What are they? How do you use them?
First, what are ETFs? Exchange Traded Funds, invented about 11 years ago, are akin to Mutual Funds. Like their brethren, they are invested in a group, basket, sector or index of stocks, bonds or commodities or all of the above. Like Mutual Funds you can buy them through fund companies, but mostly through brokers.
That may be where the family likeness ends. Mutual Funds are priced at the end of each trading day, at 4:00 PM to be exact, so trading Mutual Funds takes place at the close price. ETF prices change throughout the day, so ETFs can be traded throughout the day. ETFs can be shorted or have options on them, where Mutual Funds do not. ETFs can use stop and limit orders and be bought on margin. ETFs can do all that because they are bought and sold on the stock market.
Another important point is that ETFs get rid of stock picking by fund managers and portfolio turnover because it stays in a solid sector or index. This reduces fund cost on capital gains and transaction cost to say nothing of stock picking error. The expenses are lower by a wide margin, ¼ of a percent versus 1.5% for the average Mutual Fund if you hold it. You will have to pay your own transaction cost when you buy, sell, trade and pay your own capital gains when you sell. Even after that, ETFs are less expensive than Mutual Funds with the average 0.6% round trip expense of buying/selling a $10,000 stake. That is, it’s less for the buy and hold type of investor. See James Glassmans article at http://www.nationalreview.com/nrof_glassman/glassman200404140841.asp
How do you use them? What’s available?
Check out http://quote.bloomberg.com/apps/data?pid=mutualfunds and put in the following fund symbols. Try QQQQ, it is the Nasdaq-100 Index Tracking Stock. This fund is an exchange-traded fund which represents undivided ownership interests in The Nasdaq-100 Trust. The objective of the Trust is to provide investment results that generally correspond to the price and yield performance of the component securities of the Nasdaq-100 Index. For more information see http://www.nasdaq.com/aspxcontent/qqqq/index.aspx . Try SPY, it is the SPDR Trust Series 1. This fund issues exchange-traded funds called Standard & Poor's Depositary Receipts or "SPDRs". The SPDR Trust holds all of the common stocks of the Standard & Poors 500 Composite Stock Price Index and intends to provide investment results that, before expenses, correspond to the price and yield of the S&P 500 Index. For more information see http://www.amex.com/ .
Mutual Fund companies are also in the ETF fray. Vanguard offers a 500 Index VFINX, Total Stock Market VTSMX, Small Cap Index NAESX, Growth Index VIGRX, and Value Index VIVAX to name a few. And Barclays is in the mix with Barclays Global Investors S&P 500 Stock Fund, WFSPX.
Are ETFs for you?
Want to join the ETF family? Be careful. The cost benefits of ETFs are not always what they seem. For one thing, trading costs add up to a weighty sum. If you're investing in a fund that tracks broad market indices such as the S&P 500 or the Wilshire and if you invest regular amounts in your funds, (read transaction cost), then your existing low-cost mutual-fund options may be difficult the beat. http://ednewcomb.blogspot.com/
First, what are ETFs? Exchange Traded Funds, invented about 11 years ago, are akin to Mutual Funds. Like their brethren, they are invested in a group, basket, sector or index of stocks, bonds or commodities or all of the above. Like Mutual Funds you can buy them through fund companies, but mostly through brokers.
That may be where the family likeness ends. Mutual Funds are priced at the end of each trading day, at 4:00 PM to be exact, so trading Mutual Funds takes place at the close price. ETF prices change throughout the day, so ETFs can be traded throughout the day. ETFs can be shorted or have options on them, where Mutual Funds do not. ETFs can use stop and limit orders and be bought on margin. ETFs can do all that because they are bought and sold on the stock market.
Another important point is that ETFs get rid of stock picking by fund managers and portfolio turnover because it stays in a solid sector or index. This reduces fund cost on capital gains and transaction cost to say nothing of stock picking error. The expenses are lower by a wide margin, ¼ of a percent versus 1.5% for the average Mutual Fund if you hold it. You will have to pay your own transaction cost when you buy, sell, trade and pay your own capital gains when you sell. Even after that, ETFs are less expensive than Mutual Funds with the average 0.6% round trip expense of buying/selling a $10,000 stake. That is, it’s less for the buy and hold type of investor. See James Glassmans article at http://www.nationalreview.com/nrof_glassman/glassman200404140841.asp
How do you use them? What’s available?
Check out http://quote.bloomberg.com/apps/data?pid=mutualfunds and put in the following fund symbols. Try QQQQ, it is the Nasdaq-100 Index Tracking Stock. This fund is an exchange-traded fund which represents undivided ownership interests in The Nasdaq-100 Trust. The objective of the Trust is to provide investment results that generally correspond to the price and yield performance of the component securities of the Nasdaq-100 Index. For more information see http://www.nasdaq.com/aspxcontent/qqqq/index.aspx . Try SPY, it is the SPDR Trust Series 1. This fund issues exchange-traded funds called Standard & Poor's Depositary Receipts or "SPDRs". The SPDR Trust holds all of the common stocks of the Standard & Poors 500 Composite Stock Price Index and intends to provide investment results that, before expenses, correspond to the price and yield of the S&P 500 Index. For more information see http://www.amex.com/ .
Mutual Fund companies are also in the ETF fray. Vanguard offers a 500 Index VFINX, Total Stock Market VTSMX, Small Cap Index NAESX, Growth Index VIGRX, and Value Index VIVAX to name a few. And Barclays is in the mix with Barclays Global Investors S&P 500 Stock Fund, WFSPX.
Are ETFs for you?
Want to join the ETF family? Be careful. The cost benefits of ETFs are not always what they seem. For one thing, trading costs add up to a weighty sum. If you're investing in a fund that tracks broad market indices such as the S&P 500 or the Wilshire and if you invest regular amounts in your funds, (read transaction cost), then your existing low-cost mutual-fund options may be difficult the beat. http://ednewcomb.blogspot.com/
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