Why you should be adding Exchange Traded Funds to your portfolio

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July 6, 2009 9:46am ETF BASIC NEWS

exchange-traded-funds“An Exchange Traded Fund, or ETF, may be a prudent allocation for many investors who are wondering how to retool their portfolios. ETF’s may be loosely defined as a hybrid between a mutual fund and a stock. ETF’s are often index-based to a broad or narrow benchmark, and can be hard to beat over time. 

Let’s you think these are a passing fad, take note that there are currently more than 700 different ETF available with more than $ 500 billion invested. They can be thin sliced into almost every imaginable sector: large cap value, small cap growth, bonds, energy, gold, agriculture, single countries like Turkey or Singapore, and even those that move inversely to their underlying sectors,” Richard Eller reports from TheHour.com.

“Currently, there are at least 20,000 different mutual funds available to investors. Some of their benefits include professional management, liquidity and economies of scale. All mutual funds, load and no-load alike, are technically investment companies that have a board of directors, portfolio manager, and print annual reports among other activities. All of this comes at a cost to shareholders,” Eller reports 

“While these costs will vary with the fund and fund family, it’s safe to say the average fund costs its shareholders somewhere between .65% – 1.50% each year. By contrast, the average ETF has an annual operating expense of approximately .30% each year. It’s no secret these savings, over time, can add up. Note, however, that a no load mutual fund will allow an investor to buy shares without a commission or fee whereas purchasing an ETF will likely result in your being charged a commission or fee to buy,” Eller reports 

“Unlike regular mutual funds, which are bought or sold at the same price, at the close of trading each day, regardless of when during the day you placed your order, ETF’s trade all day long, the same as IBM shares. That means you can now enter or exit your position at a price you set, with foresight and transparency. It also means that you can set a stop loss order, after you buy shares, to help prevent a free fall in the value of your newly bought shares. Setting a stop loss is a lot like driving over a bridge with guard rails — few of us have ever hit the rail, but we feel a whole lot better aware of their presence,” Eller reports.

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