Glossary, Mutual Funds, N - T

Open End Mutual Funds

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Definition:
An open end mutual fund don’t have limits on the quantity of shares the fund will issue. Provided that demand is requested often, the fund will continue to issue shares no matter the number of investors. Open-end funds likewise will purchase back shares when investors would like to sell.
 
More Detail:
The large amount of mutual funds are open-end. By constantly buying and selling back fund shares, the funds will provide investors with a useful and convenient investing tool.

Please note that when a fund’s investment manager decides that a fund’s total assets are becoming too large to adequately accomplish its stated objective, the fund will be cut off to new investors and in extreme cases, be shut off to new investment by existing fund investors.
 
 

ETFs, Stocks

ETF Screeners: Tools for Filtering Financial Securities

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Let’s say you are looking to purchase a new car. The next step would be to start your research and gather a list of cars that you would be interested in. How would you compile all the available information and retain the essential things that meets your criteria? The answer would be to use a search engine and filter the results. For example, you would filter for cars by make, that are manual, lower than 90 000 miles, leather seats, etc. Eventually, you would end up with a short list of cars that are exactly what you need and lead the decision-making process to a lot easier task.

The same idea can be applied in trading. As an example, there is a lot of U.S. listed stocks where individually reviewing each stock can be painful and exhausting. Luckily for us traders, we have screeners at our disposition. A screener is a software that filters financial securities based on specific criteria requirements established by the user. There are many screeners available on the market, where some of them also include their own reviews of the security.

 

Glossary, H - M

Loaded Mutual Fund

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Definition:
A load mutual fund comes with a sales charge or commission. To compensate a sales intermediary (ex: a broker, financial planner, investment advisor) for their knowledge and time in choosing a suitable fund for the investor, the fund investor will pay the load. The load is either paid prior to the time of purchase (front-end load), or when the shares are sold (back-end load), or as long as the fund is in possession by the investor (level-load).
 
More Detail:
To be considered a “no-load” fund, the fund will limit its level load to no more than 0.25% (the maximum is 1%), it will be located in its marketing literature.

Front-end and back-end loads are neither part of a mutual fund’s operating expenses, however level-loads, called 12b-1 fees will be included. The annals show that the performance of load and no-load funds are very much alike.

Glossary, N - T

No-Load Mutual Fund

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Definition:
A no-load mutual fund in which shares are sold without a commission or sales fee. The notion for this is that the shares are allocated directly by the investment company, rather than going through a alternate party. This is different from a load fund, which charges a commission at the time you purchase the fund, at the time of the sale, or as a “level-load” for whatever time frame the investor holds the fund.
 
More Detail:
On account of there is no transaction fee to buy a no-load fund, all of the funds invested is being applied for the investor. For instance, if you buy $10,000 worth of a no-load mutual fund, the entire $10,000 will be invested into the fund. So if you purchase a load fund that charges a front-end load (sales commission) of 5%, the actual amount invested in the fund is only $9,500. Rather if the load is back-ended, when you sell the funds, the $500 sales commission will come directly from the proceeds. If the level-load (12b-1 fee) is 1%, the fund balance will be charged $100 yearly for as long as you have that fund.

The reason for a load fund is that investors will be compensating a sales intermediary (broker, financial planner, investment advisor, etc.) for their time and expertise in choosing an appropriate fund.

As a note, research shows that load funds do not outperform no-load funds.
 
 

Glossary, H - M, Mutual Funds, The 10 Terms You Need To Know

Mutual Funds

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What is a Mutual Fund?

Mutual Funds are a way you can buy into a wide range of stocks, bonds, money markets, or other securities all at once. They are professionally managed, so you are basically buying a piece of a larger portfolio.

Definition

mutual funds

Mutual Funds come in several different flavors, but the core concept is always the same: the fund is a pool of money contributed from many different investors that are used to purchase a bundle of securities. All contributors to the fund are given shares in proportion to how much they contributed, and they receive returns based on the performance of the underlying security.

Mutual funds are also sold in shares, just like stocks. However, unlike stocks, there may or may not be a limit to the number of shares outstanding at any given time (depending on the type of mutual fund), and it can be very common to own fractions of a share of a mutual fund.

Types Of Mutual Funds

Mutual Funds typically fall into one of three categories: Open Ended, Closed Ended, and Unit Investment Trusts.

Open Ended Mutual Funds

Open Ended means that there is no limit to the number of shares of these funds that can exist at any given time. However much money investors have contributed will be issued shares, and will be used to buy more underlying securities. Investors can also cash out any day they want, selling off their shares in the fund at the market price for that day.

This also means that investors cannot day trade mutual funds. Since the distribution of assets is managed by professional portfolio managers, the actual value of each share is not precisely known until the end of the day. Investors can only buy and sell their shares from the fund managers themselves, not on the open market.

In practice, this means that you buy open-ended mutual funds for a fixed dollar amount, rather than as a number of shares. You will actually receive these shares at the end of the day (almost always 6:00pm New York Time), and most likely will have a decimal value (for example, 10.1252342 shares). Conversely, when you want to sell your shares, your order will execute at 6:00pm New York Time, when the transactions for the fund settle.

Closed Ended Funds

Closed Ended means that there is a fixed number of shares, and so these funds can trade on exchange (similar to an ETF). These funds are still professionally managed, but the total amount invested is determined only once; at the Initial Public Offering.

Unit Investment Trusts

These are much less common than the other types of funds, and are also closed-ended. These funds are special in that they have a limited lifespan; they are issued once, but the fund eventually expires and all investors are paid out based on their investment and the return of the underlying assets. These funds are also special in that they are not professionally managed. The holdings are determined at the Initial Public Offering and are fixed while the fund is active. However, investors can redeem their shares from the fund managers at any time, or even sell shares on the open market (although this is very rare).

Advantages To Using Mutual Funds

Mutual funds can be a very easy way to diversify, since there are many different types of mutual funds it is usually possible to find a selection to complement your portfolio. Mutual funds have historically been an important part of retirement planning; since the funds are professionally managed, they do not require as frequent attention compared to a portfolio of stocks you actively pick, buy, and sell.

Mutual funds also pass through dividends to their shareholders. If a stock owned by the mutual fund pays a dividend, it is paid directly to the mutual fund shareholders.

Disadvantages To Using Mutual Funds

The biggest disadvantage is that the professional management of the fund comes at a price; mutual funds generally charge a fee based on the initial capital invested. This can add up quickly, especially if the fund is underperforming. One major issue with retirement accounts during a financial crash is that mutual funds will still charge fees on your capital even if the value of the fund itself is decreasing, acting as a double-penalty.

Another major disadvantage is that you have no option to customize the holdings of a mutual fund. You are stuck with what the fund manager chooses. Of course, you should always diversify your portfolio outside owning a single (or even multiple) mutual funds, but you could end up in a position where you are shorting a stock while simultaneously long in a mutual fund you own.

Differences with ETFs

At first glance, there is very little difference between a closed-ended mutual fund and an ETF: both trade on an exchange, and both hold a wide range of assets. However, there are some important key differences:

  1. ETFs are typically not “managed”, in that they typically have holdings mimicking a particular index, (for example, the S&P 500) and the fund managers do not actively shift the holdings outside that index. This means it is possible to “buy into an index” that you want to hold, and you will know the actual holdings of the fund (and so the Net Asset Value) at any given time.
  2. Because they are not actively managed, the fees associated with ETFs are typically much lower.
  3. The tax structure for owning an ETF is more similar to owning stocks than Mutual Funds.

When choosing between ETFs and mutual funds, all of these are important considerations; because of the lower fees alone ETFs have become increasingly popular in the last 10 years. However, the fact that mutual funds are actively managed may make them more attractive to long-term retirement planning, (depending on your personal tastes).

For a list of the most popular mutual funds, click here!

Note When Trading Mutual Funds

Unlike Stocks, ETFs, or most other security types, when you buy mutual funds, (both in a real brokerage account or on HowTheMarketWorks) you specify how much you want to buy in Dollar Amounts, not Shares. This is because the actual value of the shares is not known at the time you make your purchase. It’s only calculated at the end of the day.

If you want to trade mutual funds, remember to specify the exact dollar amount you want to trade, not the number of shares!

Glossary, H - M

Leveraged ETFs

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Definition:
An exchange-traded fund (ETF) that utilizes financial products and monies due to enlarge the returns of an underlying index. Leveraged ETFs are accessible for almost all indexes, like the Nasdaq-100 as well as the Dow Jones Industrial Average. These funds are directed to hold a continual amount of leverage during the investment time frame, for example a 2:1 or 3:1 ratio.
 
More Detail:
Most bull and bear ETFs are leveraged. 2x and 3x leveraged ETFs do not guarantee a 200% or 300% return on their underlying index or asset, even though that is the goal. Also, the return is expected on the daily return, not the annual.

3x ETFs use a variety of complex, exotic financial instruments to generate multiplicative returns, both positive and negative. In order to obtain these returns, these ETFs creates long or short equity positions. They invest around 80% of their assets in equity securities which will not generate daily returns of 3x of the target index. To accomplish this, the balance of the fund assets are invested into futures contracts, options on securities, indices and futures contracts, equity caps, collars, and floors, swap agreements, forward contracts, and reverse repurchase agreements.

Click Here to see all Intermediate ETF Articles

 

ETFs

Spider ETF

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Spider ETFs

Spider ETFs are one of the most popular provider’s of ETFs in the US and are administered by State Street Global Advisors. Their most famous ETFs track either the whole or an industry part of the S&P 500, most notably the SPY (SPDR S&P500).

The SPY ETF in particular is very useful to beginners because it tracks what is generally regarded as “the market”. The S&P 500 and the Dow-Jones Industrial Average are usually the indices quoted in finance news. It is usually regarded as the goal of most investors to “beat the market”, which is always hard to do when picking individual stocks, but by buying a Spider ETF, investors can let the market do the work for them, with the ETF holdings representing a fairly balanced portfolio.

However, they offer over a hundred ETFs covering everything from the Russell 2000 TWOK, to the DOW (DIA), to small cap to emerging market ETFs. One of their other well known ETFs is GLD, which tracks the price of gold.

You can learn more much more about SPDR ETFs and the various products they offer by visiting their site:

All SPDR ETFs from Select Sector SPDR | Top Sector ETFs (sectorspdrs.com)

ETFs

Most Popular ETFs

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etfcloud

Most Popular ETFs by Volume

Symbol
Name
Avg Volume
Total Assets
SPY SPDR S&P 500 122,437,320 $120,699.8 M
XLF Financial Select Sector SPDR 49,102,004 $8,232.3 M
EEM MSCI Emerging Markets Index Fund 42,278,938 $37,379.9 M
IWM Russell 2000 Index Fund 40,192,414 $17,667.3 M
QQQ QQQ 34,720,602 $34,638.4 M
VWO Emerging Markets ETF 19,842,342 $57,872.7 M
TZA Daily Small Cap Bear 3X Shares 19,332,826 $962.3 M
EFA iShares MSCI EAFE Index 18,263,959 $36,799.2 M
XLI Industrial Select Sector SPDR 13,520,156 $3,231.0 M
FXI FTSE China 25 Index Fund 13,448,381 $4,716.9 M
EWZ MSCI Brazil Index Fund 13,214,093 $8,684.2 M
GDX Market Vectors TR Gold Miners 12,772,995 $10,276.7 M
EWJ MSCI Japan Index Fund 12,379,027 $4,101.0 M
UNG United States Natural Gas Fund LP 11,814,471 $1,094.8 M
SLV Silver Trust 11,731,185 $11,148.4 M
XLE Energy Select Sector SPDR 11,183,659 $7,449.9 M
VXX S&P 500 VIX Short-Term Futures ETN 10,918,017 $6,428.9 M
XIV Daily Inverse VIX Short-Term ETN 10,558,250 $282.9 M
FAZ Daily Financial Bear 3X Shares 10,070,953 $701.1 M
TVIX Daily 2x VIX Short-Term ETN 9,500,033 $152.1 M
GLD SPDR Gold Trust 9,239,053 $76,452.4 M
TNA Daily Small Cap Bull 3X Shares 8,519,233 $648.1 M
USO United States Oil Fund 8,007,349 $1,290.6 M
XLK Technology Select Sector SPDR 7,772,023 $10,799.0 M
XLB Materials Select Sector SPDR 7,584,499 $2,369.5 M
IYR Dow Jones U.S. Real Estate Index Fund 6,483,609 $4,896.7 M
TLT Barclays 20 Year Treasury Bond Fund 6,452,129 $3,205.1 M
XLU Utilities Select Sector SPDR 6,354,533 $6,135.3 M
SSO Ultra S&P500 6,209,150 $1,569.9 M
IAU COMEX Gold Trust 6,186,352 $11,780.9 M
XLP Consumer Staples Select Sector SPDR 5,818,765 $6,225.6 M
XHB SPDR Homebuilders ETF 5,711,262 $1,954.1 M
EWT MSCI Taiwan Index Fund 5,286,026 $2,500.7 M
EWG MSCI Germany Index Fund 5,195,400 $3,605.8 M
NUGT Daily Gold Miners Bull 3x Shares 4,824,349 $388.6 M
XLV Health Care Select Sector SPDR 4,781,324 $5,391.5 M
XLY Consumer Discretionary Select Sector SPDR 4,776,647 $3,327.1 M
DIA Dow Jones Industrial Average ETF 4,558,762 $11,861.2 M
JNK SPDR Barclays Capital High Yield Bond ETF 4,497,191 $12,259.3 M
QID UltraShort QQQ 4,416,236 $450.9 M
RSX Market Vectors Russia ETF 4,249,398 $1,829.8 M
SDS UltraShort S&P500 4,242,855 $466.9 M
SPXU UltraPro Short S&P500 4,080,291 $531.7 M
FAS Daily Financial Bull 3X Shares 4,048,294 $1,199.2 M
OIH Market Vectors Oil Services ETF 3,994,468 $1,087.9 M
XOP SPDR S&P Oil & Gas Explor & Product 3,837,909 $728.5 M
XRT SPDR S&P Retail ETF 3,674,165 $778.4 M
IVV S&P 500 Index Fund 3,628,303 $33,408.1 M
EWH MSCI Hong Kong Index Fund 3,597,701 $2,499.3 M
GDXJ Market Vectors Junior Gold Miners ETF 3,408,023 $3,207.0 M
UVXY Ultra VIX Short-Term Futures ETF 3,403,966 $177.4 M
XME SPDR S&P Metals & Mining ETF 3,370,859 $972.0 M
HYG iBoxx $ High Yield Corporate Bond Fund 3,085,600 $17,148.8 M
SH Short S&P500 2,901,745 $1,936.8 M
QLD Ultra QQQ 2,826,962 $615.4 M
EPI India Earnings Fund 2,797,380 $1,101.5 M
ERY Daily Energy Bear 3X Shares 2,622,609 $113.8 M
ITB Dow Jones U.S. Home Construction Index Fund 2,477,079 $1,442.8 M
EWA MSCI Australia Index Fund 2,309,726 $2,309.7 M
DBC DB Commodity Index Tracking Fund 2,290,591 $6,147.5 M
EWS MSCI Singapore Index Fund 2,243,717 $1,591.5 M
VEA Europe Pacific 2,231,499 $9,476.9 M
VNQ REIT ETF 2,229,501 $14,555.0 M
EWW MSCI Mexico Index Fund 2,214,374 $1,344.7 M
UCO Ultra DJ-UBS Crude Oil 2,196,976 $410.5 M
MDY SPDR MidCap Trust Series I 2,104,909 $10,234.2 M
IWF Russell 1000 Growth 2,048,638 $16,873.7 M
EDZ Daily Emerging Markets Bear 3X Shares 2,039,595 $133.2 M
LQD iBoxx $ Investment Grade Corporate Bond Fund 1,990,102 $24,524.8 M
SMH Market Vectors Semiconductor ETF 1,983,599 $271.5 M
VGK European ETF 1,952,577 $3,718.0 M
UPRO UltraPro S&P 500 1,943,727 $311.9 M
AMLP Alerian MLP ETF 1,852,403 $4,269.2 M
TBT UltraShort Barclays 20+ Year Treasury 1,845,774 $780.4 M
TWM UltraShort Russell2000 1,845,241 $285.3 M
UUP DB USD Index Bullish 1,844,333 $952.7 M
KBE SPDR S&P Bank ETF 1,813,144 $1,670.3 M
EWM MSCI Malaysia Index Fund 1,748,656 $987.6 M
SQQQ UltraPro Short QQQ 1,659,036 $175.9 M
EWY MSCI South Korea Index Fund 1,639,576 $2,975.5 M
EUO UltraShort Euro 1,601,903 $719.3 M
TQQQ UltraPro QQQ 1,571,761 $225.5 M
EWC MSCI Canada Index Fund 1,564,562 $4,430.5 M
SPXS Daily S&P 500 Bear 3x Shares 1,468,552 $185.2 M
UWM Ultra Russell2000 1,444,579 $696.2 M
VTI Total Stock Market ETF 1,426,930 $23,675.0 M
AGQ Ultra Silver 1,413,627 $974.6 M
KRE SPDR S&P Regional Banking ETF 1,403,573 $1,354.2 M
IWD Russell 1000 Value 1,370,335 $13,259.9 M
DBA DB Agriculture Fund 1,370,317 $1,894.7 M
PFF S&P US Preferred Stock Fund 1,355,045 $10,287.9 M
IWN Russell 2000 Value Index Fund 1,354,450 $4,284.3 M
SCO UltraShort DJ-UBS Crude Oil 1,335,151 $106.4 M
ERX Daily Energy Bull 3X Shares 1,189,483 $265.4 M
BND Total Bond Market ETF 1,186,005 $17,452.0 M
PCY Emerging Markets Sovereign Debt Portfolio 1,165,595 $2,539.8 M

Click Here to see all Beginner ETF Articles

ETFs

Commodity ETF

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Definition:
Exchange-traded funds that invest in physical commodities such as natural resources, agricultural goods as well as precious metals. A commodity ETF can be fixed on a single commodity and grasp it in physical storage or may invest in futures contracts. Alternative commodity ETFs look to track the performance of a commodity index which includes dozens of individual commodities through a combination of physical storage and derivatives positions.

Because a lot of commodity ETFs utilize bargaining through the buying of derivative contracts, ETFs may have big portions of uninvested funds, which is used to buy Treasury securities or other nearly risk-free assets.
 

More Detail:
Commodity funds frequently design their individual benchmark indexes which may contain only agricultural products, metals or natural resources. To the extent, there is frequent tracking errors around broader commodity indexes such as the Dow Jones AIG Commodity Index. Notwithstanding, any commodity ETF ought to be passively invested once the underlying index methodology is stationary. Commodity ETFs have risen in popularity due to the fact that they give investors exposure to different commodities without them having to learn how to purchase futures other derivative products.
 
 
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ETFs

Country ETFs

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Definition

A “Country ETF” is an ETF that is invested across companies specific to a single country or region. Since Country ETFs are often listed on US exchanges, they are an easy and accessable way to invest in another country while using a standard brokerage account that only lists US stocks and ETFs.

However, since country ETFs invest in such a wide range of companies, they often have a hard time beating the market, and are usually recommended only for more advanced investors. There are also tax considerations; some special retirement accounts may exclude country ETFs from tax-exempt status, since it may require investments be made in US companies.

Examples

An example of these ETFs are some common Canadian-specialized ETFs, such as FCAN, EWC, and QCAN. These ETFs invest in a wide range of Canadian companies.

The ENY ETF is another Canadian ETF, specializing specifically on the Canadian energy sector.

You can find a more complete list of country ETFs at InvestSnips (Click Here to view)

ETFs, Glossary, H - M

Indexed ETFs

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Index ETF
Image by Nina from Pixabay

Definition

An exchange traded fund (ETF) designed to match or track the stocks in that market index, such as the Standard & Poor’s 500 Index (S&P 500). These type of ETFs provide a great deal of diversity, market exposure, and low operating expenses in the selected category of stocks.

More Detail

Indexed etfs have been used to successfully outperform most actively managed mutual funds. The most popular index funds track the S&P 500, a number of other indexes, including the Russell 2000 (small companies), the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East) and the Lehman Aggregate Bond Index (total bond market).

Using an index fund is a passive form of investing that rarely outperforms the broad indexes.

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ETFs, Stocks

ETFs vs Stocks

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What are the differences between investing in Exchange Traded Funds verses stocks? Let’s discuss…

Ease of Transaction

Most stocks are easy to buy or sell. You can buy them using a broker or an online account. ETFs are just as easy to buy.  ETFs are unlike indexes as trading ETFs require a single transaction. So as far as entering the stock market or ETF market, this one is the same.

Transaction Costs

Transaction costs of ETFs are smaller than indexes or mutual funds, but when it comes to stocks, it’s the same. Commissions are based on the number of stocks/ETFs or the value of the stocks/ETFs. Once again the same.

Liquidity

Liquidity is again pretty much the same and is based on how many of the stocks/ETFs exchange hands each trading day. But since there are more stocks to choose from than ETFs, we will say that in general stocks have greater liquidity.

Risk / Reward

This can get tricky as any investment can have a different risk beta. However, you can make an argument that an ETF has slightly less risk since it’s a mini-portfolio and therefore slightly diversified, but it really depends on what is in the actual ETF. Then again, with less risk comes less chance of reward, so it all comes down to your risk tolerance. We have to call this one a tie since it’s case-by-case for each investment.

Taxes

Since ETFs and stocks use a single transactions, the capital gain taxes are realized when the fund/equity is sold. A tax advantages of ETFs is that it’s treated like a stock trade on your tax return as opposed to how mutual funds and indexes are handled.

Access to a Sector or Market

To get your foot into an industry, it is best to buy several stocks.  Multiple stocks spread the risk. Then you have to figure out which stocks to buy and how many. By buying an industry specific ETF, you get that broad exposure buying an industry sector ETF.

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ETFs, Mutual Funds

Advantages of ETFs Over Mutual Funds: Increased Cost Efficiency

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The goal of a smart investor should be to build a diversified portfolio of stocks and bonds with low fees and the Exchange Traded Funds (ETFs) offer seven advantages over mutual funds:

  • Lower cost
    ETFs have lower expenses than low-cost indexed mutual funds. The Barclays i-shares S&P 500 ETF charges 0.09% a year in fees, compared to about double that for the Vanguard 500 Index Mutual Fund.  A portfolio of index mutual funds costs about 18% less in annual expenses using ETFs than if we use a Vanguard index funds.   With indexed mutual funds, you are pretty much locked into a family of products. If you want to avoid transaction fees, you have to have a Vanguard account. But having your portfolio with a single fund locks you to that one provider’s funds.  It prevents you from shopping for the least cost funds.
  • Greater tax efficiency
    ETFs are better in terms of tax treatement than mutual funds.  Mutual Funds make regular capital gains distributions. Therefore investors who hold them in taxable accounts (as opposed to retirement accounts) will have to pay  tax bills on the distributions. In contrast, index ETFs generally make minimal or no capital gains distributions to help their investors avoid this tax. The larger the mutual fund and the more it trades hands, the smaller the capital gains.
  • Better tax management
    Better and easier tax management is possible with ETFs than index mutual funds. Tax treatment are the key advantage that results in financial differences, particularly for large accounts. If you buy ETFs in an account that tracks tax lots, you can sell ETFs with the highest cost-basis, thereby minizing taxable gains. (You can make charitable gifts of appreciated stock funds with the lowest cost basis.) Your holdings in a mutual funds are often reported and sold using average purchase price.  This reduces your ability to realize tax losses.
  • Easier asset allocation
    You can manage your asset allocation more easily with ETFs. You can buy a basket of ETFs – stock, bond and REIT indexes – in a single online brokerage account, see all your assets in one place, and track your asset allocation.  Mutual funds from Vanguard, for example, don’t appear in the Schwab supermarket. That means that if you want to use mutual funds to allocate your funds among different asset classes, you’ll likely need multiple accounts. You will not be able to track your asset allocation in one place, and rebalancing assets.
  • Easier portfolio rebalancing
    You can rebalance your portfolio easier with ETFs.  You can use limit orders to buy and sell funds at preset prices. The ability to manage taxes better with ETFs means that rebalancing becomes an option in taxable accounts. With mutual funds held in a taxable account, you’re often forced to “buy and hold” without rebalancing because of the tax implications of rebalancing.
  • No fraud!
    ETF transactions are easier to track and far harder to manipulate.  ETFs and closed-end funds are baskets of stocks traded on exchanges, where the bid-offer spread is publicly available.  In contrast, mutual funds are purchased at set prices after the US stock market closes, creating the risk of legal or illegal arbitrage. This issue is particularly problematic for International mutual funds. The tranparency and trading advantages effect both exchange traded mutual funds and closed-end fund versus regular or open-end mutual funds.
  • You can short ETFs
    Shorting ETFs is available and has sound uses in some cases for experienced investors.

 

Click Here to see all Beginner ETF Articles

 

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A - G, ETFs, Glossary, The 10 Terms You Need To Know

Exchange Traded Fund (ETF)

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What is an ETF?

ETFs are a fairly new way that you can buy a large group of stocks, assets, or other securities all at once. ETFs trade just like stock; you can buy and sell shares of an ETF throughout the day on an exchange.

Definition of Exchange Traded Fund (ETF):

ETF stands for Exchange Traded Fund, which is exactly how it sounds; they are like mutual funds in many ways, but they trade on a normal stock exchange like a stock, with their value being determined both by the value of the underlying assets and the value of the ETF itself.

ETFs are not usually actively managed, instead they work like an index; the fund is established to track a basket of stocks or other assets in a certain pre-existing class. An example is the Spider SPY ETF, this fund is based on the S&P 500. This means that all shares of the SPY ETF represents a small piece of shares in the 500 companies in the S&P 500.

Almost all popular stock indices have an ETF that tracks them these days, but that isn’t the only kind of index an ETF will follow. There are also ETFs that are designed to follow commodities; for example USO and OIL are based on the price of oil, and companies that mine/refine oil, while GLD and SLV follow the price of gold and silver, respectively.

ETFs are very useful because it is an easy way to buy a diverse range of assets all at once; you don’t need to worry as much about trying to ‘beat the market’ if you can buy the SPY ETF and be very close to matching the market’s performance automatically.

Types of ETFs

There are many different types of ETFs, but they all have one thing in common; they are designed to track a pre-existing index of some sort. Here are some of the most popular ones:

Stock Index ETFs

These ETFs track an existing stock index and attempt to replicate its performance. For example, SPY tracks the S&P 500, QQQ tracks the Dow-Jones Industrial Average, and IWM tracks the Russell 2000. There can be several ETFs that track the same index, since ETFs are issued by individual companies, some companies may want to track the same index as another.

Commodity ETFs

There are also ETFs designed to follow a basket of commodities. These ETFs are very popular with investors that would like to buy oil, for example, but do not want to start trading commodity spot contracts or futures. Some ETFs in this category are OIL for oil, GLD for gold, and SLV for silver.

Volatility ETFs

Volatility ETFs are much more complicated; they are based on the “fear” of the market at any given time. Volatility ETFs are generally based off the VIX volatility index, which measures how much investors expect the market to move over the next 30 days. These are more complex financial instruments, and while anyone with a brokerage account can buy them, they are more difficult to manage and use.

Inverse ETFs

These ETFs work by doing the exact opposite as the ETFs above; their goal is to do the exact opposite of the index they are tracking. For example, the Inverse S&P 500 ETF SH tries to go down by 1% every time the S&P500 goes up by 1%. They do this by short selling and other financial derivatives. You may be interested in an ETF if you think the index you are tracking will be going down in the short-term. For example, you could want to buy an inverse Oil ETF if you think the price of oil is about to fall. It is a very popular way of short selling for investors who do not have a margin trading account.

Leveraged ETFs

Leveraged ETFs use a complex set of financial tools to double or triple the index it tracks; for example JDST tries to triple the returns of the Gold index it tracks, on a daily term. This means that if gold goes up by 1% today, the JDST ETF will be somewhere close to 3%. The opposite is also true, so if the index goes down by 1%, the leveraged ETF will fall by 3 times that.

Inverse leveraged ETFs also exist, which double or triple the inverse of the index they track. For example DWTI is an inverse leveraged Oil ETF; when oil goes down by 1%, it tries to go up by 3%. For a list of leveraged ETFs, click here!

Difference between an ETF and Mutual Fund

There are a few main differences between the two, but the biggest one to keep in mind is that mutual funds are actively managed (meaning there is a portfolio manager and a team of analysts actively buying and selling securities in the fund to try to get the best return given the mutual fund’s purpose). While an ETF is not actively managed, it follows a pre-existing index. This means that the underlying assets of most ETFs do not change much; the makeup of an S&P 500 ETF is not going to change much over time. Some other important differences are:

  • ETFs trade on an exchange, just like a stock
  • ETFs may have a slightly different value than the Net Asset Value (NAV) of its holdings; this means that it may be possible to buy an ETF for slightly less than the value of the securities it represents, making an opportunity for profit through arbitrage
  • ETFs typically have lower fees than mutual funds
  • It is often easier to keep track of the underlying assets in an ETF, since they do not change as much as mutual funds

Other Details

Just like a mutual fund, if an underlying asset of an ETF that you own pays a dividend, it is transferred to the ETF holding members (so you may receive an ETF dividend payment). ETFs can also split; usually this will happen once per year, with all ETFs created by a company having their split at the same time.

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Options

Option Spreads

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Definition:
Option Spreads are a kind of option that will get its value from the difference between the prices of two or more assets. Spread options can be written on all sorts of financial products which include bonds, equities and currencies. This kind of position is purchased on large exchanges, but is generally traded in over-the-counter markets.
 

More Detail:
An options spread strategy involves the simultaneous buying and selling of options of the same underlying security but with different strike prices and/or expiration dates.The three most common spreads are known as:

  1. Vertical spreads
  2. Horizontal spreads (also known as Calendar Spreads)
  3. Diagonal spreads.

 

1. Vertical Spreads

A vertical spread involves the simultaneous buying and selling of multiple options of the same underlying stock, having the same expiration date but having DIFFERENT strike prices.  This strategy can be used with either all calls or all puts.

Suppose an investor is following closely ZZZ currently trading at $84.  The investor believes that the stock will begin to rally and increase in price.  The investor would utilize a Vertical Spread by (i) purchase a JUL 80 call for $600 and (ii) Write (receive credit) a JUL 90 call for $200.  Total cost to enter the position is $600 – $200 = $400.  Note that for simplicity, the brokerage fees, commissions and other fees are not mentioned.

The stock of ZZZ rises to $92 on the day of expiration in July.  Both options expire in the money, and the JUL 80 call has an intrinsic value of $1,200.  The JUL 90 call has an intrinsic value of $200.  The spread is now worth $1,200-$200 = $1,000.  Total profit at expiration = $1,000 – $400 = $600

Consider the reverse scenario; ZZZ has declined to $76.  Both options expire worthless and the investor loses the $600 to enter the call position, but collects a $200 credit for writing the put.  Total loss at expiration = $600 – $200 = $400.  The $400 is the maximum possible loss that is possible using this strategy.

 

2. Horizontal (Calendar) Spread

A horizontal spread involves the simultaneous purchase of options with a certain expiration date and the sale of the same instrument with a different expiration date.

This spread is thus also referred to as a Calendar Spread.

Suppose ZZZ is trading at $80 and believes that ZZZ will gradually rise over the next four months.

To enter a horizontal spread position, the investor would (i) Buy OCT 90 call costing $400 and write a JUL 90 call, receiving a credit of $200.

Both positions must be out of the money for the spread to be most effective.

Total cost to enter the position = $400 – $200 = $200.

Note that for simplicity, the brokerage fees, commissions and other fees are not mentioned.

 

Suppose one month later in July, ZZZ increases to $84.

The JUL 90 calls will expire worthless.

As the investor predicted, ZZZ goes on to trade at $98 in October.

The OCT 90 call expires in the money and has an intrinsic value of $800 on expiration.

Total profit from this trade is $800 – $200 = $600.

On the other hand, if the investor had picked the wrong direction of ZZZ and the stock has not risen or fell below $90, both options will expire worthless.

The investor faces a maximum loss of $200, which is the total cost to enter the initial positions.

 

3. Diagonal Spreads

A diagonal spread is utilized when an investor simultaneously buys long term calls while selling (writing) an equal number of near-month calls of the same stock with a higher strike price.

After more analysis regarding ZZZ, the investor still believes that the price will gradually increase over the next few months.

ZZZ is still trading at $80 in June.

To enter a Diagonal Spread position, the investor will (i) buy OCT 90 call for $600, write JUL 45 call for a credit of $200.

Total cost to enter the strategy = $600 – $200 = $400.

Note that for simplicity, the brokerage fees, commissions and other fees are not mentioned.

 

As predicted, ZZZ increases by $2 a month and closes at $88 on the expiration date of the long term call.

As each near-month call expires, the investor would write another call of the same strike for $200.

A total another $600 was collected as credits for the writing of 3 more calls.

At the price of $88, the OCT 80 cal expires in the money with an intrinsic value of $800.

Total profit is:

$800 (intrinsic value of OCT 80 call) + $600 (credits collected for writing the 3 calls) – $400 (initial cost to enter the positions) = $1,000

 

If the price of ZZZ had declined to $76, both options will expire worthless.

The investor would be prudent not to write additional calls since they are too far out of the money, and will not bring in a significant credit to make the position worthwhile.

The maximum loss would occur, which is the cost of the initial investment of $200.

 

Conclusion

Options strategies allow an investor to take advantage of the benefits of trading options such as the low cost to enter a position.

Many novice investors enter a position without understanding how the utilization of a spread can provide a better strategy, minimize risk and cost.

Effective use of spreads usually eliminates or greatly reduces the element of volatility, or to use it to the most of your advantage.

Option spreads are not recommended for beginner investors to jump in to right away.

Careful practice of many spreads for many different stocks is a great way to get a feel for how the options market operates.

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Options

Why Use Options

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Speculation
An advantage of options is the reality that you will not be restricted to making a gain only when the market is successful. Due to the adaptability of options, you can produce a profit even when the market take goes downward or even sideways. Consider speculation as betting on the movement of a security.

Using the speculation option in this manner is why they have the reputation of being insecure in which big profits are made or lost. Upon buying an option, you have to be correct in deciding not only what direction the stock will go in, but also the degree and the timing of the movement. To succeed you must correctly forecast whether a stock will go up or down.  Also you will have to be right regarding how much the price can fluctuate also the length of time it will take for this process. Remember not to forget commissions. The mixture of these factors means the odds are stacked against you.

Consider why do investors speculate with options if the odds are so unpredictable? Besides their versatility, it’s all about using leverage. When you are in charge of 100 shares with one contract, it really doesn’t take much of a price change to build large profits.

Hedging
Another function of options is hedging. Regard this as an insurance policy. Just as you insure your belongings, options are used to insure your investments against a downswing. Critics of options comment that if you are not sure of your stock picks, than you need a hedge, you should reconsider making the investment. Contrary, there is no apprehension that hedging strategies can be helpful, particularly for large institutions. Even the individual investor can benefit. Let’s say you wanted to take advantage of technology stocks and their upward trend, than say you also desired to curtail any losses. By using options, you will be able to confine your downside while enjoying the full upside in a cost-effective way.

A Word on Stock Options
Even though employee stock options aren’t accessible to everybody, this kind of option could somehow be classified as a third reason for utilizing options. There are many companies who use stock options as a manner to attract and to keep talented employees, especially management. They are similar to normal stock options example is that a holder has the choice but not the obligation to buy company stock. The contract, is however between the holder and the company, where a regular option is a contract between two parties that are completely unrelated to the company.

Best Discount Option Brokers and Promotions

If you are ready to open a real brokerage account to start trading options, please look at this review of the best option broker commissions and current promotions.

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A - G, Glossary

Covered Calls

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Definition:
An options strategy where an investor purchase a long position in a stock and sells a call options on the same stock in an effort to create income from the asset. This is often utilized when an investor has a short-term unbiased outlook on the asset and then keeps the asset long and concurrently has a short position through the option to produce income from the option premium.
 

Example:
As an illustration, you may have shares of the TSJ Sports Conglomerate. You’re considering the long-term prospects of TSJ’s share price but you assume in the short term the stock may trade a bit flat, perhaps within a few dollars of its current price of $25. Whether you choose to sell a call option on TSJ for $26, you may make the premium from the option sale but might cap your upside. Consider one of three different scenarios that will play out: a) TSJ shares trade flat, below the $26 strike price. The option will decrease and you keep the premium from the option. In this example, by using the buy-write option you have exceeded the stock. b) TSJ shares fall then the option closes worthless, you maintain the premium, and once again surpass the stock. c) TSJ shares rise above $26, the option is utilized and your upside is capped at $26, as well as the option premium. In this case, if the stock price goes higher than $26, as well as the premium, your buy-write strategy has underperformed the TSJ shares.

 
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Beginners

Creating a Stock Portfolio

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Do you own stocks or stock funds? If the answer is yes, this tutorial can help you develop a portfolio that makes sense for you.

If the answer is no, this planning center has the information and advice you need to confidently place your first buy order.

  • Getting Started
    Stocks can be volatile, but they have historically returned more than any other investment.
  • Keep an Eye on Earnings
    his is the bottom line, profits. Plus, how share prices and earnings can help you compare stocks.
  • Check Key Numbers
    Book value, return on equity, total return and other indicators can help you zero in on quality stocks.
  • Establish Your Game Plan
    A personalized approach and investing at regular intervals are the best ways to build wealth.
  • Avoid Common Errors
    One requirement for successful investing is keeping mistakes to a minimum. These eight mistakes recur with unnecessary frequency.
  • Recruit the Right Broker
    How much advice do you need — and how much are you willing to pay for it?
Beginners

Common Investment Mistakes

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Avoid common investment mistakes and follow the following advise.

1. Create an investment plan.

Without a plan, your investments will be haphazardly selected with a shoot from the hip style.  Investors should decide the type of company they want to own — growth companies, cyclical firms or speculative ones.  You need to decide if you want current income or capital gains. Don’t abandon your plan when there is a bull or bear market.

2. Take the Time to be Informed.

The most common form of investment mistake is to forget to get information about a company’s finance. It it too common that investors buy stock without even checking what the company makes or what the future might be for that kind of product.

3. Check the Quality of Your Advice.

Many investors don’t check on their broker or adviser’s investment success before investing with them. They rarely check out their educational or professional background.

4. Do Not Invest Money that Should be Set Aside for Other Use.

People invest money that should be set aside for emergencies or for other uurgent expense. If you invest with money that should have been set aside for emergencies, you may be forced to sell at a loss.

5. Be careful not to be Optimistic at the Top and Pessimistic at the Bottom.

Optimism and bullishness are infectious, as are pessimism and bearishness. Thus, even when the market is high, people go right on buying. They do it because everyone seems to be buying. They assume that nothing will change and that the bull market will continue.

Conversely, people grow increasingly pessimistic as the market drops. Often they reach the  bottom when stocks are cheapest. This may be when you should be buying.

6. Avoid Buying on the Basis of Tips and Rumors.

It is rare that people get inside information that has any value for a publicly held company. Even if you do, it is typically old and out of date.  No matter how hot a tip you hear, plenty of people knew it before you did.

7. Do Not Become Sentimental About a Stock.

Some investors grow attached to their stocks. They hold their stocks long after the potential for profit is gone. The other type of mistake is to ignore the fact that you were wrong about buying a stock.

8. Avoid Buying Low-Priced Stocks Assuming that they will Have Best Returns.

A low-priced stock may seem like a bargain but not because it is a low priced stock. The price of a stock is what the marketplace believes the company is worth divided by the number of outstanding shares. Stocks that have a low price are seen by the market to having little value. Period.

A - G, Glossary, rewrites

Cash Flow Statement

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Definition:
The cash flow is the revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities – financing, operations or investing – although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments. This holds true for both business and personal finance.

The Cash Flow Statement is a mandatory part of a company’s financial reports since 1987, records the amounts of cash and cash equivalents entering and leaving a company. The Cash Flow Statement (CFS) allows investors to understand how a company’s operations are running, where its money is coming from, and how it is being spent.

Here you will learn how the CFS is structured and how to use it as part of your analysis of a company.

The cash flow statement is distinct from the income statement and balance sheet because it does not include the amount of future incoming and outgoing cash that has been recorded on credit. Therefore, cash is not the same as net income, which, on the income statement and balance sheet, includes cash sales and sales made on credit. Cash flow is determined by looking at three components by which cash enters and leaves a company: core operations, investing and financing.

Operations

Measuring the cash inflows and outflows caused by core business operations, the operations component of cash flow reflects how much cash is generated from a company’s products or services. Generally, changes made in cash, accounts receivable, depreciation, inventory and accounts payable are reflected in cash from operations.
Cash flow is calculated by making certain adjustments to net income by adding or subtracting differences in revenue, expenses and credit transactions (appearing on the balance sheet and income statement) resulting from transactions that occur from one period to the next. These adjustments are made because non-cash items are calculated into net income (income statement) and total assets and liabilities (balance sheet). So, because not all transactions involve actual cash items, many items have to be re-evaluated when calculating cash flow from operations.
For example, depreciation is not really a cash expense; it is an amount that is deducted from the total value of an asset that has previously been accounted for. That is why it is added back into net sales for calculating cash flow. The only time income from an asset is accounted for in CFS calculations is when the asset is sold.
Changes in accounts receivable on the balance sheet from one accounting period to the next must also be reflected in cash flow. If accounts receivable decreases, this implies that more cash has entered the company from customers paying off their credit accounts – the amount by which AR has decreased is then added to net sales. If accounts receivable increase from one accounting period to the next, the amount of the increase must be deducted from net sales because, although the amounts represented in AR are revenue, they are not cash.
An increase in inventory, on the other hand, signals that a company has spent more money to purchase more raw materials. If the inventory was paid with cash, the increase in the value of inventory is deducted from net sales. A decrease in inventory would be added to net sales. If inventory was purchased on credit, an increase in accounts payable would occur on the balance sheet, and the amount of the increase from one year to the other would be added to net sales.
The same logic holds true for taxes payable, salaries payable and prepaid insurance. If something has been paid off, then the difference in the value owed from one year to the next has to be subtracted from net income. If there is an amount that is still owed, then any differences will have to be added to net earnings.

What are the components of a cash flow statement?

ABC Inc.

 

Cash Flow Statement

For the year ended December 31, 2999
Cash Flow from Operating Activities    
     Net Income $x,xxx,xxx  
     Depreciation xx,xxx  
     Increase in A/R (accounts receivable) (xx,xxx)  
     Decrease in A/P (accounts payable) xx,xxx  
     Increase in Inventory (xx,xxx)  
          Net cash provided by Operating Activities   xxx,xxx
     
Cash Flow from Investing Activities    
     Sale of Equipment, Machinery xxx,xxx  
     Purchase of land (xx,xxx)  
          Net cash provided by Investing Activities   xxx,xxx
     
Cash Flow from Financing Activities    
     Notes Payable xx,xxx  
     New Equity Issued xxx,xxx  
          Net cash provided by Financing Activities   xxx,xxx
     
Net change in cash flow   xxx,xxx
Beginning Cash Balance   xx,xxx
Ending Cash Balance   xxx,xxx
     

Cash flow statements are divided into three main parts. Each part reviews the cash flow from one of three types of activities: (1) operating activities; (2) investing activities; and (3) financing activities.

  1. Cash flow from operating activities: represents the amount of money a company brought in from its regular business activities. This includes cash generated through manufacturing and selling goods or providing services to customers. It also includes cash paid to suppliers and taxes paid.
  2. Cash flow from investing activities: reflects transactions that a company makes to invest in resources for growth and production that involve long-term uses of cash. This includes cash paid for the purchase of fixed assets like property, a factory, or equipment. On the other hand, it also includes cash received from selling property or equipment, or as a result of a merger.
  3. Cash flow from financing activities: focuses on how a company raises capital and how it pays it back to investors and creditors. This includes paying cash dividends, issuing or buying back more stock, and adding or changing loans. 

Who is interested in a cash flow statement?

There are three main groups who are interested in a company’s cash flow statement:

  • Investors: will review the cash flow statement to understand how well a company’s operations are running and to view their ability to generate cash and meet their obligations.
  • Lenders/Creditors: will review the cash flow statement to determine how much cash is available for the company to fund its operation and pay its debts.
  • Management: the accountants, the Chief Financial Officer (CFO), the Chief Executive Officer (CEO) are some of the management team who will review the numbers of the cash flow statement to know whether the company is prepared to cover their payroll and other expenses.