ETF and etfs

[punkass]

Yo, I was asking my friend about stocks....as I want to start investing (I just started a job and have lots of time)
My friend (who started last year) said he has some money in ETF. Not exchange-traded funds, but the symbol ETF. He says it's tied to tech-stocks. Does anyone know anything about this stock?

And now that I brought up ETFs (exchange-traded funds), are they a good place to invest? QQQ? SPY?

Please advise in both taxable accounts, and Roth IRAs.

Thanks.
Thanks for any help.

[GeorgeF]

My original post seems to have disappeared, anyway.

1) ETF is a well regarded closed end fund. You can research it at.
http://finance.yahoo.com/q?s=etf
www.sec.gov (http://www.sec.gov)
www.cefa.com (http://www.cefa.com)

It is currently selling for less than the value of the assets, which is possible in closed as opposed to mutual funds. This bargain price is partially due to the fact that 25% of the fund assets are in illiquid venture capital type things that are concentrated in Israel and are reported as fund manager estimates not market prices.

As to exchange traded index funds, they generally have lower annual expenses which is good but lack features like checking and automatic purchases from your paycheck.

As to IRA's it probably makes no sence to put tax free investments like munis or treasuries in an IRA. REITs, funds with high yearly cap gains distributions would be better of in an IRA. In general index funds like ETFs do not buy and sell their holding much so you will report few cp gains to the IRS, making the IRA advantage less important.

Roth IRAs allow you to prepay your taxes in hope of avoiding a large tax hit when you retire. You are assuming that 1) you will do real well and have large amounts of cap gains and 2) The tax rate in the future will be very high. It is possible that you will not do well in the market, meaning that pre paying taxes was a waste. It is also possible that in the future the government will be funded by means other than income taxes. For example in London England they are using a computer scheme to charge a toll on rush hour drivers everywhere in the city of London. All over the EU they collect a 'value added tax'. In the future schemes like these might reduce or eliminate the need for taxes on income. This would make the Roth IRA less valuable. The Bush tax cuts, if perminent, also make a IRAs less valuable.

You can also use IRAs to avoid taxes if you trade allot. I doubt you will make any money trading.

[Carl_William]

Some info on ETFs

Spiders (SPY) & Cubes (QQQ) have a low spread -- a penny up to a few cents. But many of the lesser traded ETFs usually have high spreads -- this could be very expensive -- so check the spread and who you are buying the ETFs from. Of course you should have a good discount broker (I use TD Waterhouse -- but there are a few brokerage firms with better rates than Waterhouse).


http://www.etfconnect.com/select/etf/etf.asp
Below info copied from the site URL listed above (I think)


Like a traditional mutual fund, an index ETF is an investment structure that pools the assets of its investors and uses public indexes to invest the money to meet clearly identified objectives, such as current income or capital appreciation. Unlike a mutual fund, an index ETF is created when an institutional investor deposits securities into the fund in return for creation units. In return for the deposit, the institutional investor receives a fixed amount of shares, some or all of which may be traded and priced throughout the day on a stock exchange such as the American Stock Exchange (AMEX). Retail investors who wish to buy or sell fund shares do not purchase or redeem directly from the fund - rather, they buy or sell fund shares on the stock exchange in a process identical to the purchase or sale of any other listed stock. All the strategies associated with stocks, such as market orders, limit orders, stop orders, short sales, and margin buying can be used in the purchase and sale of index ETFs. For index ETFs that are registered investment companies, annual management fees or trustee fees are also collected, ranging from 0.09% to 0.99% of fund assets. For index ETFs that are not registered investment companies (i.e. HOLDRs), an annual custody fee of 0.08% is charged if any of the underlying stocks pay dividends.

The price of an index ETF typically resembles, but is independent of, the underlying net-asset-value of the fund. When demand for fund shares exceeds supply, the market price at which an index ETF trades may be higher than its underlying net-asset-value. When there are more fund sellers than buyers, the market price may be lower than its net-asset-value.

Unlike Closed-End ETFs, the shares for an index exchange-traded fund can be created or deemed on a daily basis by market specialists. Also, institutional investors can redeem 50,000 share lots in-kind if there is a gap between the net-asset-value and the market price of the fund. These arbitrage opportunities typically create enough demand to minimize the gap between the fund net-asset-value and the fund price.

[Carl_William]

Re: ETF and etfs


Dear Punkass,

If you desire, you can spend $16.95 + tax for the book:

"All About Exchange-Traded Funds (The easy way to get started)," by Archie Richards, JR., McGraw-Hill,
ISBN 0-07-139302-1

This book will be a good reference if you want to learn more about ETFs. You can buy it at a Barns& Noble store or order it online. I have the book and I'm glad I bought it.

Myself I have some Spiders & Cubes. Hopefully the way they came about has a stable foundation -- I have read a few times how ETFs have been invented and came about -- but I still don't really understand it. The general consensus is that ETFs are safe

Like I previously mentioned, always check the spread for any ETF that you are considering. Big spreads can cost you lots of money. I think it will be sometime in the future before ETFs for the European, Australia, and Far-East stocks funds have reasonable spreads. So in the meantime, I recommend using a passive no-load low expense ratio mutual fund for investing in the EAFE index funds.

Sincerely

Carl

[Carl_William]

Punkass: Closed-end ETFs are known as CEFs

Index Exchange-Traded Funds (ETFs) and Closed-End ETFs (CEFs) feature intra-day trading and stock exchange listing. They rapidly are changing the way many financial advisors and investors manage their portfolios.

[punkass]

Is it changing for the better? Are these funds (ETFs and CEFs) replacing mutual funds as popular options?