 Hello and welcome to the session. This is Professor Farhad in which we would look at the exchange, trade at funds or ETF. This topic is covered in an essential or principles of investment course. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them and share them. If they benefit you, it means they might benefit other people, connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources that complement and supplement your accounting as well as your finance, CPA, CMA, and accounting courses. So let's talk about the exchange traded funds. Exchange traded funds are an offshoot of mutual fund. The first time they were introduced were in 1993. It allowed investors to basically trade index portfolio just as they trade stocks. So simply put, in ETF, think of it as a stock. And when you think of a stock, it means you can buy it and sell it on regular basis. However, those ETFs, they track some index. So the first one that created in 1993, it was called the SPIDER, nicknamed as the symbol for it, SPDR. Or what it does, it tracks the S&P 500 index. So if the S&P 500 index went up that day, 1%, well, the ETF will go up by 1%. But you have to keep in mind, the index is traded throughout the day. It's not like bought and sold at NAV. So unlike a mutual fund, which can be bought or redeemed only at the end of the day at NAV net asset value, if you don't know what net asset value is, please view the prior recording, the ETF, you can transfer it, you can trade it throughout the day. So throughout the day, it could go up, it could go down, it could stay the same, it will basically mimic the what's going on in the S&P 500. And you can buy it and sell it with no issues whatsoever. And after SPIDERS, now we have different types of ETFs. We have what's called the diamond, which attracts the Dow industrial. The ticker is DIA. We have the cubes based on the NASDAQ 100. The ticker is QQQ. We have the WEPS, the World Equity Benchmark Share. So basically, you can buy an index or an ETF that attracts exactly what's going on in the NASDAQ 100, top 100 stocks. And these ETFs are very, very popular these days by 2017. There were about 2.5 trillion invested in those ETFs in 1500 ETFs and five general broad classes like the US market index. We have ETFs that follow specifically an industry or a sector, international indexes, commodities, bonds. And let's take a look at a sample of it. For example, those are sponsored by a firm. For example, we have the BlackRock iShares, which is we're going to look at them in a moment because they are the most popular ones. We have some Merrill Lynch sponsored ETFs, State Street, and Vanguard. And we have some broad US indexes. Again, we talked about SPIDER, actually this symbol is SPY, the diamond, the QQQ, and the iShares Russell 2000. You can also buy specific ETFs that attract a specific sector. For example, XLE, rather than selecting a specific energy company, you can buy the XLE and you buy the whole industry. IYE, it's the energy. I share energy sector, the oil service sector, OIH. Financial sector, XLF, I believe the technology is XLK. If I could be wrong, but there's one for technology. There's one for everything. There's one for biotech. We're going to look at them in a moment. And there's also, if you want to invest in the United Kingdom, you don't have to know anything about the United Kingdom. Buy the ETF, the sticker. If you want to invest in France, you buy the ETF, invest in Japan. So it's easy for you to buy and diversify your holdings and portfolio by just buying an ETF, Electronic Exchange Traded Fund. It's very, very easy ETF. BlackRock is the leader in ETF market. It uses the name I-Shares. And if you listen to Bloomberg, they advertise a lot on Bloomberg, on CNBC as well. So the firm sponsor ETFs for several dozen equity funds, which we're going to look at them in a moment, including many broad US equity indexes, broad international and single country fund. So if you want to invest in Denmark, they have an ETF that tracks the Denmark market, okay? And US and global industry sector fund. And they have one for gold and silver as well. And let's go ahead and look at their website, just to kind of, just to show you what the ETF looks like in the real world. And specifically, we're going to be looking at the I-Shares, the BlackRock. And the reason is because they're the most leader in this industry. So this is their website, I-Shares.com slash US or just I-Shares.com. And our fund, you can find fund, you can view all the fund, you can explore fund, you can compare fund, you could look at funds by equity, by fixed income, by commodity. Let's just look at view all funds, then we can basically start to filter them, start to filter them. So this is all funds. Notice their ETF funds, they have 379 ETF fund, 360 R index fund. Basically, they just track some index. And they have 19 that are considered active. For example, you could look at those, you could look at asset classes. Do you want to invest in equity? Mostly in equity. Commodities, there's funds that specifically, for example, you could just click on commodity. I just want to see the commodity fund. So I'm interested in investing in commodity. I just, I can just filter them. Let me just filter them one more time. Okay, filter them. And I share gold, trust, silver. This is commodity index. So if you just want to do commodity, just commodities. Now, if you want to know what's inside this commodity, you could just look at the fact sheet and they will tell you exactly what they are invested in. So launch 2014. Let's see, let's see what this index, that's what this index is about. This is the QCIP, it's traded on NASDAQ. The I share commodity select strategy, seek that return by providing invested with broad commodity exposure. So this is basically broad commodity exposure. Nothing, nothing specific. They'll show you the performance. Let's take a look at something else. So you have commodity, you have equity, you have fixed income, real estate, you could do subclasses. For example, you could choose large gap, mid gap, so on and so forth. If you want to fix income, government securities, high yield, inflation, you could do market and region. For example, you could choose Asia Pacific, like Australia, China, Hong Kong. You could use Europe. There's one for Austria, Belgium. One is a broad market in Europe, Denmark, as I told you, Finland. So you could basically choose an ETF and it will track for even a country like Turkey if you want to know what's going on in Turkey, Brazil, Colombia, the Middle East. It's just basically you're getting an exposure to these markets by buying a single investment, single stock. Let's take a look at just the US and some equity because, you know, we are mostly interested in equities. And let's see active ones, choose active ones, because index is pretty straightforward. This is the BlackRock equity factor rotation. Let's look at something interesting. iShares evolved US technology, so that sounds interesting. Let's take a look at it. Let's see what's inside this ETF. What does it track? Okay, let's see. The top holding in this ETF is Microsoft and Apple, obviously, and Amazon and Facebook and Alphabet. Gooch is Google, Visa, NVIDIA, Adobe and Cisco. So this is 60% of the mostly this is the top holding in this fund. And obviously this fund is doing pretty well since we had the crash in March, the COVID, now it's coming back. So basically if you want to invest in all these companies, all you have to do is invest in the ticker, IETC. You don't have to buy them separately by the sticker and it will track those stocks. And as these stocks go up, your performance, your wealth will go up as well and it will go down with that as well. So this is basically how it works. Let's look at some other interesting one, healthcare, healthcare staples, discretionary, US consumers, media and entertainment, and financial. So this is easy, basically, and this is the year return. Notice technology, year return is pretty good. This is as of July 24th, which is the closing as of yesterday. And this would have been higher if it was last week because the market went down this week. So it's very interesting to expose yourself by buying those shares. Let's go back to the PowerPoint slides and talk about the advantages of exchange-traded funds. What are the advantages? They offer several advantages and I told you when I finished the mutual fund, I said ETFs start and replace mutual fund. Remember, a mutual fund has a net asset value. Basically, you compute the net asset value of the mutual fund at the end of the day. Therefore, you can sell it or buy it only once a day if it's a mutual fund. ETF, you can trade continuously. So the ETF goes up and down throughout the day and you can trade it. Unlike also mutual fund, they can be sold short or purchase on a margin. It's like if you want to kind of buy more and you don't have the money, you can borrow money to buy ETF. If you don't like the ETF, if you think the technology sector is going down, you can short the technology sectors and there's triple leverage ETFs. There's inverse ETFs that you can buy the ETF that goes against the market. For example, there's something called SQQQ and this is basically inverse three times the QQQ, the NASDAQ 100. So if the NASDAQ 100 goes up, this one goes down three times. If the NASDAQ 100 goes down 1%, SQQQ go up 3%. So it's triple inverse and you have the also the TQQQ, which is triple, but it goes positively with QQQ. So if you want to kind of have more exposure to the market, you can buy those ETFs. And like other shares, but unlike ETFs, they can be sold short and it's all you and bought on a margin. They also offer a potential tax advantage. Of course they do. We remember when we talked about mutual fund, we said you have no control over when you have capital gain and capital losses because the mutual fund company buys and sells the shares and they pass, remember it's a pass through status, the mutual fund, they pass this gains and losses to you and you have to pay taxes. In ETF, you decide when to pay the taxes, when you actually sell the ETF, the ETF. So you have more control at offer attacks advantage. Also because you don't have someone managing your ETF, it's cheaper. So it's much cheaper than a mutual fund because investors who buy ETF, they do so through a broker rather than buy it, rather than buy it from a fund. Therefore, the service cost of marketing is smaller. Well, if the service cost is smaller, your management fee is smaller. So in comparison to mutual fund, for example, the expense ratio on Vanguard total stock market mutual fund, which tracks the S&P 500 is 0.15, which is the ratio at the, not the ratio, the total stock market ETF is only 0.04. So why would you pay 0.15, 0.15 expense ratio if you can basically buy the same product by the same product tracking the S&P 500 and your expense ratio is 0.04%. You might think this is a small percentage, but if you have millions or billions of dollars invested, this translates into huge differences in terms of dollar amount. But also there are some disadvantages of electronic fund, traded funds. I don't believe there are disadvantages that I have to tell you what they are. There's a bid and ask price because just like a stock, there's a bid when you buy it and when you sell it, there are, you know, when you, obviously the broker wants to make a profit, there's a bid and ask. When you buy the mutual fund, it's purchased at an NAV. There is no bid and ask, which is not, I don't think that's a big deal. Also the prices can depart from NAV. Now, what we mean by net asset value, not the net asset value that you think about, that you think about, about mutual fund. Think about QQQ. QQQ, track the NASDAQ top 100 stocks, okay, NASDAQ 100. Now what happened is, as those stocks within the NASDAQ 100, like Amazon, Apple, Facebook, Google, they go up and they go down continuously, the QQQQ has to go up and go down. But sometime it moves very fast. So you might have few split seconds where the QQQQ is not 100% tracking the NASDAQ 500. So there could be some, some, some places for price arbitrage, but that's very small. And that could happen. And this actually happened with me when the market is under stress. I remember, I mean, this is, I can't think the year, August, I remember I was starting the semester, August of 20, I don't know, 2014 maybe or 2013. I still remember one day the NASDAQ went down substantially, one day in August, late August. I don't remember what year. I had SQQQQs. I was shorting the NASDAQ. The NASDAQ went down around maybe 4%. SQQQQ supposed to go up 12%. It went up like 18%. Because it, the market was so stressed that the SQQQQ, everybody was buying the SQQQ in addition to reflecting the decrease in the NASDAQ, it was not reflecting for, for a few minutes, it was not reflecting the 12%. It was traded at 18%. Unfortunately, I did not sell, but that's a different story. So the point is, when there's stress in the market, it may not 100% follow what it's supposed to follow. And you should understand this. I mean, this is, I mean, you might be tracing 3, 400 stocks that are moving continuously, and that ETF will have to reflect that. So sometimes there is split seconds or sometimes a minute or so, where it's not tracking 100% what's going on, especially when the market are not working properly. For example, when we had the flash crash, well, obviously, they cannot keep up with this. It can be hard to measure the net asset value of the ETF portfolio. And sometimes ETFs track less liquid assets, assets that are not very, very liquid. Or even if even the assets are liquid, you could still have those discrepancies. But again, I would not say those are major, it's not a major issue. And what reinforces the problem is some ETFs may be supported only by very few small numbers of dealers. So if there's not enough activity in the market, because you have few dealers, the prices could spike up and down unpredictably. But again, I don't think this is an issue. The ETFs that I work with that I trade, they're pretty liquid, and they constantly I would say 99.99% follow what they're supposed to follow. I think so. I think it's they're supposed to be 100%. But maybe for split seconds, they may not. Okay, but again, if you are investing in an ETF, you should know the risk, but the benefit will definitely outweigh the risk in my opinion, in my opinion. Anyhow, if you like this recording, please like it, share it. In the next session, we're going to start to look at managing the portfolio and the risk. We're going to look at risk analysis. As always, I'm going to remind you to visit my website, farhatlectures.com. If you are looking for additional resources for this course as well as other courses, accounting and finance, good luck, study hard and stay safe.