Bus 140 Section 2070 - Twelve Things You Need to Know About Etf’s

May 16, 2012

Bus 140 Section 2070

Response: Twelve Things You Need to Know About ETF’s

        I decided to read over an article from Bloomberg.com, and the article was on Exchange traded funds. The article was written by Ben Steverman, and it actually covers some very important parts about exchange traded funds. The first thing recognized is choice overload. Steverman discusses choice overload, where he points out valuable information as to how much money is invested in ETF’s. He points out that more than $1.1 trillion of assets are invested in the U.S. Which he suggests, “Ads up from $430 billion five years ago, and the assets are keeping pace increasing 31% in 2012 (para 2).” What this means for me is an important investment vehicle that I can use to help increase revenue or income. Then the article explains why ETF’s are so popular, which Sterverman suggests it’s mainly because of their low expense and their ease of trading (para 3), because they trade throughout the day like stocks. And what it means that ETF’s trade like common stock is they trade on the stock exchanges, they are set up to match certain market segments. The article follows up the common sectors suggestion because they can also be exposed to a wide variety of assets such as currencies and commodities. Nearly all ETF’s, from what I understand, are structured as index funds, and then own their own representative sample of stocks in a targeted market segment or index. The article then covers why there are so many ETF’s, and the simple answer is diversification. By owning or investing in an ETF, means that the investor is trying to diversify their portfolio and profit from targeted industry trends, or trends in the market (para 3). From my understanding diversification is a primary motive for investing in mutual funds, which then allows for investors or people like me to reduce risk by indirectly investing in several types of securities. Steverment then points out how similar ETF’s can perform differently (para 7). The more obvious reason I could personally believe this is, is because they all vary in their invested amounts so ETF’s naturally don’t have the same outcomes. However, Steverman says it’s because “ETF’s hold a broad sampling of an index rather than hold an index than hold every index rather than hold every security in it (para 7).” It’s referred to as optimization because it can lower expenses but also have weird results. Also the article reflects on if ETFs can protect against inflation and they do.  Steverman suggests funds that hold treasury inflation protected securities, such as, the “SPDR Barclays Capital TIPS ETF, which matches the official inflation rate but offer almost no returns otherwise (para 9).” Then he gives information about the best hedge against inflation which is equities, also he adds, “Are broad commodities indexes and real estate funds (para10).” He goes over some other stuff about ETFs like getting a fair price, how important are ETF expenses, can ETFs affect bill taxes, are they changing bond investing, how commodity funds work, and some other stuff that talks about aesthetics. I covered some of the more other important parts of ETFs in the article which dealt more with the financial aspects because those I believe affect me more. I like how the article covered the greatness of ETFs and how much of them the U.S. has invested in, it shows that they really do have some risk factor involved, but not one that will affect me drastically. So, should I invest in either common stocks or ETFs I’d prefer ETFs because they’re safer and are known to have fewer risks. The professional management, diversification, financial returns, make ETFs appear very equitable. And what they show for someone like me is that I should look forward to them in the near future because they’re safer.