Trade-Exchange Funds

The “It” equity — the exchange-traded mutual fund – is no spring chicken. It’s been around since the early 1990s. But ETFs are still turning heads. It’s no wonder: The combination of index investing with the handiness — and lower costs — of individual stock ownership is irresistible. Are ETFs a good match for your portfolio?consult dictionary of investingWhat exactly is an exchange-traded fund (ETF)? “Exchange-traded” refers to shares that trade all day long on the major stock market exchanges (just like regular stocks). “Funds” are investing vehicles that hold dozens, hundreds, or even thousands of companies under one umbrella unified by a particular investing theme (such as companies that comprise the Dow or ones whose main business is in the biotech industry). Like any other publicly traded company, ETFs have ticker symbols (snappy ones, in fact, like Cubes, Spiders, and Diamonds). But instead of typing “MSFT” to buy Microsoft, for example, you enter “DIA” for the Dow Jones Industrial Trust, or “Diamond” ETF. Do you need diamonds in your portfolio?comptitionThey may track the same stocks and offer easy diversification — but subtle differences between index funds and exchange-traded funds can affect your long-term returns:Taxes: The big buzz about ETFs is their tax efficiency. The big “tax event” for ETF shareholders happens when you sell your shares, hopefully at a profit, after which you’ll pay capital gains taxes.Expense ratios: By construction, ETF investors have less exposure to capital gainstaxes than mutual fund shareholders. That’s because fund managers frequently buy and sell the fund’s holdings — and ask investors to pick up the tab. ETFs occasionally shift shares, too, although much less than most mutual funds. Annual expenses for ETFs range between 0.1% and 0.65% and are deducted from dividends. Index mutual fundscharge anywhere from 0.1% to more than 3%.Minimum investment requirement: For investors with limited funds (say, less than $1,000) who want to get started in the stock market, ETFs offer a cheap entrée. Through your discount brokerage account, you can buy one single measly share if you choose. In comparison, many index mutual funds have high initial balance requirements. (Those with lower requirements often charge higher fees.)Ease of use: Here’s the double-edged sword of ETF investing. They are easy to buy — you simply need a discount brokerage account (and that’s easy to get — and cheap). Consequently, they’re easy to trade. And trade and trade and trade.