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Product Characteristics
ETF OVERVIEW |
ETF Overview PDF |
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How to Use ETFs
Offering trading flexibility and transparency, ETFs are popular and useful investment vehicles for both individual and institutional investors. ETFs can be effectively used in many types of investment strategies, including the ones outlined below:
- Asset allocation. Asset allocation strategies consider investor goals, time horizons and risk tolerances in the construction of suitable portfolios. ETFs can be a solid building block in an asset allocation program because they provide broad exposure to market segments, making them ideally suited as components of an asset allocation program.
- Harvest tax losses/Tax management. ETFs can play an important role in helping investors better manage the tax consequences of their investments. This strategy is most often used at year-end and comes into play when an investor wants to harvest a tax loss, yet stay invested in the segment of the market represented by that security. Here's how it works: The investor sells the security and takes the tax loss and simultaneously purchases an ETF with similar characteristics as the sold security.*
- Cash equitization. When investors want to invest in the market but are unable to decide on which specific investment to select, ETFs may provide a convenient "parking spot" for this cash. Called "cash equitization," this investment strategy offers investors an opportunity to use ETFs to put cash to work for them in the market until they make their investment selection—in an attempt to avoid the potential opportunity costs of missing key investment days in the market.
- Transition management. Investors sometimes employ this investment strategy when switching asset managers.To maintain equity exposure, investors would sell a current investment and purchase an ETF until they select their new asset manager. Once the new manager is selected, the ETF would be sold and the new asset purchased.
- Hedging risks. Because they can be borrowed and sold short (even on a downtick, unlike stocks), ETFs can make excellent hedging vehicles. ETFs trade in smaller denominations than most derivative contracts, making them potentially more effective for hedging smaller portfolios. Borrowing and short selling involve increased risks and costs. With short sales, you risk paying more for a security than you received from its sales. These strategies may not be suitable for all investors.
 
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ETFs are subject to risks similar to those of stocks and may not be suitable for
all investors. Investment returns and principal value will fluctuate so that when
shares are redeemed, they may be worth more or less than original cost.
Securities are not guaranteed by any bank, are not insured by the FDIC or any
other agency, and involve investment risks, including the possible loss of the principal
amount invested.
* This information does not construe tax advice. Please consult your tax advisor for more complete information prior to using this strategy.
RydexShares are distributed by Rydex Distributors, Inc., an affiliate of Rydex Investments.
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