| The word 'funds' in the phrase Exchange Traded | | | | ETFs may not be actively managed, but their |
| Funds or ETFs, quite often confuses some | | | | returns are in-line with the benchmarks that they |
| investors who tend to identify them with mutual | | | | are designed to mirror. ETFs also mirror other |
| funds. More so, when people think that both the | | | | indexes and offer a number of significant benefits |
| ETFs and the mutual funds spread the risk by the | | | | to the investors. So if some tech company |
| diversification of investments. | | | | promises a good earning, with an ETF that |
| Confusion apart, the fact remains, that most | | | | tracked the NASDAQ, an investor can buy shares |
| people do not like the management and the | | | | early on and then sell them later for a profit, |
| investment policies and the high operating | | | | because ETFs trade like stocks. |
| expenses associated with the actively managed | | | | ETFs trade like stocks. Investors have to pay |
| mutual funds. The performance of mutual funds | | | | commissions for their trades in the same way |
| also does not offer the level of transparency that | | | | they have to do for stocks. But even these |
| the investors would expect. | | | | commissions can be reduced considerably by |
| Another problem with the mutual funds is that the | | | | finding brokerages that charge very low or flat |
| funds of the investors just lie in the portfolio for | | | | commissions. |
| years. Though this may be a good investment | | | | ETFs give the investors a great amount of |
| policy as it brings in the benefits of long term | | | | flexibility along with the added benefit of reduced |
| investment, yet the investors cannot get the | | | | risks due to diversification at minimal expense. |
| advantages of short term movements in the | | | | Asset allocation forms an important part of sound |
| market. | | | | investment strategy. It is against all cannons of |
| For example, when Hurricane Katrina occurred in | | | | sound investment to put all the eggs in one |
| 2005, there was an upturn in crude oil prices. If | | | | basket. This is the reason why investment |
| the investors wanted to take advantage of this | | | | experts advise the investors to split the portfolio |
| upsurge in crude oil prices, they would have to | | | | among a variety of asset classes. |
| wait until the end of the business day when the | | | | Another big reason for the popularity of the ETFs |
| net asset value -NAV- is calculated. The investor | | | | is that they are much cheaper than the actively |
| would again have to wait till the next day to buy | | | | managed mutual funds. Most investors love to |
| the shares of the mutual fund with the oil | | | | invest in ETFs because they are not actively |
| company holdings and the value of the share | | | | managed and their low expense ratios allow the |
| would remain unchanged till it was again | | | | investors to invest more money in them. An |
| determined only at the end of the day. By this | | | | average expense ratio for an ETF is between |
| time the value could fall again before the investor | | | | 0.1-0.7 percent. |
| was able to sell his shares. | | | | A great complaint about mutual funds is against |
| It may be noted that the value of the oil stock | | | | their high management operating fees and |
| might have risen during the trading period in | | | | commissions that are taken out even before any |
| course of the day, but the investor could not | | | | shares are purchased. These deductions may |
| take the advantage of the price rise and sell his | | | | lower the turnover and also reduce the amount |
| shares. Moreover the investor would also have to | | | | of capital actually used to invest. |
| pay penalties and possibly the sales commissions | | | | ETFs cover all major indexes, asset classes that |
| if he sold his shares. Mutual funds do not provide | | | | any niche investor can imagine and aspire to |
| any investment tools for those who wish to | | | | invest in. There are ETFs that are comprised |
| invest on short term price movements. | | | | exclusively of specialty industries in the tech and |
| Exchange Traded Funds or ETFs were, therefore, | | | | energy sectors besides the commodities such as |
| devised to remedy the problems that are | | | | gold and oil. Investors can add real estate |
| associated with the mutual funds. ETFs are index | | | | investments to their portfolio and can thus create |
| funds as they are designed to track the major | | | | a portfolio consisting of diversified investments |
| indexes such as the S&P 500 or NASDAQ. | | | | quickly and simply by using ETFs. |