Those of you who are loyal listeners to my radio show know that I love using exchange-traded funds, or ETFs for short. ETFs are like mutual funds in that they invest in a "basket" of stocks that represent a particular market index or market sector. But unlike mutual funds, they come with a very small management fee, few trading restrictions and they are objectively managed, meaning you know exactly what you are getting when you buy ETFs.
There are hoards of reasons why I like ETFs better than mutual funds, and in fact, I think mutual funds will be a relic of the 20th century before too long. Of course, the epitaph hasn’t yet been written for mutual funds, but with each passing year the popularity of ETFs rises, so much that I wouldn’t be surprised to see them dominate investor portfolios over the next five to 10 years.
Now for those of you who are not yet familiar with ETFs, or who haven’t yet tested the waters in their own portfolio by actually buying an ETF, I say now is the time to climb aboard the ETF train.
The following excerpt is from one of my Special Reports available at www.dougfabian.com. In this report entitled "From Mutual Fund Mess to ETF Success," we show you how to get yourself positioned in the investment vehicles of the new millennium. I encourage all of my Making Money Alert readers to check out this report. And now, here’s a little sneak peak:
The ETF Revolution
"Every revolution was first a thought in one man’s mind, and when the same thought occurs in another man, it is the key to that era."
—Ralph Waldo Emerson
Exchange-traded funds or ETFs are an idea whose time has come. Indeed, it is often said that there is no force so powerful as an idea whose time has come, and that’s precisely how I feel about ETFs.
What are ETFs?
For those of you not familiar with them, ETFs are sort of the "best of both worlds" between a stocks and mutual funds. They offer you the exposure to both broad market indices (such as the Dow and S&P 500) as well targeted market sectors like energy and basic materials, yet they trade like a stock on an exchange (most trade on the AMEX), which means you can buy and sell them anytime during market hours. With mutual funds there is a one-day delay when you buy or sell, and then you are forced to accept the closing NAV of the fund as your buy or sell price. Using ETFs, your decision is automatic and you know what price you’ve bought or sold at moments after you execute your order. This is particularly important in a tough market when each day could mean the difference between a gain and a loss for the year. Currently there are over 200 ETFs to choose from, including ETFs that cover the bond market.
My style of investing is known as "trend following," meaning I am in the market when stocks are rising and out of the market when stocks are declining. I base my decisions on the price movement of a proprietary market indicator that represents a cross section of the entire market. Because I may get these "Buy and Sell" signals several times in a year, I only recommend to my readers investment options with low fees and few holding period penalties. ETFs offer all of these benefits, and at a fee structure far more attractive than mutual funds.
While the average mutual fund’s management fee is 1.56%, ETF fees can be as low as 0.1%. In fact, the average ETF management fee is just slightly higher at 0.36%. Compare 1.56% to 0.36% and that’s a real, in your wallet difference at the end of the year, especially when you’re dealing with big numbers.
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