“Exchange traded funds are one of the more interesting categories of products that the Commission regulates in the Investment Management area. In recent years, exchange traded funds have been characterized by dramatic growth and exciting prospects. In the past three years, assets in U.S. exchange traded funds have grown from just over $15 billion to nearly $80 billion. As of the end of November, there were 101 exchange traded funds listed in the United States, up from just 29 three years ago.” This is an excerpt from a January 2002 speech by U.S. Securities and Exchange Commission (SEC) Director of the Division of Investment Management, Paul Roye.
Mr. Roye went on to say “Assets continue to flow into exchange traded funds, and investors continue to praise these products for their tax efficiency, their liquidity, their modest fees, and their ease of trading. It appears that the exchange traded fund segment of the fund industry can look forward to a bright future.”
As of April 2008, exchange traded fund assets had grown to $595.96 billion (according to the Investment Company Institute). By now you are probably asking what an exchange traded fund (ETF) actually is.
An ETF is a security sold by prospectus. It tracks an index and represents a basket of stocks like an index fund, but trades like a stock on an exchange, experiencing price changes throughout the day as it is bought and sold.
An ETF gives you the diversification of an index fund and the ability to buy short, buy on margin, and purchase as little as one share. Expense ratios for most ETFs are lower than the average mutual fund. When buying and selling ETFs you pay the same commission to your broker you would pay on any stock order or you pay a fee quarterly in a fee-based account where transaction charges may by paid by the broker.
Performance returns may fluctuate and are subject to market volatility. As with most securities, you can lose money, and there is no guaranteed growth rate. Past performance is not a guarantee of future results.
The most widely known ETFs are SPDR (Spider), which tracks the S&P 500 index, and QQQ, which tracks the Nasdaq-100 Trust.
Consider adding ETFs to your portfolio if you are comfortable investing in a brokerage account and you meet some or all of the following criteria:
•Want liquid investments for short-term trading needs
•Want the ability to buy and sell shares throughout the day
•Are engaging in large transactions, so that brokerage commissions are spread across sizeable sums or in fee-based accounts
•Want to buy shares on margin
•Can accept the risk that shares may trade for less than you paid for them
•Wish to follow a long-term buy-and-hold strategy so you benefit from low expense ratios.
A mutual fund is probably a more suitable investment choice if you:
•Are regularly adding to or withdrawing from your investment. Dollar cost averaging is not advisable with ETFs because of the brokerage costs assessed when you purchase shares
•Don’t have sufficient investable assets to justify brokerage trading costs
If ETFs interest you, call us at 770.931.1414 or speak to another financial professional to see if these make sense for your portfolio.
Roger S. Green is a Registered Representative with Multi-Financial Securities Corporation, member FINRA/SIPC, with his office located at 3700 Crestwood Parkway, Suite 140, Duluth, GA 30096. Hear more “Your Green”, Saturdays at 3:00, on WNIV 970 AM or live at www.wniv.com. Visit Roger’s website at www.rogersgreen.com.
