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Does it make more sense to buy a sector or only the top stock in that sector?

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You buy the sector, not just the lead stock of the sector. Anybody here in Rochester who has their Kodak shares proudly framed and hanging on the wall knows that. The forecasts work until they don't. Some macro-change will take place and then the forecasts will alter, giving the impression they knew it all along. Though it is conventional wisdom, periodically I hear accusations of fraud regarding ETFs. That is, they have pressured the market to sell more shares than actually exist, muc

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You buy the sector, not just the lead stock of the sector. Anybody here in Rochester who has their Kodak shares proudly framed and hanging on the wall knows that.

The forecasts work until they don't. Some macro-change will take place and then the forecasts will alter, giving the impression they knew it all along.

Though it is conventional wisdom, periodically I hear accusations of fraud regarding ETFs. That is, they have pressured the market to sell more shares than actually exist, much as through the fractional reserve requirement, banks lend out more money than actually exists, and that there will one day be dire consequences on that account.

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52 minutes ago, admin said:

I hadn't heard about the ETF shares before though. How would I research that further?

BillCara,com used to write about it some. Bill is an astute stock manager once based in Toronto with a long professional track record. He once hosted a blog, perhaps still does, which was much like this one, only financial. Brilliant qualified high-powered persons would jockey with complete novices posting comments. Here and there he used to dive into social commentary and he was ever distrustful of Big Money and how the worldwide markets had become corrupted.

I distrust ETFs and prefer individual stocks whenever I have held some. In recent years I have come to think mega corporations drive world events for the worse even more than governments, and put less $ into stocks on that account. "Fortunately" I never have/had that much to worry about.

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    • By admin
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      When investors want to sell their ETF holdings, they can do so by one of two methods. The first is to sell the shares on the open market. This is generally the option chosen by most individual investors. The second option is to gather enough shares of the ETF to form a creation unit, and then exchange the creation unit for the underlying securities. This option is generally only available to institutional investors due to the large number of shares required to form a creation unit. When these investors redeem their shares, the creation unit is destroyed and the securities are turned over to the redeemer. The beauty of this option is in its tax implications for the portfolio.
      We can see these tax implications best by comparing the ETF redemption to that of a mutual fund redemption. When mutual fund investors redeem shares from a fund, all shareholders in the fund are affected by the tax burden. This is because to redeem the shares, the mutual fund may have to sell the securities it holds, realizing the capital gain, which is subject to tax. Also, all mutual funds are required to pay out all dividends and capital gains on a yearly basis. Therefore, even if the portfolio has lost value that is unrealized, there is still a tax liability on the capital gains that had to be realized because of the requirement to pay out dividends and capital gains.
      ETFs minimize this scenario by paying large redemptions with stock shares. When such redemptions are made, the shares with the lowest cost basis in the trust are given to the redeemer. This increases the cost basis of the ETF's overall holdings, minimizing its capital gains. It doesn't matter to the redeemer that the shares it receives have the lowest cost basis, because the redeemer's tax liability is based on the purchase price it paid for the ETF shares, not the fund's cost basis. When the redeemer sells the stock shares on the open market, any gain or loss incurred has no impact on the ETF. In this manner, investors with smaller portfolios are protected from the tax implications of trades made by investors with large portfolios.

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      An ETF has many advantages over a mutual fund including costs and taxes. The creation and redemption process for ETF shares is almost the exact opposite of that for mutual fund shares. When investing in mutual funds, investors send cash to the fund company, which then uses that cash to purchase securities and in turn issues additional shares of the fund. When investors wish to redeem their mutual fund shares, they are returned to the mutual fund company in exchange for cash. Creating an ETF, however, does not involve cash.
      The process begins when a prospective ETF manager (known as a sponsor) files a plan with the U.S. Securities and Exchange Commission to create an ETF. Once the plan is approved, the sponsor forms an agreement with an authorized participant, generally a market maker, specialist or large institutional investor, who is empowered to create or redeem ETF shares. (In some cases, the authorized participant and the sponsor are the same.)
      The authorized participant borrows stock shares, often from a pension fund, places those shares in a trust and uses them to form ETF creation units. These are bundles of stock varying from 10,000 to 600,000 shares, but 50,000 shares is what's commonly designated as one creation unit of a given ETF. Then, the trust provides shares of the ETF, which are legal claims on the shares held in the trust (the ETFs represent tiny slivers of the creation units), to the authorized participant. Because this transaction is an in-kind trade — that is, securities are traded for securities—there are no tax implications. Once the authorized participant receives the ETF shares, they are sold to the public on the open market just like stock shares.
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      The use of exchange traded funds (ETFs) has increased rapidly in recent years. If you're just getting started with ETFs, here are a few basics to help get you oriented on these convenient, low-cost, flexible funds.
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