About ETFs

ETFs are similar to traditional mutual funds in many ways. Each represents a pooled investment vehicle that provides a certain degree of diversification and professional management.

The most important difference between ETFs and mutual funds is that rather than dealing directly with the fund company, ETF investors purchase shares – just as they would for an individual stock – through an investment broker. This difference creates many advantages to the ETF investor:

Transparency. When you invest in ETFs like the JETS that seek to replicate the performance of a published index, there is never a mystery as to what the portfolio manager is purchasing on your behalf. Your JETS fund will not always hold every stock named in the index, but it will include securities whose combined performance will correlate with that of the index. Further, since ETFs need not keep cash on hand for redemptions, the funds can better remain fully invested at all times.

Liquidity. Mutual funds generally stand ready to redeem their shares just once day, typically as of 4 p.m. ETF investors, in contrast, can place an order at any time during the trading day. This permits immediate portfolio adjustments when market conditions change. It is important to understand, however, that unlike mutual funds, ETFs are not traded at net asset value. Instead, transaction prices are determined by supply and demand, and are typically at a premium or discount to NAV.

Trading flexibility. Similar to individual stocks, ETFs can be purchased on margin, sold short, or traded with the use of limit orders*. These conveniences are not available in traditional mutual funds.

Portfolio construction. One trade in an ETF purchases an entire basket of securities, and in the case of ETF based on a published index, the contents of that basket are entirely transparent. These features make it easy for the investor to construct and manage all their holdings, using ETFs as portfolio modules.

*A limit order is an order that instructs a broker to buy a security below a certain price or sell a security above a certain price. Selling short is a strategy an investor uses to profit from a decline in a stocks price, which involves the sale of a security that the seller does not own. The risk is that one may pay more for the borrowed security than income received from its sale.