Lecture 7 - ETFs Flashcards
What is an ETF?
A basket of securities that tracks an underlying index
What type of investments can an ETF contain?
Stock, Commodities, Bonds, etc.
ETF benefits over mutual funds
- Buy and sell during market hours
- No investment minimums
- Tax efficient
- No sales load
Traditional ETFs
ETFs that are passive or designed to track an underlying index
Portfolio (Asset Allocation) ETF
VBAL (Vanguard Balanced ETF Portfolio)
Investment objective is to maintain long-term asset allocation of 60% equities and 40% fixed income
Active ETF
Attempt to outperform an index or benchmark by using stock selection, asset allocation, factor analysis or other PM strategies.
Types of Non-Traditional ETFs
1) Leveraged ETFs
2) Inverse ETFs
3) Factor-based ETFs
4) Hedged ETFs
5) Alternative Investments ETFs
Leveraged ETFs
Seek to deliver multiples of the performance of the index or benchmark they track.
Inverse ETFs
Seek to deliver the opposite of the performance of the index or benchmark they track
Pros of Inverse ETFs
- Allows investors to make money when the market or underlying index declines
- Helps investors hedge their investment portfolio
Cons of Inverse ETFs
- Can lead to losses quickly if investors bet wrong
- Can lead to losses if held more than one day
Leveraged and Inverse ETFs
Seek to achieve a return that is a multiple of the inverse performance of the underlying index or benchmark
Cons of Leveraged and Inverse ETFS
- Use derivative instruments
- These ETFs reset daily so they’re designed to meet their objective daily
Factor-Based ETFs
Implements factors such as volatility, yield, quality, momentum, value, size, etc.
Hedged ETF
Refers to currency-hedged ETFs as issuer takes a short position in foreign currency to match the total notional
