What is an ETF?

In Short

An ETF (Exchange Traded Fund) is a basket of securities that attempts to duplicate the performance of a multiple of an index. See here for the definition of a stock index. There are also commodity indexes.

Their Benefit

They are extremely low cost (in terms of management fees), and will usually include some diversification. See here for the benefits of diversification. So it is thereby easier for an investor to gain diversification will needing to invest a lot of money.

How they Work

Every index is made up of a basket of securities and/or commodities. The items that are included in the index are publically available. The ETF manager buys and sells these items so the ETF proportionally matches a multiple of the index. By multiple I mean the manager can either try to duplicate the index perfectly (1x multiple), try to duplicate the inverse of the index (-1x multiple) by using short selling (see here for definition), or use derivatives (see here for definition) to try to get a greater multiple (>2x multiple or <-2x multiple).

How They Trade

An ETF trades exactly like a stock. To buy or sell, just give the symbol to your broker.

Fee Structure

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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