| An ETF, or exchange-traded fund, is a basket of | | | | - More flexibility: ETF shares can be bought and |
| securities designed to replicate the performance | | | | sold during the day, similar to buying individual |
| of a stock, bond, or commodity index. Examples | | | | stocks. On the other hand, we can only buy index |
| are QQQQ (Nasdaq), EWJ (MSCI Japan's index), | | | | funds based on the NAV (net asset value), which |
| and IGE (Goldman Sachs Natural Resources | | | | is calculated once a day after than market closes. |
| Index). In other words, its performance relies on | | | | Also, there is normally a minimum investment |
| broad market trend and not the stock-picking | | | | amount for index funds but not ETFs. |
| skills of individuals (could be good or bad). Each | | | | - Lower cost: For index funds, fund managers |
| ETF is listed on an exchange and is traded like any | | | | have to buy and sell the constituent stocks more |
| other stocks. | | | | frequently to have cash available for investors' |
| Why buy ETF? | | | | redemption (i.e. taking out their money). While for |
| ETF has pros and cons when compared with | | | | ETF, there is basically no "managers" as the ETF |
| other financial products. Let's go over it one by | | | | simply tracks the movement of the particular |
| one. | | | | index. Therefore, management fee is generally |
| 1. ETF vs stocks | | | | lower for ETF. |
| PROs | | | | CONs |
| - Better diversity: The greatest advantage of | | | | - A few index fund managers may waive the |
| ETFs over company stocks is diversity. Buying | | | | transaction commission for their funds. In this |
| ETF for the S&P Latin America Index, for | | | | case the expense will be slightly lower than ETF. |
| example, is less risky than buying Telefonos de | | | | 3. ETF vs mutual funds |
| Mexico alone. | | | | PROs |
| - Better exposure: In fact, we may find it quite | | | | - Same as above (index funds), except that |
| difficult to buy individual companies not listed in our | | | | mutual funds are actively managed and thus incur |
| local market. ETF gives us an easy alternative. | | | | even more administration costs. This translates to |
| CONs | | | | higher management fees. |
| - Do more homework: When picking an ETF, we | | | | CONs |
| should have a general understanding of the | | | | - A few mutual funds manage to outperform |
| particular industry/region. What's good about it - | | | | their comparable ETFs, index funds and their |
| an economic recovery, an oil-rich region, or an | | | | peers on a consistent basis based on their skills, |
| industry with high margin? | | | | expertise and knowledge in the particular area. |
| 2. ETF vs index funds | | | | - If you are able to identify such a fund manager, |
| This is probably the most common question | | | | the mutual fund can give you a superior |
| because both ETF and index funds allow you to | | | | investment return. Be careful: for apple-to-apple |
| buy into a portfolio of securities without your own | | | | comparison, make sure you pick the "after-fee" |
| active management. Here is my take on the | | | | return. And remember to read the small fonts |
| difference and the pros and cons: | | | | where the mutual funds bury the miscellaneous |
| PROs | | | | fees and restrictions! |