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Electronically Traded Funds (Exchange Traded Funds)

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Presentation on theme: "Electronically Traded Funds (Exchange Traded Funds)"— Presentation transcript:

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/m arketcapitalization.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/in dexes/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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