About Exchange-Traded Funds
Efficient . Transparent . Flexible
An ETF is an investment fund that trades throughout the day on stock exchanges during normal trading hours. ETFs combine the advantages of investing in index funds, including diversification and low costs, coupled with the liquidity and flexibility of investing in individual stocks. ETFs offer investors many advantages over other investment vehicles, including enhanced tax efficiency, all day liquidity and complete transparency. ETFs are designed to closely track the holdings and performance of their designated index, whose selection methodology can be either passive or strategic.
Comparing Claymore ETFs to Other Investment Solutions
Claymore ETFs: Access to Innovation
Innovative
Claymore ETFs provide access to innovative indexes distinctly designed as investment solutions. Unlike ETFs that track traditional indexes representing market participation, the indexes Claymore ETFs track seek to best capture the investment potential of unique strategies.
Strategy Driven
Claymore believes that a strategy-driven, quantitative process provides a disciplined investment approach that may offer the potential for superior performance over market cycles.
Best-in-Class Index Providers
The indexes Claymore ETFs seek to track are designed by best-in-class index providers with defined investment philosophies. These index providers have backgrounds in areas including financial analysis, academic research and investment research and management.
How ETFs Work
To create an ETF, large institutional investors or dealers commit millions of dollars to the fund and purchase a minimum number of units. Rather than delivering money, they deliver a basket of securities. This basket is based on the construction of the benchmark the ETF is tracking. The institutional investor delivers all of the securities in the index weights and in the value they would like to contribute. The investor delivers these securities to the fund, which issues the institutional investor ETF units. The institutional investor can either hold them in their account or resell them to their retail investors in the secondary market, known as the stock exchange, if they are licensed to transact stocks. It is through this process that ETFs are always invested.
Benchmarks
When an ETF is created, it is pegged to a benchmark. Benchmarks may be large indexes or a basket of securities may be chosen from one, both or other domestic and/or international indexes. ETFs that seek to track the performance of an actively managed fund represent another possible benchmark.
Tracking
Tracking variance, or tracking error, measures the difference in performance between an ETF and the underlying benchmark. This difference is primarily due to the various costs ETFs incur, such as management fees and administrative expenses. Taken together, these costs are represented by an ETF's management expense ratio, or MER. The lower the MER, the lower the tracking error. Since ETFs have extremely low MERs, they should track their benchmarks more faithfully than a traditional mutual fund.
Cash Drag
Unlike traditional mutual funds - active and index - which carry cash to either meet redemptions or seize perceived investment opportunities, ETFs have no need to maintain a cash balance. As a result, ETFs will rarely, if ever, suffer from what is called “cash drag.” Cash drag affects performance because the fund is not fully invested to benefit from market movements.
Distributions
ETFs earn both income and capital gains, which are distributed at least annually to investors. Stock-only ETFs will primarily earn dividend income and capital gains, while bond-only ETFs will primarily earn interest income and capital gains. For Claymore ETFs, dividend income is distributed quarterly while realized capital gains, if any, will be distributed annually.
Features of Claymore ETFs
Tax-efficient operation
ETFs are designed with tax-efficiency in mind, meaning they may make substantially lower capital gains distributions over time, however there is no guarantee this will occur.
Intraday Liquidity
ETFs can be bought and sold throughout the day on a stock exchange during normal trading hours.
Flexibility
Similar to stock trading, ETFs can be purchased on margin, sold short and can have stop and limit orders placed on them.
Transparency
ETFs post their holdings on a daily basis, thereby enabling investors to know what they own and to make more informed investment decisions.
Cost efficiency
ETFs have relatively low annual expense ratios compared to other investment products. This is because ETFs are index-based and generally do not experience the amount of portfolio turnover and trading costs that other products may have.
Diversification
ETFs represent an investment in an index or basket of securities, thus providing a convenient approach to achieve diversification. This level of diversification would be time consuming (and expensive) to replicate using individual stocks and bonds.