| Exchange Traded Funds, or ETF's as they are | | | | is that ETFs trade just like stocks. Their stock-like |
| commonly referred to, are quickly becoming the | | | | features include the ability to sell short, use |
| new darlings of Wall Street. The first U.S. ETF | | | | stop-loss orders or buy on margin. ETFs also have |
| was the Standard & Poor's Depository | | | | the capability for options to be written against |
| Receipt, or "Spiders", which was introduced on the | | | | them. Another important difference is the fact |
| American Stock Exchange in 1993. Since then | | | | that ETFs are more liquid investments than |
| they have grown in number. ETFs grew from 100 | | | | mutual funds. ETFs trade throughout the day, |
| ETF funds at the beginning of 2006 to over 400 | | | | whereas mutual fund investors can only purchase |
| funds by the end of that year. Their original | | | | or sell units at the end of the day. |
| design was intended to compete with index funds. | | | | While ETFs may appear to be an ideal investment |
| So what exactly are ETFs? An ETF is similar to a | | | | there are some disadvantages. Like stocks, ETFs |
| mutual fund in that each ETF share gives the | | | | charge a commission every time an investor buys |
| investor a tiny piece of the numerous companies | | | | or sells an ETF. Commissions make ETFs |
| that are held in the fund. Like an Index Mutual | | | | somewhat unattractive, due to their high cost. |
| Fund an ETF is a type of investment company | | | | One of the biggest advantages of mutual funds is |
| which invests its funds in stocks that mirror some | | | | the ability to buy and sell them without incurring |
| particular market index, such as the S&P 500 | | | | any commissions. ETFs often trade their shares |
| or the NASDAQ 100. The ETF fund's portfolio of | | | | more rapidly to maintain a higher cost basis of |
| public company stocks is packaged into Creation | | | | their underlying shares and this can result in ETF |
| Units, which are sold to large investors (i.e. | | | | dividends failing to be treated as qualified |
| institutional investors) in the primary market. The | | | | dividends. Qualified dividends have a low 15% tax |
| institutional investors then split up these Creation | | | | rate. |
| Units into smaller units, or shares, which are then | | | | ETFs can be grouped into four basic categories: |
| sold as ETF shares to smaller investors on the | | | | Broad-Based ETFs, Fixed Income ETFs, |
| secondary market. All ETFs seek to achieve the | | | | International ETFs and Sector ETFs. Broad-Based |
| same returns as the particular market index it | | | | ETFs follow specific indexes styles such as |
| mirrors. For example "Spiders" invest in all of the | | | | growth indexes, value indexes, small-cap, mid-cap |
| stocks contained in the S&P 500 Composite | | | | and large- cap indexes. Fixed Income ETFs track |
| Stock Price Index. | | | | indexes for corporate and Treasury bonds. |
| The main attraction of ETFs for investors is their | | | | International ETFs track indexes for foreign |
| very low expense ratios (fees charged by the | | | | countries as well as international regions (i.e. Asia). |
| fund, expressed as a percentage) compared to | | | | Sector ETFs track indexes for specific industries |
| that of mutual funds. An ETF fund typically | | | | such as health care. |
| charges between .1%-1%, whereas mutual fund | | | | ETFs can minimize market risk by allowing a |
| fees can range from 1%-3%. Also, ETFs have a | | | | broad investment opportunity. Imagine having the |
| much lower turnover ratio (the sale of | | | | opportunity to invest in 3,000 companies at once. |
| company-owned stock that is sold within the fund | | | | It would take some disaster to the entire U.S. |
| during the year, also expressed as a percentage) | | | | market to negatively impact your ETF |
| as compared to traditional mutual funds. This | | | | investments. ETFs offer diversification, liquidity and |
| lower turnover ratio means less capital gains | | | | tax efficiency like no other investment. Individuals |
| distributions to investors and thus lower taxation. | | | | work hard for their money and oftentimes rely |
| ETF investors generally only realize capital gains | | | | on their financial advisors to provide them with as |
| when they sell their ETF shares. For this reason | | | | much upside potential as possible while limiting the |
| ETFs are considered tax efficient investments. | | | | downside. ETFs help both Financial Advisors and |
| The main advantage of ETFs over mutual funds, | | | | their clients sleep better at night. |
| besides the low expense and low turnover rates, | | | | |