Exchange-traded global equity index funds seek to track the performance of indexes composed of transnational companies associated with a specific country or industry sector by investing in the constituent equities of those indexes. However, due to liquidity and foreign ownership constraints in some foreign countries, there is no assurance that the performance of the benchmark indexes can be matched.
Holding company depositary receipts (HOLDRs) are depository receipts that represent beneficial ownership in a fixed basket of stocks that are held in a corresponding grantor trust. HOLDRs can be purchased and sold on the American Stock Exchange in 100 share increments in a process identical to the purchase or sale of any other listed stock. Unlike other index ETFs that can only be created and redeemed by institutional investors, any shareholder can exchange 100 shares of a HOLDR for the underlying stocks at any time. This feature typically minimizes the gap between the fund net asset value and the fund share price.
Each HOLDR is initially composed of twenty stocks chosen by Merrill Lynch & Company, the fund sponsor. The stocks and the shares of each stock remain the same throughout the life of the HOLDR, reflecting corporate actions and share splits as necessary. HOLDRs allow exposure to specific industries and sectors, but provide no flexibility to refresh the portfolio over time or replace stocks as merger and spin-offs occur. Shareholders retain the voting and dividend rights of the underlying stocks.
Fixed-income index ETFs seek to provide current income by investing in corporate or government fixed income securities (bonds and bills) associated with specific indexes. Since the underlying indexes represent various maturity ranges, investors can make investments consistent with their views about interest rate movements in the short or long term. However, there are significant differences between fixed-income indexes. Some are market-capitalization weighted and target specific maturities, while others are equal-weighted and focus on specific bond ratings.
Many fixed-income securities are rated for credit worthiness and payment default risk by independent ratings services such as Standard & Poors and Moody's Investors Service. Bonds rated in one of the four highest ratings categories generally are considered to be of investment-grade quality, while bonds rated in the lower categories are considered to be non-investment-grade. Although many of these funds focus their investments towards either investment-grade or non-investment grade securities, fund portfolios often contain a blend of security credit ratings.
Similar to traditional open-ended mutual funds, these bond-based ETFs enable investors to purchase a basket of bonds with one simple transaction. Unlike open-ended bond funds, however, bond index ETFs may be traded throughout the day at market price. In addition, mutual funds are required to disclose their holdings only semi-annually, while ETF holdings are available daily.
