Exchange-Traded Funds are investment vehicles designed to match the performance of a given index or market segment, or to put an investment strategy into practice, which are exchange-listed and can be bought and sold intraday by the investing public, similar to standard equities. The funds can hold any tradeable instrument whether U.S. stocks, bonds, commodities, currencies, or futures, including internationally-listed issues.
The most commonly traded ETFs track broad U.S. stock indices such as the S&P 500 (e.g. SPY) or the Russell 3000 (e.g. IWV) , specific market sectors such as Financials or Utilities (XLF, XLU), commodities like Gold (e.g. GLD), or U.S. Treasury Bonds (e.g. SHY).
Most ETFs hold one asset type (along with a cash instrument in most cases), though some ETFs hold multi-asset portfolios.
ETFs are created and managed by an issuing entity (the “Issuer”) such as State Street Global Advisors, Black Rock, or iShares.
Chaikin Investments has partnered with Index IQ to launch its own ETFs:
- CSML – I.Q. Chaikin U.S. Small Cap ETF.
- CLRG – I.Q. Chaikin U.S. Large Cap ETF.
These ETFs track an underlying NASDAQ/Chaikin Index (NQULCHK, NQUSCHK) which reflects proprietary weightings of NASDAQs indices based on the Chaikin Power Gauge model.
Active vs. Passive ETFs
Most ETFs are passive, meaning they either directly track a specific index, or operate according to rules which allow them to implement a defined strategy without subjective decision-making by a manager. For these, predictive analytics can be applied, based on constituent holdings.
However, some ETFs are active, meaning portfolio decisions are made by an investment manager. For these, predictive analytics may be harder to apply.
Leveraged & Inverse ETFs
Most ETFs are “long only”, meaning they hold stocks or other instruments in standard fashion.
Some ETFs are Leveraged (2x or 3x), meaning they implement strategies to multiply the directional effect of an underlying index. An “S&P 500 2x Leveraged ETF” is structured to go up (or down) twice the amount of the S&P 500 index on any given day.
Other ETFs are “Inverse” or “Short”, meaning they allow an investor to bet against an underlying index. These ETFs are structured to gain value when the index goes down, and vice versa.
Some ETFs are both Inverse and Leveraged.
Some ETFs implement a particular investing strategy such as High-Dividend Yield, Ethical investing, or various Options hedging strategies. These allow an investor to put a strategy into play without having to determine individual stock holdings themselves.
The caveat is that the investor is putting this responsibility in the hands of the fund issuer and should examine both performance and constituent holdings carefully to see how well they match the strategy before investing.
ETFs can be structured in numerous ways. Individual investors should be aware of these structures before directly investing in them, as they can affect such things as tax reporting:
- ETNs. Some ETFs are structured as Notes in which the issuer – generally a banking entity – links the performance of the Note to a benchmark index or trading strategy, less investor fees. These are called “Exchange-Traded Notes” or ETNs. While market performance is generally similar to an ETF, an ETN does not actually hold underlying equities or other instruments, leading to lower tracking error, and a simplified tax structure, but exposes the investor to the credit risk of the issuing institution.
- Closed-End Funds. Some ETFs are Closed-End Funds, for which a fixed number of shares are issued, rather than issuing new shares to meet investor demand, similar to Closed-End Mutual Funds.
- Funds of Funds. Some ETFs are structured as “funds of funds”, often multi-asset ETFs which hold specific funds for each asset types.
- Long/Short Funds. These are mutual funds which seek to enhance returns by taking both long and short positions in equities or other instruments.
- Hedge Funds. Some ETFs are structured as actively managed Hedge Funds, whose shares are themselves publicly listed. Hedge Funds can go long or short, and have broader leeway to engage in higher-risk investing strategies in pursuit of higher returns, relative to mutual funds and other ETFs.
- “Alternative ETFs”. Broadly, “alternative” funds are those holding anything but stocks, bonds, or cash. Chaikin uses this term generally to encompass various types of “alternative” investment structures, including Multi-Asset ETFs.