Etf Basics

iT’S THE UNIQUE HYBRID STRUCTURE OF eXCHANGE tRADED FUNDS THAT MAKE THEM SO INNOVATIVE.
sEE, THEY TRADE ON AN EXCHANGE LIKE A STOCK BUT ARE STRUCTURED LIKEA TRADITIONAL MUTUAL FUND.
JUST LIKE A STOCK, etFS TRADE ON AN EXCHANGE THROUGHOUT THE DAY. sO YOU CAN APPLY STOCK
TRADING STRATEGIES TO etFS—LIKE PLACING ALIMIT ORDER, SHORT SELLING, AND (ON SOME IsHARES
etFS) TRADING OPTIONS.
bUT AT THE SAME TIME, etFS ALSO OFFER MANY OF THE BENEFITS OF AN INDEX MUTUALFUNDINCLUDING
BENCHMARK TRACKING, LOW EXPENSE RATIOS, AND LOW TURNOVER.
bUYING AND SELLING SHARES OF IsHARES FUNDS WILL RESULT IN BROKERAGE COMMISSIONS. fiITHSHORT
SALES, YOU RISK PAYING MORE FOR A SECURITY THAN YOU RECEIVED FROM ITS SALE.
etFS FEATURE A UNIQUE PROCESS FOR CREATING AND REDEEMING SHARES. aND THISMAKES A WHOLE
HOST OF BENEFITS POSSIBLE. HERE’S HOW IT WORKS.
tHE CREATION AND REDEMPTION OF etF SHARES OCCURS BETWEEN THE FUND AND INSTITUTIONAL
BROKERDEALERS OR MARKET MAKERS CALLED aUTHORIZED PARTICIPANTS. tHESE aUTHORIZED PARTICIPANTS
GATHER UNDERLYING SECURITIES THAT REPLICATE THE FUND’S EXACT HOLDINGS ANDWEIGHTS AND
THEN DELIVER THEM TO THE FUND WITH A SMALL AMOUNT OF CASH.
tHE FUND, IN TURN, PROVIDES etF SHARES BACK TO THE AUTHORIZED PARTICIPANTS, WHO THENRELEASE
THOSE etF SHARES INTO THE MARKETPLACE.
tHIS PROCESS WORKS IN REVERSE FOR REDEMPTIONS, AND IT’S KNOWN AS AN IN-KIND TRANSFER. iT’S A
TAX-FREEEXCHANGE. aND etF FUND MANAGERS DON’T HAVE TO SELL SHARES OF THE FUND TO RAISE
CASH IN ORDER TO MEET REDEMPTIONS – A KEY PART OF WHY etFS ARE SO TAX-EFFICIENT.