ETF Education

Learn the basics of ETFs, how they work, and the risks and benefits to investors.

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ETF Creation/Redemption

As ETFs continue to grow in assets and scope of coverage, we are often asked questions about how they actually work.

ETF Tax Efficiency

While ETFs and mutual funds are similar in some ways, they are also very different. ETFs potentially provide much more transparency, flexibility, tradability and tax efficiency. There’s never been a better time to explore the many potential benefits and tax advantages of an ETF.

Benefits of ETFs

 

Even though exchange-traded funds (ETFs) have become fairly popular, we’re still somewhat surprised by how often people misunderstand the differences between ETFs and mutual funds. It’s natural to compare ETFs and mutual funds, as they are both pooled investments, but we think that understanding the differences in the way the two are structured and traded may help investors choose the investment type best suited to their investment goals.

  • As their name suggests, ETFs are investment funds that trade openly on the stock exchange.
  • ETFs can be bought and sold on an exchange throughout the day, whereas mutual funds can only be bought or redeemed from the mutual fund company only after the close of trading.
  • ETFs typically disclose their portfolio holdings on a daily basis, where mutual funds may only be required to report their holdings on a quarterly basis.

 

ETFs Mutual Funds
Bought and Sold On an exchange throughout the day Through mutual fund companies
Sales Charges None, but ordinary brokerage commissions may apply May have sales loads, purchase and/or redemption fees
Minimum Investment None, an investor can buy one share May have high minimum investments
Liquidity Ability to trade intraday Trades only executed once per day
Trading Flexibility Special trading orders are possible (Market, Stop, Limit, Short Selling) Special trading not possible
Trade Restrictions None May have short-term trading restrictions
Transparency Typically has full transparency into all underlying holdings Holdings may only be disclosed quarterly
Management Fees Traditionally low Dependent on manager style, but typically higher than ETFs
Tax Efficiency Typically more tax efficient due to creation and redemption process Selling only within the structure may trigger capital gains

 

For more information, visit ETFs vs. Mutual Funds: The Age-Old Question.

ETF Trading

 

The below content is relevant to institutional investors interested in trading exchange-traded funds (ETFs) in significant volume. Individual investors do not always have access to liquidity providers to trade ETFs as referenced below

Trading Best Practices

 

You may have heard time and time again that exchange-traded funds (ETFs) are bought and sold just like stocks on an exchange. While this is true, it is important to understand the various order types used to execute ETF transactions. The execution aspect of an ETF investment is often under-emphasized, but it can be costly if not traded correctly. Investors need to be familiar with the basic order types available and with how to access their ETF block desk to ensure best execution. Furthermore, they need to be well-versed in their respective order entry system. Here are some of the basic terms used for ETF trading. 

 

 

Market versus Limit Orders

 

Market and limit orders are the two most basic order types available—and the difference between the two is vital.  
A market order is an order to buy or sell an ETF at the best available price immediately. There is no price control, and while it typically ensures instant execution, the order may get filled at any available price, which may be far from the current bid offer, especially during times of market volatility.  
A limit order
is an order to buy or sell an ETF with a restriction on the maximum or minimum price to be paid. A buy limit order can only be executed at the limit price or lower and a sell limit order can only be executed at the limit price or higher. While limit orders are not guaranteed to fully execute, they protect the investor against an unforeseen market move or a momentary lack of deep bids and offers. We always recommend utilizing limit orders in a reasonable range of fair value with the understanding that a limit order does not ensure execution.

 

Stop-Loss Orders versus Stop-Loss Limit Orders

 

A stop-loss order is an order to buy or sell an ETF at the market price once the ETF has traded at or through your specified or stop price. Once the stop price is triggered, the order turns into a market order. This order is designed as an automatic trigger to immediately trade if the market breaks through a set price threshold. Stop-loss orders can be very dangerous, especially in times of market volatility, and they were a contributing factor to large price swings on August 24, 2015.1

A stop-loss limit order is an order to buy or sell an ETF at the market price once the ETF has traded at or through a stop price, but with a limit price attached to it. The goal here is to activate a limit order at a specified price. As mentioned above, we always recommend utilizing limits when trading, as it gives the investor price control of their orders. Just like limit orders, stop-loss limit orders do no ensure execution.  

Order Types

 

Block Execution

 

When trading a large block of an ETF or trading an ETF that has lower volume on an exchange, it is important to employ all tools available, especially your block ETF desk. Many investors believe that only large institutions have access to liquidity providers, who can access the underlying liquidity of an ETF, but that is not the case. Firms like Charles Schwab, TD Ameritrade or Fidelity as well as all the wirehouse platforms typically have block desks to utilize as a resource, and these are just a few examples. Almost all custodian and wirehouse broker-dealers have agency block execution desks available as a resource to their clients. While each platform has its own system, it is important to note that the client must select their order as not held in order to allow the platform desk to execute on the client’s behalf. An order marked or defaulted to "held" will be sent directly to the market and executed without discretion. The Capital Markets team at WisdomTree is always available to guide institutional investors on best trading practices and help them understand all their trading outlets.

 

1Please note: The New York Stock Exchange (NYSE) no longer accepts or honors stop-loss orders as of February 26, 2016.

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WisdomTree CAPITAL MARKETS

 

The WisdomTree Capital Markets team is a U.S.-based team with global coverage that functions as the key point of contact for both investors and the trading community for all things trading related to WisdomTree exchange-traded funds (ETFs). The team is responsible for maintaining relationships across the ETF support ecosystem, including market makers, authorized participants and exchanges. Additionally, the group advises institutional investors, RIAs and wealth managers on the most efficient means for implementing their trading strategies, and helps investors navigate their specific path in the ecosystem to achieve liquidity.

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