ETFs What Only A Man Could Love

<p>ETFs, or Exchange Traded Funds,&nbsp;are a type of investment fund that only a man could think up.&nbsp; Men have this thing about equations, like E=mc2, or&nbsp; E+T+F= I&#39;m a genius. <br><br>To understand ETFs, without getting into&nbsp;arcane market jargon, we can look at the male psychology behind their creation.&nbsp;&nbsp;<br><br>ETFs were designed to be better than mutual funds, in certain respects. Mutual funds, as you know, are&nbsp;&quot;mutual&quot; assets.&nbsp; You send a mutual fund your money and you get a&nbsp;proportional ownership of a basket of stocks.&nbsp; When you redeem your money they either pay you out of&nbsp;their cash account, or sell the stocks in the portfolio and pay you from that, but everyones shares are worth the same.&nbsp; When you send them money, they buy more stock.&nbsp; <br><br>A mutual fund is a kind of co-op food pantry, only it holds stocks and bonds.&nbsp; There are many women who run mutual funds, Lynette Schroeder, Michelle Stevens and Ami Domini, to name a few.&nbsp; One of the downsides of a mutual fund is that you can only buy or redeem at the end of the day.&nbsp; You can send your order in at any time, but the value of what you put in, or take out, is determined after the market closes.<br><br>As you probably know, there are many men who like to go into and out of the market three, four, five, maybe ten times a day.&nbsp; (Have you ever met a female day-trader?&nbsp; I haven&#39;t.)&nbsp; Anyway, these men find mutual funds frustrating.&nbsp; There are a &quot;closed-end&quot; variety of mutual funds that you can trade during the day, but they have premium/discount problems we won&#39;t get into here.&nbsp; Mutual funds are designed for the long-term, but we all know men like to play around in the short-term.<br><br>So men got to thinking, how can we create a mutual funds that can trade any time during the day like a stock.&nbsp;That way we can add them to our equations and charts and market-timing systems.&nbsp;You wouldn&#39;t believe the amount of thought and energy that went into the creation of ETFs.&nbsp; So many loop-holes have to be gone through that it costs an ETF provider about $1 million in legal fees, and a year of waiting, to get the SEC to give them exemptive permission to create one.&nbsp; There are over 600 ETFs as I write this.<br><br>The problem the ETF men faced was how to allow investors to go into and out of the fund during the day without hurting the value of the other investors.&nbsp; For example, if Adam decides to sell $50 million worth of his fund shares during the day the fund might have to sell that much in IBM stock.&nbsp; Such selling would drive the price down, making other fund holders end up, at the end of the day,&nbsp;with less value in their holdings.&nbsp; <br><br>It&#39;s accepted in the market that people buying and selling stock will drive the prices up an down.&nbsp; But in a fund you can&#39;t allow one shareholder to do something that hurts other shareholders.&nbsp; Otherwise, how would you sleep at night?<br><br>As I get closer to having to explain how ETFs work I&#39;m thinking, there&#39;s no way to explain this except to say Men Are Nuts!<br><br>An ETF starts with an index.&nbsp; The index is a list of stocks in a model portfolio.&nbsp;&nbsp;An ETF manager then forms a relationship with a financial heavyweight, called an authorized participant, or AP.&nbsp; The AP, who owns every stock known to man, in its own account (think Goldman Sachs), trades a basket of stocks listed in the index for shares in the ETF.&nbsp;&nbsp;&nbsp;<br><br>You can think of an ETF like a special lunch basket.&nbsp; The AP is the food wholesaler.&nbsp; The ETF creates lunch baskets out of the wholesalers food.&nbsp; But here&#39;s where it get&#39;s complicated.&nbsp; When you buy your ETF you don&#39;t get rights to the food behind it, like you do a mutual fund.&nbsp; You can&#39;t trade in your apple, to the wholesaler, and get what it&#39;s worth.&nbsp; You must sell your lunch basket to someone else.&nbsp; <br><br>This is where men really get lathered up.&nbsp; How do you prevent the lunch baskets from losing too much value if you can&#39;t get them to sell your proportional ownership?&nbsp; What if no one wants to buy your lunch basket?&nbsp; You want your ETF to be worth what the index is worth, not something less (though you wouldn&#39;t mind something more).&nbsp; The answer is arbitrage.&nbsp; That&#39;s malespeak for buying something from some innocent person who doesn&#39;t know&nbsp;it&#39;s worth more across the street.<br><br>The arbitrage works like this.&nbsp; If the ETF value gets too low, the AP would be motivated to sell his ETF shares at the discount and resell the component stocks at their market rate, which is higher, and earn a profit.&nbsp; For example, if you bought your lunch basket for $10, and it only contains an apple and a sandwich, and it went down to $5, while apples were still worth $5 alone, then the AP would buy the ETF from you, resell the apple for $5, and then whatever the sandwich was worth would be pure profit.&nbsp; <br><br>Working in the other direction, if the ETF went up very high, the AP would create ETF lunch baskets with its food and resell the ETFs for a profit.&nbsp; Through this process, ETF shares are created and redeemed in a way that keeps them naturally close to the index value.<br><br>ETFs, then, are exactly what they say they are, Exchange Trade Funds, or Funds that are traded on the stock market.&nbsp; Though they&#39;re not really funds in the traditional sense.&nbsp; They are stock market shares that are supposed to follow the value of an&nbsp;index representing a theoretical fund, like the S&amp;P 500, or NASDAQ 100, or some stocks representing the stock market in China. &nbsp;Mutual funds, again, are not traded on a market.&nbsp; Once a day every shareholder can put in, or take out, money from the mutual fund directly.<br><br>So if your husband or boyfriend thinks something good is going to happen to financial stocks at 2:30 pm, he can buy an ETF following a financial stock index at 1:00 pm, wait for the event to happen, then sell the ETF at 3:00 pm and put you to sleep with his exploits that same night.<br><br>Well, that&#39;s enough for now.&nbsp; Let me know if you want me to write more about ETFs, or any other fund subject.&nbsp; <br><br>I also hope you&#39;ll visit my site <a rel="nofollow" href="http://www.fundanalyze.com">FundAnalyze.com</a> where you can work on your current portfolio of mutual funds, should you wish to lower your costs. <br><br><br><br><br><br></p>