What is an ETF?

We believe Exchange Traded Funds (ETFs) can provide an efficient and simple way to invest in different aspects of the economy.

An Exchange Traded Fund (ETF) allows investors to buy and sell an entire basket of securities, and may or may not track an index. There are passively managed ETFs and actively managed ETFs.

  • ETFs are listed on various exchanges. For instance, U.S. exchanges include the New York Stock Exchange (NYSE), Chicago Board Options Exchange (Cboe), and the Nasdaq Exchange.

  • While there are significant differences, ETFs act similar to stocks when traded. Investors can buy and sell ETF shares during market hours, like trading shares of a public company.

  • An ETF is a portfolio of securities, much like a mutual fund. ETFs can be based on an existing index or a unique mixture of stocks/securities that can change frequently, depending upon the strategy.

How are ETFs Different?

General Table for Comparison (for informational purposes ONLY, as a general overview. Not all ETFs are less expensive than some mutual funds.)

*For informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. Benefits may vary from fund to fund. Diversification may not protect against market risk. This material is not intended to be tax advice. The tax consequences of dividend distributions may vary by individual taxpayer.

*Please consult your tax professional or financial adviser for more information concerning your specific situation. Investors should carefully consider the investment objectives, risks, and expenses of any investment solution before investing.

What are the Benefits of using ETFs?

  • Liquidity

    ETF shares are bought and sold similar to a stock on an exchange. ETFs possess underlying liquidity, due to their unique creation and redemption process, so low trading volume should generally not impact an investor’s ability to trade the ETF during normal market hours.

  • Diversification

    ETFs allow investors to diversify their portfolio across a range of securities or asset classes, managing risk by spreading their investments across different sectors and industries.

  • Costs

    ETFs generally have, but don’t always have, lower fees than actively managed mutual funds, making them an attractive option for cost-conscious investors. Compared to buying single stocks, however, mutual fund and ETF investors bear their share of the fund’s brokerage cost.

  • Flexibility

    ETFs can be bought and sold similarly to individual stocks, allowing investors to easily adjust their portfolio as market conditions change.

  • Transparency

    Most ETFs are required to disclose their holdings on a daily basis, providing investors with a clear understanding of what they are invested in. Passive ETFs should generally reflect the index they seek to track. Mutual funds are not required to disclose their holdings daily. As an individual security, single stocks are inherently transparent.

  • Tax Efficiency

    ETFs tend to have lower capital gains distributions when compared to a similar peer group of mutual funds, which may result in lower tax liabilities for investors.

What are Drawbacks of Investing in ETFs?

Exchange-traded funds (ETFs) generally offer many benefits to investors, including diversification, low costs, flexibility, transparency, liquidity, and tax efficiency. However, there are also some potential drawbacks to consider when investing in ETFs:

Market risk - ETFs are subject to market risk, meaning that the value of the ETF can fluctuate based on changes in the underlying assets. This means that the value of an ETF may go up or down, depending on market conditions.

Tracking error - ETFs that are designed to track the performance of a specific index or asset class may still exhibit differences between the performance of the ETF and the underlying index. This is known as tracking error, and it can impact the returns that an investor realizes from an ETF.

Liquidity risk - Some ETFs may not be as liquid as other investments, which means that it may be more difficult to buy or sell the ETF when needed. This could potentially impact the price that an investor is able to get for the ETF.

Management fees - While ETFs generally have lower fees than actively managed mutual funds, they do still charge management fees. These fees can impact the overall returns that an investor realizes from the ETF.

*It is important for investors to carefully consider these potential drawbacks when deciding whether ETFs are appropriate for their investment portfolio. The above list is not comprehensive and is for informational purposes only. It is always recommended to consult with a financial advisor or conduct your own research and due diligence before making any investment decisions.

Active vs. Passive ETFs

ETFs can be actively managed or seek to provide investment results that correspond closely to a benchmark index. Parabla engages in active management.

Passive / Index ETFs

Passive / Index ETFs track an underlying index, such as the S&P 500, Dow Jones Industrial Average, or MSCI Emerging Markets Index. A passive ETF aims to match the performance of a given benchmark index and is therefore "passively managed." Generally, fund managers only change the asset allocation when changes occur in the underlying index.

Active ETFs

Active ETF management is based on research and the portfolio manager’s discretion within the investment strategies of the ETF, similar to an active mutual fund. Since the portfolio manager is picking stocks based on research, actively managed funds are not necessarily attempting to benchmark to the performance of a given index.

Overall, passive ETFs are suitable for investors who want a simple way to gain exposure to a specific market or asset class. Active ETFs may be suitable for investors who want a more actively managed portfolio. It is important for investors to carefully consider their investment goals and risk tolerance when deciding which type of ETF is appropriate for their portfolio. For more general details on ETF’s visit https://www.sec.gov/investor/alerts/etfs.pdf