Investing Information

Exchange Traded Funds

They call 'em ETFs.

There are hundreds of them.

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


Because they beat the socks off mutual funds inso many categories. The expense ratios of mostmutual funds runs about 1.5% and many are muchhigher. To buy a mutual fund you must wait untilthe end of the day to find out what price youpaid. Many mutual funds have institutedredemption charges should you decide to sell outearly. Early is whatever definition they want toapply and could be a year out, maybe more. Thefee at this time is about 2% for many funds.

Fund managers tell you it is to discourageovernight trading that adds to their expensesand therefore penalizes shareholders, but thatis not true.

The two most popular ETFs are SPY and QQQ. SPYis composed of the stocks in the SP500 Indexwith 500 stocks and it is priced every fewminutes. It can be bought and sold any timeduring the day. The mutual funds who tell you itis too expensive to price their funds more thanonce a day are either lying or stupid. ETFsprove that. And that same logic goes for shortterm trading.

The investor buys and sells ETFs the same asany stock. The big brokerage companies chargehigh commission whereas investors who place buyand sell orders with discount brokers will findcommissions around $7.00 to $15.00 to buy orsell. That charge is for one ticket and not per100 shares. The commission is the same for 100shares or 1,000 or more shares. Big Wall Streetfirms charge many times this for the sameexecution.

You can do research on ETFs just as you do onmutual funds. If you want to determine whatstocks an ETF manger holds they will tell you intheir prospectus. What you want to know is whatSector the ETF represents. The internalstructure does not change often as does thestock ownership in a regular mutual fund.

At this time there is one drawback to buyingand selling certain ETFs. Do not place MarketOrders when buying and selling most ETFs unlessit trades more than 250,000 shares each day. Aswith stock there is a Bid and Offer Price. Inthinly traded issues where the ETF has a volumeof less than 50,000 shares daily the Spread canbe as high as 20 cents and many times more. Inthese issue it is suggested Limit Price Ordersbe entered. If the last trade was $20.50 the Bidcould be $20.40 and the Offer $20.60. A marketbuy order would be filled at $20.60 and a sellorder at $20.40. It is best to place a LimitOrder at $20.50 and most of the time these willbe executed at the Limit Order price. Stop LossOrders are also poorly executed in low volumeETFs.

Over the next few years as more and moreinvestors discover these advantages they will bebuying ETFs in preference to both load andno-load mutual funds.

investment, money, mutual funds, Al Thomas' book, "If It Doesn't Go Up, Don't BuyIt!" has helped thousands of people make moneyand keep their profits with his simple 2-stepmethod. Read the first chapter athttp://www.mutualfundmagic.comand discover why he's the man that Wall Streetdoes not want you to know. Copyright 2005

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