Why I’m Thankful for ETFs
Happy Thanksgiving week! I must admit that this is one of my favorite weeks of the year, and that’s not just because we get an extra day off from the hustle and bustle of the financial markets.
What I really love about Thanksgiving is that it provides us with a reminder to stop and reflect on what we’re all truly thankful for. In my case, I am thankful for all of my tremendous family and friends who help fill my life with happiness and purpose. I’m also thankful that I was born and raised in a country that provides the freedom for me to choose my own destiny.
Professionally, I am thankful for one of the biggest, most positive developments in years, and that is the proliferation and increasing adoption of exchange-traded funds (ETFs).
Why am I so thankful for ETFs? Here’s a short list of my favorite reasons why we all should be thankful for these fantastic investment vehicles.
There are many more reasons why I am thankful for ETFs, but I think these seven give you a great sense of why we all should be grateful for the proliferation of what are tremendously productive investment vehicles.
For more on which ETFs you should own right now, I invite you to check out my Successful ETF Investing advisory service. Right now, subscribers are profiting from several major trends using targeted ETFs. To find out how you can get a leg up on the markets, I invite you to check out Successful ETF Investing today.
Welcome to ETF University
Today, I am proud to tell you about a new website my team and I created called ETF University (ETFU.com). We created this website for one primary reason, and that is to help investors learn more about the world of exchange-traded funds (ETFs).
As you may know, I have been a passionate advocate of ETFs for many years. That advocacy has been expressed extensively in my various publications. I’ve also discussed the copious virtues of ETFs on my radio show and my weekly podcast.
Yet early this year, I realized that while I had been writing and speaking about the benefits of ETFs for some time, there still were many questions out there about ETFs, such as how they work; how you buy them; what are the advantages and disadvantages of using ETFs, etc. I also realized that there wasn’t really a single, trusted source that investors had that would answer these questions, at least not a source that would answer these questions the way I think they should be answered.
So, rather than look around for various sites to fill this knowledge void, we decided to create ETFU.com. I want you to think of ETFU.com as your one-stop source for anything and everything related to the world of exchange-traded funds.
Here are just some of the features you’ll find at ETFU.com:
These are just some of the current and future planned features available to readers, absolutely free, at ETFU.com. The only thing we ask of readers who want complete access to this content is to simply join us.
I strongly encourage you to join ETFU.com as soon as possible.
ETF Talk: Large-Cap Vanguard Fund Seeks Growth
The Vanguard Growth ETF (VUG) focuses on a growth investment strategy for investors who are willing to accept additional risk. This Vanguard fund holds $16.4 billion in assets under management and has a low expense ratio of 0.09%, which is 92% less than the average cost of similar funds with other providers.
VUG specifically tracks the performance of an index of large-capitalization growth stocks. The ETF’s holdings are approximately in the same proportional weighting as those of the index it attempts to mirror. So far in 2014, VUG has gained 12.86%. This fund also offers a dividend yield of 1.17%.
VUG has hefty weightings in technology, 25.74%; consumer cyclical, 17.23%; and healthcare, 12.94%. Its top 10 holdings account for 23.01% of its total assets. These holdings include Apple Inc. (AAPL), 7.11%; the Coca-Cola Company (KO), 1.98%; Google Inc. (GOOGL), 1.96%; Gilead Sciences, Inc. (GILD), 1.90%; and Facebook, Inc. (FB), 1.88%.
This ETF seeks to match the performance of the large-cap growth segment of the U.S. equity market. Vanguard Growth ETF (VUG) provides a simple and comparatively inexpensive way to invest in this market.
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.
Top 10 ETF FAQs
I get a lot of questions every day about ETFs. So, this week I decided to compile a list of the top most frequently asked questions (FAQs) to help investors understand the basics of ETFs and how they work. So, here you go!
1) What is an ETF?
An ETF, or exchange-traded fund, is an investment fund traded on stock exchanges. An ETF holds assets such as stocks, commodities or bonds. Most ETFs track an index, such as the S&P 500 or Dow Industrials, etc.
2) What are the advantages of investing with ETFs?
There are many advantages of investing with ETFs. The primary advantages of using ETFs include their low cost, ease of use, transparency, wide variety of choice, tax efficiency and liquidity.
3) What are the disadvantages of using ETFs?
ETFs do require some specialized knowledge to understand how to use them successfully. In some cases, they can be more complicated than mutual funds. When purchasing an ETF, you also incur a transaction fee. If you are making small purchases month after month, over time those fees can reduce your total return. There are more than 1,600 ETFs listed on U.S. exchanges, so the sheer number alone can be intimidating for some investors.
4) Where, and how, do I buy ETFs?
The purchase or sale of ETFs is done through a brokerage account. Popular national brokerage firms such as Fidelity, Schwab, TD Ameritrade and Vanguard are good choices for your brokerage account. Once you have a brokerage account, you can follow that investment firm’s instructions to buy and sell ETFs online.
5) What are the main differences between ETFs and mutual funds?
ETFs are priced throughout the trading day, while mutual funds are priced just once a day at the close of trading. ETFs are completely transparent, meaning you always know what an ETF holds. Mutual funds are only required to report their holdings quarterly. ETF purchases do involve a transaction fee, but there are no sales charges or deferred sales charges like there are with mutual funds. ETFs also are much cheaper, more tax efficient and offer far more choice than mutual funds.
6) What are some common mistakes made when investing with ETFs?
Investing involves risk, and using certain ETFs (e.g. ETFs that use leverage) can be inappropriate for some investors. Some small, i.e. thinly traded, ETFs have wide bid/ask spreads. This can cause investors to buy at a high price and to sell at a low price. ETFs require some specialized trading knowledge to sidestep these and other mistakes. Educating you on how to avoid these mistakes is one of the missions of Doug Fabian’s Weekly ETF Report.
7) Are ETFs for stocks only?
No. ETFs allow investors to allocate to stocks, specific market sectors, foreign stocks, fixed income, commodities and currencies. The growth in the number and variety of ETFs over the past several years means that almost every type of asset class that is publicly traded now is accessible with ETFs.
8) Do ETFs pay dividends and interest like mutual funds?
Yes. ETFs pass through dividends paid from stocks, as well as interest from fixed income securities, directly to shareholders. Distribution frequency varies depending on the ETF, as some ETFs pay monthly while others pay quarterly or semiannually.
9) What are the tax advantages of using ETFs?
ETFs offer greater tax advantages to shareholders than mutual funds. Because most ETFs are structured like an index fund, there is an extremely low turnover rate in the holdings when compared to mutual funds. It is the buying and selling of assets within a mutual fund that tends to create tax issues, but there is very little of that when investing with ETFs.
10) Are there costs and sales charges when purchasing ETFs?
When purchasing an ETF, you likely will incur a transaction fee that is charged by your brokerage firm. While there are no sales charges, commissions or redemption fees associated with ETFs, you likely will have to pay the small transaction cost associated with buying and selling any asset.
If you have questions about anything ETF related, just send me an e-mail.
Snow on Thanksgiving
“If you think Independence Day is America’s defining holiday, think again. Thanksgiving deserves that title, hands-down.”
–Tony Snow
The late, great journalist Tony Snow knew the importance of Thanksgiving in America’s history. This year, take a few minutes to read about the real meaning of Thanksgiving, which actually has a lot to do with the triumph of capitalism over collectivism.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.
In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor about the best target for international investing dollars. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
All the best,
Doug Fabian
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