ETF’s Popularity Rises Amidst Mutual Fund
Scandals
What is an ETF?
What are ETFs one may ask? ETF is an acronym which stands for Exchange
Traded Funds, they are index funds which trade on stocks, they are fairly
new, and have been available for trading in the United States fairly recently,
with the NASDAQ market pioneering its development. While Mutual fund trading
is marked by price inefficiencies, ETFs are far more efficient, in the
sense that they mirror and track the underlying index very closely.
Reasons for the growing popularity of Exchange
Traded Funds (ETF) vis-à-vis Mutual Funds
Because of the price inefficiencies that have given room to wide spread
scandals, some investors have switched to ETFs as alternative to mutual
funds according to published reports. The process of trading an ETF generally
sidesteps some of the scandals revealed in the mutual fund investigations.
ETFs are largely immune to the market-timing abuses, which are currently
being investigated by state and federal industry regulators.
Advantages of ETF over Mutual Funds
Part of the reason stems from the fact that unlike mutual funds, which
have their prices set once a day at 4 p.m. EST. an ETF trades continuously
on exchanges; hence it does not leave room for price manipulations and
market timing strategies that are largely abused by influential market
participants.
ETFs can also be sold short as stocks are; a strategy used to bet that
prices might fall. More importantly, ETF trading avoids the uptick rule,
a strategy to sell stocks short only when the last trading activity in
the stock pushes its price up. Such strategy is used to prevent massive
declines, which may result from increased short selling activities. This
rule does not apply to ETF’s; this means ETFs can be bought and
sold short regardless of market conditions.
Exchange Traded Funds : Current Scenario
Currently there are about 100 ETFs available for trading, ranging from
SPDRS to Diamonds, tracking both broad and narrow exchange indexes. Some
of the disadvantages of ETFs include its high commission cost. They are
not made for everyone, and trading these instruments require broad knowledge
about the stock market indexes upon which such ETF is constructed.
ETF: Future Trends
The unique thing with ETFs is money is not exchanged when you sell them.
An authorized participant buys large block of ETFs on the open market and
sends it to the custodial bank and in return receives back an equivalent
basket of individual stocks, which are then sold on the open market or typically
returned to their loanees. They trade in large blocks; hence Exchange Traded
Funds are very suitable for managers handling large blocks of trades or
institutional investors with large sums to invest. ETFs are currently not
traded in all exchanges, but as its popularity continues to grow, expect
to see these trading instruments on every global exchange.
Paul Oranika
Editor-in Chief
Hedgeco.net
Email: Editor@hedgeco.net
Related Reading:
 Mutual
Fund Scandal Fails To Derail Gains By Stock Funds
New
Mutual Fund Product launched Utilizing Hedge Fund Strategies
SEC
(Securities and Exchange Commission) Turns its Attention to Mutual Fund
Brokerage Scandals
An
Appraisal Of Asia-Pacific Fund Investment Market
Other Useful Links:
What
is a Hedge Fund?
Hedge
Fund Performance
|
