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Many investors don’t get ETFs

By Sheyna Steiner ·
Friday, October 14, 2011
Posted: 3 pm ET

Exchange traded funds, or ETFs, offer investors a bundle of securities like a mutual fund but with lower expenses and fewer taxes. Unlike mutual funds, which calculate the net asset value -- or price per share -- at the end of the day, ETFs are priced throughout the day like stocks.

They can be structured fairly basically. They typically follow an index and own the underlying assets.

ETFs that don't own the underlying assets are known as synthetic ETFs and come with risks not associated with physical ETFs. But that's just the beginning, they can be even more complex as in the case of leveraged ETFs which use derivatives and short selling to juice returns.

In a nutshell, investors have a wide range of options and that could be part of the problem. More options equal more confusion whether you're talking about ice cream or investments. In the case of ETFs, the options range from vanilla to off-the-charts sophistication.

A recent survey highlighted the growing popularity of ETFs. Though many people find ETFs slightly intimidating, more and more are interested in using them. According to the Schwab survey, 44 percent of investors questioned plan to invest more in ETFs.

From the press release:

…the study also offers insights on the gaps that still exist in investors’ knowledge about ETFs. Forty-six percent of investors surveyed call themselves ETF “novices,” and one-fourth of all respondents indicate that they do not understand their costs or how to best use them.

Thirty-one percent of all investors say they don’t know how to use ETFs across asset classes, and more than 25 percent know nothing about the difference between actively managed and index-based ETFs.

Do you use ETFs? If you don't, why not?

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October 17, 2011 at 3:02 pm

The blog post could have been a little more clear, I agree. I do not take responsibility for scaring away the masses, though.

I find the structure of ETFs a little hard to get my head around, especially when they are compared to mutual funds or stocks which are easy-peasy -- everyone can grasp how stocks basically function without several pages of explication.

An ETF comes to life through a trade between the sponsor of the ETF and authorized participants or the people who are going to be responsible for actually farming out the shares on an exchange.
The authorized participant sells or lends the stocks to the ETF.

They get back creation units, typically representing 50,000 shares of the ETF. The authorized participant can then sell those individual shares on the market to individuals.

That's quite simplified however…

October 14, 2011 at 9:42 pm

I did not understand anything you stated in this ETF article. Can see why the masses will not touch them!!