ETF's Everywhere {Part III}

Part III of our coverage of the Barron's ETF article.  {Excerpt with my highlights.}

Discount and full-service brokers want to capitalize on the ETF boom. Financial advisors who once picked stocks for clients and later selected mutual funds have morphed into asset allocators, and ETFs are an easy and low-cost way to get diversification. The annual expenses on the average one are around 0.50%—one-half to one-third the fees of many mutual funds—and many ETFs charge 0.10% or less.

"There is no better way for individuals to build diversified investment portfolios. Every asset class is available at rock-bottom costs," says Charles Schwab, founder and chairman of Charles Schwab (SCHW).  Schwab has made a major push into ETFs; its clients now hold $100 billion worth of them. .....

...One obstacle to growth is unfamiliarity. "If you asked eight out of 10 people, they probably wouldn't know what ETF stands for," says Peter Crawford, a senior vice president at Schwab's client group. Just 17% of Schwab's retail clients now own exchange-traded funds.

AMONG THE KEY differences between mutual funds and ETFS are that mutual funds can only be traded once a day, while exchange-traded funds can be bought or sold whenever exchanges are open. Most mutual funds are actively managed, while virtually all ETFs are passive. Actively managed ETFs probably will remain scarce because government regulators appear loath to approve them. Active managers are reluctant to disclose their holdings daily, partly for competitive reasons. ETFs, in contrast, provide such disclosure.

How do exchange-traded funds add assets? When investors buy shares, the ultimate sellers are designated market makers. When these market makers see their inventories depleted, they create new shares by purchasing the underlying investments and then delivering them to the ETF manager for new shares. Likewise, heavy selling of exchange-traded funds prompts market makers to liquidate the underlying investments, extinguishing shares.

The most actively traded ETF is the original, the SPDR S&P 500 (SPY), which turns 18 years old in January. Others include the iShares Russell 2000 (IWM), which invests in the popular small-cap index; the PowerShares QQQ Trust (QQQQ), which buys stocks in the Apple-heavy Nasdaq 100 index, and the iShares MSCI Emerging Markets (EEM), which holds stocks throughout the developing world.

Link:  ETF's Everywhere.

*Long ETFs related to the S&P 500, Long SPY IWM, QQQQ and EEM in client accounts.  In addition Charles Schwab and Co. is the custodial broker for most of the individual client accounts we manage at Lument Capital Mahagement, LLC.