nasaa 2010 investment adviser training exchange traded funds (etfs) & leveraged etfs chad...

NASAA 2010 Investment Adviser Training

Exchange Traded Funds (ETFs) Exchange Traded Funds (ETFs) & &

Leveraged ETFsLeveraged ETFs

Chad HartwickChad Hartwick

State of MichiganState of Michigan


These views are my own views These views are my own views and not necessarily those of and not necessarily those of

NASAA or the State of NASAA or the State of MichiganMichigan


ETFs in GeneralETFs in General

Definition – Security that tracks an index Definition – Security that tracks an index much like a index mutual fund but is traded much like a index mutual fund but is traded like a stock on an exchange.like a stock on an exchange.

ETFs hold assets such as stocks and bonds.ETFs hold assets such as stocks and bonds. Legally classified as:Legally classified as:

Open-end investment companiesOpen-end investment companies Unit Investment Trusts (UITs)Unit Investment Trusts (UITs)

First ETFs were created by SSgA (1993)First ETFs were created by SSgA (1993) Spiders (SPDR) – S&P 500 – SPY on AMEX Spiders (SPDR) – S&P 500 – SPY on AMEX

Approximately 1000 ETFsApproximately 1000 ETFs


Trading ETFsTrading ETFs

Trade intraday just like stocksTrade intraday just like stocks Can sell short, limit orders, stop-loss Can sell short, limit orders, stop-loss

orders, and buy on marginorders, and buy on margin No minimumsNo minimums Many have the ability for options to Many have the ability for options to

be written against thembe written against them Very small deviation between market Very small deviation between market

price and net asset valueprice and net asset value


ETFs TypesETFs Types

Index ETFs – most popularIndex ETFs – most popular Sector ETFs – more expensiveSector ETFs – more expensive Commodity ETFs – not regulated as Commodity ETFs – not regulated as

investment companies under the 40 actinvestment companies under the 40 act Fixed-Income ETFs – Bond, TreasuriesFixed-Income ETFs – Bond, Treasuries Currency ETFs – generally not long termCurrency ETFs – generally not long term Actively Managed ETFs – started in 2008Actively Managed ETFs – started in 2008 Inverse ETFs – moves opposite of Inverse ETFs – moves opposite of

benchmarkbenchmark Leveraged ETFs – greater volatilityLeveraged ETFs – greater volatility


ETFs vs Mutual FundETFs vs Mutual Fund CostsCosts

ETFs would pay brokerage commissions, where MFs may ETFs would pay brokerage commissions, where MFs may be purchased direct with no loadbe purchased direct with no load

ETFs have a lower expense ratio (not actively managed)ETFs have a lower expense ratio (not actively managed) Most ETFs do not have 12b-1 feesMost ETFs do not have 12b-1 fees

TaxationTaxation ETFs are generally more tax-efficientETFs are generally more tax-efficient ETFs investors only realize capital gains when they sell ETFs investors only realize capital gains when they sell

their own shares or when the ETF trades to reflect a their own shares or when the ETF trades to reflect a change in the indexchange in the index

TradingTrading MFs end of the day pricingMFs end of the day pricing Rebalancing and Dollar-Cost Averaging easier with MFsRebalancing and Dollar-Cost Averaging easier with MFs


ETFs vs Mutual FundsETFs vs Mutual Funds

DividendsDividends ETFs distribute quarterlyETFs distribute quarterly MFs immediatelyMFs immediately

LiquidityLiquidity Some ETFs are not as liquid and may Some ETFs are not as liquid and may

have high bid-ask spreadshave high bid-ask spreads MFs always get NAV at the end of the dayMFs always get NAV at the end of the day

TransparencyTransparency ETFs have transparent portfoliosETFs have transparent portfolios


Leveraged ETFsLeveraged ETFs

Exposure to indexes with greater volatilityExposure to indexes with greater volatility If S&P 500 rises by 1% the LETF would rise by If S&P 500 rises by 1% the LETF would rise by

2%2% If S&P 500 falls by 1% the LETF would fall by 2%If S&P 500 falls by 1% the LETF would fall by 2%

Leveraged ETFs typically uses options and Leveraged ETFs typically uses options and futuresfutures

May be purchased in retirement accountsMay be purchased in retirement accounts Usually has higher expense ratiosUsually has higher expense ratios

Daily rebalancing, maintaining ratioDaily rebalancing, maintaining ratio Low liquidityLow liquidity Short TermShort Term


Inverse ETFsInverse ETFs

Moves in opposite direction of benchmarkMoves in opposite direction of benchmark If S&P 500 rises by 1% the IETF fall by 1%If S&P 500 rises by 1% the IETF fall by 1% If S&P 500 falls by 1% the IETF would rise by 1%If S&P 500 falls by 1% the IETF would rise by 1%

Uses short positions on underlying stocksUses short positions on underlying stocks Hedge for bearish markets when you don’t Hedge for bearish markets when you don’t

want to sell or can’twant to sell or can’t May be purchased in retirement accountsMay be purchased in retirement accounts Daily basis investment objectiveDaily basis investment objective Leveraged Inverse ETFsLeveraged Inverse ETFs


Leveraged ReturnsLeveraged Returns

Day 1 – Market -10%Day 1 – Market -10% Index $100 - $10 = $90Index $100 - $10 = $90 LETF(2) $100 - $20 = $80LETF(2) $100 - $20 = $80

Day 2 – Market +10%Day 2 – Market +10% Index $90 + $9 = $99Index $90 + $9 = $99 LETF(2) $80 + $16 = $96LETF(2) $80 + $16 = $96

Index Return of -1%Index Return of -1% LETF(2) Return of -4%LETF(2) Return of -4%


ResourcesResources

NYSE – Informed Investor – What NYSE – Informed Investor – What should you know about exchanged should you know about exchanged traded fundstraded funds

SEC – Exchange-Traded FundsSEC – Exchange-Traded Funds SEC/FINRA Investor Alert – Leveraged SEC/FINRA Investor Alert – Leveraged

& Inverse ETFs& Inverse ETFs FINRA – Non Traditional ETFs – FAQFINRA – Non Traditional ETFs – FAQ FINRA – Notice to Members 09-31FINRA – Notice to Members 09-31


Thank you!Thank you!

Have a nice day Have a nice day

nasaa 2010 investment adviser training exchange traded funds (etfs) & leveraged etfs chad...

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