What Is an ETF?

An ETF is essentially a portfolio of stocks (or in some cases other investments) that trade on a stock exchange much like a regular stock does. Its performance tracks an underlying index, which the ETF is designed to replicate. An S&P 500 ETF for example tracks the performance of a basket of stocks that make up the underlying components of the S&P 500 index.

An ETF's price changes throughout the day, fluctuating with supply and demand, unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day.

By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock. Because ETFs trade like stocks, you can short sell them, buy them on margin and purchase as little as one share. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade.

Varieties of ETFs ?
The first exchange-traded fund was the S&P 500 index fund (nicknamed spiders because of their SPDR ticker symbol), which began trading on the American Stock Exchange (AMEX) in 1993. Today - tracking a wide variety of sector-specific, country-specific and broad-market indexes - there are hundreds of ETFs trading on the open market. ?

According to Morgan Stanley, by the end of 2007, there were 1,171 ETFs trading worldwide, with assets approaching US$ 800 billion.
?
You can pretty much find an ETF for just about any kind of sector of the market. For example, if you were interested in the biotechnology sector, perhaps Barclay’s iShares Nasdaq Biotechnology Index Fund (ticker IBB) would be worth looking into. Does the Indian market pique your interest? Then take a look at the Societe Generale’s Lyxor ETF India (S&P CNX NIFTY) (ticker FC6). Or if you’d like exposure to the gold sector, then maybe Standard & Poors Depository Receipts’ SPDR Gold Trust (ticker 087) might be for you. ?

5 Best-Performing ETFs from March Lows

While the markets rode on an upward trend from March lows, some ETFs surprised and elated many with their huge rallies. Let’s take a look at some of the best showings.

•    Claymore/MAC Global Solar Energy (TAN): up 9.1% year-to-date; up 104.5% off its March 9 low
•    iPath MSCI India Index ETN (INP): up 54.6% year-to-date; up 102.7% off its March 9 low
•    Market Vectors Coal ETF (KOL): up 57.2% year-to-date; up 101.2% off its March 9 low
•    SPDR KBW Regional Banking (KRE): down 35.8% year-to-date; up 95.7% off its March 9 low
•    iShares MSCI Turkey Invest Mkt Index (TUR): up 40.3% year-to-date; up 94.0% off its March 9 low
* Source: ETFtrends.com

ETFs – right for you?

ETFs are index funds at heart, so investors are encouraged to study the philosophy of index investing which downplays stock picking in favour of buying the market.

ETFs can be a valuable component for any investor’s portfolio, from the most sophisticated institutional money manager to a novice investor who is getting started. Like other investments, it is important for the investor to evaluate the different options to ensure the right ETF is chosen for the job.

--

Sunil Khemlani
StoneBridge Securities (NZ) Limited
Tel: 09 308 0787
Email: sunil.khemlani@stonebridgegroup.co.nz

This is not an offer to deal in any financial product and is not specific advice for any particular investor. A full Disclosure Statement in accordance with the Securities Markets Act 1988 is available free of charge on request.