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Flashcards in Mutual Funds/ ETFs Deck (27):

Selecting a Mutual Fund:

- investment objectives- what is the point of the fund and does it line up with your goals and strategies, every mutual fund before you invest is provided with a prospectus


ETFs -Exchange Traded Funds

- A Mutual Fund Alternative

- Combine the elements of stocks and mutual funds

- You own shares that track specific indexes or a certain investment type

- Your stock really represents an entire portfolio

- They are bought and sold as individual shares of stock


Benefits of ETFs

- Index performance except for actively traded ETFs and others employing speculative techniques

- Some track specific market sectors

- Immediate diversification

- Liquidity - traded anytime during US market hours

- Flexibility - traded just like stocks through market or limit orders, bought on margin, or sold short

- Cost effective - low fees (usually < .5%)
- Tax efficient


Risks of ETFs

- Pricing – shares could be priced at a premium to the NAV

- Tracking Error

- Expense ratios

- Low volume can increase the bid/ask spread

- Watch out for the use of speculative techniques – leveraging and shorts

- Proliferation of ETFs


Available ETFs

- Diamonds (DIA)
- track the DJIA

- Beta vs. S & P 500 = 0.94

- Expense ratio = 0.167%

- Turnover – changes as the DJIA changes



•Offered by State Street Global Advisors

•Index and sector offerings

•Varying betas

•Expense ratios - varies

•Turnover - varies



•Offered by Barclays

•Many types of index funds

•Betas vary

•Turnover varies



•Offered by Vanguard

•Similar to their mutual funds

•Mutual fund money can be transferred to Vipers

•VWO – Emerging Markets; expense ratio - 0.27


Achieving Wealth:

- stop acting rich... Thomas Stanley ( there are lots of people in the world who pretend to be rich, live lavish lives, but deep down there really not and are in serious debt) Don't wear yourself out to get rich

 - build a portfolio that supports your type of style


Investors need some kind of strategy:

- studies have shown that many investors have no strategy

- investments made haphazardly

- often stock are purchased with not regard to how they relate to other holdings

- investors believe in diversification but don't practice it


Tolerance for Risk

- all of us have different ideas about what's risky and what's not, nothing wrong with risk as long there is the possibility of an acceptable return


Return Needs

- income vs. growth (some people are interested in one more than the other)


Time Horizon-

- if you're 25 years old and your investing for your retirement thats not for 40 years


Your Personal Investment Profile

Total Return- What is acceptable?

How Much Volatility is acceptable?

Why is Return Important?

- Allow us to keep score
- Tells us if we are being adequately


Required Return

- the rate of return on each investment that an investor must earn to be fully compensated for its risk


The Investment Pyramid:

- Speculation
- Growth
- Foundation

- form the foundation  ( real estate, emergency savings account(3-6 months of savings) ), then move toward investments more growth oriented, then with small portion of portfolio make some speculative higher risk investments


What is a Portfolio?


- a collection of investment vehicles assembled to meet one or more investment goals



Efficient Portfolio

- a portfolio that provides the highest return for a given level of risk, want more return for lower risk


Traditional Approach:

-emphasizes "balancing" the portfolio using a wide variety of stocks and or bonds

- uses a broad range of industries to diversify the portfolio


Modern Portfolio Theory

-uses statistical measures to develop a portfolio plan

- focuses on : expected returns, standard deviation of returns, correlation of returns

- combines  securities that have a negative ( or low positive) correlations between each others rates of return.


Key Aspects of Modern Portfolio Theory

- Beta: a measure of non-diversifiable risk or volatility
- Portfolio Beta
       - the beta of a portfolio; the weighted average of the betas of the individual assets
       - to earn more return, one must bear mor risk
       - build a portfolio


Beta values:

 2: twice as volatile as the market
1: same volatility as the market
.5: only half as volatile as the market
0: Unaffected by market movement

combine all betas in portfolio to find beta risk for portfolio: use weighted average


Positively Correlated

move together (stocks, bonds and funds)


Negatively Correlated:

move apart (...) add negatively correlated funds to diversify portfolio


Sharpe ratio

- tells us whether a portfolio's return are due to smart investment decisions or a result of excess risk.
- higher- the better its risk adjusted performance



- the excess return of the fund relative to the return of the benchmark index (market value) ; the value that a portfolio manager adds to or subtracts from the return