Exchange Traded Funds

They call ‘em ETFs.

There are hundreds of them.

The mutual funds don’t want you to find out about them.

Why?

Because they beat the socks off mutual funds in
so many categories. The expense ratios of most
mutual funds runs about 1.5% and many are much
higher. To buy a mutual fund you must wait until
the end of the day to find out what price you
paid. Many mutual funds have instituted
redemption charges should you decide to sell out
early. Early is whatever definition they want to
apply and could be a year out, maybe more. The
fee at this time is about 2% for many funds.

Fund managers tell you it is to discourage
overnight trading that adds to their expenses
and therefore penalizes shareholders, but that
is not true.

The two most popular ETFs are SPY and QQQ. SPY
is composed of the stocks in the SP500 Index
with 500 stocks and it is priced every few
minutes. It can be bought and sold any time
during the day. The mutual funds who tell you it
is too expensive to price their funds more than
once a day are either lying or stupid. ETFs
prove that. And that same logic goes for short
term trading.

The investor buys and sells ETFs the same as
any stock. The big brokerage companies charge
high commission whereas investors who place buy
and sell orders with discount brokers will find
commissions around $7.00 to $15.00 to buy or
sell. That charge is for one ticket and not per
100 shares. The commission is the same for 100
shares or 1,000 or more shares. Big Wall Street
firms charge many times this for the same
execution.

You can do research on ETFs just as you do on
mutual funds. If you want to determine what
stocks an ETF manger holds they will tell you in
their prospectus. What you want to know is what
Sector the ETF represents. The internal
structure does not change often as does the
stock ownership in a regular mutual fund.

At this time there is one drawback to buying
and selling certain ETFs. Do not place Market
Orders when buying and selling most ETFs unless
it trades more than 250,000 shares each day. As
with stock there is a Bid and Offer Price. In
thinly traded issues where the ETF has a volume
of less than 50,000 shares daily the Spread can
be as high as 20 cents and many times more. In
these issue it is suggested Limit Price Orders
be entered. If the last trade was $20.50 the Bid
could be $20.40 and the Offer $20.60. A market
buy order would be filled at $20.60 and a sell
order at $20.40. It is best to place a Limit
Order at $20.50 and most of the time these will
be executed at the Limit Order price. Stop Loss
Orders are also poorly executed in low volume
ETFs.

Over the next few years as more and more
investors discover these advantages they will be
buying ETFs in preference to both load and
no-load mutual funds.