Chapter 61. Exchange-Traded Funds

GARY L. GASTINEAU

Managing Director, ETF Consultants, LLC

Abstract: Exchange-traded funds are the most popular examples of a category of financial instrument that might be characterized as a "portfolio-in-a-single-share". In addition to open-end exchange-traded funds based on the SPDR structure, closed-end funds, HOLDRs, exchange-traded notes and even FOLIOs sometimes compete in the portfolio-as-a-share market. While the products all feature multiple instruments in a single transaction, these products and structures have distinct differences in tax treatment, trading costs and convenience. The open-end exchange-traded fund structure offers unique opportunities for increased shareholder efficiency and the delivery of actively managed portfolios in a tax-efficient format. The genesis of exchange-traded funds was in portfolio or program trading and its cousin, index arbitrage.

Keywords: exchange-traded funds (ETFs), mutual funds, portfolio trading, program trading, SPDRs, HOLDRs, exchange-traded notes (ETNs), exchange of futures for physicals (EFP), TIPs, WEBS, expense ratio, closed-end funds, open-end funds, FOLIOs, creation units, arbitrageur, creation, redemption, tax efficiency, shareholder accounting, Regulated Investment Company (RIC), grantor trust, structured product, special purpose vehicle (SPV), actively managed ETFs

Exchange-traded funds (ETFs) are the most important—and potentially the most versatile—financial instruments introduced since ...

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