Exchange-Traded Funds Gain In Popularity

"Guarding Your Wealth" is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.

(PRWEB) September 19, 2005 -- Since being introduced in the mid '90s, Exchange-Traded Funds have continued to grow in popularity. Over 60% of money flowing into index fund-type vehicles is going into Exchange-Traded Funds. Should you be using them? Read on to find out.

I recently spoke in New York City at a national summit for financial advisors that focused on Exchange-Traded Funds. Over 200 advisors from all over the country attended and learned why the use of exchange-traded funds can give them a competitive advantage and benefit their clients. Whether you are a traditional buy and hold investor, or actively trade to profit from shorter-term opportunities, you should strongly consider their use.

Exchange-Traded Funds (ETFs) are designed to mirror a market index. The three most popular stock market indices are the Dow Jones Industrial Average, the S&P 500 and the NASDAQ. The ETFs that mirror these indices are referred to as Diamonds, Spiders and Cubes because their symbols are DIA, SPY and QQQ.

Exchange-Traded Funds provide the diversification benefits of a mutual fund with the advantage of being traded like an individual stock. Whereas a mutual fund can only be bought or sold based on that day's closing price, Exchange-Traded Funds can be bought or sold anytime throughout the trading day. This allows you to more quickly enter or exit the market during the day.

With over 172 different ETFs, there is an ETF for practically every index available. In fact, ETFs track nearly twice as many broad-based market indexes as traditional index mutual funds. This creates amazing flexibility in structuring an overall portfolio to the specific needs of any investor.

Besides many broad-based ETFs, there are also ones targeting specific sectors of the market. And Exchange-Traded Funds aren't just for stock-based investments. There are separate ETFs that invest in bonds, real estate, precious metals and other commodities. There are ETFs designed for growth and others designed for income.

The internal expenses of most Exchange-Traded Funds are very low. The average actively-managed mutual fund may have internal expenses over 1% per year. The internal expenses of Diamonds, Spiders and Cubes are less than 1/5 of 1% per year. (Since ETFs are purchased like a stock, there is a commission to buy and sell them. The use of a discount broker should minimize this expense.)

The majority of exchange-traded funds are not actively managed. In that sense they are very similar to an indexed mutual fund. Recently, though, actively-managed ETFs have been introduced to the market. Expect more and more of these to become available over the next few years.

Exchange-traded funds allow an investor to control when the taxes will be paid on an investment, whereas in a traditional mutual fund those decisions are made by someone else. An investor can also sell a stock or mutual fund to generate a tax-deductible loss and then replace that investment with a similar ETF.

Moreover, ETFs can be sold-short without having to wait for an 'uptick'. To short an individual stock you must wait for it to trade higher than its previous trade (referred to as an uptick). As a result, it can be difficult to sell-short when the market is falling. With ETFs, you can easily sell-short in a falling market and thus profit from it. This is one technique that can be effectively used to protect the rest of your non- IRA portfolio.

To summarize, ETFs can be used in many ways. They can be used to round out a portfolio. If you have several individual stocks that you don't want to sell for tax reasons, ETFs can be used to add diversification. ETFs can be sold short so they can also be used to protect the rest of your portfolio in a falling market. Or ETFs can be used to increase specific exposure of an overall portfolio. For instance, you could have international exposure but overweight Japan by buying a broad-based international ETF and a Japan-focused ETF.

I use ETFs extensively in my client's accounts because of their flexibility and low cost. Your portfolio can probably benefit from their use as well. If you would like to learn more about how to use ETFs in your portfolio just let me know.

For clear, straightforward, unbiased answers to your financial questions contact me at jeff@guardingyourwealth.com.

Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or www.guardingyourwealth.com.

Looking for an energetic expert who is passionate about financial and wealth management? Mr. Voudrie is an excellent speaker who will excite and inspire your audience. Mr. Voudrie is available for a limited number of speaking engagements, television appearances and radio talk shows. For booking information, email jeff@guardingyourwealth.com.

Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth Article Archive.

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