Mutual Funds

Exchange Traded Funds

vs.

MUTUAL FUNDS

WHAT ARE MUTUAL FUNDS?A mutual fund is an investment company that invests its

shareholders’ money in a diversified portfolio of securities.

A mutual fund can be considered a financial product sold as ownership interests (shares of stock) to the public by an investment company.

When investing in a mutual fund, investors are becoming part owners of a widely diversified portfolio of securities.

The fund is built and managed by the investment company for the investor.

This management comes at a charge for the investor.

TYPES OF MUTUAL FUNDSOpen-End Funds

Most common No limit to the amount of

growth Purchased from the mutual

fund company directly and redeemed likewise

Net Asset Value (NAV) is based on price of underlying securities

Ordered at the future NAV

Closed-End Funds Less common but gaining in

popularity

There is a limit to the amount of growth

Once issued they are bought and sold on the major exchanges just like stocks

Price is related to underlying securities, but determined by market demand

Traded at current market price throughout the day

ADVANTAGES• Instant diversification

• Asset allocation

• Variable transaction costs (shop around/compare)

• Dollar-cost averaging

• Liquidity

• Professional management

DISADVANTAGES• Returns are not guaranteed

• Must actively evaluate fund’s performance against other funds

• Shareholder fees

• Annual management fees 1-3%

• Misleading advertisements

EXCHANGE TRADED FUNDS (ETFs)

WHAT ARE EXCHANGE TRADED FUNDS?

An Exchange Traded Fund (ETF) is a basket of securities that tracks the performance of a stock, bond, or commodity index -- yet trades like a stock. It has a ticker, is marginable, can be sold short, and is traded

on a stock exchange such as:

American Stock Exchange New York Stock Exchange

NASDAQ

The basket of securities is generally called a “trust” or “fund” and is held and managed by a financial institution.

CLASSIFICATIONS OF ETFsUnit Investment

Trust• Dividends do not

reinvest immediately, but accumulate as cash in order to purchase additional creation units

• Creates slight cash drag on overall performance

• Examples: SPDR Trust Series I, Diamond Trust Series I

Open-Ended FundFund will reinvest dividends immediatelyLittle or no cash build upExamples: iShares, Select Sector SPDR’s

HISTORY AND GROWTH OF ETFs

The first Exchange Traded Fund traded in 1990 on the Toronto Stock Exchange.

State Street Global Advisors started the first U.S. ETF in 1993; it is still being traded today on the American Stock Exchange.

The SPDR (Standard & Poor’s Depository Receipt) S&P 500 ETF tracks the S&P 500 stock index and is the largest ETF on the market.

ETFs grew in popularity and began to be seen on all the major markets. Today, there are more than 1,100 ETF’s* traded amongst all of the major exchanges and are still growing in number.

• Market Cap – track a variety of market indexes including each of the major U.S. market indexes:o Dow Jones Industrials (DIA) “Diamonds”o S&P 500 Index (SPY) “Spiders”o NASDAQ 100 (QQQ) “Qubes”

• International/Regional – track a specific world emerging markets:

DJ EURO Stoxx 50 ETF

Since ETFs strive to track indexes, they vary according to which type of index is being used. The many different categories include:

TYPES OF EXCHANGE TRADED FUNDS

Sector/Industry :track a given sector of the market such as Financial (XLF) or Technology (XLK). There are nine Select Sector SPDRs that represent the S&P 500 as a whole.

TYPES OF EXCHANGE TRADED FUNDS

Consumer Discretionary

XLY

Consumer Staples

XLPEnergy - XLE

TYPES OF EXCHANGE TRADED FUNDS

COMMODITY : track a given commodity such as gold and silver (SLV): streetTRACKS Gold Shares (GLD)

FIXED INCOME: track bonds: Municipal Bonds Fund (TFI)

CREATING AN ETF• A financial institution will formulate a “Creation Unit,”

which is a collection of stocks, perhaps 50,000 shares, that serve as the underlying investment of the ETF.

• The ETF trust portfolio will consist of many Creation Units that are split up to provide shares of the ETF.

• Each ETF share represents a tiny faction of the trust.

• These individual ETF shares can then be traded like shares of stock on the open market.

HOW THE PRICE OF AN ETF IS DETERMINED?

• Market Price is based on the Net Asset Value (NAV) Market value of the underlying securities Any cash in the portfolio Management fees are deducted as expenses.

• However, Supply and Demand forces impact the price causing it to fluctuate from the NAV.

• A market price that differs from the NAV is either bought or sold at a premium or discount to the NAV.

ADVANTAGES DISADVANTAGES• You can apply limit, stop,

and trailing stop orders

• Can be a more diversified short-term investment and more flexible long-term investment.

• No minimum balance requirement.

• Lower distributions for tax purposes can be good.

• You can narrow in on a tighter sector.

• They are not exactly like the index that they track since price fluctuates with market demand

• Passively managed• Commission charged to buy

and sell• Lower distributions for tax

purposes may not be appealing if you have an IRA or other tax sheltered investment

• May include many bad stocks that exist in a sector

ETF FUNDS AT A GLANCESPDR S&P 500 ETF

TOP HOLDINGS FUND WEIGHTExxon Mobil Corp 2.85%

Apple Inc. 2.71%Microsoft Corp 1.70%           

Johnson & Johnson 1.68%           Chevron Corp New 1.63%           General Electric Co 1.62%           

Pfizer Inc. 1.56%Google Inc. 1.54%

Procter & Gamble Co 1.50%AT&T Inc. 1.45%

ALLOCATION

17.53%

16.11%

12.82%11.78%

11.16%

10.61%

9.88%

3.64% 3.38%3.06%Fund Sector Information TechnologyFinancialsHealth CareConsumer DiscretionaryConsumer StaplesEnergyIndustrialsUtilitiesMaterialsTelecommunication Svcs.

• Fund sells/buys at nearly NAV Price

• Low Expense Ratio

• Large Net Assets

• Large Exchange Volume

Fund CharacteristicsDividend Yield 2.02%FY1 P/E Ratio 14.33

Number of Holdings 502

Price/Book Ratio 2.28Weighted

Average Market Cap ($M)

$105,894.78 M

Fund InformationTicker Symbol SPYGross Expense

Ratio 0.1102%

Net Expense Ratio♦ 0.0945%

Inception Date 01/22/1993Primary

Benchmark S&P 500

Investment Manager

State Street Global Advisors

Net Asset ValuePrice $157.85

Shares Outstanding 817.58 M

Total Net Assets $129,058.37 M

Market PriceClosing Price $157.90

Bid/Ask $157.88Premium/Discount 0.02%

Day High $158.29Day Low $157.54Exchange Volume (shares)

17,266,303

As of 04/24/2013

FUNDS AT A

GLANCE

WHO ARE THE MAJOR PLAYERS?There are more than 30 “SPDR” ETFs but not all are linked to any Standard & Poor's Index.

Any ETF associated with State Street Bank and Trust Company is grouped as “SPDR.”

Other SPDRs include: Select Sector SPDRs and streetTracks

Other groupings of ETFs based on sponsoring financial institution which

hold the underlying securities:

VIPERS are marketed by Vanguard.

iShares group ismarketed byBarclays GlobalInvestors.

HOLDRs (Holding Company DepositoryReceipts) are marketedby Merrill Lynch.

SPDRS

OTHER MAJOR PLAYERS

SIMILARITIES BETWEEN MUTUAL FUNDS AND ETFs

A managed portfolio of securities

Portfolio of varying securities Striving to provide

diversification among different companies

Closed-end fund and ETFs are traded at the normal stock

exchange

* AS OF 04/22/2013

Type Of Fund Symbol

Acct Min

IRA Min Assets Exp.

Ratio

Dreyfus S&P 500 Index Fund PEOPX $2,500 $100 $2.52 B 0.51%

SPDR S&P 500 ETF SPY 1

Share* -- $129.05 B 0.0945%

• Less money is required to start investing in the ETF over the Mutual Fund

• The ETF has a lower expense ratio• The ETF has billions of dollars of more

assets

COMPARING ETFs TO INDEX MUTUAL FUNDS

SPDR S&P 500 ETF

Average Annual Total Returns (%) Before Taxes

1 YR 3 YR 5 YR 10 YR

Dreyfus S&P 500

Index Fund

13.44%

12.15% 5.36% 8.05%

SPDR S&P 500 ETF

13.78%

12.50% 5.73% 8.42%

Over a 10 year span, the ETF out performed

the Index Mutual Fund.

Neither the Mutual Fund nor the ETF was able to

perfectly track the actual

Market Index.

COMPARING ETFs TO INDEX MUTUAL FUNDS

SPDR S&P 500 ETF

Advantages of An ETF Over a Traditional Index Fund

(SPDR S&P 500 ETF) ETF is both diversifiable like mutual funds and tradable

like stock Lower expense ratios than the lowest-cost index mutual

funds Lower minimum investments (can buy one share instead

of having to invest $2500 or more – some index funds require $10,000)

More accessible since can trade them with any broker No surprise in price since traded all throughout the day

WORD OF CAUTIONIMPORTANT!!!

You must assess your risk tolerance and decide whether these would be a wise investment vehicle for your portfolio. When properly used, they can greatly compliment many portfolios.

ETF’sMutual Funds

CONCLUSION

ETFs are constantly growing in popularity and availability and can be added to a 401k

plan.

Possible alternatives to traditional mutual funds

while still providing diversification.