Create a broadly diversified portfolio
This guide tells you what you need to know about ETFs - one of the most dynamic groups of products to reach the market in recent years.
The guide explains how ETFs are created, the range of choices you have, and how you can use ETFs to create a broadly diversified portfolio.
exchange traded funds
each etf holds a portfolio of securities or other investment products.
Exchange traded funds (ETFs) combine some features of individual stocks with others that are characteristic of mutual funds. But that doesn’t mean these investment products are ungainly hybrids. Rather, they offer both individuals and institutions an easy-to-use alternative for converting their investment strategies into action, whether those strategies are as basic as diversification or as potentially complex as hedging risk.
Identity Check
Like stocks, ETfs are listed on a securities exchange, purchased through a brokerage account, and traded throughout the day at prices set by supply and demand and other market forces. You can give limit as well as market orders. You can sell ETF’s short, buy them on margin, and on some but not all, purchase options contracts.
Like mutual funds, each ETF owns a portfolio—typically referred to as a basket—of securities appropriate to its investment objective, which is stated in its prospectus. Similarly as well, an ETF provides its shareholders with the opportunity to benefit from the collective performance—or share the losses—of the fund’s underlying investments without having to purchase them individually.
Mutual funds and ETFs, but not exchange-traded commodity funds or notes, are governed by provisions of the Investment Company Act of 1940, which among other things limits their use of leverage and requires a daily valuation.
creating an etf
there are a lot of players present at the creation of a new etf.
Creating an ETF has much in common with issuing new stock or inaugurating a mutual fund. But there are some important differences that make this event unique. One of the most relevant is the number of individuals and organizations who play a role in the process: a sponsoring investment company, an index provider, a custodian, a number of authorized participants and the Securities and Exchange Commission (SEC) in its role as securities regulator. Another is the process through which the creation occurs.
The First Steps
An ETF sponsor or distributor begins the creation process by identifying the fund’s investment niche and determining its underlying assets, in most cases by selecting an index that’s available to license or collaborating with an index provider on the creation of a new index.
Sponsors generally offer a family of ETFs and have a particular strategy for or philosophy about ETF construction. Some work at building a broad and deep roster of traditional index-based funds. Others take a smaller-scale but less conventional approach, which may include redefining what index means.
It’s also the sponsor’s responsibility to register with the SEC, to create and market the fund, to select the bank that will act as custodian, and to identify authorized participants who will provide the underlying assets in exchange for shares they can sell on the open market.
Finally, the sponsor must create enough interest in the new ETF so that investors will buy it.