Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why ETFs Beat Mutual Funds Investing By a Mile

InvestorEducation / Exchange Traded Funds May 07, 2009 - 09:22 AM GMT

By: Money_and_Markets

InvestorEducation

Best Financial Markets Analysis ArticleRon Rowland writes: I’ve been trading and investing in mutual funds for most of my life, and I’ve had some success. Yet I have to admit that mutual funds have some shortcomings as an investment vehicle. I’ll bet you’ve noticed the same things, too …


blackhalfarrow Why ETFs Beat Mutual Funds By A Mile Limited Liquidity. You can only buy and sell mutual funds at the end of the day. Even worse, you don’t know the price until after you’re already committed. How crazy is that?

blackhalfarrow Why ETFs Beat Mutual Funds By A Mile Exorbitant Fees. In a stock fund it’s common to pay out 1.5 percent of your hard-earned capital every year to a manager who — to put it kindly — probably isn’t missing any meals. And that doesn’t count the “loads” and “advisory fees” that go to the broker or financial planner who helps you select your funds.

The big fees you pay a mutual fund manager can eat into your returns. And that manager probably isn’t missing any meals.
The big fees you pay a mutual fund manager can eat into your returns. And that manager probably isn’t missing any meals.

blackhalfarrow Why ETFs Beat Mutual Funds By A Mile Information Gap. When you buy a mutual fund, you have no idea what you’re getting. Managers are only required to disclose their holdings twice a year, usually with a 30-60 day delay. A few are generous and give out monthly updates. As far as I’m concerned, this is absolutely ridiculous in today’s fast-moving markets.

See the problem?

Mutual funds were a fantastic idea in the beginning, back when it was hard for individual investors to build their own stock portfolios. Like many good ideas, they had their day. Now a new generation is taking the lead. So do you want to stay out front? Then you need to learn about ETFs.

SPY: The First ETF

Back in the 1980s, index investing started becoming popular. More than a few people were doubtful about the ability of mutual fund managers to “beat the market” over long periods of time. And if you can’t beat the market, why not just buy the market?

Back then Vanguard dominated the index fund business. But their funds still had limitations — especially if you wanted to buy and sell frequently. So along came a Spider.

In 1993 the American Stock Exchange introduced the “S&P Depository Receipt,” affectionately called the SPDR. The idea was simple yet revolutionary. The SPDR was basically a stock that owned other stocks — in this case, all 500 companies that make up the S&P 500 Index.

Want to jump into the S&P 500? Shazam! With the S&P 500 SPDR, all it took was one trade, any time the stock market was open. No need to wait until the end of the day. Suddenly it became possible for anyone to buy or sell the index — on their own schedule, not Vanguard’s.

Moreover, the SPDR had rock-bottom fees that were competitive with even the cheapest index funds. Online trading was starting to take off, too, so brokerage commissions were coming down fast. It was the perfect storm.

This first ETF is still around today. The ticker symbol is SPY and it remains the largest, most actively-traded ETF. Soon more SPDR funds were launched to track other indexes.

In 1996 Barclays Global Investors opened a family of international ETFs called WEBS — World Equity Benchmark Shares. Later they changed the brand name to iShares.

As the ETF business grew, other players joined the fray: Companies like PowerShares, ProShares, Claymore, Direxion, and more. Even Vanguard now has an extensive lineup of ETFs.

In 1996 Barclays Global Investors opened their World Equity Benchmark Shares. Later they changed the brand name to iShares.
In 1996 Barclays Global Investors opened their World Equity Benchmark Shares. Later they changed the brand name to iShares.

It’s not hard to see why ETFs are now the hottest business on Wall Street, attracting untold billions in assets. Everyone wants a piece of the action, which is why there are now more than 800 exchange-traded products like ETFs. Hundreds more are now in the SEC registration process. Even the bear market isn’t slowing down the trend.

Hidden Genius: ETF Arbitrage

What made SPY so revolutionary was a unique design feature that keeps its market price in line with the value of the underlying stocks. Unlike closed-end mutual funds, where the share price can trade at a dramatic discount or premium to its actual worth, ETFs stick very close to their net asset value.

How do they do this? It’s all in the plumbing. Institutional investors can “create” and “redeem” shares of ETFs in exchange for the underlying portfolio stocks. This creates an arbitrage opportunity. If the price of an ETF drifts too far above or below its actual value, professional traders will usually push it back into line very quickly.

Behind the scenes, professional traders keep the market price of ETFs in line with the value of the underlying stocks.
Behind the scenes, professional traders keep the market price of ETFs in line with the value of the underlying stocks.

This all happens behind the scenes, and you don’t have to think about it. Do you still have to be careful when you’re buying or selling an ETF? Of course. But ETFs are designed from the ground up to give you a fair deal. That’s more than you can say for many mutual funds.

ETFs Win By a Mile!

So in contrast to mutual funds, ETFs offer investors plenty of advantages, including three huge ones …

  1. ETFs are Liquid! You can buy or sell an ETF in a regular brokerage account anytime the markets are open. You can also use special techniques like stop-loss and limit orders, and you can see the latest quoted price in real-time on many financial information services. ETFs are Inexpensive! Almost all ETFs have fees of less than 1 percent a year, and most are much less. A few are almost negligible. SPY, for instance, has annualized net expenses of only 0.09 percent, and a few Vanguard ETFs are pegged even lower at 0.07 percent.
  2. ETFs are Transparent! You’ll always know what you are getting when you buy an ETF, because they are based on publicly available market indexes. So you don’t have to wonder if your ETF owns something you didn’t know about.

Now, you can see why I like ETFs so much!

Sure, I still suggest mutual funds every now and then, but ETFs are the present … and the future. And that’s why I’ll devote a lot of space to them in future Money and Markets issues. So stay tuned!

Best wishes,

Ron

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in