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Exchange Traded Funds (ETF)- Better than Managed Funds?

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image from http://www.flickr.com/photos/sequoya/Exchange Traded Funds is something that works like a unit trust/mutual fund and at the same time trades like an ordinary stock.

Best of all, it has very low management fees, less than 1% while the managed funds typically have more than 1% or even higher.

It does this by tracking an index so it saves on researching costs and trying to justify why one stock is better than another.

What this means is that the money you invest works harder for You and NOT for your financial advisor or brokerage.

I just bought some and thought the whole process of buying is quick and easy since it is exactly like buying an ordinary stock. Coupled with what I have read about value averaging recently, I think the ETF is a great tool to implement this value averaging technique which is better than dollar cost averaging in many ways. The ETF will allow me to switch easily between index stocks and a group of bonds which some ETF tracks also.

I have been reading a few books about investment and the best of the lot so far is "A Random Walk Down Wall Street" by Burton G. Malkiel. It is thus far, one of the best books about investment that I have read and the fact that it is in it's ninth edition tells you all you need to know about this book.

Throughout this testing time for anyone who is invested and intends to continue to invest in the markets, reading investment classics like these makes one more sure that being calm and continuous investment despite the bloodbath in the financial markets will be the surest way to financial freedom.

As Warren Buffet says, "Buy when there is blood on the streets."

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1 comments:
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dan said...
February 13, 2009 at 6:31 PM  

Hey there, this is a great article! It is key to stay calm, and "buy when others are fearful." It's a timeless strategy that have built wealth around the world.

However, one should also consider certain drawbacks of ETFs. One of the biggest downsides that I see is that ETFs typically track collections of large cap stocks. This means that you do not have the benefit of the growth potential that you would see by having some mid or small capitalization stocks in the portfolio.

Additionally, because they are traded like stocks, you may run into issues with low trading volumes for sector-specific ETFs. Probably not a big deal if you are in it for the long haul, but still it is something to consider.

Since I do a lot of Forex trading, I have found that the currency ETFs are nice, at least in terms of providing an additional data point -- since forex is so decentralized, there is no concept of "volume." however, with the currency ETFs, you can get a good picture of the volume and activity, at least during the New York session.

One other key feature of ETFs that I like are the Long and Short ETFs. The Short ETFs can be used to get around some of the restrictions on short selling that have been put into action, as they provide a relatively safe way to capitalize on the decline in securities, without some of the riskiness inherent in actual short selling.

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