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CONTINUE Go Back
  1. Home | US Financial Professionals
  2. Investment Strategies
  3. Exchange Traded Funds (ETF) Investing
  • What is an ETF?

  • How does an ETF work?

  • What are the different types of ETFs?

  • Why are ETFs tax efficient?

  • How do ETFs trade?

  • Why do ETFs trade at Premiums and Discounts?

  • How do ETFs trade at time of stress?

  • How to buy ETFs?

What is an ETF?

An exchange-traded fund (ETF) is an investment wrapper which combines the benefits of a fund and a stock.

A fund offers:

  • Diversified exposure
  • Economies of scale
  • Professional management

A stock offers:

  • Liquidity
  • Transparency
  • Trading flexibility
stock-etf-bond
Source: J.P. Morgan Asset Management. Shown for illustrative purposes only.

How does an ETF work?

The structure of the ETF wrapper provides greater opportunity for improved economics.

  • Generally, ETFs do not charge 12b-1 fees
  • In-kind creations/redemptions, where securities are exchanged for ETF shares, contribute to the cost-effectiveness of ETFs
  • Market-makers help mitigate outsized premiums/discounts of the ETF market-price to the ETF net asset value
Chart 4-reworked
For Illustrative Use Only. Investors must buy and sell units on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying units and may receive less than the current net asset value when selling them.

Type of ETFs

types-of-etfs
*Source: J.P. Morgan Asset Management. Shown for illustrative purposes only.

Why are ETFs tax efficient?

When redemptions occur, ETFs remove purchases with the lowest cost basis, reducing tax liability.

  • When redemptions occur, purchases of securities with the lowest cost basis are moved out of the portfolio without being taxed. What’s left in the ETF are higher-priced securities, reducing the future tax liability when the ETF is sold.
  • Portfolio gains are not distributed annually, so investors do not pay capital gains taxes until the ETF is sold.
  • When investors sell ETFs on an exchange, share are usually transferred to a buyer. No money comes out of the ETF, which means no capital gains taxes because managers aren’t forced to sell securities to raise cash.
percentage-of-equity-funds
Source: Morningstar, J.P. Morgan Asset Management. Cost basis is the original purchase price used to capital gains and losses. Unrealized gain is the profit, if any, on a security that has not been sold (current price minus cost basis). Data are as of December 31, 2023. Shown for illustrative purposes only.

How do ETFs trade:

ETFs offer more liquidity than meets the eye.

liquid-graphic
Sources: 1. Morningstar (54 ETFs), January 3, 2024. 2. Russell 1000 Value Index, January 3, 2024.

Why do ETFs trade at premiums and discounts?

Premiums and discounts are common with international ETFs.

why-do-etfs-trade-at-premiums-and-discounts
Source: J.P. Morgan Asset Management. Shown for illustrative purposes only.

How do ETFs trade at time of stress?

High yield ETF trading volume in periods of market stress.

Share (%) of 20-day rolling average trading volume of overall high yield bond market

  • During periods of market stress, investors can trade ETF shares instead of buying or selling the underlying securities at unfavorable prices.
  • In October 2022, trading volume in high yield ETF shares represented 39% of the average trading volume of the high yield bond market.
  • However, trading volume of the underlying bonds in high yield ETFs was just 7.5% of the overall high yield bond market volume.
how-do-etfs-trade-at-time-of-stress
Source: Bloomberg, J.P. Morgan Asset Management. High yield ETF market is represented by HYG, JNK, PHB, HYLB, SJNK, SHGY, USHY, HYLS, ANGL, HYS, BSJL, BSJM, BSJK, and JPHY. High yield bond market is represented by FINRA TRACE Market Breadth High Yield Bond Dollar Volume (NTMBHV) and FINRA TRACE 144a HY $ Vol (NTMB4HYV). Data are as of December 31, 2023.

How to buy ETFs?

how-to-buy-etfs

ETF Education Spotlight