Rich Carreiro wrote:
- quote -

Even some institutional money managers are not set up to trade futures
or are uncomfortable with them. If one's desired ultimate portfolio
will resemble the index, one can buy the ETF, later "crack" it to get
the shares, and then trade to get the desired positions. This may
involve lower transaction costs than obtaining the desired positions
from scratch, especially for a small cap ETF. OTOH, maybe the same
strategy can be pursued with futures using the "exchange for physicals"
(EFP) market.

Tad Borek <borekfm[at]pacbell.net> writes:

- quote -

Do they really do that? Wouldn't they instead "securitize" the cash
by buying SP500 (or whatever) index futures?

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Rich Carreiro wrote:
- quote -

You're right, they could do it that way. I've heard the park-cash-in-ETF
thing discussed at a few institutional conferences, ask if it's commonly
done. And questions about it were on the lines of "how big a trade can
the market absorb?" rather than "why would I do that instead of
futures?" Might have something to do with charter/investment policy - eg
not being able to invest in derivatives. Or, a benchmark that isn't
easily accessed using futures, but has a corresponding ETF. This seems
to get down to the issue of deviating from performance benchmarks.

-Tad

beginner -

Put research, planning, and implementation first in determining your
investment policy (not taxes). If you are a beginner, read two or three
best books on investing. I always refer people to Ben Graham's "The
Intelligent Investor" first.

You are correct about the 366 days and the difference between long and
short-term capital gains tax rates. The explanatory material you read
on ETF's includes mutual funds which by charter may be required to
maintain exposure to the stock market. Nevertheless, pretty much any
return you get on your funds (prior to making your long-term
investments) will be subject to taxation. Don't put tax considerations
first in determining your investment policy. Put research, planning,
and implementation first in determining your investment policy. The net
after-tax return is the bottom line (subject to a ton of considerations
about what you know, what you are good at, the time you have for it,
risk tolerance, and so on). For the past few days, I'm not sure you
would have been happy with exposure to the stock market - that is the
type of questions you want to answer first.

beginner wrote:
- quote -

That statement is directed at someone who for whatever reason wants to
keep 100% of their money invested in the stock market - even while
figuring out exactly HOW they want that money invested. By buying the
ETF you avoid the risk of missing a big run-up in the overall market.

Imagine you manage $50,000,000 for a pension fund and your mandate is to
invest in US stocks. You have a stock in the portfolio that suddenly
runs up a lot and you want to sell it - let's say it's $4,000,000 worth
of stock.

After the sale you have $4M or 8% of your money sitting in cash. Let's
say you don't really have anything on your "buy" radar right now - what
do you do? If the stock market happens to rally 10% while you're looking
for something, then 8% of your portfolio missed that run-up and you're
going to have a very uncomfortable meeting next quarter with the
directors of the pension fund that hired you.

So that type of manager might park the $4M in an ETF that tracks the
broad US Stock Market. If the market goes up 8%, it goes up about 8%
too. This is an easy way to keep money invested in the stock market, at
very low cost - the market for ETFs can swallow big trades like this.
And when you find some individual stocks you want to buy, you sell off
enough of the ETF to pay for them. Throughout, you're 100% invested in
the stock market (and that will be a big determinant of how your
portfolio does, vs. being say 20% in cash and 80% in US stocks).

There are many variations on this where ETFs are useful - "new cash" is
a similar scenario, if you don't know where to put it.

Getting back to your question - while anyone could have a reason to do
this, you're right that it might not be as feasible for an individual
investor who is concerned with the taxes associated with short-term
trading. But if it's in an IRA that's not a problem, and if it's a small
holding then it won't be much dollar-wise, and you avoid that potential
risk of "missing a big move in the market." That small tax penalty might
be worth it. And if you wanted to you could avoid the problem in a
taxable account by essentially "banking" a bunch of the ETF that you
would later match your short-term sells to, for tax purposes.

The bottom line though is that if you're a beginner this stuff isn't
going to be of interest - if you use ETFs you'll probably buy and hold
them awhile.

-Tad

i understand that in order to avoid taxation at a higher rate, i should
hold investments for one year and one day.

i was reading some explanatory material on Exchange Traded Funds tonight
and it said (i am probably taking it wrong) that ETF's can be used for
"short-term cash management to maintain exposure to the stock market while
your portfolio is in a transition phase or if you have an influx of cash
waiting to be moved into long-term investments."

why would i use ETF's in such a short term, wouldn't i get whacked on
taxes? don't i have to hold them 366 days like anything else?