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To capture investor interest, Exchange Traded Funds (ETF) have become the latest market innovation. Since 1990, they have been actively traded in a form of basket of securities.’ Assess the main features of exchange traded funds (EFTs) drawing on their advantages and disadvantages as the cause of their popularity. Advantages Diversification Can be traded like stocks Lower fees for passively managed ETFs Reinvestment of dividends No minimum investment amount needed Lower capital gains compared to actively managed mutual funds. Discounts and premium prices are lower Disadvantages Lower levels of diversification Overkills intraday pricing Costs could be higher than mutual funds-broker fees Dividend yields are generally low. Returns on leveraged ETFs can be skewed

To capture investor interest, Exchange Traded Funds (ETF) have become the latest market innovation. Since 1990, they have been actively traded in a form of basket of securities.’ Assess the main features of exchange traded funds (EFTs) drawing on their advantages and disadvantages as the cause of their popularity. Advantages Diversification Can be traded like stocks Lower fees for passively managed ETFs Reinvestment of dividends No minimum investment amount needed Lower capital gains compared to actively managed mutual funds. Discounts and premium prices are lower Disadvantages Lower levels of diversification Overkills intraday pricing Costs could be higher than mutual funds-broker fees Dividend yields are generally low. Returns on leveraged ETFs can be skewed

Fundamentals of Financial Management (MindTap Course List)
Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
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‘To capture investor interest, Exchange Traded Funds (ETF) have become the latest market innovation. Since 1990, they have been actively traded in a form of basket of securities.’

Assess the main features of exchange traded funds (EFTs) drawing on their advantages and disadvantages as the cause of their popularity.

Advantages

  • Diversification
  • Can be traded like stocks
  • Lower fees for passively managed ETFs
  • Reinvestment of dividends
  • No minimum investment amount needed
  • Lower capital gains compared to actively managed mutual funds.
  • Discounts and premium prices are lower

Disadvantages

  • Lower levels of diversification
  • Overkills intraday pricing
  • Costs could be higher than mutual funds-broker fees
  • Dividend yields are generally low.
  • Returns on leveraged ETFs can be skewed
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