Investor s Guide to Exchange Traded Funds.

Transcription

1 Investr s Guide t Exchange Traded Funds. Investment Strategies Risk Management

2 ETFs Exchange-Traded Funds (ETFs) prvide an efficient and simple way t invest in wrldwide markets. ETFs ffer investrs the pprtunity t buy and sell an entire basket f securities with a single transactin thrughut the trading day. ETFs are built like an index fund, but trade like a stck. They are generally designed t track a specific index and ffer investrs the advantages f lwer csts ver traditinal, actively-managed mutual funds. Indexing has mved beynd the S&P 500 tracking a wide variety f sectr-specific, cuntry-specific and brad-market indexes. Since the first ETF was intrduced in 1993, the industry has grwn significantly. ETFs invest in a variety f assets, including large cmpany stcks, small cmpany stcks, internatinal stcks, real estate investment trusts, and many mre asset classes. ETFs ffer a simple way fr investrs t allcate lng-term investments in the market perfrmance f industry leaders. ETFs can be an effective tl fr implementing many investment strategies fr all types f investrs. They allw individual investrs t btain the ecnmies f scale that large fund managers enjy, which the average persn wuld nt be able t prduce with a small amunt f capital. They are easy t btain, easy t track and inexpensive. Hw d ETFs Cmpare? ETFs Stcks Index Funds Lw Expenses Lw Investment Minimums Intraday Liquidity Diversificatin Fully Invested Pssible Prtfli Transparency Pssible Ease f Ownership Able t Sell Shrt Able t Buy n Margin Able t Use Limit and Stp Orders Listed Optins Available Ease f Dllar Cst Averaging Yu shuld cnsider a fund s investment bjectives, risks, and charges and expenses carefully befre investing. Cntact yur financial advisr r call FT Prtflis Canada C. at t request a prspectus, which cntains this and ther infrmatin abut a fund. Read it carefully befre yu invest. See the back f this brchure fr imprtant disclsures.

3 ETFs ffer similar advantages f indexing such as lw perating csts, perfrmance designed t track an index and cnsistent investment strategies. The ETF structure prvides many benefits: Diversificatin Owning an ETF allws investrs t hld a basket f securities and have expsure acrss an entire index. An ETF ffers the day-t-day trading pprtunities f a stck with the diversificatin f a mutual fund. Diversificatin primarily helps reduce vlatility and als has the ptential t enhance yur returns. Lw Expenses ETFs are index-based and nt actively managed. Because f this, they are less likely t carry high management fees and usually have lwer annual expense ratis than ther investment vehicles. Flexible Any ETF can be bught and/r sld with the same flexibility as an individual stck. This allws investrs t place stp-limit rders, buy n margin, r sell shrt. Any f these transactins wuld make them subject t the same terms that wuld apply t individual cmmn stcks. Transparency Investrs will knw exactly what they purchase. The hldings f ETFs are listed n a daily basis, whereas mutual funds generally release their hldings quarterly. The transparency f the ETF s prtfli allws investrs t easily btain r hedge expsure t a specific grup f securities. Dividend Reinvestment Dividends frm the underlying securities may be reinvested in the ETF. Any dividends paid t sharehlders frm the ETF may be reinvested directly, rather than receiving cash, prviding yur brkerage firm ffers this reinvestment ptin. Tradability ETFs can be purchased r sld during any part f the trading day. They are listed n an exchange, s it s easy fr investrs t buy r sell shares thrughut the day. Because ETFs are listed, investrs can btain up-t-the-minute share prices frm their brker r financial advisr and trade the relevant index as thugh it were ne single stck. A Guide T Exchange-Traded Funds 2

4 Investment Strategies Using ETFs In tday s financial marketplace, a well-maintained prtfli is vital t any investr's success. Investrs are fcusing n the fundamentals f sund investing and are realizing that time in the market is nt the nly factr that determines lng-term success. Sund prtfli cnstructin begins with aligning investment gals t apprpriate investment strategies such as asset allcatin, diversificatin, cst cntrl and risk management and applying peridic prtfli rebalancing. Exchange Traded Funds (ETFs) cmbine many f the features fund in index mutual funds with the trading flexibility f individual stcks. The flexibility prvided by ETFs makes these instruments ne f the mst useful investment tls available fr bth individual and institutinal investrs. ETFs are well-knwn as a tl t invest in brad-market indexes. They ffer a simple way fr investrs t assemble a lw-cst, bradly diversified prtfli f industry leaders frm majr glbal market segments. ETFs ffer diversificatin and lw expense ratis in a flexible investment that can be adapted t suit a multitude f bjectives. The benefits f investing in ETFs can be enhanced when using them strategically. Asset Allcatin There are many significant cnsideratins when cnstructing an investment prtfli yur current financial situatin, future needs fr capital and yur risk tlerance t name just a few. Investrs have lng recgnized the imprtance f balancing risk and creating diversificatin by dividing assets amng majr asset classes such as cash, bnds, stcks, and real estate. ETFs prvide a sphisticated means t efficiently gain expsure t market segments encmpassing a wide range f asset classes, market capitalizatins, styles and sectrs. ETFs have made it pssible fr all investrs t build tailred investment prtflis cnsistent with their financial needs, risk tlerance and investment hrizn. Selecting an apprpriate asset allcatin strategy and cnducting peridic reviews may help t achieve yur lng-term investment gals and prvide the ptential fr abve average returns while reducing risk. Prtfli Cmpletin An investr can use ETFs t fill a missing asset class in their allcatin. Many prtflis might nt have adequate expsure t certain sectrs r market capitalizatin ranges. If, fr example, yur prtfli was underweighted in small-cap cmpanies, yu culd purchase an ETF t gain the prper degree f expsure which is dictated by yur asset allcatin plan. Small-Cap & Micr-Cap ETFs 3 A Guide T Exchange-Traded Funds

5 Cre & Satellite Prtfli Structure The strategy f investing in brad based assets that prvide market matching returns as a cre cmpnent in a prtfli, enhanced by satellite psitins that are cncentrated in specific market segments, has been part f investr s asset allcatin plans fr decades. This strategy cnsiders yur tlerance fr risk and allws yu t actively tailr the investments based n yur specific asset allcatin plan. With the wide variety f ETFs available tday, investrs can use ETFs effectively as bth cre and satellite cmpnents. Brad based ETFs can be used as the cre f a prtfli and are cmplemented by sectr, style r ther specialty ETFs that are used fr the satellite assets. And because f the ETF structure, investrs are able t make changes easily which has a direct impact n risk management. Style ETFs Sectr ETFs Brad Market ETFs Specialty ETFs Risk Management Diversificatin Fr sme ETFs diversificatin is a risk-management practice that cmbines a variety f investments within a prtfli in an effrt t reduce the verall vlatility f the prtfli. Because certain ETFs prvide brad expsure t an entire asset class, they can be used t efficiently mitigate the risk f being ver expsed t any ne cmpany r area f the market. Hedging ETFs have pened up risk management strategies fr individual investrs that were nce available nly t large institutins. They can be purchased n margin and sld shrt, even n a dwntick, prviding maximum trading flexibility. Listed ptins are available n sme ETFs and ffer pprtunities fr additinal hedging r t increase incme. It is imprtant t nte that substantial risks and higher csts may result frm brrwing and shrt-selling ETFs. These strategies may nt be suitable fr all investrs. A Guide T Exchange-Traded Funds 4

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7 Disclaimer Cmmissins, trailing cmmissins, management fees and expenses all may be assciated with mutual fund/etf investments. Please read the prspectus befre investing. Mutual funds/etfs are nt guaranteed, their values change frequently and past perfrmance may nt be repeated. A fund s shares will change in value, and yu culd lse mney by investing in a fund. An investment in a fund invlves risks similar t thse f investing in any fund f equity securities traded n exchanges. One f the principal risks f investing in a fund is market risk. Market risk is the risk that a particular stck wned by a fund, fund shares r stcks in general may fall in value. Yu shuld anticipate that the value f the shares will decline, mre r less, in crrelatin with any decline in the value f the index. A fund s return may nt match the return f the index. A fund may nt be fully invested at times. Securities held by a fund will generally nt be bught r sld in respnse t market fluctuatins and the securities may be issued by cmpanies cncentrated in a particular industry. A fund may invest in small capitalizatin and mid capitalizatin cmpanies. Such cmpanies may experience greater price vlatility than larger, mre established cmpanies. Investrs buying r selling fund shares n the secndary market may incur brkerage cmmissins. Investrs wh sell fund shares may receive less than the share s net asset value. Unlike shares f pen-end mutual funds, investrs are generally nt able t purchase ETF shares directly frm the fund. Hwever, specified large blcks f shares called creatin units can be purchased frm, r redeemed t, the fund.

8 First Trust Prtflis Canada First Trust Advisrs L.P. is the advisr t the fund. First Trust Advisrs L.P. is an affiliate f FT Prtflis Canada C., the fund s distributr. 5/2013