ProFunds Group Has A Number Of ETFs Designed To Perform This Way

Category: Finance, Financial Planning.

Exchange traded funds are index funds which have advantages over open- end index mutual funds.

There are a number of reasons, which we ll discuss, for investing in index funds( Exchange Traded Funds or mutual funds) but let s start with the fact that the S& P 500 index beats 80% of all actively managed funds. (And, an index fund has lower expenses than an actively managed fund, further enhancing its net return. ) If you can invest in an index fund and be in the top 20 percentile of fund returns, that s a pretty good place to start. ETFs trade all day long on the stock exchanges, may be purchased through any broker, have lower fund expenses than mutual funds, and have less likelihood of generating unwanted taxable gains than mutual funds. You can construct a well- diversified portfolio entirely out of ETFs. Exchange Traded Funds enable you to diversify into assets which you may not otherwise feel comfortable owing because of expertise, risk and/ or liquidity issues. There are Exchange Traded Funds for almost every type of investment you can imagine. They are well- suited for investing in exotic areas such as currencies and commodities. One of the most attractive features of Exchange Traded Funds is their ability to provide you with greater liquidity than if you were to directly own their underlying investments.

Of course, they re great for sectors such as small cap or international stocks. Take municipal bonds, for example. Minimum investment size can be another problem. Most Muni issues trade infrequently and the transaction costs for the individual investor are substantial. Munis typically have a$ 1, 000 denomination and trade in large blocks. You can buy as little as one share of an ETF( generally less than$ 100) during market hours and at the same cost as for a stock.

ETFs are the answer to all these issues. You can hedge an investment and/ or lock in gains using ETFs. Investing on margin can magnify your returns and your losses. Unlike open- end mutual funds, Exchange Traded Funds can be bought on margin and shorted. The ability to short enables you to make money when something goes down in value. However, to paraphrase TV commercials, these strategies should only be employed by a professional driver on a closed course.

Think shorting the dollar or home building stocks. It s also important to note that you don t have to short an ETF if you think an asset is going to decline in value. ProFunds Group has a number of ETFs designed to perform this way. You can probably find an ETF which is structured to generate an inverse return to that asset. So, for example, if you think the Chinese stock market will decline, you can purchase a ProFund which should increase in value if you re right. One S& P 500 ETF may weight its stock holdings by market cap, another may weight them all equally.

All ETFs, even those which track the same index, are not the same. This will result in different returns. Since most indexes are not strictly defined, think technology versus S& P 500, there will be a variety of different investment strategies employed. Two ETFs which track the technology sector may hold different stocks and/ or in different weightings. Different strategies to mimic an index are not good or bad, but they may have different risk levels and will produce different returns. You need to know what you re investing in.

Some ETFs also use leverage to enhance their returns or structure there holdings to magnify any gains( thus, also losses) of an index. To understand how a specific ETF works, visit its website and read its prospectus. Also, there will be, within five years more money invested in ETFs than in open end index mutual funds. Within five years most investors will have at least one ETF in their portfolio. The advantages of Exchange Traded Funds- liquidity, transparency and lower expenses, to name a few- will force changes in open end mutual funds. Happily, the investor will be the winner in the competition between these two investment vehicles.

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