Exchange Taded Funds
Posted on December 16th, 2010

When looking for diversification in your investments you want to first determine your asset allocation (how much you want in bonds, stocks, international vs US, commodities, real estate etc). Next you need to fill the different pieces of your asset allocation pie chart with stuff.

The stuff that fills each piece of your pie chart should be baskets of investments in that category. For example, if we say you need 25% of your assets in large US companies. We really dont want you to go buy the stock of 1 large US Company. We want you to own a bunch of large US Companies. There are only 3 ways you can reall do this.

  • 1. Go out and buy a bunch of stocks in a bunch of different companies. This can be incredibly expensive and time consuming to start with not to mention you would then have to keep track of how each stock is doing to make sure you dont lose a bunch of money.

  • 2. Buy a Mutual Fund. In the past, mutual funds were the only way to get a basket of investments in one stock. You could go out and buy something like the American Funds Growth Fund of America (AGTHX). and this could satisfy the large US company portion of your portfolio. However, most mutual funds have a lot of fees. (There are some that dont. ex: Vanguard). They have loads, and initial sales charges, and deferred sales charges, and 12b-1 fees, and management fees and on and on.

  • 3. Exchange Traded Funds (ETFs). ETFs have been around for a few years now and provide for a great way to get this basket of stocks in specific categories. There are many hundreds of different ETFs that allow you to buy a category as wide as almost all US Stocks to a category as specific as just silver. The main benefit of ETFs vs. other ways to buy baskets of investments is that they are generally incredibly low cost. More often than not they have very low ongoing management fees (around 0.20% vs 1.5% in most comparable mutual funds). There is sometimes a cost associated with buying or selling the ETF but places like Charles Schwab, Fidelity, Vanguard, and TD Ameritrade are offering commision free transactions on many ETFs. Check them out as an alternative in your portfolios.

as always check with your advisors, read prospectuses, and make sure that investments fit your risk tolerance, return needs, and financial goals.

Posted in Investments, Retirement, College Education    Tagged with investing, ETF, exchange traded funds, mutual funds, asset class, vanguard, ameritrade, fidelity, schwab


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