ETF: A Very Cool
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These securities track a basket of stocks or commodities. You could say they’re like mutual funds, but trade like stocks. There are differences between ETFs and mutual funds.
A mutual fund calculates its price at the end of the day; the Net Asset Value. ETFs are priced throughout the day depending on supply and demand. Just like a stock a you can buy one share or a hundred. Unlike a mutual fund, you can go short or buy on margin.
You can use fancy stock order like stop or limit. With mutual funds you just buy and hold. Not that there's anything wrong in that. As I mentioned in my section on mutual funds, I am pro-mutual funds. But pro-index funds. Want to impress your friends by trading in different industries and parts of the world? I recommend ETFs.
ETF’s provide the diversification of a mutual fund. But you can kick up the volatility by focusing in on different sectors.
Generally, most stocks with an industry will rise and fall together. If positive news is affecting the precious metals industry, which companies should you invest in? Pick the wrong ones you’re screwed. An ETF will make this easy.
An ETF is comprised of leading stocks, from that sector.
How about GDX? The Gold Miners ETF from Van Eck Securities. This security tracks a basket of gold and silver mining companies. The volatility is minimized a bit and you can trade the industry as opposed to an individual stock.
What are some advantages of ETFs?
Commissions & Costs - ETFs hands down are cheaper than mutual funds. They’re about 50% lower in costs than a standard index type fund and about 75% lower than an actively managed fund. Why the difference? ETFs don’t require the services of professional stock-pickers. The basket of assets is already set.
Taxes - The taxes you’ll pay are lower than mutual funds. I wouldn’t lean to heavy on this one. I’ve read numerous articles saying that ETFs aren’t required to sell shares to meet redemption thus avoiding a capital gains distribution. But these benefits may be more for institutional investors.
Asset Allocation - Are you thinking about diversifying into bonds, real estate or Taiwan? Through your brokerage account you can easily shift money through ETFs.
There's about several hundred ETFs and more being created each month. Before you invest in an ETF it's important to do some due diligence. Some ETFs can track the same type of stock basket. You don't want that. You want to spread the cash around.
A list of all ETFs are posted at
www.amex.com
Ok. What are the disadvantages of this amazing “walks on water” financial product? You pay commissions when you buy and sell just like a stock. Commissions can run $5 - $20 a trade. Discounted broker recommended.
To invest in ETFs you should be playing with a reasonably large sum of money. If you invest $100 or so per month, paying a $7 commission is not worth it.
Fund managers are slicing and dicing the industries and sectors to feed growing demand. As a matter of fact I read about a fund manger that will be offering subsectors of the health care industry. You can buy cardiology or even ophthalmology ETFs.
What are the most popular ETFs? SPDRs, which match the broad indices. Diamonds Trust Series I (DIA, which match the DJ industrial avaerge and the QQQ which match the NASDAQ-1000.
ETFs are great for giving your portfolio international exposure. You can trade a basket of Middle East & African stocks or go long on China. The iShares MSCI EAFE Index (EFA) is a widely recommended international “starter fund”. The holdings consistent of about 800 companies from the European, Australasian and Far Eastern markets.
The dollar is weakening and oil prices are rising. Commodities and energy funds might be worth looking at. As I alluded to earlier, you can focus on what oil prices will do to the energy sector as a whole; and not have to search for the perfect stock.
Will nuclear power be in vogue again? As long as oil prices keep rising and the U.S. wants to declare it’s independence from foreign sources, it might. To its credit there hasn’t been a nuclear accident in years and the French seem to like it. That’s enough for me.
Here’s a new ETF that follows the nuclear power industry. The fund started in August 2007 so the track record is limited. It seems the bulls are saying “yes” to nukes.
Although mutual funds still have more dollars invested than ETFs, the ETF industry is growing. Lower fees that don’t eat away at your returns, the ability to trade them like stocks and a wide variety of choices give these three letters a thumbs up.
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