Exchange Traded Funds

06-Oct-2009 | kate | Investment Ideas The Wise Investor

Exchange Traded funds are relatively new to the stock market, only being introduced in 1993 but have steadily been growing in popularity ever  since, which is why the Retire First Blog thinks its time once again to review the benefits of how ETF’s work.

An ETF is similar to a mutual fund since both investment tools are created to hold assets such as stock and bonds in their portfolio and are valued on the underlying securities.

Mutual funds are priced once per day at the close of the market and everyone one who purchases the fund that day gets the same price, regardless of when they entered their order. Unlike mutual funds ETFs traded on the stock market and can be bought and sold at intraday prices. Their stock like quality allows investors to take advantage of a rise in the price of underlying assets through the trading day by buying and selling the ETFs through out the day. Mutual funds on the other hand do not let investors take advantage of the daily fluctuation in their basket of securities you always get filled at the end of day price.

Since ETF are exchange traded they also let investors take advantage of short selling and margin investing.

Another reason that ETF are gaining in popularity is the ability for investors to save money in comparison to mutual funds with all the same benefits of mutual funds- low turnover and broad diversification, but cost a lot less. The average mutual fund in Canada charges around 2.5% management fee plus trade costs, legal expenses and accounting fees taking the total expense ratio closer to 3%.Compared to one of the lowest cost index funds such as the SPDR 500 ETF charges 11 basis points which is 96% lower.

ETF are a great way for first time investors to diversify their accounts and maintain their asset allocation (bond, stock, income funds) with limited funds for investing. ETF are available for a variety of funds cover a diverse variety of indexes, sectors, international/regional market and industries and even market niches like gold and oil. Some ETF even cover asset classes like bonds and income producing assets, which will allow a smaller account to diversify their money into the market and bonds.

ETF are a great alternative to their mutual fund cousins. With intra day trading and lower cost, ETF have obvious advantages over the traditional mutual fund, making it easier for small investors diversify their portfolio.

This blog has been prepared by the Retire First Team. The blog expresses the opinions of the writers and not necessarily those of Retire First Ltd. Statistic and factual data are from sources Retire First believes to be reliable but their accuracy can not be guaranteed. This blog is furnished on the basis and understanding that Retire First is under no liability whatsoever in respect thereof. It is for informational purposes only and is not be construed as an offer or solicitation for the sale or purchase of securities. Retire First Ltd. And its officers, directors, employees and their family may from time to time invest in the securities discussed in this blog. This blog is intended for individuals where Retire First Ltd is registered as a dealer in securities.

Retire First is a member of the Canadian Investors Protection Fund.

Commission, trailing commissions, management fees and expense all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. A recommendation of any of the mentioned investments would only be made after a personal review of individual portfolio. Third Party research has been used in formulating the writer's opinions.

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