Show #272 Airing: Sunday, October 10, 2004
Are you tired of trying to beat the market? Do you find that most of the time it’s your investments that are taking the beating? You may be better off buying the market, getting all the stocks of the S&P 500, or the Nasdaq, or some other exchange. Here to “exchange” our ignorance for knowledge about Exchange Traded Funds is an expert we wouldn’t trade for anybody, Jim Lineweaver, founder of Lineweaver Financial Group.
Question: What are exchange traded funds?
Answer: An exchange traded fund is a type of investment that combines the advantages of mutual funds with the trading flexibility and continual pricing of individual stocks. Like shares of stocks, ETFs are traded on a stock exchange and can be bought and sold throughout the trading day at prevailing market prices.
Since virtually all ETFs are designed as index funds that track specific market indexes, they offer low operating costs, close tracking of their benchmark index, the potential for high tax efficiency, and consistent investment strategies.
Like conventional mutual funds, ETFs must distribute any taxable income and capital gains to shareholders.
Question: How do exchange traded funds differ from mutual funds?
Answer: First, ETF shares can only be bought and sold through a brokerage account, while conventional no-load mutual fund shares can be bought and sold directly from the fund company.
The market price of an ETF’s shares is determined by both the net asset value and the supply and demand for the shares. Hence, the market price changes throughout the day. A mutual fund’s price is calculated once per day, at the end of the trading day.
ETFs have more trading flexibility. You can use stock-trading techniques such as stop order, limit orders, buying on margin, and selling short.
ETFs often feature expense ratios that are lower than corresponding mutual funds. However, you must pay brokerage commissions and other transaction costs to buy or sell ETFs. Depending on the size of your investment and the frequency of your trading, the costs associated with buying and selling ETFs may outweigh the potential savings from their lower expense ratios.
Question: Who should invest in ETFs?
Answer: ETFs may be an appropriate investment option if you:
- Are comfortable investing through brokerage account.
- Need liquid investments for short-term market exposure.
- Want the ability to buy and sell shares throughout the day.
- Are engaging in large transactions, so that brokerage commissions are spread across sizable sums.
- Wish to follow a long-term buy-and-hold strategy and want to benefit from low expense ratios.
Question: Who should not?
Answer: A conventional mutual fund is probably a more suitable investment choice if you:
- Are systematically adding to or withdrawing from you investment on a regular basis. It’s not advisable to use dollar-cost averaging with ETFs because you’ll incur brokerage costs every time you purchase shares.
- Don’t have sufficient investable assets to justify brokerage trading costs. For smaller investment amounts, ETFs are not practical.
- Wish to take advantage of the services available when you maintain a direct relationship with a fund sponsor, such as checkwriting, direct deposit, and automatic investment.
Do Exchange Traded Funds fit into your portfolio? As with many financial questions, the answer is not clear-cut, and will depend on your individual circumstances. For more information, or a free brochure, you can call the Lineweaver Financial Group.
Jim Lineweaver is a registered representative of and offers securities through Walnut Street Securities, Inc. (WSS) Member NASD/SIPC.
Branch Office:
9050 Sweet Valley Drive,
Valley View, OH 44125
216-520-1711
WSS does not offer tax or legal advice.
Lineweaver Financial Group is not a subsidiary or affiliate of WSS.
Material discussed is for information purposes only and should not be the basis for any investment decisions.
