Issue link: https://resources.envestnet.com/i/1527504
FOR HOME OFFICE AND ADVISOR USE ONLY – NOT FOR USE WITH THE INVESTING PUBLIC. © 2024 Envestnet | PMC. All rights reserved. Why APs and Baskets Matter Mutual fund shares are created when the fund company purchases securities and then sells shares in itself. The process is then reversed when a mutual fund investor wants to offload shares–some of the fund's securities are sold in order to repurchase the investor's shares of the fund. As we'll explore in-depth with a future blog post, this method of mutual fund transactions can create tax bills for all of the fund's investors when any of one investor's shares are sold. The fund's portfolio manager(s) may trigger even more taxable distributions for shareholders as the fund's portfolio is adjusted. Do you really want to pay more in taxes just because I dumped shares in a fund? Do your clients? ETFs generally can be much more tax-efficient than mutual funds due to the share creation and redemption mechanism with APs that's described above. This same process enables intraday pricing and trading in ETFs, as described in our ETF 101 post. In short, the basic organization of an ETF directly enables its potential advantages. Wrapping Up Now that you have a better understanding of how ETFs function, you'll be better prepared to evaluate them and discuss them with your clients. When you consider how an ETF's potential key features flow from its fundamental structure, it'll also help you to identify possible use cases for these products. Navigating the ever-widening range of available ETFs can be daunting, but all of these funds use APs and baskets of securities in transactions. There are certainly various flavors of ETFs–low-cost, market-cap-weighted products (beta), systematic, factor-based strategies (strategic beta), and active ETFs. Regardless of the ETF strategy, though, the nuts and bolts all work the same. While we've focused on the common denominators of ETFs in this article, we welcome your questions on other topics related to ETFs and their possible inclusion in portfolios! Thanks for reading! Disclosure The information, analysis, and opinions expressed herein are for informational purposes only and represent the views of the speakers, not necessarily the views of Envestnet. The views expressed herein reflect the judgement of the writer and are subject to change at any time without notice. Information obtained from third party resources are believed to be reliable but not guaranteed. Any graphical information contained herein is for illustrative purposes only and not based on actual client data. Exchange Traded Funds (ETFs) and mutual funds are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. Income (bond) ETFs and mutual funds are subject to interest rate risk which is the risk that debt securities in a fund´s portfolio will decline in value because of increases in market interest rates.