What Are Exchange-Traded Funds?

WHAT ARE EXCHANGE-TRADED FUNDS?
While you cannot invest directly in a market index such as the S&P 500 or the

Dow Jones Industrials, you can invest in a representative sample of the

securities that make up a market index. These investments, called exchange

traded funds, or ETFs, are passively managed portfolios designed to track the

performance of specific indexes or baskets of stocks. ETFs trade primarily on

the American Stock Exchange (AMEX) and have many of the same

characteristics of traditional investments. However, when you invest in some

ETFs you take the risks associated with investing in a narrowly focused

group of stocks.

Advantages of ETFs
For the average investor, ETFs compare favorably with more traditional investments but offer several advantages:
Easy-To-Track Portfolio Holdings.
The holdings within an ETF will be the same as or very close to the underlying index it is
tracking. ETFs disclose their holdings on a daily basis, unlike traditional open- or closed-end
mutual funds that disclose holdings on a semiannual or quarterly basis. With ETFs, you know what stocks you own and what percentage they are of your portfolio.
Low Expenses
The expenses for ETFs are generally lower than those of actively managed mutual funds
and some traditional index funds. ETFs give investors some of the lowest expense ratios in
the fund industry today.
Tax-Efficient
ETFs pass few capital gains to shareholders because of low turnover in the funds’ positions, which occurs only when a change in the underlying index is made. Unlike traditional open-end mutual funds,ETFs do not have to sell stocks to meet investor redemptions, which can result in realizing taxable gains that must then be distributed to investors.

Greater Trading Flexibility
ETFs trade on the stock exchange and can be bought and sold throughout the day. The
typical open-end mutual fund sets the price once a day based on that day’s closing net asset value (NAV), the per share value of a mutual fund. However, with ETFs, you can trade anytime during the day based on an up-to-the second price. Also, investors can use limit and stop-loss orders, buy on margin* and sell short shares of ETFs.
* Please note there are special risks associated with investing on margin. If the market value of the securities in your margin account declines, you may be required to deposit
more money or securities.

Help Meet Your Financial Objectives With ETFs
Here are some examples of how you could use ETFs to help meet your investment objectives:
Add to Core Holdings/Portfolio Completion

With their low expense ratios and tax-efficient nature, ETFs are an ideal choice for long-term, diversified equity exposure, especially in taxable accounts. Well-known, broad market index ETFs — the S&P Composite (500), Dow Jones Industrials, or the Russell 1000 — are available for investments.
Adjust Asset Allocation or Customize Portfolios
ETFs let you either build a customized portfolio or add selected exposure to an existing portfolio in an easy, cost-effective manner. You can build a diversified portfolio using various ETFs for exposure to select large-cap, mid-cap, small-cap, growth, value or foreign indexes. In addition, you can add or reduce exposure to specific sectors or industries in their portfolios by buying or selling short ETFs that focus on specific sectors, industries or investment styles.
Diversify.
With ETFs, you can gain diversified exposure to favored sectors or industries without the
company-specific risks associated with individual stocks. However, ETFs do not allow you to pick and choose the underlying stocks in the sector or index. You should be aware that when you invest in a specific sector, you may experience more volatility than when you invest in a broad-based index.

Participate in Short-Term Trading
With an active daily trading market and the ability to sell shares short, ETFs are an obvious
choice for investors who want to take advantage of short-term movements in the overall market or in specific sectors or industries. Investors who tend to move assets around on a regular basis have found ETFs attractive. Keep in mind, your investment return and principal value will fluctuate. You may receive more or less than your original investment when you sell your shares.