Investing in ETF's

Let’s start here…many people ask me about this thing called ‘ETFs’. This is market ‘lingo’ that explains a kind of trading vehicle. This vehicle has trading symbols and you can purchase them – in the same fashion as any other listed stock.

ETF – means ‘Exchange Traded Fund’. What’s special about ETFs? – it’s this – they are listed securities that track broad indexes and sectors of the market. There are many different issuers that offer a variety of types of ETFs.

What are some of the kinds of ETFs that you might be looking for? There are ETFs that represent the Dow Jones Industrial Average (the ‘Dow’), and there are ETFs that represent the NASDAQ Index, and there are ETFs that represent the Standard & Poor’s 500 Index – to name a few. And why would you want to buy them? For two reasons: (1) one ETF enables you to invest in a broad portfolio of stocks and (2) when you buy them, you know that they correlate directly to the market information that you are hearing quoted each and every day on websites and market news on TV.

While ETFs are not considered either mutual funds or stocks – they have some of the characteristics of both. ETFs trade like a stock (meaning that their price is readily quoted and their price fluctuates during the trading day) – and ETFs look like a mutual fund in that they represent a broad holding of stocks. By contrast, though, ETFs do not have the management feeof a mutual fund – and therefore are a more economical way to invest. ETFs trade frequently in the market so they have plenty of liquidity – meaning you can readily buy and sell them because there are lots of them out there.

The ETFs that track the three major indexes noted above are the DIAs (familiarly called the ‘diamonds’) for the Dow Jones Industrial Average, the QQQQs (familiarly called the Qs) for the NASDAQ 100, and the SPYs (familiarly called the ‘spys’) for the S&P 500. These three choices enable you to invest in a well know piece of the market. You would use these choices when you expect the market to go up – because these are securities to buy at a lower price and then sell, profitably, at a higher price.

This year the DIAs, the QQQQs and the SPYs have all taken a tumble in the falling market conditions. There will be another time in the market when these securities will be a good choice – it just hasn’t been lately.

Because ETFs have grown in popularity, you can find many, many more to chose from – including ETFs for gold, the dollar, financial services, health care etc. This makes many segments and industries in the market available to you.

You can imagine – that in the past before ETFs were developed, which is a recent thing – that to own a broad selection of small-cap stocks (the new kids on the block), mid-cap stocks (those that have been around longer) and large cap-stocks (the ‘big’ guys) as well as some bonds – that you would have needed to purchase 30 or 40 individual stocks and a number of bonds, or invest in mutual funds which can be quite expensive. But with ETFs you can invest in four ETFs, and you are done!

How many of you have questioned – what’s the difference between ‘mutual funds’ and ETFs? They can look similar on the surface. And by digging deeper – you see that ETFs have advantages that put them light years ahead of mutual funds. These include: (1) trading costs – they are cheaper to buy and sell, (2) management costs – these are minimal, (3) transparency – you easily know what you are buying, (4) trading flexibility – they quickly trade in the market all day long, (5) options – many ETFs are also ‘optionable’ which is not true of mutual funds.

Maybe now you are asking yourself why you would own mutual funds – good question – thank you. ETFs have great advantages. We’ll be talking more about ETFs. Here we have explored ETFs that trade on the ‘long side’ – meaning that they are appropriate when the market is showing a trend of going up. Later we will be talking about ETFs that trade on the ‘short side’ – meaning that these are appropriate investment choices when the market is showing a trend of going down.

Remember – if you don’t know what the market is doing – the choice is to put money in a money market account which is the equivalent of a ‘cash’ position.

Here’s how you would use an ETF: Let’s say that you notice that the market is going up – or that a segment of the market is going up, like health care, oil or gold rising. And, you aren’t picking individual stocks. You could do all of this by investing in these ETFs – U.S. Health Care (IYH), the U.S. Oil Fund (USO) and Gold (GLD). Nearly everything you can think of has an ETF – or there will be one coming soon – because this is an essential way that investors are choosing to invest these days.

Good to know about ETFs! – and they will be foundational to our investing methodology to take charge of your money and grow wealth!