Exchange Traded Funds (ETFs) & ETF Trading

Inverse ETFs tries to profit off the decline in stock prices by shorting stocks. Shorting is the act of selling a stock at a certain price and expecting to repurchase it a lower price. However, it is important to note that many inverse ETFs are actually in fact Exchange Traded Notes (ETNs). An ETN is a bond that trades similarly to a stock, but is backed by an issuer such as a bank. Similar to other ETFs, an inverse ETF can be leveraged. Leveraged inverse ETFs look to maximize the inverse of a specific index’s performance. For example, the Direxion Daily S&P 500 Bear 3X Shares (NYSEArca: SPXS), were created to produce returns that are three times the inverse of the S&P’s daily performance. For instance, if the S&P 500 would drop by 3% tomorrow, this ETF should be expected to gain approximately 9%.

An ETFs expense ratio is the percentage of the fund’s assets that are deducted every year in order to cover the cost of maintenance and management of the fund. However, some ETFs like those that are passively-managed have a relatively low expense ratio. Since most passively-managed funds are designed to merely track a certain index such as the S&P 500, the cost of maintenance is typically lower than that of an actively-managed fund. Of course, it is always important to take a look at the ETFs prospectus to not only understand how the fund is managed but what its expense ratio is as well.

The bid/ask spread is the difference between how much the buyer is willing to pay for a share (the bid) and the price that a seller is willing to accept for the share (the ask). Normally, the more an ETF is traded, the smaller the bid/ask spread becomes.

Each of our advisors at Florida Financial are knowledgeable on the different types of ETFs available and can help guide you to make sure a particular ETF is the right choice for your portfolio. Contact us today for a free consultation.