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What is an ETF or ETN? : Guide to Exchange Traded Funds and Notes versus Mutual Funds

By Kim, Steven

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Book Id: WPLBN0003971990
Format Type: PDF (eBook)
File Size: 246.33 KB.
Reproduction Date: 8/21/2015

Title: What is an ETF or ETN? : Guide to Exchange Traded Funds and Notes versus Mutual Funds  
Author: Kim, Steven
Volume:
Language: English
Subject: Non Fiction, Bibliography, Investing
Collections: Contemporary Reviews, Authors Community, Bibliography, Finance Management, Technology, Commerce, Finance, Economy, Literature, History
Historic
Publication Date:
2015
Publisher: MintKit Press
Member Page: Steven Kim

Description
An exchange traded fund (ETF) is a communal vehicle for investment, as is an exchange traded note (ETN). This primer profiles the duo of instruments and compares them to mutual funds. The relative merits of the securities are explained, along with the grave risks both blatant and subtle. The serious investor has to juggle the crucial factors in order to thrash out a robust program of investment.

Summary
An exchange traded fund (ETF) is a communal vehicle for investment, as is an exchange traded note (ETN). This primer profiles the duo of instruments and compares them to mutual funds. The relative merits of the securities are explained, along with the grave risks both blatant and subtle. The serious investor has to juggle the crucial factors in order to thrash out a robust program of investment.

Excerpt
As a supple tool for investment, the exchange traded fund (ETF) has enjoyed explosive growth since its debut on the stock market. To a lesser extent, the story is similar for the exchange traded note (ETN). The popularity of these vehicles stems from the ease of investing in a diversity of assets at low cost. An ETF is an investment pool whose shares are listed on a bourse. For this reason, the securities can be bought and sold just like any other stock by way of an equity account at a brokerage firm. From a historical stance, the traditional form of communal investing lies in the mutual fund: a commercial trust whose shares are offered for sale directly to the general public. In other words, an investor deals with the operator of the collective pool in procuring and unloading the units. By contrast, the shares of an ETF are traded amongst the actors within the stock market. This primer begins by profiling the exchange traded fund. One topic deals with the similarities and differences between an ETF and a mutual fund. Another issue involves the contrast between active and passive modes of investment in tending a portfolio of any kind. A third and related factor concerns the role of an index fund as a showcase of the passive approach to investment. A fourth dimension lies in the face-off between direct and indirect types of widgets for investing in a given market. The duality of schemes, also known as physical versus synthetic modes, is especially relevant to the realm of exchange traded pools. A fifth, and related, item on the menu is a type of synthetic product known as the exchange traded note. This security resembles an equity in that it is listed on a stock exchange but in fact represents a form of debt. At the dawn of the millennium, the ETF market has grown at a giddy rate. A happy outcome is a plethora of choices for the thoughtful investor bent on drumming up a robust portfolio. On a negative note, though, a disturbing trend lies in the profusion of shaky vehicles cobbled together by a passel of peddlers. Unknown to the bulk of investors, the flimsy schemes adopted by the opportunists suffer from excessive risk in mottled ways. In the din and smog of the ETF field, the mass of investors have a patchy grasp of the tactics employed by the operators along with the dangers in store. Amid the pother, the upsurge of exchange traded pools has been setting the stage for a blowup of massive scale in the financial tract. As a move in the right direction, the first task of the prudent investor is to understand the distinctions between motley types of funds. The second step is to grasp the crucial features and veiled dangers lying behind the litter of exchange traded rigs. An exemplar lies in an index fund whose function is to track a popular benchmark of the market. Even for a straightforward task of this sort, the actual performance of the vehicle may differ a great deal from the perceptions of the investing public. A case in point is an ETF whose putative goal is to track the price of crude oil. Sadly, though, the vehicle has a custom of trailing behind its quarry by a woeful amount with each passing year. We will examine this dire case in detail later on. More generally, the structure and behavior of investment funds can differ greatly from the perceptions and expectations of the mass of investors. To compound the quandary, the prospect of a blowup – along with the scale of the aftershock – are apt to reach a peak at the worst possible moment; namely, a synchronized blowup of the financial markets. For a medley of reasons, then, the earnest investor takes care to understand the true nature of exchange traded products along with the techniques employed by their custodians. In this effort, the guidelines laid down below should serve as the bedrock for building up a sturdy program of investment.

Table of Contents
Climb and Slide of Mutual Funds Active versus Passive Ploys Hidden Dangers Travails of Index Funds Physical versus Synthetic Assets Exchange Traded Note Madness of the Mob Bane of Leverage Additional Forms of Risk Wrapup of the ETF and ETN Further Information References

 

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