Exchange Traded Funds

Investors can capitalize on the convenience and flexibility of ETFs to pursue a wide variety of investment strategies.

Core investment- Investors can use ETFs as a core investment for their Portfolio.
The purchase of shares in a single ETF can provide broad market exposure of a
portfolio of stocks or bonds for long-term holding that is easy to establish,
easy to track, inexpensive, and tax efficient.

Portfolio diversification- ETFs cover virtually every segment of the equity markets
and several segments of the U.S. bond market, providing an easy and convenient
way to adjust the investment mix of a core portfolio.

Hedging- Exchange traded funds can be purchased on margin and sold short (even on a
downtick), which has opened up risk management strategies for individual
investors that were once available only to large institutions. For example,
ETFs can be sold short to hedge a core stock portfolio or interest rate
fluctuations. This allows investors to keep their portfolio intact while
protecting it from market losses. In a declining stock market or rising
interest rate environment, profits from a short position can offset some of
the losses in a portfolio. (Investors are required to make arrangements to
borrow securities before selling short.) Listed options, available on some ETF
products, also offer opportunities for additional hedging or to increase
income. Investors should contact their broker regarding initial and
maintenance margin requirements.

Cash management- ETFs have often been used to “equitize” cash, providing a way for
investors to put cash to work in the market or maintain allocation targets
while determining where to invest for the longer term.

Rebalancing- Investors can adjust ETF positions at any time throughout the trading
day, without redemption fees or short-term restrictions. Again, usual
brokerage commissions will apply.

Tax loss strategy- An investor can sell a security that is underperforming and claim
a tax loss but retain exposure to its sector by investing in an ETF. Consult a
tax advisor about a tax loss strategy.


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