Potential Advantages of ETFs
By: O’Shares ETFs
Exchange traded funds (ETFs) have become popular with advisors and retail investors because they provide several advantages over individual stocks and mutual funds. Investors may find ETFs to be a complement or alternative to the stocks and mutual funds in their portfolios. Some potential advantages of ETFs are described below.
Diversification. Diversification means not putting all your eggs in one basket. This is a key investment notion for those who want to reduce risk. ETFs and mutual funds are essentially a basket comprised of stocks or bonds. This feature allows investors to hold a diversified portfolio by simply purchasing one ticker. One ETF may hold hundreds of investments. In addition, ETFs and mutual funds often have specific investment objectives that may emphasize region, sector or market cap size just to name a few.
Lower Costs. Most ETFs are generally considered passive investment strategies. They aim to replicate an index. Contrast this, to actively managed products that pay managers to make decisions in hopes of outperforming an index. This is one of the reasons that ETFs generally charge lower expense ratios when compared to mutual funds. For the average investor, using an ETF can also help save on transaction costs. As mentioned above, investors can buy a whole portfolio with just one transaction.1
Trades on an Exchange Like a Stock. While ETFs allow investors to buy a diversified portfolio of stocks, they also have the advantage of being exchange traded. This means that ETFs trade like a stock. Investors can buy and sell at prices that are updated throughout the day. Mutual funds, however, update prices once, at the end of each day.
Tax Efficiency Advantages Versus Mutual Funds. ETFs may reduce capital gains tax for investors. Authorized participants may conduct what is referred to as an in-kind transaction. They may redeem shares and receive a basket of stocks representing the portfolio. This is a non-taxable event. Transactions in mutual funds require the buying/selling of the underlying securities, increasing the likelihood of triggering taxable capital gains.
Transparency: ETF issuers must publish their holdings daily allowing investors to see exactly what their ETFs are invested in. Mutual fund companies are only required to do this quarterly. This intermittent reporting means that mutual fund investors may not know exactly what they are invested in for extended periods of time.
Reduced Risk of Style Drift: ETFs own portfolios that follow a passive or active index, usually according to defined rules. Investors can generally be confident that the investment objectives of the ETF are being adhered to. Actively managed mutual funds are not necessarily governed by a set of defined rules. A manager’s discretion regarding investment decisions may lead to a portfolio that differs materially from what the original fund investment objectives set out to accomplish. Some advisors and investors may view the risk of style drift as a reason to use ETFs versus actively managed mutual funds.
1. Since investors buy and sell ETF shares through a brokerage account or an investment adviser like ordinary stocks, brokerage commissions and/or transaction costs or service fees may apply. Please consult your broker or financial advisor for their fee schedule.
Before you invest in O’Shares Investments℠ funds, please refer to the prospectus for important information about the investment objectives, risks, charges and expenses. To obtain a prospectus containing this and other important information, please visit www.oshares.com to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing including the possible loss of principal.
Concentration in a particular industry or sector will subject the Funds to loss due to adverse occurrences that may affect that industry or sector. The funds may use derivatives which may involve risks different from, or greater than, those associated with more traditional investments. The funds' emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund's purchase of such a company's securities. Returns on investments in foreign securities could be more volatile than, or trail the returns on, investments in U.S. securities. Exposures to foreign securities entail special risks, including political, diplomatic, economic, foreign market and trading risks. In addition, unless perfectly hedged, the Fund’s investments in securities denominated in other currencies could decline due to changes in local currency relative to the value of the U.S. dollar, which may affect the Fund’s returns. The funds' hedging strategies may not be successful, and even if they are successful, the funds' exposure to foreign currency fluctuations is not expected to be fully hedged at all times. See the prospectus for specific risks regarding the Fund.
The securities of small capitalization companies are often more volatile and less liquid than the stocks of larger companies and may be more affected than other types of securities during market downturns. Compared to larger companies, small capitalization companies may have a shorter history of operations, and may have limited product lines, markets or financial resources.
Past performance does not guarantee future results. Shares are bought and sold at market price (not NAV), are not individually redeemable, and owners of the Shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, consisting of 50,000 Shares. Brokerage commissions will reduce returns. Shares are not individually redeemable and can be redeemed only in Creation Units. The market price of shares can be at, below or above the NAV. Brokerage commissions will reduce returns. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 PM Eastern time (when NAV is normally determined), and do not represent the returns you would receive if you traded shares at other times.
O’Shares Investments℠ funds are distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC is not affiliated with O’Shares Investments℠ or any of its affiliates.