What the ETF?

March 7, 2018

















Investing in the market can be cumbersome.  If you are looking to dabble into the market because you want to see how it works, then I always recommend diversification.  Diversification is typically 30 or more stocks when considering equities.  The idea is that the more diversified a portfolio, the less risk that’s exposed.  Exchange-Traded Funds (ETFs) is one option for investors.  ETFs are stocks pooled together to track a targeted index or sector; yet, it is passively managed meaning the portfolio manager or advisor rarely looks at it once the investment is set up—hence passive.  Every investment option has its pros and cons and the ETF is no different.  The positive traits about ETFs are these investments are relatively inexpensive and you can benchmark an index such as the S&P500 Index.  According to ETF.com, “U.S. equity mutual fund charges 1.42 percent in annual expenses, the average equity ETF charges just 0.53 percent.”1  Also in comparison, ETFs are more transparent than mutual funds as by law, mutual funds are only required to report their portfolios on a quarterly basis while ETFs can report daily.


It is important to note that investments come with risk and one must consider its tax implications of cash distributions or dividends.  When ETFs generate dividends, it is normally in the form of cash dividends.  If such an investment is for a retirement account, then I highly recommend you speak with a qualified financial advisor or tax planner to determine your particular benefits of tax-advantaged accounts to avoid paying taxes until retirement or deferral.


Other risks that ETFs face can include the following:

Market Risk

Tax Risk

Broker Risk


If you are looking to mirror the S&P500, then the ETF ticker, SPY, mirrors that.  It is a U.S. Equity Large Cap designed to move up and down per the movement of its index.  


As of March 7, 2018, the breakout of the SPY is as follows:

If you are considering to invest on your own, then ETFs can deliver a particular set of diversification to your portfolio.  Be sure you research each category to determine which investment is right for you based on the amount of risk you are willing to accept and if it meets your investment needs.  If you have questions, you may schedule an appointment with me to further discuss. https://www.dollarotter.com/bookappointment



Source: ETF.com


1 Why Are ETFs So Cheap? ETF.com. Retrieved from http://www.etf.com/etf-education-center/21012-why-are-etfs-so-cheap.html


SPY Fund Description

The SPDR S&P 500 ETF tracks a market-cap-weighted index of US large- and midcap stocks selected by the S&P Committee.

SPY Factset Analytics Insight


SPY is the best-recognized and oldest ETF and typically tops rankings for largest AUM and greatest trading volume. The fund tracks the massively popular US index, the S&P 500. Few realize that S&P's index committee chooses 500 securities to represent the US large-cap space—not necessarily the 500 largest by market cap, which can lead to some omissions of single names. Still, the index offers outstanding exposure to the US large-cap space. Unlike direct peers IVV and VOO, SPY is a unit investment trust, an older but entirely viable structure. As a UIT, SPY must fully replicate its index (it probably would anyway) and forego the small risk and reward of securities lending. It also can’t reinvest portfolio dividends between distributions; the resulting cash drag will slightly hurt performance in up markets and help in downtrends. SPY is extremely cheap to hold, but is typically edged out by IVV and VOO in this respect. SPY's phenomenal trading volume makes it the perfect vehicle for tactical traders and mom and pop investors alike.





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