An ETF allows investors to buy and sell an entire basket of securities with a single transaction throughout the trading day. ARK believes ETFs are an effective tool for different investment strategies and enable individual investors to obtain economies of scale.
ETFs possess two different types of liquidity, making them easily tradable. First, ETF shares are bought and sold like a stock on an exchange, making it easy for investors to trade the ETF. Second, ETFs possess an underlying liquidity due to their unique creation and redemption process, so low trading volume should not impact an investor’s ability to trade the ETF during market hours.
ETFs disclose their holdings daily. Passive ETF holdings should reflect the index to which they are tethered. Active ETFs are similarly transparent and required by the SEC to disclose their holdings every day. Mutual funds are not required to disclose their holdings daily, and stocks are naturally transparent as a single security.
ETFs are packaged and sold as a unique collection of securities. Holding one ETF could offer an investor exposure to hundreds of securities, instead of just buying and selling individual stocks and bonds.
The ETF creation and redemption process, which uses in-kind transfers of securities, makes index ETFs relatively more tax efficient when compared to mutual funds and stocks. Mutual funds are taxed when a manager sells securities within the fund and a capital gain is distributed. A tax must be paid on a stock every time it is sold.
ETF expense ratios generally are more cost effective compared to mutual fund expense ratios. Compared to buying single stocks, mutual fund and ETF investors bear their pro rata share of the fund’s brokerage cost but do not pay the full brokerage fees for several individual stocks in order to gain broader exposure to a segment of the market.