Exchange traded funds are a relatively new development in the fund industry, and investors are only beginning to get acquainted with the investment tool. Consequently, many are still trying to understand what ETFs are all about.
For instance, more people know that they can gain exposure to gold through physically backed ETFs. The ETFs track the price of gold through physical gold bullion holdings stored in secured vaults. However, some are concerned about the safety of the gold funds.
“Many people do get confused on this subject, but, generally, you don’t have to worry,” writes Sameer Hassija, senior investment analyst at Morningstar Investment Management, India, on the Financial Express, “Investments in gold ETFs are safe and secure. They are backed with high quality physical gold.”
Hassija also points out that if the fund house goes under, gold ETF unitholders will not be affected since the custodian holding the underlying assets is independent of the asset management company. If the fund provider goes bankrupt, the gold ETF holdings are liquidated and the money goes to the investors.
Secondly, investors who are new to ETFs may wonder if returns from the index fund always matches those from the underlying assets.
Index-based ETFs are designed to reflect the performance of the underlying index, but they may employ a sampling technique where a only a sample of stocks form the benchmark are selected. Additionally, the ETF’s operating expenses, or expense ratio, will also be taken out of the fund’s returns. Consequently, an index fund may not always perfectly mirror the underlying index, but it will come close. [ETF Basics]
Additionally, investors may wonder how capital gains on stock and bond ETFs are treated.
Both stock and bond ETFs are taxed just as the underlying stocks or bonds would be. Consequently, for taxpayer’s subject to the new Net Investment Income tax, a 3.8% surtax with adjusted gross income over threshold limits, the maximum tax on long-term gains is 23.8% and a maximum 43.4% for short-term gains, according to Michael Iachini, Managing Director of ETF Research at Charles Schwab Investment Advisory.
Lastly, since ETFs track an underlying basket of securities, some investors have wondered if it were possible to track the net asset value the ETF’s quote.
Every ETF has a second ticker that shows price movements on the underlying basket of holdings, allowing individuals to execute trades on a better informed investment decision. Looking up the intraday net asset value, or INAV, by sticking the “.IV” at the end of an ETF’s ticker, investors can see price movements on the underlying index calculated at 15-second intervals throughout the day. [How to Know You’re Getting the Best Price on ETF Trades]
For more information on ETFs, visit our ETF 101 category.