2. Mutual Funds
a. Definition – pool of money, Open-ended investment company
b. History / Purpose
c. Types: Growth, income, small-, medium-, and large-cap funds, money market, specific sector, industry, or type of security (201), international funds, and Index (202, use as Segway)
i. “After the initial success of the index fund, a variation was created: exchange-traded funds, commonly referred to as ETFs. As the name implies, and exchange-traded fund is an investment company whose shares are traded on an exchange” (203).
3. Exchange Traded Funds
a. Definition – pool of stocks
i. “ETFs originate with a sponsor, who selects the investment objective, determines which securities will be included in the basket of securities, and makes agreements with institutional investors (denominated authorized participants). These authorized participants create the market for ETF when they bring the designated basket of securities to the fund or trust in exchange for one creation unit holder (e.g., 50,000 ETF shares)”. (Romero-Pérez & Rodríguez, 2012, p. 1637)
b. History / Purpose
1. “The oldest exchange-traded fund—the SPDR S&P 500 ETF—turns 20 this year.” (ETF revolution, 2013, p. 10)
c. Types: Same as mutual fund plus…
i. regional “iShares”
ii. Holding Company Depository Receipts (HOLDRS) which maintain a fixed portfolio of about 20 stocks in a particular sector (246)
iii. streetTracks which follow specialized indexes such as REITs or large-, medium-, and small-cap growth stocks.
iv. Leveraged ETFs which aim to magnify daily changes of a tracked index.
a. Less risk through more diversification
i. “This study examines the substitutability or complementariness of index ETFs and index mutual funds (OEFs) t...
... middle of paper ...
...managers also need to validate their fees and commission. This process is a constant balance.
ii. “ETFs not only made benchmarks investable, but ETFs offer more transparency at a lower cost. Many mutual fund managers feel threatened by ETFs, because they are attempting to offer the same value proposition as the ETF” (Vasan, p. 1)
iii. “We believe that ETFs will continue to grow for a variety of reasons. Many traditional, long-only mutual fund managers will continue to struggle to beat their benchmarks, which will continue to push the marginal dollar to ETFs.” John Lunt, president of Salt Lake City-based money management firm Lunt Capital Management (aqi Vasan, p. 6)
a. Will see gradual shift of investors to from mutual funds to ETFs.
b. Will see investors duplicating efforts using both mutual funds and ETFs to beat index or benchmark performance
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