Squaring off your positions:

One of the obvious reasons why one should sell ETFs is for booking profits. So let’s say you have been in a long position for a while now and you want to take out some or all profits then one can sell the ETFs and get profits out of it. Also if one believes that now the market is not going to take the price of this ETF any further one can choose to square off their long positions.

Reducing downward risk:

So if one is heavily invested in the market and is feeling the risk of turbulent markets he/she can choose to sell an Index ETF so to hedge their current positions. So even if the markets turn downward still shorting ETF would at least keep an investor away from heavy losses.

Reducing downward industry risk:

If one has good amount of investments in a particular sector or a commodity he/she should consider taking a short position for sector ETFs or Commodity ETFs respectively. So let’s say a trader is bullish about Information Technology sector and have heavily invested in several stocks belonging to that sector he should also sell I.T. Sector ETFs to hedge their current positions.

Reducing your risks in Futures and Options:

Weather you have invested in equity, index, ETFs or futures and options you can use ETFs to hedge your risks. So let’s say you are bullish about the Crude Oil prices and you are long on Crude Oil Call options, you can sell Oil ETFs to gain an exposure to the downside risk you might have if the Crude Oil Prices fall.

Bearish about markets:

If you are a firm believer that markets are going to fall, in that case also you should consider selling Index ETFs. Additionally, within all the sectors if you think that a particular sector is going to perform the worse you can also consider selling that sector’s ETF.

Therefore, if you want to hedge your current positions, book some profits or take advantage of bearish market you can consider selling ETFs.

Make 6% Per Month in ETFs. Trade only 10 minutes per evening. Click here to learn more.

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1.)    Costs involved: It is often talked about and is true in the majority of the cases that ETFs are the most cost efficient when expense ratios, management fees and brokerage fees are looked at. However, one should compare ETFs with the comparable mutual funds or indexes before making any decision based on the costs. One other thing to point out is commissions so if you are a trader you should also consider this expense before you start trading ETFs.

2.)    Objective: A Trader should be clear about his objectives and goals before taking an ETF position. One should ask himself/herself on why are they taking ETF position? Is it because they want to gain an exposure to a particular index? Or they want exposure to a particular sector? Are they looking to hedge their current positions? Whatever may be the reason one should figure out what are their objectives before narrowing down to a particular ETF.

3.)    Taxation: Even though ETFs have a tax advantage over other comparable Mutual Funds or other comparable financial instruments when talking about International ETFs it turns out that taxation part is not so gracious.

4.)    Time Line: Trader should think about for how long he/she wants to stay invested in a particular financial instrument because there are pros and cons of different ETFs based on their preferred time horizon.

5.)    Fully Research the ETFs: One of the best aspects about ETFs is the way how information is shared with current and prospective investors. Most updated scripts or securities held by ETFs are being shared openly. So if you are scoping out feasibility, you should start analyzing holdings of all the ETFs being considered by you. If you are looking at an Index ETF you can find out how ETFs have diversified their portfolio, if you are looking at Emerging Market ETFs you can find out which countries this ETF is focusing on, for sector ETF one can analyze the companies these ETFs have invested in.

So consider these aspects before you narrow down to a particular ETF.

Make 6% Per Month in ETFs. Trade only 10 minutes per evening. Click here to learn more.

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1.) Easy Trading

ETFs’ stock like feature makes it easy for individual investors, institutional investors and hedge funds to buy and sell these instruments. Unlike Mutual Funds one can trade ETFs on the exchange anytime during the trading session.

2.) Hassel Free Management

For some of the Index ETFs the prime goal of their establishment is to track the performance of an Index as opposed to Mutual Funds where they might look at outperforming an Index. Hence the risk associated with ETF is low coupled with low management fees.

3.) Futures and Options

If a trader is looking to use Futures and Options for hedging their current positions they do not need to think about the learning curve or directly get involved in risky F&Os instead one can invest in Derivatives ETF.

4.) Cost Effective

If these funds are compared with other available funds, ETFs have lower expense ratio and lower management fees.

5.) Transparency

All of the holdings of Exchange Traded Funds are broadcasted on daily basis. This feature keeps the investors satisfied as they can find out where their investments are being utilized.

6.) Taxes

When ETFs are compared to Mutual Funds then ETF wins the race for Capital gain taxes which are comparatively low.

7.) Hassel Free Portfolio Investment

If a trader believes that a particular sector is going to be a top gainer in near future he has an option of investing in a particular stock which belongs to that sector and keep a track on the price. This becomes risky since it’s hard to predict which stock will be a winner amongst all and also it’s a hassle to continuously keeping a track on the price. Instead trader can invest in Sector ETF which invests in several companies that belongs to that particular sector and in turn trader can stay out of the hassle.

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Exchange Traded Notes are in a way a combination of bonds and Exchange Traded Funds. They were first issued by Barclays Bank PLC. Generally, notes are type of secured bonds with fixed returns and with principle protection but Exchange Traded Notes are unsecured debts, the returns of these notes depend on how good or how bad the markets perform and there is no protection of investor’s principle how one would have in case of bonds. ETNs can also be stock like bought and sold on the exchange during the trading hours, this feature of ETN matches with that of ETF.

One feature that helps the traders to differentiate between ETN and ETF is that there is a maturity associated with ETNs, so one can trade the ETNs on the exchange or wait for the maturity and get the principle and the gains or losses on that particular day. One aspect that may affect the price of these notes is the credit rating of the issuer of the notes. Therefore, even though there is not much change in the price of index, the value of exchange traded notes may fall due to the drop in the credit rating of the issuer. As per the IRS’ tax guide lines normal tax rates will be applicable on gains from currency ETNs as opposed to ETFs where capital gain taxes are applied. So when ETNs are compared to ETFs from taxation perspective ETNs loses its edge.

There are different types of Exchange Traded Notes available in the market today. However, the four major types of ETNs are Currency ETNs, Commodity ETNs, strategy ETNs and Emerging Market ETNs. Most of you might be aware about three of the above four types but Strategy ETNs. So what are strategy ETNs? Strategy Exchange Traded Notes are associated with the performance of the index. So Index Long and Index Short are examples of strategy ETNs.  Two of the popular ETNs offered by Barclays are iPath CBOE S&P 500 Buy Write Index ETN (BWV) and Barclays GEMS IndexTM ETN (JEM).

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Institutional investors, Banks and Hedge Fund managers have already tried and tested ETF Funds so the popularity and growth seen in the recent years is due to these set of investors. Financial Guru’s and Researchers believe that the growth will continue since ETF funds have started attracting ordinary traders as well. If we look at asset growth then during the year 1995 approximately little over a billion dollars were invested in ETFs, then in year 2000 it grew to $62 billion approximately, in year 2005 it was around $300 billion and last year in 2008 it shoot up to around $540 billion.

Authorized participants act as a liaison between the investors and the ETF sponsors. They are the only party which deals with the sponsors and are also known as the market makers. In absence of market forces with the help of Arbitrage authorized participants try to bring the market price of ETF near to the current net asset value. More over arbitrage is not carried out to facilitate the investors or the ETF sponsors but it is done to earn a prospective profit out of it.

One of the important features of Exchange Traded Funds is the availability of information, institutional investors and banks that offer these funds fully share their holding details (as opposed to mutual funds who is unwilling to share their holding details). Additionally, a comprehensive detail of the holdings of a particular ETF also helps the traders to make a decision on including an ETF into their investment portfolio. Since holding an ETF is like holding stocks of several companies, it provides more diversified portfolio which is less risky and of course by investing in ETFs one is staying away from managing and daily tracking of bunch of stocks.

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Some of the examples of Divided ETF are:

1.)    Power Shares Dividend Achievers (PFM): is a portfolio where the fund has invested in group of diversified dividend paying companies. Amongst these companies some have increased their dividends from last twenty two years on an average and annually by 12% from last ten years. Top five companies where PFM has invested in today are Wal-Mart Stores, Inc. (4.97%), Johnson & Johnson (4.77%), International Business Machines Corp (4.7%), ExxonMobil Corporation (4.67%) and AT&T Inc. (4.66%).

2.)    Power Shares International Dividend Achievers (PID): this portfolio tracks the dividend growth of international companies which are listed in the American exchanges as ADRs over a period of five years. Top five holdings of this portfolio is Banco Bibao Vizcaya Argentaria SA ADR (4.47%), Vodafone Group PLC ADR (3.18%), CRH PLC ADR (3.09%), Southeast Airport Group ADR (3.03%) and National Grid PLC ADR (2.77%).

3.)    Power Shares High Growth Dividend Achievers (PHJ): is a portfolio of hundred dividend paying companies which includes companies that has the highest dividend growth rate annually for 10 years. Top five companies where this funds have invested are Wal-Mart Stores Inc. (4.66%), International Business Machines Corp (4.45%), PepsiCo Inc. (4.31%), McDonald’s Corporation (4.02%), Johnson & Johnson (3.92%).

Since the olden times when traders started investing in stocks listed on the exchange, Dividends have been a vital basis of returns out of stocks. If tax laws are not given importance dividends become a crucial aspect for many investors portfolio. So this is a great option for all the traders out there who wants to invest in ETF and wants ETF dividends.

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On the other side ETFs are completely opposite and comes into being with the stocks and not money. What I mean by this is Huge financial institutions already have invested billions of shares, so to create an ETF they strip off a part of their investment and gather a set of different stocks that fall under a particular category. Gathering a set of different stocks an index like fund is created which is being registered with a stock exchange and shares of that fund are being sold on the exchange. More shares of the fund can be added to the market if the financial institution decides to increase their investment in that set of different stocks.

Further, traders are choosing to invest in ETFs over Mutual Funds. Mutual Funds directly can be bought from Bank or Financial Institution with no sales charge or “load” but the management fees typically turns out to be high and on the other side you can buy or sell only at the closing price at the end of the trading session. ETF wins the competition if a trader is looking at ETF vs. Mutual Funds as the brokerage fees, expense ratio as well as taxes are lower with ETF and to top that ETF can be traded like a stock on the exchange.

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However investors should be aware about one aspect which can have an impact on their returns from ETFs. Investors should keep in mind that these instruments which are being traded on the exchange are subject to brokerage fee. Usually in the United States the brokerage fees hovers between $10 to $20, and at times it can also be as low as $3 with some discount brokers. As everyone is in the business to earn profits same is reflected in the brokers policies, so if someone wants to invest $300 per month may have a considerable proportion of investment ruined immediately, as opposed to someone making a $500,000 investment, the cost of brokerage fee may be minor.

Investor should also remember the expense ratio which is the administrative burden that the funds charges for investing trader’s money. As a trader if you are thinking on either investing in ETFs or mutual funds it’s important to remember that most mutual funds have higher expense ratio than comparable ETF expense ratio. For example: Mutual funds may charge somewhere between 1% to 3%, or more; while with ETF expense ratio mostly falls between 0.1% to 1% range. Merely looking at the percentage it may seem like a small difference but for an actual trader this difference in percentage can be an important driver while adding an investment to his/her portfolio.

If you are looking at all the expenses involved with ETF then taxation is also one expense to consider before making that investment decision. So again if we are looking at ETF in comparison to mutual funds since they are the most similar kind of investment instruments, from taxation perspective ETFs are more attractive than mutual funds.

The most important benefit for ETFs that it can be stock like traded on the exchange combined with the low ETF expense ratio makes it more lucrative for traders when they are compared with mutual funds, stocks, derivatives or bonds.

Make 6% Per Month in ETFs. Trade only 10 minutes per evening. Click here to learn more.

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