| Until now, I've been a big fan of ETF investments | | | | PowerShares Dyn Building & Construction |
| (Exchange Traded Funds). After all, they offer | | | | (AMEX: PKB) or |
| choice, flexibility, low costs and tax efficiency, | | | | Rydex S&P Midcap 400 Pure Growth (AMEX: |
| among other benefits. And they're growing like | | | | RFG) |
| wildfire... | | | | Some new ETFs, however, are extremely |
| Though small compared to the 8,000 mutual | | | | popular. For example... |
| funds valued at $9 trillion, there are now 253 | | | | The new iShares Silver Trust (AMEX: SLV) trades |
| ETFs with assets exceeding $315 billion, up 41% | | | | 625,000 shares a day, priced at $116 a share. |
| from a year ago. Clearly, they have fulfilled an | | | | The iShares COMEX Gold Trust (AMEX: IAU) |
| important need. | | | | trades 250,000 shares a day.iShares Dow Jones |
| Everybody on Wall Street is getting in on the act, | | | | U.S. Real Estate (AMEX: IYR) shares trade 2.3 |
| too. The New York Stock Exchange, the Nasdaq, | | | | million times each day. |
| the AMEX and the COMEX; brokerage houses like | | | | Liquidity also depends on popularity, and it's quite |
| Merrill Lynch, Goldman Sachs, and Lehman; the | | | | possible that some hot ETFs will be difficult to |
| indexer Dow Jones; and the rating services | | | | unload years later. |
| Standard & Poor's and Morningstar. Even | | | | Foreign markets are hot right now, and so are |
| giant mutual fund companies Vanguard and Fidelity | | | | the ETFs that specialize in them. You should have |
| see the advantages of ETFs and are offering | | | | no problem selling your iShares MSCI Emerging |
| new ones. | | | | Markets Index (AMEX: EEM), which trades 7 million |
| Many of these exchanges and institutions are | | | | shares a day, or the iShares Japan Index (AMEX: |
| offering ETFs through iShares, PowerShares, | | | | EWJ), which trades 25 million shares a day. But |
| streetTRACKS and Rydex. | | | | volume on iShares MSCI South Africa (AMEX: |
| But there is a downside. As I see it, two dangers | | | | EZA) and iShares MSCI France (AMEX: EWQ) |
| threaten your ETF portfolio... | | | | reaches just 150,000 shares daily. |
| ETF Investments Danger Sign # 1: The Liquidity | | | | My advice: Check the average daily volume of |
| Factor... You Can Buy, But Can You Sell? | | | | each of the Exchange Traded Funds. Don't invest |
| With so many new ETFs coming on market, | | | | in these ETFs unless you find that there is good |
| there's real concern that you may not be able to | | | | liquidity in both bull and bear markets. |
| sell. | | | | ETF Investments Danger Sign #2: Poor |
| Institutions are offering so many new ETFs that it | | | | Diversification |
| makes your head swim. At last count, Morningstar | | | | The other threat to your wealth is an incomplete |
| listed 253 ETFs trading on exchanges, compared | | | | ETF index. That's not a problem with the |
| to 152 the year before. New specialized ETFs are | | | | S&P Depository Receipts, which mimic the |
| being created every week. | | | | S&P 500 Index; or the DIAMONDS Trust, |
| There's no liquidity problem with most of the | | | | which imitates the Dow 30. But Merrill Lynch's |
| older, bigger ETFs, such as the DIAMONDS Trust | | | | Internet HOLDRs (AMEX: HHH), which was |
| (AMEX: DIA), which trades, on average, 8.4 million | | | | created in September 1999 - nearly the top of |
| shares a day, the S&P Depository Receipts | | | | the Internet bubble - is heavily weighted in only |
| (AMEX: SPY), with a daily volume reaching 87 | | | | three stocks: Yahoo!, eBay and Amazon. |
| million; or the Nasdaq 100 Trust (Nasdaq: QQQQ), | | | | In fact, it does not even include Google (Nasdaq: |
| which trades 128 million shares on average. | | | | GOOG), which went public in 2004. If it had been |
| But what about the 1st Trust Dow Jones Internet | | | | included, HHH would have been a top performer. |
| Index (AMEX: FDN), iShares Dow Jones U.S. | | | | Instead, open-ended tech funds, such as the |
| Regional Banks (NYSE: IAT), the Rydex Small-Cap | | | | Jacob Internet Fund (JAMFX), have outperformed |
| 600 Pure Growth (AMEX: RZG), or | | | | HHH in the past two years... by a wide margin. |
| streetTRACKS DJ Wilshire Large Cap (AMEX: | | | | Lesson: When investing in ETFs, check the |
| ELR)? All four had "zero" (0) trades the day I | | | | holdings before you invest. |
| wrote this article! | | | | In short, don't sell your mutual funds anytime |
| Lots of other ETFs have serious liquidity | | | | soon. Ultimately, they may have some |
| problems, too, trading fewer than 10,000 shares a | | | | advantages over ETF investments, especially |
| day. Most of these are new, such as:iShares Dow | | | | when it comes time to sell or diversify. |
| Jones U.S. Home Construction (NYSE: ITB) | | | | |