TOP DRAWER ARTICLE

Exchange Traded Funds
by
HL Carpenter

If you’re looking for a way to diversify your portfolio beyond mutual funds, you might consider Exchange Traded Funds (ETFs).

Here’s an overview of this investment.

What are ETFs? Think of a bundle of different securities stuffed into one big envelope, in a manner similar to a mutual fund. You purchase a piece of the envelope – in other words, each share represents ownership in a group of stocks.

Why not just buy a mutual fund? ETFs trade like stocks and can be bought and sold at current prices throughout the day. This gives you more flexibility than mutual funds, which trade at the closing price established at the end of each day.

Are there drawbacks? Because you can buy and sell ETFs just like stocks, you’ll incur broker fees in addition to management costs. Your overall expenses may be higher than mutual funds. ETFs are also subject to manager risk, meaning the manager’s skill – or lack of - can affect returns.

Are ETFs suitable for my portfolio? The answer depends on your personal situation, and factors such as your investment horizon and risk threshold. You’ll also want to weigh the costs and benefits against other comparable investments such as conventional index mutual funds.

Originally published October 2006.

Last update: December 30, 2009