Author: Ronald Emery

How Do Exchange-Traded Funds Work in Options Trading?

Similar to index funds, exchange-traded funds (ETFs) are securities that enable investors to purchase and sell them throughout the day like typical stocks.

The main purpose of ETFs is to make it easy to buy various securities in a single purchase. They are more convenient than mutual funds, with the same level of diversification.

How to Invest in ETF Shares

ETFs are some of the most useful and popular securities available in the market. Starting in 1993 with the Standard and Poor’s Deposit Receipt, ETF shares were typically called SPDR or “Spider.”

These funds gave investors the ability to mimic the S&P 500 without any need for index funds. They also behave similarly to stocks, enabling people to purchase and sell them on a daily basis, purchase them on margin, or short them.

stock market up arrow

Investors should keep in mind that they can’t buy shares directly through ETFs, but sponsors can sell large blocks of 50,000 or more “creation unit” shares, which an authorized participant can then buy.

These individuals may include institutional investors, specialists, or market makers who can place those shares in a trust prior to splitting them into ETFs and selling them via secondary markets.

Normally, investors sell ETFs to other investors buying in the open market, but investors also have the ability to collect and redeem them for single creation units, profiting on underlying securities, but the latter actions are typically avoided because of the large sum of shares that can be overwhelming and unmanageable.

Why Get ETFs?

ETFs have surged in popularity recently, with a growing number of offerings. Specific benefits of using ETFs include:

  • More liquidity with mutual funds that allow investors to buy and sell hundreds of thousands to millions of ETFs at any time throughout the day
  • Additional tax benefits with the ability to buy ETFs in the open market without any additional tax liability, along with payoff for redemptions via stock shares instead of cash
  • Lower cost because of a lack of front- and back-end loads that investors see with traditional mutual funds, along with a lack of active management and no minimum investment requirements

These benefits can make ETFs an attractive option for many types of investors, but keep in mind that there are reasons you may want to stick with traditional mutual funds.

Determine if ETF Shares are Right for You

While ETFs can come with some advantages over traditional mutual funds, there are certain problems that investors may have with these funds.

The main problems with ETFs may apply to those who prefer active management, as ETFs are normally fixed, and each purchase also includes a brokerage commission when trading them as stocks, which may be too costly for some investors.

These disadvantages may be enough to keep certain investors away, but the benefits they offer may outweigh the downsides if investors need more than what traditional funds have to offer.

Taking into account how an ETF works and these shares’ pros and cons, you can decide whether or not to use them when investing.

Cash-Paying Chinese Home Buyers in U.S. Have Tripled Since ’05

Mandarin-speaking Chinese home buyers in the U.S. are purchasing high-end homes with an average price of over $500,000. According to an analysis performed by realty research company RealtyTrac and multicultural marketing company Ethnic Technologies, 46% of these high-end buyers paid all in cash, which is more than triple the number reported in 2005. At almost 18% of all non-English cash buyers, they are only second behind Spanish-speaking buyers, who comprise 43%.

How Foreign Cash Buyers Are Affecting the Market

RealtyTrac and Ethnic Technologies used predictive software to gather the data about foreign cash buyers, which was able to determine ethnicity and language preferences according to names and addresses appearing on public property sales records.

dollar sign for cash

Daren Blomquist, RealtyTrac’s vice president, determined, “Cash buyers across the board are playing a much bigger role in the housing market now than they were 10 years ago, and that is particularly true for Chinese Mandarin-speaking cash buyers, who are more likely to be foreign nationals.

Foreign cash buyers have helped to accelerate U.S. home price appreciation over the past few years given that these buyers are often not as constrained by income as local, traditionally financed buyers.”

All in all, Chinese buyers spent a total of $22 billion on American housing from March 2013 to March 2014. That’s 72% more than the previous year, according to the National Association of Realtors.

Most of these buyers are purchasing homes over $500,000. It turns out, according to Windermere Real Estate president OB Jacobi, “Seattle is the closest mainland U.S. city to travel to from Beijing and offers things that really appeal to the Chinese, like clean air, quality education, and employment opportunities with several Fortune 500 companies.”

English-speaking cash buyers of course make up most of the market for 2015, at 87.01%. Spanish speakers made up 5.54% and Mandarin speakers make up 2.31%.