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Exchange traded funds are used by WALT ST to (1) instantly establish, increase or decrease exposure to broad U.S. and international equity markets and sectors and U.S. bonds (2) track a benchmark through a single execution (3) trade equity and bond market exposure as easily as stocks, throughout the day.
WALT ST uses ETFs as a hedging vehicle, a means of equitizing cash or maintaining market exposure during periods of transition. WALT ST likes ETFs because they are tax efficient, easy to trade and relatively inexpensive. Effectively, the convenience of ETFs enable the pursuit of a wide variety of investment strategies.
What are exchange traded funds?
Exchange traded funds (ETFs) represent shares of ownership in either funds or unit investment trusts that hold portfolios of common stocks or bonds, which are designed to generally correspond to the price and yield performance of their underlying indexes, either broad stock market, stock industry sector, international stock, or U.S. bond. ETFs give investors the opportunity to buy or sell an entire portfolio of stocks or bonds in a single security, as easily as buying or selling a share of stock. They offer a wide range of investment opportunities.
ETF Structure
ETFs are open-ended registered investment companies under the Investment Company Act of 1940 that have been granted certain exemptive relief from the SEC to allow secondary market trading on the Exchange.
The advantages of ETFs
Tax efficiency
ETFs, like index funds in general, tend to offer greater tax benefits because they typically generate fewer capital gains than actively managed funds due to low portfolio turnover. Generally, an ETF only sells securities to reflect changes in the composition of its corresponding index. Exchange trading of ETFs further enhances their tax efficiency. Investors who want to liquidate shares in an ETF simply sell them to other investors, thus not requiring the fund to sell securities and generate capital gains tax liability. In addition, the creation and redemption process involves an "in kind" transfer of securities, a transaction that is not a taxable event for the fund or trust. This means that imbalances between supply and demand for ETF shares can be satisfied through the creation and redemption process and will not have an adverse taxable effect upon existing ETF shareholders.
Lower costs
Lower turnover costs--Because they are index-based, ETFs require few portfolio changes, resulting in much lower transaction costs than actively managed portfolios.
Lower expense ratios--As passive investments, ETFs also have lower operating expenses and lower management fees, resulting in lower annual expense ratios than many other registered investment products.
Lower operational costs--Since ETFs trade on an exchange and use "in kind" Creation and Redemption, they are insulated from the costs of buying and selling securities to accommodate shareholder purchases and redemptions.
Lower trading costs--Spreads on many ETFs tend to be narrow making them inexpensive to buy and sell. Of course, some ETFs will have much wider spreads and the cost of these spreads, as well as commission costs, should be taken into account when assessing the overall costs of exchange traded funds.
Transparency
To facilitate an ETF's unique Creation and Redemption process, the composition file for each ETF creation unit is published daily. Since an ETF's holdings are designed to provide performance similar to its underlying index, investors will essentially know the securities that are held in an ETF and their weightings.
Buying and selling flexibility Because they are exchange traded, ETFs can be bought and sold at intraday market prices
All day tracking and trading
Investors can track ETF prices throughout the trading day and adjust portfolio holdings to capitalize on changes in the market.
Diversification
Because each ETF represents a basket of stocks or bonds, it inherently provides diversification across an entire index. Additionally, the expanding universe of ETFs available at the American Stock Exchange offers exposure to a diverse variety of markets, including:
broad-based equity indexes (such as total market, large-cap growth, and small-cap value)
broad-based international and country-specific equity indexes (such as Europe, EAFE, and Japan)
industry sector-specific equity indexes (such as healthcare, energy, and real estate)
U.S. bond indexes (such as long-term Treasury bonds and corporate bonds)
Dividend opportunities
Dividends paid by companies and interest paid by bonds held in an ETF are distributed to ETF holders, less expenses, on a pro rata basis. Of course, not all companies will pay dividends. Based on past performance, few, if any, distributions can be expected from certain ETFs. There may also be opportunities for reinvestment of distributions.
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