RSSWhy Wait to Get Your ETF Education?
By Tom Lydon | November 06, 2008 | 4:38 PM | 0 Comments
It's depressing out there for the markets and exchange traded funds (ETFs). Investors are waiting on the sidelines, looking for some sign that it's time to get back in. We're like the kids in the backseat, whining "Are we there yet??" But "there" is now "the bottom" - not Disneyland.
Why not use this time to bone up on some ETF education? After all, we'll get "there" someday, and this sidelined money is going to be looking for a home. It's better to educate yourself now, while you have the time, instead of trying to do it on the fly.
One thing we hear frequently from the ETF industry is that education is sorely lacking. Sure, there are webinars, books, conferences. But the general sense we get is that the ETF industry could always be doing more. More can be done to inform investors about the existence of ETFs, how they can benefit from them, and to teach them about the importance of low fees and transparency.
Many investors already know about these things. But what about the finer points?
As big believers in ETFs and the superior benefits they offer, we're all about doing our part here. With that in mind, here are some interesting things investors might want to know, or just be curious about, when it comes to ETFs.
Why is size important with ETFs?
In a word, liquidity. Heavier trading volumes tend to be associated with larger funds that can spread expenses over a large base of ownership. An ETFs expense ratio can represents a constant cost paid over an investors entire holding period of the fund, but trading expenses can also eat into the overall return on the investment.
How does tracking error happen?
Tracking error, the difference between an ETF's return and that of the index it's tracking, happens for a couple reasons. Some ETFs are "niche" funds that track obscure, less liquid indexes. Another factor is index optimization, which can be done when replication isn't possible because of cause, limits on share ownership, etc.
What happens when an ETF closes?
Once it is announced that an ETF is closing, there is a period of a few weeks where it's still traded. During this timeframe, everything proceeds as it normally would and the buying and selling of shares continues. On closing day, trading ceases and the provider has two weeks to sell the underlying securities. Procees are then distributed to the owner of record. If you're holding an ETF on closing day, you run the risk that those securities could go down between closing and selling time.
What things should I ask before buying an ETF?
- Does this fund enhance my portfolio and keep it diversified? Will I be well-rounded?
- Or, on the other hand, does this fund only amplify areas where I'm already allocated? Will I be overweight if I get this fund?
- Do I understand the expenses, risks and underlying holdings of this fund? You should always know what you own.
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