Mutual Fund Archives

Fundamentals of Exchange Traded Funds

Exchange Traded Funds (ETFs) offer an approach to investing that combines instant diversification with trading flexibility, reduced expenses, and improved tax efficiency. Fundamentals of Exchange Traded Funds.

WHAT ARE ETFs?

An ETF is a collection of securities that tracks, and is intended to represent, the performance of a broad or specific segment of the market (e.g., US equities, small cap stocks or emerging markets).

An ETF is similar to an index mutual fund but trades like a stock throughout the day. ETFs combine the features of index mutual funds with individual securities:

Like index mutual funds, ETFs allow investors to track hundreds of domestic and international indexes, including the S&P 500® and the Dow Jones U.S. Total Stock Market IndexSM, as well as specific sectors or industries (e.g., utilities, technology, or healthcare).

Like individual stocks, ETFs give investors the flexibility to buy and sell on the major stock exchanges throughout the day, at the market price. Like stocks, investors can place stop loss and limit orders on ETFs. They can even be bought on margin and sold short, subject to your broker’s terms and conditions.

(Click to enlarge)

*Morningstar. Average Prospectus Net Expense Ratio for ETFs and open end mutual funds as defined by Morningstar. Data as of 9/30/2014. Average Net Prospectus Expense Ratio for US ETFs and US Mutual Funds as defined by Morningstar.
Unlike a stock, Index ETFs and mutual funds are managed funds that follow a passive investment strategy, attempting to track the performance of an unmanaged index of securities. As a result, the Funds may hold constituent securities of the Index regardless of the current or projected performance of a specific security.

ETFs trade like a stock and will fluctuate in market value over the course of the trading day, unlike an index mutual fund. ETFs may trade at prices below or above the ETF net asset value. Buying shares of an Index ETF, similar to buying a stock, will typically involve brokerage commissions to which index mutual funds may not be subject. Frequent trading of ETFs could significantly increase commissions and other costs.

THE POTENTIAL BENEFITS OF EXCHANGE TRADED FUNDS

DIVERSIFICATION. ETFs offer one of the easiest ways to diversify a portfolio, especially for investors who want to focus on a specific sector or industry. By virtue of being index investments, ETFs offer exposure to a particular market segment, helping to protect against the risk of a select number of individual stocks hurting an investor’s overall portfolio performance. It’s important to remember that diversification does not ensure a profit or guarantee against loss.

LOWER FEES AND EXPENSES. Because most ETFs are passively managed, they typically have low management fees and operating expenses. However, frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.

TRADING FLEXIBILITY. ETFs trade all day long, so investors can lock in the market value of the ETF anytime during the trading day. Because ETFs trade like stocks on an exchange, a wider range of techniques (short selling, stop loss and limit orders) can be used to take advantage of anticipated market movements. It’s important to keep in mind that frequent ETF trading, which typically occurs through a broker, can significantly increase brokerage commissions potentially washing away any savings from low fees or costs.

TRANSPARENCY. Investors have all the information they need to make informed investments—no strategy drift or black boxes to decipher. With ETFs, you know precisely which securities the ETF holds and what you’re invested in—there is no need to wait for the end of the quarter to review the fund’s holdings.

TAX EFFICIENCY. The ETF investor decides when to sell his or her ETF shares and much like a stock transaction the individual controls the timing of any taxes on any resulting capital gain/loss. Unlike mutual fund investors, ETF buyers and sellers usually don’t assume as high a tax burden for fellow shareholder redemptions. In this case, the resulting capital gains tax burden would be shared by all of the ETF’s investors.**

DEFINITIONS

FLEXIBLE TRADING OPTIONS

Ease and efficiency with which one can purchase a security. ETFs, like stocks, trade on an exchange and can be bought and sold at any point during trading hours at their current market value. Buy and sell orders for mutual fund shares are placed and transacted after the market close at the mutual fund’s closing market value, where the closing value is calculated at the end of the trading day.

Source: “State Street Global Advisors ETFs: A Brief Introduction”.

TAX TREATMENTS

Tax consequences related to the trading of securities. Turnover of individual stocks will have either short term or capital gains tax consequences for the individual investor only. Similarly, holders of ETFs will not typically be affected by other shareholder redemptions. With a mutual fund, if multiple shareholders redeem their shares concurrently, the fund manager may have to sell underlying holdings to raise cash to pay those shareholders; in addition to transaction costs, this could trigger capital gains. The taxes on those capital gains would then be absorbed by all shareholders in the fund.

Source: “State Street Global Advisors ETFs: A Brief Introduction”.

INDEX DEFINITIONS

S&P 500 INDEX

The S&P 500 Index is an unmanaged index of 500 common stocks that is generally considered representative of the US stock market. The index is heavily weighted towards stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. The S&P 500 Index figures do not reflect any fees, expenses or taxes.

Source: standardandpoors.com.

DOW JONES U.S. TOTAL STOCK MARKET INDEX

The Dow Jones U.S. Total Stock Market Index represents the broadest index for the US equity market, measuring the performance of all US equity securities with readily available price data. Over 5,000 capitalization weighted security returns are used to adjust the index.

Source: dowjonesindexes.com.

TALK TO YOUR FINANCIAL ADVISOR

If exchange traded funds interest you, speak to your advisor to determine if you could benefit from incorporating ETFs in your investment plans.

Your advisor can help you analyze your current investments, risk tolerance, tax situation and time horizon, and then recommend strategies to help you achieve your goals.

ABOUT SPDR® ETFs

SPDR ETFs are a comprehensive fund family of over 100 ETFs, spanning an array of international and domestic asset classes. Offered by State Street Global Advisors, SPDR ETFs provide investors with the flexibility to select investments that are precisely aligned to their investment strategy. Recognized as the industry pioneer, State Street Global Advisors created the first ETF in 1993 (SPDR S&P 500®—Ticker SPY). Since then, we’ve sustained our place as an industry innovator through the introduction of many ground-breaking products, including first-to-market launches with gold, international real estate, international fixed income and sector ETFs.

For information about our ETF family, visit spdrs.com.

STATE STREET GLOBAL ADVISORS
State Street Financial CenterOne Lincoln StreetBoston, MA 02111
866.787.2257spdrs.com

** Like mutual funds, though, there may be times when changes in the underlying index trigger the sale of securities held by the ETF.

FOR PUBLIC USE.

IMPORTANT RISK INFORMATION

ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETFs’ net asset value. Brokerage commissions and ETF expenses will reduce returns.

Passive management and the creation/redemption process can help minimize capital gains distributions.

Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs.

The use of short selling entails a high degree of risk, may increase potential losses and is not suitable for all investors. Please assess your financial circumstances and risk tolerance prior to short selling.

Information represented in this piece does not constitute legal, tax, or investment advice. Investors should consult their legal, tax, and financial advisors before making any financial decisions. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.

Foreign investments involve greater risks than US investments, including political and economic risks and the risk of currency fluctuations, all of which may be magnified in emerging markets.

Standard & Poor’s and S&P are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed by SSgA. The Dow Jones US Total Stock Market Index is a product of S&P Dow Jones Indices LLC, and has been licensed by SSgA.

“SPDR” is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”) and has been licensed for use by State Street Corporation. STANDARD & POOR’S, S&P and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products. Further limitations and important information that could affect investors’ rights are described in the prospectus for the applicable product.

Distributor: State Street Global Markets, LLC, member FINRA, SIPC, a wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., a registered broker-dealer, is distributor for SPDR S&P 500, SPDR S&P MidCap 400 and SPDR Dow Jones Industrial Average, and all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc. is distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Markets, LLC.

Before investing, consider the funds’ investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call 866.787.2257 or visit spdrs.com. Read it carefully.

When Will Commodities Recover?

When Will Commodities Recover? Commodities have been in a multi-year bear market, with especially sharp drops in the past year. As commodity investors, this begs the question: When will commodities bottom and begin to recover?

The history of markets suggests that an upward cycle in prices is inevitable. Putting aside the fact that the fundamentals, in general, may support a turnaround, if this is a traditional commodity cycle – and that is a big caveat – investors may continue to wonder when the mayhem will end. We believe that it could be reasonably soon.

Non-fundamental, or technical, analyses can be helpful for timing cycles. Markets often move regardless of what fundamentals may indicate. The third quarter was a prime example of this phenomenon. We saw a huge, sudden fall in commodity prices, but there were no material changes in global demand. Additionally, there was no significant change in China’s economic growth; China’s growth was slowing well before the third quarter and we believe this trend will continue.

Our Analyses Point to the First Half of 2016

Assuming this is a normal cycle, and unless commodity prices fall much further, most of our analyses suggest a bottom may occur during the first half of 2016, and most likely in the first quarter.

We examined two different indicators: the length of prior cycles and long-term price momentum.

1) Prior Commodity Cycles

First, we looked at commodity cycles historically, as shown below in Chart A. Prior cycles suggest to us that the end of March 2016 might be the time to start buying. Past commodity downturns have generally lasted approximately 18 months. We’re 11 to 12 months into the current downturn, and six months more bring us to March, or the end of the first quarter of 2016.

Chart A: Commodity Cycles Usually Last 18 Months

Measure: CRB Commodity Composite Price Index1

1See CRB Commodity Composite Price Index definition below.
Notes: Shaded areas are longer periods of falling commodity prices (> 10 months).
Source: Financial Times, Haver Analytics, Deutsche Bank Research. Data as of October 2015.

A Closer Look at Oil Prices

Let’s look specifically at historical oil prices. WTI crude oil returns are currently near historic lows as shown in Chart B below. The lows of trailing 18-month price returns for WTI have historically been tested at approximately -50%. We have already seen these levels this year: as recently as September, October, and November.

Taking a different perspective on oil, we note that price cycles generally last 15 months. The length of the current downturn is 15 months. At least one prior crude supply/oversupply cycle (1994-2003) suggests getting invested now.

Chart B: Oil Prices Don’t Typically Correct More than 50%

Measure: WTI Crude Oil Price Returns, Trailing 18 Months

Notes: Red Line at -50%: Lows have historically been tested at approximately -50%.
Dotted Yellow Line at -25%: Longest period of < -25%=”” trailing=”” return=”” is=”” 17=”” />
Average period of < -25%=”” trailing=”” return=”” is=”” 6=”” />
Current period of < -25%=”” trailing=”” return=”” is=”” approximately=”” 11=”” months=”” (nov.=”” 2014=”” to=”” />
Source: Bloomberg. Data as of September 30, 2015.

2) Long-Term Price Momentum

We also looked at a long-term commodities momentum signal: the 250-day moving average. This indicator signals a ”buy” when the current price is above the 250-day moving average. As shown below in Chart C, the Morningstar Long/Flat Commodity Index (which uses the 250-day moving average) currently is less than 2% invested/long exposure in commodities. Let’s look forward and assume two possible price scenarios: 1) a bullish scenario that assumes prices increase 20%; and 2) a flat scenario that assumes commodity prices stay at current levels. The bullish scenario indicates that the Morningstar Long/Flat Commodity Index signal would be more than 50% invested in commodities by April 2016. The flat scenario pushes this 50% invested date out to August 2016. If you are a bullish investor, we believe the time to invest is some time in the first quarter of 2016, well before the final signal in August should prices stay flat.

Chart C: Using a Longer-Term Signal to Get Reinvested in Commodities

Measure: Morningstar Long/Flat Commodity Index2

2See Morningstar Long/Flat Commodity Index definition below.
Notes: Calculation based on current commodity weightings in Index and uses each commodity’s 250-day moving average; Index weightings adjusted on third Friday of month.
Source: Morningstar, Van Eck Research. Data as of November 5, 2015.

Van Eck’s Approach

Here at Van Eck, we are generally bottom-up investors, i.e., we deal in fundamentals. More precisely, we focus most of our attention on companies that can provide shareholder return despite what the markets might be doing. Of course you cannot really escape the markets, but we focus on companies with quality management teams that have the potential to add value.

Supply Drives Markets, Not Demand

Similarly, when we look at commodity markets, we focus primarily on supply. We don’t believe demand drives markets. We think that supply drives markets and that analyzing supply is a bottom-up, fundamental exercise. We look at particular markets for commodities and whether supply will increase or decrease based on the behavior of suppliers and producers.

When it comes to timing cycles, however, fundamentals may not always be the best bet. We believe it makes sense to mix technical and fundamental analyses, and given our current findings, we believe you should give serious thought to allocating to commodities.

Video: Commodities Poised to Rebound in 2016

My colleague Roland Morris, Commodities Strategist, goes into greater depth on how the current supply dynamics in commodity markets are positioning the space for a likely rebound in 2016.

Van Eck Views Blog

November 25, 2015
by Jan van Eck, CEO

An innovator of investment solutions, Jan van Eck has created a multitude of strategies spanning international, emerging markets, and commodities opportunities. van Eck plays a very active role in helping to shape the firm’s mutual fund, ETF, and alternative investment offerings. As CEO, his approach is guided by the wisdom gained from the firm’s 60 year history.

Important Information For Foreign Investors

This document does not constitute an offering or invitation to invest or acquire financial instruments. The use of this material is for general information purposes.

Please note that Van Eck Securities Corporation offers actively managed and passively managed investment products that invest in the asset class(es) included in this material. Gold investments can be significantly affected by international economic, monetary and political developments. Gold equities may decline in value due to developments specific to the gold industry, and are subject to interest rate risk and market risk. Investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation.

Please note that Joe Foster is the Portfolio Manager of an actively managed gold strategy.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made.

1NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 2Market Vectors Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver. 3Tail risk is the risk of an asset or portfolio of assets moving more than three standard deviations from its current price. 4S&P 500® Index (S&P 500) consists of 500 widely held common stocks covering industrial, utility, financial, and transportation sectors. 5Dot-com bubble grew out of a combination of the presence of speculative or fad-based investing, the abundance of venture capital funding for startups and the failure of dotcoms to turn a profit. Investors poured money into internet startups during the 1990s in the hope that those companies would one day become profitable, and many investors and venture capitalists abandoned a cautious approach for fear of not being able to cash in on the growing use of the internet. 6Source: Bloomberg.

Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results; current data may differ from data quoted. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. ©2015 Van Eck Global.