is happy to pay less as a capital gains tax and not keen on reducing dividend payouts.
John finishes explaining and warns Mike by saying, “If you continue to spoil my sleep from now on, I’m going to kill you.” Mike laughs and says, “I was just planning to bring some journals on ETFs to start hustling, to get started.”
ETF’s Performance:
Let’s discuss a sample of ETFs performance from Mr.Vinstors# portfolio:
SPDR S&P 500 ETF Trust (SPY) – 0 stock splits
Then Year1995 - 100shares (100x55) = $5500 **
Now Year2020 – 100shares (100x320) = $32,000 **
Vanguard Total Stock Market Index Fund ETF Shares (VTI) – 1 stock splits
Then Year2005 - 100shares (100x60) = $6000 **
Now Year2020 – 100shares (100x165) = $16,500 **
SPDR Dow Jones Industrial Average ETF Trust (DIA) – 0 stock splits
Then Year2000 - 100shares (100x105) = $10,500 **
Now Year2020 – 100shares (100x266) = $26,600 **
Invesco QQQ Trust (QQQ) – 1 stock splits
Then Year2000 - 100shares (100x90) = $9000 **
Now Year2020 – 100shares (100x260) = $26,000 **
iShares Russell 2000 ETF (IWM) – 1 stock splits
Then Year2000 - 100shares (100x50) = $5000 **
Now Year2020 – 100shares (100x150) = $15,000 **
#Vinstor – The Value Street Value Investor
*These are subjected to changes.
**These are varying estimated values obtained from the historical data on the corresponding companies used as examples for conceptual understanding and do not represent any financial data or investment advice.
Disclaimer : All the conversations are solely for the understanding of the concepts and doesnot represent any live examples.
