Finance 101: Exchange Traded Funds
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Exchange traded funds are complete vehicle of investment in its own category. And they are available in order to invest in the exchange traded funds, the formulas are the same as the rest of the investment. First you must decide why you want to trade in the exchange traded funds. Then you’ll have to start your homework, your research and come up with a list of best funds that will fit your criteria. You must keep your aim and goal of investing in mind before you start looking into investing in the stock exchange period funds. You should not deviate from your plan, from your philosophy and the net results you want to achieve. Keeping all above in mind then you start searching for the stock exchange traded funds that suits you 15-year program and it gives you the end results that you want. It will be helpful if you go and discuss all this with your investment advisor. Exchange traded funds can bring you very good re4sults once you have followed the basic principles of investing and you have done your homework completely and thoroughly. Before starting to finalize your list or shortlist, first you must go through the entire stock traded funds that are available. Look at the history when they were started. What kind of results did they have? Which are the funds that give you consistent better results? Also try to sort out the funds that have a great fluctuation and trade like a yoyo. You want to invest in the funds that have a long history or stable and have been producing good results for a number of years.
It’s a great way to diversify in a given section. In some cases, it is similar to the mutual funds. You will find exchange made of funds domestic international worldwide. Then you can decide and take your pick which sector and world you want to continue on.
Exchange-traded funds (ETFs for short) have only recently begun to draw fast-growing investor interest nationwide, but the concept has been around for quite a while. In 1993, The American Stock Exchange began offering the first ETF in the United States, the SPDR 500 Trust (often called the Spider). It allows the investor to invest in the entire S&P 500 with a single security. Most U.S. ETFs continue to trade on the Amex- including the most actively traded ETF today, the Nasdaq 100 Trust, known by its distinctive ticker symbol, QQQ.
An ETF is an index fund that trades on an exchange like a stock; as with a stock, it can be bought and sold at any time, and its price fluctuates throughout the day. If you buy it, you do not get professional management: the ETF simply tracks the performance of the related index or basket of securities. On the other hand, you also don’t pay for professional management. The annual costs of ETFs are often substantially lower than the costs of managed funds – and since they are not managed, there is no danger of “style drift” or manager changes.
Another potential advantage of ETFs is that large institutional investors can purchase or redeem “creation units” of an ETF, in large blocks as net asset value, through contributions or redemptions of in-kind baskets of the fund’s underlying stocks, with very little transfer of cash. So there is little need or no need for the ETF to raise cash to meet redemptions. That means that there are few or no taxable capital gains to report at year end, and there is a little divergence between an ETF’s net asset value.
The main disadvantage of ETFs concerns the investor who uses dollar-cost averaging to invest through small periodic purchases. Buying and selling ETFs will trigger commissions the same as buying and selling stocks, so small, frequent transactions are not as economical in ETFs as in many managed funds, or traditional index funds, that offer such programs.
But for the buy-and-hold investor, ETFs can deliver substantial diversification at low cost. Through a selection of ETFs in various sectors of the market – large-capitalization growth, small-cap growth, large- and small-cap value, and international, for example – you can use ETFs to rebalance your portfolio every year or so, taking advantage of the way these sectors move relative to one another.
For information on whether exchange-traded funds can help you pursue your financial goals, talk with your financial advisor.
Exchange-traded funds are subject to risks similar to those of stocks. Investment returns may fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Request a free prospectus, which contains more complete information, including charges, fees and expenses. Read it carefully before you invest.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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