If you are fed up with early redemption charges and ever increasing mutual fund management fees on top of bad-performing fund managers, read on.
There is a quiet revolution going on in the no-load mutual fund industry and you, the individual investor, may benefit from it greatly.
I am referring to Exchange Traded Funds (ETFs), which have been around for years, but have grown tremendously since their inception. There are currently over 100 choices with around $10 billion in assets.
In a nutshell, an ETF is a specific kind of no-load mutual fund that you might consider to be a basket of stocks. ETFs are diversified like mutual funds, only they trade like stocks.
They are cheap to trade (as low as $8.00) and don't hit you with any short-term redemption fees. And they offer investing opportunities across the board.
ETFs track every index under the sun including the S&P 500, the Nasdaq 100, The Russell 2000 and many others.
Available through any stockbroker, they basically fall into one of the following three major categories:
1. Broad-Based U.S. Indexes
2. Sectors and
They have esoteric names such as iShares, StreetTracks, HOLDRs and SPYDRs. The difference is in the index they are tracking and the company marketing them. You will see big name companies offering them, like the American Stock Exchange, Barclay's Global Investors, Vanguard, and State Street Global Investors.
In addition to inexpensive trades and no short-term redemption fees, how else can ETFs save you money vs. no load mutual funds?
One way is on their annual management fees. That fee for ETFs is in the area of 0.45% vs. 1.5% on average for no load mutual funds. The fees charged by discount broker are so low they almost can be disregarded, usually less than 0.1% of the transaction.
So, if these ETFs are so great, why hasn't your broker or financial planner recommended them to you? Simple! Brokers, and those advisors working on commissions, don't make money on ETFs; no commissions up front or hidden on the back end.
It's simply not in their interest to promote them!
With all the positives for the investor, there is one disadvantage, which may not be applicable to you unless you are a hot shot no load mutual fund picker.
It is that in any given economic environment really super performing mutual funds can outperform the indexes, but an ETF can never outperform the index it's tied to. You would need to look at your own investment record to know whether this is a downside for you.
A word of caution! Just because ETFs are cheap and easy to buy doesn't mean they will guarantee you a profit. You can lose money with them just as easily as you do with no-load mutual funds!
You still need to make sure you have a disciplined methodology in place to help you get into and out of the market ...
If you don't, you're gambling no matter what you invest in!
By Ulli Niemann