Editor's Note: This story was originally published Sept. 12, 2003 on RealMoneyThere's clearly a lot of interest in exchange-traded funds, and the folks at RealMoney are dedicated to covering this quickly growing area of the investment landscape. In that vein, here are answers to some of your ETF-related questions.
Question: I've heard a lot of talk comparing ETFs to mutual funds. What are the advantages of ETFs over mutual funds? Answer: ETFs have a number of advantages vs. mutual funds:
- Transparency: Mutual funds only report their holdings twice a year, so you never really know what the fund currently owns. With an ETF, however, this information is readily available; you always know the underlying stocks that you own. Buying and selling flexibility: Mutual funds trade based on the day's closing net asset value, or NAV. ETFs trade throughout the day, just like a traditional stock. ETFs can also be sold short, while mutual funds cannot. Tax efficiency: Mutual fund managers' trading creates a taxable event; ETFs tend to generate fewer capital gains. Cost effectiveness: ETFs generally have much lower annual expense ratios than mutual funds, which significantly impacts total return.
Question: How can I determine which stocks are represented in a particular ETF? Could you provide links to a site that provides lists of the stocks that make up the ETFs? Answer: One of the many advantages of ETFs and HOLDRs is transparency: You know what you're buying. As I mentioned earlier, mutual funds only disclose their largest holdings twice a year, which causes the data to be both stale and incomplete. Unlike mutual funds, however, investors in ETFs or HOLDRs can easily determine what they own. Investors in any one of the HOLDRs can go to the
Question: Can you trade options on ETFs? Answer: Many ETFs have options available. You can check with your broker to see if options are available for a particular ETF, but for iShares, you can refer to the
Question: What determines if a foreign ETF (like the iShares MSCI Japan Index Fund ( EWJ)) rises or falls? How much correlation is there to the U.S. market, or is it determined solely by what's happening in, say, the Japanese market? If it is Tuesday in the U.S., and the EWJ closes at $8, and then the Nikkei goes down big, does the EWJ automatically and percentage-wise open down that amount/percentage? Sometimes it does not seem to match and is in fact trading separately from what happens in Japan. Answer: It's important to note that the iShares MSCI Japan Index Fund is not meant to track the Nikkei. The EWJ is designed to track the MSCI Japan Index, which is a capitalization-weighted index that monitors the performance of Japanese stocks. Again, this doesn't necessarily track the Nikkei, although it is a good proxy for Japan. So to use your example, if EWJ closes in the U.S. at $8 and then the Nikkei sells off, presumably the MSCI Japan Index would decline too (although not necessarily). The next day in the U.S., EWJ would be trading down by roughly the same percentage that the MSCI Japan Index lost. EWJ does track what is happening in Japan as measured by the MSCI Japan Index, not by the Nikkei.