Golden Opportunities

Exchange traded funds are a more recent addition to the financial planning toolbox. Are they the tool choice for you? Here to hammer home the details about exchange traded funds are Concord Advisor’s Jonathan Herbruck and one of the first developers of ETF management programs in the country, Michael McClary.

Question: Jonathan, just when we start to think we've learned all our investment choices, you come up with something new — Exchange Traded Funds. What are they?

Answer: Exchange traded funds, or ETFs, are one of the latest developments in the investment world. There are some similarities between mutual funds and exchange traded funds, but some big differences as well.
Both mutual and ETFs invest in several stocks for a pool of investors, so you as an individual investor get to have a mix of stocks in one fund.
However, ETFs take a specific index, like the S&P 500, or a specific sector, like Financials, to mimic, as opposed to a specific investment objective (as a mutual fund would), such as a growth fund or a value fund. The Mutual Fund tries to pick the top stocks in this chosen category in order to hopefully beat the overall category.

Question: Do exchange traded funds trade once a day, like mutual funds?

Answer: No. ETFs trade just like a stock; you can sell when you want.
The price of the ETF fluctuates throughout the day, and you can buy and sell it any time while the market is open.

Question: Michael, you developed one of the first exchange traded fund management programs in the country, and you were one of 3 advisors in the country named by Research Magazine to the first class of the ETF hall of Fame. Are ETFs more or less expensive than standard mutual funds?

Answer: An independent study from last year showed that the average cost of a mutual fund in the United States was 1.38%. * Many of the options that we work with have expenses less than 0.3%. This could save investors over 1% from the start and allows us to do our job without high expenses acting as a hurdle.
So for investors, more of your investment dollars are working for you.

Question: Why are the expenses lower? Is it because the ETFs follow an index and so less active management is needed?

Answer: That is essentially correct. Actively managed mutual funds require large amounts of money to cover expensive overhead costs, those expenses are passed along to investors to allow the fund to be profitable.

Question: What doe an ETF manager do to earn us money?

Answer: Managers of Exchange Traded Funds provide investors the opportunity to buy precise exposure to different asset classes and market sectors and they do it for a very small fee. Then ETF management programs like ours can add value by sorting through over 700 available ETFs to create the proper portfolio mix.

Question: Who should consider buying an exchange traded fund?

Answer: ETFs are great tools for anyone looking to get exposure to equities or broad fixed income investments. Anyone who is considering buying a mutual fund, stock, or individual bond should also consider ETFs.

Question: Should you own both ETFs and standard mutual funds?

Answer: That depends on the investment strategy. We look at a client’s overall goals and objectives and put together a mix that makes sense for them.

Question: Is one company's S&P 500 ETF the same as another company's S&P 500 ETF?

Answer: Not necessarily. Due to the fact that ETFs are traded securities, issues such as trading volume and index tracking error can help one provider outshine another.

Should you “exchange” your mutual funds for Exchange Traded Funds? To learn more about ETFs, call Concord Advisors for a free fact sheet.

*Independent Study Source: Morningstar 6-30-07 ETFs, like any investment, have risks. You should carefully consider these risks before investing. Please read the prospectus of any ETF carefully before investing. This information does not constitute nor should it be construed as investment advice. You should consult a financial advisor with respect to your own situation or that of any entity which you represent or advise.