All about exchange traded funds

• Book Title: All about Exchange-Traded Funds
• Author: Archie M. Richards
• Year written/published: 2003
• Summary: about Exchange Traded Funds, ETFs… Diamonds, Cubes and Spiders ;)
• Some extracts:

the Dow Jones Industrial Average

back in 1896, Charles H. Dow, editor of the fledging newspaper, the Wall Street Journal, had a problem. The readers were Wall Street investors, brokers, and market makers. The New York Stock Exchange closed each day at 3pm. Mr Dow wanted to provide some idea of how ‘the market’ had performed by the time the readers went home… … Out of the many stocks traded on the New York Stock Exchange, Mr. Dow selected 12 that seemed to have promise and represented the entire market as closely as possible. The number was later increased to 30…. … Dow simply added up the prices of the 30 stocks and divided by 30. Presto - the Dow Jones Industrial Average. As the individual prices fluctuated, so did the average. Dow also averages for railroad stocks and utilities.

John Bogle, founder of the Vanguard found some averages…

• front-end commisions: 0,5% per year
• opportunity costs
• commisions and spreads from high turnover rates
• federal and state taxes on dividends and capital gains
• management fees and operating expence

Index funds… note: there’s a difference between index funds and ETFs

An increasing number of open-ended mutual funds are called index funds. These select a market or industry index and acquire the actual stocks that are included in that index.

advantages of index funds…

• diversification
• professional management
• adding and withdrawing funds automatically
• reinvestments of dividends, interest, capital gains

disadvantages of index funds…

• capital gains, but no cash to pay the taxes
• costs
• lots of paperwork

basics of ETFs (Exchange Traded Funds)

An ETF is a cross between an individual stock and an index fund. Short term traders treat ETFs as stock and an index fund. Short Term traders treat ETFs as stock that have characteristics of index funds. The US. securities and exchange commisions regulates exchange-traded funds as mutual funds that have characteristics of stocks. Take your pick! ETFs resemble both!

investment and you…

don’t be an investment groupie. If you fail to set yourself apart form the investment crowd, you will be more inclined to act on hot tips. You will be more inclined to buy when you freinds are supremely confident and to sell when you friends are in despair. Buying high and selling low adds nothing to a fullfilment retirement. It may be too lonely a road to think of yourself as a loner. But nat least set yourself apart regarding your investments. Do not share with your friends the pride you feel about your gains. DO not seek commiseration about losses you suffered. When it comes to investments, stay quiet.

orders… some definitions to take note

• market orders
• market not held
• market on open
• market on close
• limit
• day orders
• good till cancelled (GTC)
• market if touched
• stop order
• stop limit
• cancel former order (CFO)

Fill or Kill order

how ETFs are superior to mutual funds…

• ETFs can be traded any time of the day
• minimum investments are lwoer
• lower operating cost
• ETFs can be sold short with no restrictions
• more trading other people do in ETF, the more efficient it becomes for you

some ETFs..

• Nasdaq: the Nasdaq 100 trust
• American Stock Exchange: Spiders, Diaminds
• Barclays GLobal Investors: iShares
• Vanguard Group: VIPERS
• Merrill Lynch: HOLDRs

symbols and funds…

• Nasdaq-100 index QQQ (Qubes)
• Standard and Poors 500 index SPY (spider)
• Dow Jones Industrial Average DIA (Diamonds)