Exchange traded funds (ETFs) are versatile, easy to use and investor-friendly. They provide access to asset classes, sectors, commodities, currencies, fixed income and even hedge fund strategies.

What’s an ETF?

An ETF is a flexible, useful trading and investment vehicle that consists of a basket of stocks that track an underlying index. They trade all day on an exchange, just like a stock, but they hold baskets of stocks (usually), just like a mutual fund. They’ve been around since 1993. The first ETF, the SPDRS (NYSEArca: SPY), tracks the S&P 500. The strategy of indexing is not new, however. Barclay’s created it in 1971. [Our ETF Education Page.]

What are the advantages of ETFs?

Some of the advantages of ETFs include:

  • You always know what you’re buying, because they replicate indexes. The holdings of those indexes are easily available and posted daily.
  • ETFs offer safety in numbers. They have more diversification because they’re a basket of stocks rather than one individual stock.
  • Their performance can be easily tracked.
  • ETFs tend to have lower expenses and fees because they passively track indexes. There are no additional fees to pay to a fund manager. The average fee for a mutual fund is about 1.6%, while for a large-cap growth ETF it’s about 0.15%.
  • They’re tax efficient because investors rarely generate capital gains.

What kind of investing strategy can be used with ETFs?

A simple strategy we suggest is to look for funds that are above their 200-day moving average. There are always areas that are trending up as others are going down. To learn more about this strategy and how to employ it, read our special report on trend following. [Coping Strategies for Bubbles.]

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