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- Sep 2, 2006
I asked my Finance teacher some general questions regarding ETFs because I wanted a little more information. Thought you guys might want to see this.
His reply:
1. The expense ratio of an ETF or a mutual fund is annual fund operating expenses divided by the fund's average net assets during the year. And yes, bydefinition, it represents expenses for holding the fund for an entire year.
2. Since ETFs trade as stocks, you pay commission on them as you would on a stock. In contrast, no-load mutual funds do not charge any commission for tradinglong-term shares (most funds define these as shares held for 6months or more, though the definition of long-term varies from fund to fund)
3. I know of no tax rule that says that taxes are higher for ETFs: It may be that some mutual funds, such as VMCAX, minimize realization of capital gains anddividends, and an ETF may have less flexibility in that regard. This is a question that an accountant will be able to answer better.
4. If an ETF holds a long position in derivatives such as options, which have a fixed term to maturity, then the ETF value, like that of options in it, willdecline with the passage of time. Without knowing the context in which the phrase "decay" was used, that is the best that I can say. I understandthat both FAS and FAZ do have derivatives, but you can confirm this by consulting their prospectus, which should be available on line.
His reply:
1. The expense ratio of an ETF or a mutual fund is annual fund operating expenses divided by the fund's average net assets during the year. And yes, bydefinition, it represents expenses for holding the fund for an entire year.
2. Since ETFs trade as stocks, you pay commission on them as you would on a stock. In contrast, no-load mutual funds do not charge any commission for tradinglong-term shares (most funds define these as shares held for 6months or more, though the definition of long-term varies from fund to fund)
3. I know of no tax rule that says that taxes are higher for ETFs: It may be that some mutual funds, such as VMCAX, minimize realization of capital gains anddividends, and an ETF may have less flexibility in that regard. This is a question that an accountant will be able to answer better.
4. If an ETF holds a long position in derivatives such as options, which have a fixed term to maturity, then the ETF value, like that of options in it, willdecline with the passage of time. Without knowing the context in which the phrase "decay" was used, that is the best that I can say. I understandthat both FAS and FAZ do have derivatives, but you can confirm this by consulting their prospectus, which should be available on line.
