Anna Mate

Archive for November, 2009

Now that we’ve covered index funds, let’s turn to exchange traded funds (ETFs), which are important newer indexing vehicles that are gaining in popularity. The first ETF launched in 1993, and by the end of 2001 a total of 202 such funds were available, Nonetheless, with a value of about $92 billion at the end of 2001, they still account for less than 3% of the value of equity mutual funds (about $3.3 trillion).
Like index funds, ETFs mirror certain indexes, like the S&P 500 (one of the best knoni is “Spiders”—the symbol on the exchange’s ticker tape is SPY), the Dow Jones Industrial Average (or “Diamonds”— with the ticker symbol DIA), and the Nasdaq (“Cubes” because of its QQQ ticker symbol).
The key difference? Unlike a mutual fund, which can be bought only at the end-of-day price based on the fund’s net asset value (NAy), exchange traded funds trade like a stock throughout the day on stock exchanges. Also like stocks and unlike mutual funds, you’ll have to pay a brokerage commission every time you buy or sell an ETE. This can be a significant drawback if you trade or invest new money frequently Let’s say, for example, that you’ve set up your plan so that $100 is automatically invested every month. Good for you! But if you invest that in an ETF, you are probably spending several hundred dollars a year in brokerage commissions, money that you could have invested instead. In this case, it’s better to use an index fund. Both index funds and exchange traded funds offer broad diversification at a low cost, and they each carry pros and cons.