We’ve seen lots of articles and news pieces about the explosion of Exchange-Traded Funds, or ETF’s. Most of the opinions have been negative. In fact, one writer compared this with the flood of closed-end funds created in the late 1920’s (before the stock market crashed).
My opinion: ETF’s are a great tool, and worth looking into.
Maybe you’ve heard 80% of most mutual fund managers have trouble beating the market two years in a row. Combine that with the costs built in (sales charges, management fees) and you’re destined to fall behind whatever yardstick you are measuring with.
Some of the problems with mutual funds:
-New trading limits (especially international funds). Some managers got in trouble with “late trades” and now you (the small investor) have limits on how frequently you can trade these funds.
-No limit or stop orders on mutual funds
-You cannot short mutual funds
-Mutual funds do not trade options
Exchange Traded Funds:
-No trading limits, they’re bought/sold like stocks
-Limit and stop orders are OK
-The funds can be shorted
-Some ETF’s (not all) do trade options.
ETF’s are cheaper and flexible. Still, WHY use them?
ETF’s usually blanket an entire SECTOR. Like semiconductors.
In the old days, if you wanted to get into a sector like autos,
you either had to build your own basket of auto stocks yourself,
or find a mutual fund that was heavily into that group. Since
mutual funds are only required to show their holdings a few
times per year, you never really knew what the manager owned.
And how do you know if you (or the manager) “cherry-picked” the
Instead, with one ETF, you can buy the entire bio-tech sector
and then sell it (like a stock), when it reaches your price.
If you think a sector like “networking stocks” is due to fall,
you can sell an ETF of all networking stocks short and then buy
it back at a cheaper price. Or buy puts on the ETF.
One more thing…remember, 80% of the price move in a stock comes
from what’s happening with the sector, and the overall market.
Don’t get hung up entirely on the fundamentals, like most people.