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ETF's are just like closed end mutual funds in most respects. When you buy
an ETF, you are buying a share in a fund. That fund owns a bunch of
underlying stocks and has a manager. The manager gets a management fee of
some number of basis points per year. Like a closed end fund, shortly after
purchasing an ETF you will receive a prospectus in the mail. The prospectus
(as well as the product's web site) will list the management fee. It's is
typically 20 or 40 or so basis points, due to the passive, indexing nature
of ETF's.
ETF's differ from closed end funds, though, in the way units are fluidly
created and destroyed by the manager as open interest rises and falls. A
closed end fund has a fixed number of shares available and, if demand
outweighs supply, the shares can trade at a premium to NAV. Conversely (and
more frequently) supply can outweigh demand and they can trade at a
discount. For an ETF, though, the creation and destruction of units is how
the manager keeps the supply in balance with the demand and they trade very
close to their NAV.
In buying an ETF your returns will differ from the returns of the underlying
index by 1) the management fee, 2) your transaction costs, 3) the manager's
transaction costs in buying or selling underlying stocks to create or
destroy units, 4) basis risk in that the set of securities (including cash)
the manager holds has returns that differ from the index. Note that the
managers don't even attempt to hold all the securities in the broad indices
and will only hold a highly correlated, liquid, subset.
Aaron Schindler
----- Original Message -----
From: "Jack Griffin" <jack_2231@xxxxxxxxx>
To: "Kent Rollins" <kentr@xxxxxxxxxxxxxx>; "OmegaList"
<omega-list@xxxxxxxxxx>
Sent: Wednesday, July 18, 2001 1:09 PM
Subject: Re: QQQ and other ETF's
> Excellent question. My 2 wild guesses are dividends &
> fair/value/premium/bid/ask computer trading.
>
> Jack
> --- Kent Rollins <kentr@xxxxxxxxxxxxxx> wrote:
> > managing it's existence? For example, Merrill-Lynch
> > doesn't benefit
> > directly from my purchase of one of their HOLDR's
> > ETF, but Merrill-Lynch
> > didn't create the HOLDR's just for kicks. Ditto for
> > Barclay's and iShares.
> > What's their upside?
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