Advances in ETF Structure

Morgan Stanley joined forces with Barclays Global Investors in 1996 to launch World Equity Benchmark Shares (WEBS) on the AMEX. The series of thirteen ETFs were benchmarked to different world equity markets ranging from Australia to Belgium. The significant difference between SPDRs and WEBS is their structures. SPDRs are operated as a unit investment trust (UIT) while WEBS are organized as an investment company under the Investment Company Act of 1940. Under a UIT structure, SPDRs must...

Preferred Stock ETFs

In addition to corporate bonds, financial companies frequently issue preferred stock. Preferred stock falls between fixed income and common equity on a corporate balance sheet. Preferred stocks pay high quarterly income like corporate bonds, but taxes on the income may receive preferential treatment from the IRS. In addition, the dividend on preferred stock may be cut or eliminated without the company defaulting on the issue. Like common stock, preferred stocks represent partial ownership in a...

Lower Brokerage Firm Costs

Many people hold their investment assets, including mutual funds, at a brokerage firm. Brokers can be divided into two types discount brokerage firms such as Charles Schwab, Ameritrade, and Fidelity and full service brokerage firms such as Merrill Lynch, Smith Barney, and AG Edwards. Discount brokerages charge clients a low commission to buy mutual funds, or they offer clients funds that pay the brokerage firm a fee each year called a 12b-1 fee . For example, Charles Schwab charges a flat...

Socially Responsible ETFs

Some investors have a moral dilemma with the products some companies make or the businesses they are in. Rather than selecting companies to invest in, socially responsible indexes attempt to gain broadbased equity exposure while excluding companies that do not pass certain social criteria tests. Examples of screens include eliminating companies in the tobacco, alcoholic beverages, and pornography industries. In addition, socially responsible screens may extend into labor practices, human...

ETF Dividends

ETFs are still required to distribute all dividends and interest to shareholders. Those distributions are taxed at a rate according to the type of income it is. Most corporate dividends are taxed at a preferred rate, while interest from bonds and money market investments are taxed at an investor's ordinary income tax level. The federal income tax on qualified stock dividends was lowered to 15 percent in 2003. A dividend qualified for preferred status as long as you held the stock for more than...

Pricing ETF Shares and Components

The ETF prices printed in the newspaper are the closing price of shares from the previous trading day. They are single price that reflect the last trade of the day. The price does not tell us if that trade was a buy or sell. Like stocks, ETFs always have two prices a bid and an ask price. The price you will receive depends on whether you are buying ask or selling bid . The trading spread is the difference between the bid and the ask. A small trading spread of a few pennies means the ETF Table...

ETFs Organized as 40 Act Funds

ETFs created under the Investment Company Act of 1940 are divided into two types, Unit Investment Trusts UITs and Regulated Investment Companies RIC . Both types of funds are not taxed directly. Rather, they are eligible to pass the taxes on capital gains, dividends, or interest payments on to individual investors. There are differences between the two structures, and of course differences in their offshoot structures. 40 Act Unit Investment Trusts UITs . ETFs organized as UITs have several...

Securities Act of 1933 Exchange Traded Portfolios

Investment firms desiring to launch a highly concentrated nondiver-sified product are not able to qualify that product as an investment company or unit investment trust under the limitations of the 1940 Act. In those cases, companies file as Registered Trusts under the Securities Act of 1933. Rule 415 of the 1933 act was put in place to allow for the continuous creation and redemption of trust units as needed. Exchange-traded portfolios issued under the Securities Act of 1933 are also required...

ETF Share Creation and Redemption

Etf Creation Redemption Mechanism

The creation and redemption process that sets ETFs apart from all other mutual funds starts when an investment company sponsors a new fund. First, they record the fund's investment objective and then submit a detailed filing to the SEC for approval. The filing contains legal information about the fund, including fees, objectives, risks, symbols, and how it is responsible. That information is eventually used in the ETF's Prospectus and Statement of Additional Information. Among many other items,...