Welcome to Firm Element Session 2 March 16, A Primer on Exchange Traded Funds -

Transcription

1 Welcome to Firm Element Session 2 March 16, A Primer on Exchange Traded Funds - The Webinar will start shortly and all phones will be muted by the presenter. Please any questions you have to Lori during the session. There will be a Q&A period toward the end of the session at which time they will be addressed. Please be attentive and record the 4 key words that will be provided during the session. After the session, please them to Lori. This is the only evidence of your attendance.

2 Exchange Traded Funds (ETF) Basics First created in 1993 under an exemptive relief from the SEC. Until 2008 they could only track designated indexes. Since 2008 the exemptive relief was extended to include Actively Managed funds. These funds must disclose component securities and weighting daily. By the end of 2009 there were $778 billion is total assets and about $1billion were actively managed.

3 Exchange Traded Funds (ETF) Basics The vast majority of ETF s are registered with the SEC under the 1940 Act. About 10% are commodity based and regulated by the Commodity Futures Trading Commission (CFTC) Commonly structured as an open end investment company, an ETF is similar to a mutual in that it offers investors a proportional share of a pool of securities.

4 Actively Managed ETF s (AME) vs Passively Managed ETF s Fairly new on the scene first created in While they represent a minority of all ETF s, they are rapidly growing in popularity and some believe they will overtake their passive counterparts in the future. Costs - Passive average 41 bps while actively managed range from bps depending on the role and responsibilities of the portfolio managers. Transparency ETFS are highly transparent to the investor with regard to composition. Actively managed are potentially less transparent due to intraday day trading activity.

5 Actively Managed ETF s (AME) vs Passively Managed ETF s Tax Efficiency passive ETF s sell only when rebalancing while active ETF s trade more frequently. Accordingly, Actively traded ETF s are genrally less tax efficient Flexibility AME s are more flexible because the manager can replace underperforming components. In addition, the managers can and do employ complex trading strategies in AME s

6 Differences Between Mutual Funds and Exchange Traded Funds -Taxes - Mutual Funds (MF s) generally fund redemptions by selling securities from their portfolio this can generate a capital gains tax which is spread across all shareholders. Exchange traded funds (ETF s) are not redeemed by the fund instead, they are sold in the secondary market for a gain or loss by the investor. Accordingly, ETF s are thought to be more tax efficient.

7 Differences Between Mutual Funds and Exchange Traded Funds - Fees - ETF s are generally constructed as indexes are not actively managed and therefore have lower fees average management fee of ETF s is around 41 bps vs 147 bps for equity funds and 61 bps for money market funds. Unlike Mutual Funds, most ETF s do not have ongoing 12b-1 charges.

8 Differences Between Mutual Funds and Exchange Traded Funds - Diversification - ETF s are generally more diversified than a Mutual Fund. -Pricing - ETF s trade in the open market at NAV and are priced every 15 seconds. Mutual Funds are priced at the end of each trading day (forward pricing) and are purchased after or before the market is open.

9 Differences Between Mutual Funds and Exchange Traded Funds - Flexibility - An ETF can be highly specialized and customized to track a very narrow index as compared to Mutual Funds making them generally more responsive to market news. ETF s can be loaned, sold short, bought on margin, and used for hedging. In general, ETF s are thought to be more flexible

10 In Summary The Advantages of ETF Investing Include: Broad Choice of Funds Ranging from Narrowly Focused to Broadly Diversified Higher Transparency than Mutual Funds Lower Cost Better Liquidity Pricing Trading

11 In Summary The Advantages of ETF Investing Include: Improved Tax Efficiency Appropriate for virtually any type and size of investor Available through NFS (Series 7 Required) Available through a variety of LifeMark Managed Account Platforms

12 Questions The PowerPoint presentation and additional reading material will be ed to you after this meeting. Please stay on the line for the final key word.