Assessing the value of an ETF
"You seem to be assuming that ETFs must all work like the more traditional closed-end funds, where the market price per share tends—based on supply and demand—to significantly deviate from the underlying net asset value per share. The assumption is simplistic. What are traditionally referred to as closed-end funds (CEFs), where unit creation and redemption are very tightly controlled, have been around for a long time, and yes, they do often trade at a premium or discount to NAV because the quantity is inflexible. Yet, what is generally meant when the label ""ETF"" is used (despite CEFs also being both ""exchange-traded"" and ""funds"") are those securities which are not just exchange-traded, and funds, but also typically have two specific characteristics: (a) that they are based on some published index, and (b) that a mechanism exists for shares to be created or redeemed by large market participants. These characteristics facilitate efficient pricing through arbitrage. Essentially, when large market participants notice the price of an ETF diverging from the value of the shares held by the fund, new units of the ETF can get created or redeemed in bulk. The divergence quickly narrows as these participants buy or sell ETF units to capture the difference. So, the persistent premium (sometimes dear) or discount (sometimes deep) one can easily witness in the CEF universe tend not to occur with the typical ETF. Much of the time, prices for ETFs will tend to be very close to their net asset value. However, it isn't always the case, so proceed with some caution anyway. Both CEF and ETF providers generally publish information about their funds online. You will want to find out what is the underlying Net Asset Value (NAV) per share, and then you can determine if the market price trades at a premium or a discount to NAV. Assuming little difference in an ETF's price vs. its NAV, the more interesting question to ask about an ETF then becomes whether the NAV itself is a bargain, or not. That means you'll need to be more concerned with what stocks are in the index the fund tracks, and whether those stocks are a bargain, or not, at their current prices. i.e. The ETF is a basket, so look at each thing in the basket. Of course, most people buy ETFs because they don't want to do this kind of analysis and are happy with market average returns. Even so, sector-based ETFs are often used by traders to buy (or sell) entire sectors that may be undervalued (or overvalued)." You can follow the intra-day NAV of an ETF, for instance SPY, by viewing its .IV (intra-day value) ticker which tracks it's value.   http://finance.yahoo.com/q?s=spy http://finance.yahoo.com/q?s=^SPY-IV Otherwise, each ETF provider will update their NAV after business each day on their own website. https://www.spdrs.com/product/fund.seam?ticker=spy
"From Wikipedia: Usage Because EV is a capital structure-neutral metric, it is useful when   comparing companies with diverse capital structures. Price/earnings   ratios, for example, will be significantly more volatile in companies   that are highly leveraged. Stock market investors use EV/EBITDA to compare returns between   equivalent companies on a risk-adjusted basis. They can then   superimpose their own choice of debt levels. In practice, equity   investors may have difficulty accurately assessing EV if they do not   have access to the market quotations of the company debt. It is not   sufficient to substitute the book value of the debt because a) the   market interest rates may have changed, and b) the market's perception   of the risk of the loan may have changed since the debt was issued.   Remember, the point of EV is to neutralize the different risks, and   costs of different capital structures. Buyers of controlling interests in a business use EV to compare   returns between businesses, as above. They also use the EV valuation   (or a debt free cash free valuation) to determine how much to pay for   the whole entity (not just the equity). They may want to change the   capital structure once in control. Technical considerations Data availability Unlike market capitalization, where both the market price and the   outstanding number of shares in issue are readily available and easy   to find, it is virtually impossible to calculate an EV without making   a number of adjustments to published data, including often subjective   estimations of value: In practice, EV calculations rely on reasonable estimates of the   market value of these components. For example, in many professional   valuations: Avoiding temporal mismatches When using valuation multiples such as EV/EBITDA and EV/EBIT, the   numerator should correspond to the denominator. The EV should,   therefore, correspond to the market value of the assets that were used   to generate the profits in question, excluding assets acquired (and   including assets disposed) during a different financial reporting   period. This requires restating EV for any mergers and acquisitions   (whether paid in cash or equity), significant capital investments or   significant changes in working capital occurring after or during the   reporting period being examined. Ideally, multiples should be   calculated using the market value of the weighted average capital   employed of the company during the comparable financial period. When calculating multiples over different time periods (e.g. historic   multiples vs forward multiples), EV should be adjusted to reflect the   weighted average invested capital of the company in each period. In your question, you stated: The Market Cap is driven by the share price and the share price is   determined by buyers and sellers who have access to data on cash and   debts and factor that into their decision to buy or sell. Note the first point under ""Technical Considerations"" there and you will see that the ""access to data on cash and debts"" isn't quite accurate here so that is worth noting. As for alternatives, there are many other price ratios one could use such as price/earnings, price/book value, price/sales and others depending on how one wants to model the company. The better question is what kind of investing strategy is one wanting to use where there are probably hundreds of strategies at least. Let's take Apple as an example. Back on April 23, 2014 they announced earnings through March 29, 2014 which is nearly a month old when it was announced. Now a month later, one would have to estimate what changes would be made to things there. Thus, getting accurate real-time values isn't realistic. Discounted Cash Flow is another approach one can take of valuing a company in terms of its future earnings computed back to a present day lump sum." Thanks very much.  12b1 is a form that explains how a fund uses that .25-1% fee, right? So that's part of the puzzle im getting at.  I'm not necessarily trying to understand my net fees, but more who pays who and based off of what.   For a quick example, betterment bought me a bunch of vanguard ETFs. That's cool. But vanguard underperformed vs their blackrock and ssga etfs. I get that vanguard has lower fees, but the return was less even taking those into account.  I'm wondering, first what sort of kickback betterment got for buying those funds, inclusive of wholesale deals, education fees etc.  I'm also wondering how this food chain goes up and down the sponsor, manager tree.  I'm sure it's more than just splitting up that 1% This ETFchannel.com page shows which ETFs hold Wells Fargo and you can search other stocks the get the same information on that site. This the same information for Google This even tells you what percentage of an ETF is a particular stock.  Be warned that this site is not entirely free. You will be limited to 6 pages in 6 hours unless you pay for a subscription. Additionally ETFdb.com offers a similar tool. "First, to mention one thing - better analysis calls for analyzing a range of outcomes, not just one; assigning a probability on each, and comparing the expected values. Then moderating the choice based on risk tolerance. But now, just look at the outcome or scenario of 3% and time frame of 2 days. Let's assume your investable capital is exactly $1000 (multiply everything by 5 for $5,000, etc.). A. Buy stock: the value goes to 103; your investment goes to $1030; net return is $30, minus let's say $20 commission (you should compare these between brokers; I use one that charges 9.99 plus a trivial government fee). B. Buy an call option at 100 for $0.40 per share, with an expiration 30 days away (December 23). This is a more complicated. To evaluate this, you need to estimate the movement of the value of a 100 call, $0 in and out of the money, 30 days remaining, to the value of a 100 call, $3 in the money, 28 days remaining. That movement will vary based on the volatility of the underlying stock, an advanced topic; but there are techniques to estimate that, which become simple to use after you get the hang of it. At any rate, let's say that the expected movement of the option price in this scenario is from $0.40 to $3.20. Since you bought 2500 share options for $1000, the gain would be 2500 times 2.8 = 7000. C. Buy an call option at 102 for $0.125 per share, with an expiration 30 days away (December 23). To evaluate this, you need to estimate the movement of the value of a 102 call, $2 out of the money, 30 days remaining, to the value of a 102 call, $1 in the money, 28 days remaining. That movement will vary based on the volatility of the underlying stock, an advanced topic; but there are techniques to estimate that, which become simple to use after you get the hang of it. At any rate, let's say that the expected movement of the option price in this scenario is from $0.125 to $ 1.50. Since you bought 8000 share options for $1000, the gain would be 8000 times 1.375 = 11000. D. Same thing but starting with a 98 call. E. Same thing but starting with a 101 call expiring 60 days out. F., ... Etc. - other option choices. Again, getting the numbers right for the above is an advanced topic, one reason why brokerages warn you that options are risky (if you do your math wrong, you can lose. Even doing that math right, with a bad outcome, loses). Anyway you need to ""score"" as many options as needed to find the optimal point. But back to the first paragraph, you should then run the whole analysis on a 2% gain. Or 5%. Or 5% in 4 days instead of 2 days. Do as many as are fruitful. Assess likelihoods. Then pull the trigger and buy it. Try these techniques in simulation before diving in! Please! One last point, you don't HAVE to understand how to evaluate projected option price movements if you have software that  does that for you. I'll punt on that process, except to mention it. Get the general idea? Edit P.S. I forgot to mention that brokers need love for handling Options too. Check those commission rates in your analysis as well." "Option pricing models used by exchanges to calculate settlement prices (premiums) use a volatility measure usually describes as the current actual volatility.  This is a historic volatility measure based on standard deviation across a given time period - usually 30 to 90 days.   During a trading session, an investor can use the readily available information for a given option to infer the ""implied volatility"".  Presumably you know the option pricing model (Black-Scholes).  It is easy to calculate the other variables used in the pricing model - the time value, the strike price, the spot price, the ""risk free"" interest rate, and anything else I may have forgotten right now.  Plug all of these into the model and solve for volatility.  This give the ""implied volatility"", so named because it has been inferred from the current price (bid or offer). Of course, there is no guarantee that the calculated (implied) volatility will match the volatility used by the exchange in their calculation of fair price at settlement on the day (or on the previous day's settlement).  Comparing the implied volatility from the previous day's settlement price to the implied volatility of the current price (bid or offer) may give you some measure of the fairness of the quoted price (if there is no perceived change in future volatility).  What such a comparison will do is to give you a measure of the degree to which the current market's perception of future volatility has changed over the course of the trading day.   So, specific to your question, you do not want to use an annualised measure.  The best you can do is compare the implied volatility in the current price to the implied volatility of the previous day's settlement price while at the same time making a subjective judgement about how you see volatility changing in the future and how this has been reflected in the current price." The Creation/Redemption mechanism is how shares of an ETF are created or redeemed as needed and thus is where there can be differences in what the value of the holdings can be versus the trading price. If the ETF is thinly traded, then the difference could be big as more volume would be where the mechanism could kick in as generally there are blocks required so the mechanism usually created or redeemed in lots of 50,000 shares I believe. From the link where AP=Authorized Participant: With ETFs, APs do most of the buying and selling. When APs sense   demand for additional shares of an ETF—which manifests itself when the   ETF share price trades at a premium to its NAV—they go into the market   and create new shares. When the APs sense demand from investors   looking to redeem—which manifests itself when the ETF share price   trades at a discount—they process redemptions. So, suppose the NAV of the ETF is $20/share and the trading price is $30/share. The AP can buy the underlying securities for $20/share in a bulk order that equates to 50,000 shares of the ETF and exchange the underlying shares for new shares in the ETF. Then the AP can turn around and sell those new ETF shares for $30/share and pocket the gain. If you switch the prices around, the AP would then take the ETF shares and exchange them for the underlying securities in the same way and make a profit on the difference. SEC also notes this same process. The quant aspect '''''. This is the kind of math I was wondering if it existed, but now it sounds like it is much more  complex in reality then optimizing by evaluating different cost of capital. Thank you for sharing I'm honestly not well versed on healthcare ETFs. I have seen a few mentioned here and there on various threads around /r/investing and /r/wallstreetbets. My pro-Vanguard bias would lead me to looking most closely at VHT, but there seem to be [many other great looking picks](http://etfdb.com/type/sector/healthcare/) out there such as IBB, XLV, and IHI, among others. Right now I am generally concerned about valuations in technology and perhaps simply in general, but we'll see what happens.  As I craft my goals for the near and long term, I would favor the defense industry ($ITA), technology (broad definition -- $VGT, $V, $AAPL, $BABA, various video games companies short term), healthcare (above), some specific international exposure (such as $EWGS), and boring stuff ($VOO, $VTI). I think that assuming that you're not looking to trade the fund, an index Mutual Fund is a better overall value than an ETF. The cost difference is negligible, and the ability to dollar-cost average future contributions with no transaction costs. You also have to be careful with ETFs; the spreads are wide on a low-volume fund and some ETFs are going more exotic things that can burn a novice investor. Track two similar funds (say Vanguard Total Stock Market: VTSMX and Vanguard Total Stock Market ETF: VTI), you'll see that they track similarly.  If you are a more sophisticated investor, ETFs give you the ability to use options to hedge against declines in value without having to incur capital gains from the sale of the fund. (ie. 20 years from now, can use puts to make up for short-term losses instead of selling shares to avoid losses)  For most retail investors, I think you really need to justify using ETFs versus mutual funds. If anything, the limitations of mutual funds (no intra-day trading, no options, etc) discourage speculative behavior that is ultimately not in your best interest. EDIT: Since this answer was written, many brokers have begun offering a suite of ETFs with no transaction fees. That may push the cost equation over to support Index ETFs over Index Mutual Funds, particularly if it's a big ETF with narrow spreads.. You are correct about the first two questions.  At the time it was last measured those were the percent invested in the Basic Materials sector for the ETF and its benchmark.  Note, this ETF will be significantly different from its benchmark as it is an equal-weight index rather than the more common capitalization-weighted index.  Meaning that this ETF could have materially different performance from its benchmark. The third column is the average sector weights of all the ETFs in Morningstar's Large Blend category.  These are ETFs that generally invest in a broad collection of large U.S. stocks and (weighted?) average of all of them will be generally fairly close to the benchmark. Aswath Damodaran's [Investment Valuation 3rd edition](http://www.amazon.com/Investment-Valuation-Techniques-Determining-University/dp/1118130731/ref=sr_1_12?ie=UTF8&amp;qid=1339995852&amp;sr=8-12&amp;keywords=aswath+damodaran) (or save money and go with a used copy of the [2nd edition](http://www.amazon.com/gp/offer-listing/0471414905/ref=dp_olp_used?ie=UTF8&amp;condition=used))  He's a professor at Stern School of Business. His [website](http://pages.stern.nyu.edu/~adamodar/) and [blog](http://aswathdamodaran.blogspot.com/) are good resources as well. [Here is his support page](http://pages.stern.nyu.edu/~adamodar/New_Home_Page/Inv3ed.htm) for his Investment Valuation text. It includes chapter summaries, slides, ect. If you're interested in buying the text you can get an idea of what's in it by checking that site out. Use a compound interest calculator to project the difference with ETFs in the S&amp;P 500 (or the asset mix of your choosing), and subtract the expected pension amount. If the difference is positive, or around around even, I would do it to avoid the risk of company failure. "I'm trying to understand how an ETF manager optimized it's own revenue.  Here's an example that I'm trying to figure out.  ETF firm has an agreement with GS for blocks of IBM. They have agreed on daily VWAP + 1% for execution price.  Further, there is a commission schedule for 5 mils with GS. Come month end, ETF firm has to do a monthly rebalance. As such must buy 100,000 shares at IBM which goes for about $100 The commission for the trade is 100,000 * 5 mils = $500 in commission for that trade. I assume all of this is covered in the expense ratio. Such that if VWAP for the day was 100, then each share got executed to the ETF at 101 (VWAP+ %1) + .0005 (5 mils per share) = for a resultant 101.0005 cost basis  The ETF then turns around and takes out (let's say) 1% as the expense ratio ($1.01005 per share)  I think everything so far is pretty straight forward. Let me know if I missed something to this point.  Now, this is what I'm trying to get my head around. ETF firm has a revenue sharing agreement as well as other ""relations"" with GS. One of which is 50% back on commissions as soft dollars. On top of that GS has a program where if you do a set amount of ""VWAP +"" trades you are eligible for their corporate well-being programs and other ""sponsorship"" of ETF's interests including  helping to pay for marketing, rent, computers, etc.  Does that happen? Do these disclosures exist somewhere?" This is the chart going back to the first full year of this fund.  To answer your question - yes, a low cost ETF or Mutual fund is fine. Why not go right to an S&P index? VOO has a .05% expense. Why attracted you to a choice that lagged the S&P by $18,000 over this 21 year period?  (And yes, past performance, yada, yada, but that warning is appropriate for the opposite example. When you show a fund that beat the S&P short term, say 5 years, its run may be over. But this fund lagged the S&P by a significant margin over 2 decades, what makes you think this will change? But if you add a security to the index you also remove one from the index, thus both a buy and sell. If weights change some go up, some go down thus some need to be purchased and some need to be sold.   So I still don't see how ETFs are net sinks beyond their simple AUM.