evsh.net

I’ve been enamored with ETFs ever since I read the Radical Guide to Investing.

If you aren’t aware, there is an investment vehicle that is taking the country by storm called ETFs. ETF stands for Exchange-Traded Fund, and is basically similar to a mutual fund except it trades on an exchange and can be traded intra-day as opposed to the end of the trading day. It prices constantly as well, instead of just the end of the day.

New ETFs are showing up every day to allow the retail investor to get into asset classes that were only available to sophisticated (read: people with a lot of money) investors, hedge funds and institutional money managers.

The benefits are:

• Generally lower expense ratio than mutual funds
• ETF average expense ratio: 0.39%
• Mutual fund average expense ratio: 1.39% [1]
• Can be traded throughout the day
• A single purchase buys an entire asset class or sector
• You can (in theory) sell short to be able to hedge
• Generally more tax efficient than mutual funds
• Passive index-based investing

And of course there are disadvantages

• Commissions
  
• Since it trades on an exchange, unlike a mutual fund, you will pay a commission to purchase and sell it.
• Generally not a good idea for Dollar-Cost Averaging small amounts of money due to commissions eroding the savings from expenses.
• Could be at a Premium or Discount to NAV
• Market mechanisms usually protect this from occurring to a large extent in open-ended ETFs but due to supply/demand conditions, it is possible.
• Passive index-based investing

And if there is one thing I can’t stress enough, it’s the importance of low expense ratios.

Check this:

[2]
If you’d like to learn more, check out:

Yahoo ETF Center
ETFConnect

And for an interesting visualization of ETF performance:

Smartmoney ETF Heatmap

Please let me know if you use these in your own portfolios and if you feel you have benefited over standard mutual funds in some way.