Exchange Trade 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 trade funds (ETFs for short) have only recently begun to draw fast-growing invest interest nationwide, but the concept has been around for quite a while. In 1993, the American Stock Exchange began offering the first EFTs 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 US EFT’s continue to trade on the Amex including the most actively traded EFT’s today, the Nasdaq 100 Trust, known by its distinctive ticker symbol QQQQ.
An EFT is an index fund that traders on and exchange like a stock, as throughout the day. If you buy it, you do not get professional management: the EFT’s 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 cost of EFT’s are often substantially lower than the cost of management’s funds-and since they are not managed, there is no danger of “style drift” or manager changes.
Another potential advantage of EFT’s that large institutional investor can purchase or redeem.
“Creation units” of an EFT’s, in large blocks at net asset value, through contributions or redemptions of in-kind baskets of the funds and underlying stocks, with very little transfer of cash. So there is little or no need for the EFT 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 little divergence between an EFT’s net asset value and its market price.
(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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