Jun 15, 2007
Kara McGuire: The ABCs of ETFs (exchange-traded funds)
An exchanged-traded fund is a basket of stocks that tracks an index instead of being picked by an adviser. The funds have gained a lot of followers -- from big-bucks advisers to small-fry investors and a growing number of 401(k) plans.
By Kara McGuire, Star Tribune
Last update: June 14, 2007 – 10:33 PM
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Kara McGuire: The ABCs of ETFs (exchange-traded funds)
There's a fast-growing type of investment that's gaining a lot of money and fans. I've yet to write about these ETFs, or exchange-traded funds, because they aren't a great fit for people who invest a little bit of money over a long period of time -- which pretty much sums up most of my readers.
Who has a lump sum to invest? But after the 100th person hit me over the head with a rolled-up list of the virtues of ETFs, I realized it was time for a primer.
Here's how they work. An ETF basically is a basket of stocks that tracks an index instead of being picked by an adviser. But unlike traditional index funds, which are priced at the end of the day, ETFs are traded throughout the day on an exchange, the same as stocks.
Since they were introduced in 1993, ETFs have gained a lot of followers -- from big-bucks advisers to small-fry investors and a growing number of 401(k) plans -- because they are relatively cheap and tax-efficient and give investors an affordable way to diversify around the globe.
And the numbers are growing to meet the demand. There are now about 500 ETFs, plenty to confuse the average investor, but certainly nowhere near the thousands of mutual fund choices.
Jeff McComas of Woodbury is a "huge fan" of ETFs, using them in his IRAs, his taxable accounts -- anywhere he can. He's an indexing devotee and wisely believes that "costs matter."
Take one of his holdings, the Vanguard Emerging Markets Stock ETF (VWO). It has an expense ratio of 0.3 percent, whereas you can pay well over 1 percent for a mutual fund investing in developing countries. No wonder investors are rushing into ETFs.
However, like stocks, every time you buy and sell an ETF, whether through your personal broker or online through a brokerage account, you'll pay a fee ranging from a few dollars to more than $20, which can add up. For this reason, most advisers recommend ETFs for investors with a few thousand to invest. McComas waits until he has $1,000 or more to lock away.
Those with less to invest would be better off from a cost perspective with a low-priced index fund that doesn't charge a purchase fee, although McComas rightly points out that some funds require large minimum investments and ETFs don't.
So who should use ETFs? Here's an example from Tim Gunderson, an adviser with Tradition Wealth Management in Edina: "Let's take a 35-year-old couple who just inherited $100,000" with no short-term plans for the money. For them, ETFs "are a great choice."
Anyone with a lump sum to invest from a 401(k) plan, a bonus or the proceeds from a screenplay also may find ETFs appealing.
Gunderson also likes ETFs for clients with taxable accounts because the capital gains hit typically is smaller than from mutual funds.
Say ETFs are right for you. But which? Some track the S&P 500 and other broad, mainstream indexes. Others invest in a sliver of the market: Euro ETF, anyone? How about one that invests solely in Russia or buys water-related companies?
Narrowly slicing and dicing the market by sectors and countries can be fun. But it's risky -- although at least you're more diversified than when you buy a single obscure stock.
Scott Oeth, a principal with Midwest Investment Advisors, said some of those ETFs are "really interesting," but he advises people to keep the ones with limited scope for their "satellite portfolio, where you give yourself a budget of money" for fun. Think no more than 10 percent of your portfolio, if that.
McComas, 37, sticks with the broader ETFs. "There are too many niche ETFs available now," he complained in an e-mail. His advice: "Keep investing simple, avoid single-country investing risk and stop trying to time the market."
How do you use ETFs? Tell Kara McGuire at 612-673-7293 or firstname.lastname@example.org.
Jun 8, 2007
it feels about time again... let’s plan on getting together sat. jul-21, at 12:00. we'll be meeting at throwbacks restaurant in woodbury. they have a nice (free!) private banquet room for discussions, w/ full menu options and no minimums. for anyone new to this forum or MN but interested, feel free to join us. our last meeting had a great mix of old diehards and several new ones, too.
agenda (very draft-y):
1) entire group: introductions (your name & worst investing mistake). order and eat lunch.
2A) small groups: discussion w/ kara mcquire (star tribune business/money columnist), OR
2B) asset allocation reviews (bring ~10 copies of AA - %s only)
3) entire group: mid-year checkup (your personal investing summary for 2007 ytd and any additional changes planned).
4) small groups: ISPs OR when to retire OR recent boglehead/diehard posts/polls that have been interesting
5) entire group: open discussion / other issues people want to discuss. next meeting timing / location
we usually wrap it up after 2 - 2.5 hours. for questions or to vote your preference, post your reply here, PM me, email me, or visit our MN blog (in signature below).
our numbers have been steadily rising over the years, which is great... at our last meeting, we had 21 diehards + 2 special guests (boglehead jack! and kara from the strib). several diehards have brought their significant other or neighbor, etc. the more the merrier! i’m really looking forward to it.