Reprinted with permission by the Financial Planning Association, Journal of Financial Planning, April 2001, Wilfred Dellva, Exchanged-Traded Funds Not for Everyone
First there were SPDRs® and WEBs®. Then late in 1999 and throughout 2000 came the explosion of HOLDRSSM, iSharesTM and streetTRACKSSM. These new Exchange Traded Funds, ETFs for short, and HOLDRS are listed and traded on the American Stock Exchange. ETFs are indexed-based equity instruments that represent ownership in either a fund or a unit investment trust and give investors the opportunity to buy and sell shares of an entire stock portfolio as a single security. HOLDRS have many characteristics similar to ETFs except that HOLDRS represent ownership of a specified group of individual stocks in a particular industry, sector or group. What are the features of ETFs and HOLDRS that have made them popular with both the financial press and with investors? How do they work? Are they comparable with traditional index mutual funds? Are they suitable investments for the individual investor? These are the questions that have motivated this paper. Following a description of the major ETF categories, I conduct a comparison between ETFs and index mutual funds focusing on trading, creation and redemptions, cost comparisons and tax efficiency. This paper concludes with a discussion of the suitability of ETFs for small investors.
Click here for a summary article on this research study entitled "A Closer Look at Exchange Traded Funds." This article appeared in the Summer 2001 issue of Quarterly, a TIAA-CREF Institute publication.
