Investing in Exchange Traded Funds

What is an Exchange Traded Fund (ETF)?

Exchange traded funds, or ETFs are a tool for investing in a group of securities in a single transaction. They combine the advantages of index mutual fund with the benefits of individual stocks. ETFs are typically designed to track a specific market index.

Why invest in an index?

An index contains a diverse number of stocks that provide an accurate representation of a specific benchmark. As a result, index-based investments such as index funds and ETFs will closely follow the ups and downs of the index it is designed to mimic. Index investments have relatively low management fees compared to actively managed funds.

Advantages of index investing

Similar to index mutual funds, ETFs allow investors to implement a wide range of distinctive strategies while taking advantage of a certain sector or segment of the market. Index investing offers certain benefits:

Simplicity. Indexes are easy to understand as they have a set number of stocks that fulfill certain criteria. They are transparent – what you see in the index, you own in the ETF. Index holdings are published frequently, so it is simple to obtain current, accurate information regarding the holdings in a particular index.

Diversification. Investing in an ETF allows investors to own a broad number of stocks in one single basket. This allows investors to effectively diversify within a specific sector, potentially reducing the investor’s exposure to risk.

Cost efficiency. The passive management style of ETFs means that management fees are relatively low compared to actively managed funds. In addition, ETFs and other index investments typically have lower turnover than actively managed funds.

Consistency. Because ETFs closely follow their respective indices, they are more likely than other investments to provide returns that are consistent with their benchmarks.

Trading Flexibility. ETFs are traded with intraday pricing, meaning that an ETF may be bought or sold at any time that the market is open. When a trade is placed, the ETF will trade at the current market price. Because ETFs are bought and sold like a stock, a commission may also be charged on each trade.

Tax Efficiency. Once an ETF is created, it is traded on the open market between investors. If an investor wishes to sell his ETF, it must be sold to another investor, unlike with a mutual fund, where the manager needs to generate cash to honor the liquidation. All indexed investments incur ongoing capital gains, which can be reinvested or used as income. However as a result of the structure of ETFs, managers do not need to liquidate holdings to meet investor redemptions, limiting turnover and capital gains and making ETFs more tax-efficient than mutual funds.

Lower Expenses. Purchase orders for an ETF are placed through an investment advisor, and routed directly to the appropriate exchange. Because investors do not place their purchase and redemption orders directly through the company managing the ETF, the administrative costs are significantly lower than those of index funds. ETF managers do not need to pay for telephone call center, correspondence with investors, account record keeping and many other expenses that are common for index mutual funds.

Choosing the right index

The index that you choose to track with your investment will likely have the greatest impact on your investment results. It is important to remember that not all indices make good investment portfolios. With hundreds of traditional index funds and exchange traded funds available, selecting the appropriate indexed investment for your portfolio is challenging. Indexed investments can be narrowly focused on a specific industry or broadly diversified among multiple sectors of the market. Your Ziegler financial advisor can help evaluate the alternatives to find a product that matches your investment goals and asset allocation strategy to help you determine whether a traditional index fund or ETF is right for you. To learn more, contact your Ziegler financial advisor or our Client Service Center at 888 884 8339 or .

Investments in a single industry may involve greater risks and price volatility. All stock investing, especially within the technology sector, is subject to concentrated portfolio risks and non-diversification risks, which may result in daily price fluctuations that are more extreme than those of the overall stock market.

There are risks involved with margin investing. You may be called upon to deposit additional cash or securities if your account equity (including that attributable to ETFs) declines. With short sales, you risk paying more for a security than you received from its sale.

Prospective purchasers should carefully consider the investment objectives, risks, charges and expenses of any specific ETF that is being considered for purchase. Please consult the prospectus for additional information as each prospectus contains this and other important information about the ETF.