RIDLEY ASSET MANAGEMENT, LLC

About Exchange Traded Funds (ETFs)

Ridley Asset Management focuses on using ETFs and similar index-linked securities to implement asset allocation based investment strategies. As of January 2010, over $705 billion was invested in 772 ETFs on U.S. based equity exchanges.

ETFs are investment portfolios that trade like stocks on the major stock exchanges. Each ETF is composed of a collection of securities designed to track the performance of an index (or basket of securities) with a specific investment objective. There are ETFs that track specific financial market indexes (i.e., S&P 500) and ETFs that track asset classes, investment styles, industry sectors, geographic regions, individual countries, commodities and currencies. 

Bottom Line - ETFs Offer Competitive Performance

During any given year, about 75% of active managers underperform the passive index benchmarks used to measure their performance. Lipper research found in large-cap equity mutual funds, 91% of value, 81% of blend and 56% of growth managers underperformed their benchmark index over the past fifteen years (1992-2006). If these returns calculated after-tax consequences to investors, the underperformance would be even more dramatic. Traditional active management produces mediocre returns due to excessive fees and high portfolio turnover.

The same holds true in fixed income investing. In 2009 Standard & Poors released a study that found "that on an asset-weighted basis--measuring returns by the invested dollar rather than percentage of funds--index funds beat actively managed fund returns in all 13 fixed income categories over one and three years, and in 11 of 13 categories over five years."

Passively managed ETFs represent the performance benchmarks that most active managers fail to match. ETFs are tax-efficient because there is less portfolio turnover and a unique product structure, "in-kind" redemption, mitigates capital gains distributions which plague mutual fund investors.

"The definition of insanity is doing the same thing over and over and expecting different results."

BENEFITS OF ETFs:

• Competitive performance versus active management

• Diversification

• Low ownership costs

• Tax efficiency

• Liquidity

• Portfolio transparency