An Exchange Traded Fund (ETF) is an investment fund that is priced and traded on
an exchange through the day just like a stock. ETFs hold a basket of securities
(stocks, commodities, or bonds), and most track and index. Since they were launched
in 1993, ETFs have gained tremendous popularity and there are now more than 1,100
available, representing over $1 trillion in assets.
Traditional mutual funds’ prices are set once per day (usually 4 PM Eastern). Conversely, since ETFs price and trade throughout the day like individual stocks, CLS has the opportunity to be more responsive to changing market conditions. This increased flexibility also gives us the ability to access a specific asset class or market segment in a single transaction, and to minimize style drift so a client’s portfolio’s allocation of assets stays in line with what is appropriate for his or her risk budget.
Due to their low portfolio turnover, ETFs tend to have lower expense ratios and trading fees than traditional mutual funds. ETFs also do not impose back end redemption charges like many mutual funds.
If a traditional mutual fund must sell securities to raise cash to meet redemptions, related capital gains are distributed to all remaining investors in the fund. Conversely, since ETFs are sold on an exchange, when one investor sells shares in an ETF and another investor buys them, the underlying securities in the ETF do not need to be sold in order to raise cash for the redemption. In other words, buy/sell activity of an ETF investor does not typically affect other shareholders.
ETFs are designed to track market indexes that may contain hundreds or thousands of securities. Any time during the trading day, CLS can execute a single ETF trade that gives a client broad exposure to an entire asset class, country, region, or sector.
Most ETFs post their exact holding on a daily basis. In contrast, actively managed mutual funds and other investment vehicles only disclose their holding quarterly or semiannually. The ETF transparency enables our portfolio managers to better hone in on areas that are performing well and allows you to know what you are holding at any given time.