Frequently Asked Questions

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Exchange Traded Funds (ETFs) – Not all ETFs are created equal

What are ETFs?
An ETF combines the features of unit investment trusts (UITs) and mutual funds, in which shares represent an interest in a portfolio of securities that track an underlying benchmark or index. However, unlike traditional UITs or open end mutual funds, shares of ETFs typically trade throughout the day on an exchange at prices established by the market. In general, exchange traded funds (ETFs) are index funds or trusts that are listed and traded intraday on a securities exchange. ETFs allow investors the ability to buy or sell shares of an entire stock or bond portfolio as a single security, by adding the flexibility and liquidity of stock trading to the benefits of traditional index fund investing.
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How can I buy or sell exchange traded funds?
Exchange traded funds are traded in a brokerage account, just like stock. Exchange traded funds are listed on an exchange and can be traded intraday, making it easy for investors to buy or sell ETFs.
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What is the minimum size purchase of an exchange traded fund?
Investors can purchase as few as one share of an ETF.
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Why do investors invest in an index?
Indexing, often called "passive management," involves investing in a group of securities that represent the composition of a broad stock market, stock industry sector, international stock, or U.S. bond index. Index funds offer "market level" performance; they aim generally to match the performance of a specific index. Index funds typically have lower management fees and operating expenses than actively managed mutual funds.
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Can exchange traded funds be purchased on margin?
Unlike mutual funds, exchange traded funds may be purchased on margin, subject to the same terms that apply to common stocks.
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Can exchange traded funds be sold short?
Yes. Exchange traded funds generally may be sold short, representing the sale of "borrowed" shares in anticipation of lower prices. ETFs are exempt from the zero plus tick rule. As with stocks, investors are required to make arrangements to borrow ETFs before selling short.
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Is there a sales load on exchange traded funds?
While exchange traded funds are not subject to sales loads, usual brokerage commissions for securities purchases and sales will apply.
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Who receives dividends on exchange traded funds?
ETF holders are eligible to receive their pro rata share of dividends, if any, accumulated on the stocks held in an ETF, and interest on the bonds held in an ETF, less fees and expenses. Past performance is no guarantee for future results. There may also be the opportunity for dividend reinvestment.
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Where do exchange traded funds initially come from?
Exchange traded funds are "created" by large investors and institutions in block-sized units of shares (or multiples thereof) known as "Creation Units" of a respective ETF. A creation requires a deposit with the trustee for a specified number of shares of a portfolio of securities closely approximating the composition of the specific index and a specific amount of cash in return for shares of a specific exchange traded fund. Similarly, block-sized units of exchange traded fund shares may be redeemed in return for a portfolio of securities approximating the index and a specified amount of cash.
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Is the value of an exchange traded fund equivalent to the value of the underlying index?
Not necessarily. The share price of many exchange traded funds is initially set at a percentage of the index upon which they are based, but may differ over time due to costs and other factors.
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Please visit the FINRA notice on Leveraged and Inverse ETFs, for real life examples of how these Specialized Products can impact long term investors:
http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/P119778

Leveraged and Inverse ETFs are not intended for all investors. Before investing in Leveraged and Inverse ETFs, be sure to understand the risks, charges and expenses associated with ETFs, and whether the product fits within your investment objectives. In volatile markets, losses in Leveraged and Inverse ETFs can be substantial. For a prospectus containing this and other information regarding ETFs, please contact optionsXpress customer service via e-mail or by calling (888) 280-8020

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