What’s
my Line?
I am made up of a group of stocks but I am not a mutual fund.
What am I?
I can be traded just like a stock but I am not a stock. What am
I?
I have many of the advantages of both stocks and mutual funds
but I am neither. What am I?
Nine years ago I was born as a spider. What am I?
I now have over 100 brothers and sisters. What am I?
Do you give up yet?
Long ago when
we were kids (if you are old enough), there was a wonderful television
program called, “What’s My Line?” The
gist of this early comedy show was that various mystery guests
would appear each week. Contestants would have the opportunity
to ask the mystery guests questions to try to determine which one
was the “real” mystery guest and who the fakes were.
This all centered on an unusual occupation or activity that the
mystery guest was involved with.
So, who is our mystery guest?
Meet the ETF
An Exchange
Traded Fund, commonly referred to as an ETF, is an index fund
similar to some mutual funds with a primary difference.
Unlike mutual funds, which have only one trading price per day,
the ETF can be traded just like a stock. It is assigned a bid and
ask price and can be bought or sold intraday. This means that investors
can buy or sell shares in the collective performance of an entire
stock or bond portfolio as a single security. Exchange Traded Funds
add the flexibility, ease and liquidity of stock trading to the
benefits of traditional index fund investing.
In recent years,
many investors have employed the advantages of ETFs in both trading
and long-term investing accounts. Here
are several of the important benefits of ETFs:
Tax Efficiency
Because
of the low turnover of holdings, ETF’s
like traditional index funds, generate less capital gains
tax consequence.
Lower Expenses
Another
attractive aspect to ETF’s is that they carry rather
small expense ratios as compared with standard mutual funds. Both
mutual funds and ETF’s charge a stated percentage of
your principle on an annual basis for operating costs and profit.
Diversification
In
contrast to trading single stocks, ETF’s
provide significant diversification because like a mutual
fund an ETF is made up of
a basket of stocks. The ETF basket is smaller and more flexible
than the typical mutual fund. In terms of volatility, an ETF
falls somewhere between individual stocks and mutual funds
in a general
sense.
How
do I Find ETFs?
Like stocks
and mutual funds, ETFs are identified by ticker symbols. Here
is a partial list:
- IBB, iShares NASDAQ Biotechnology
- IJH, iShares S&P MidCap 400
- QQQ, NASDAQ-100 Index Tracking Stock
- MDY, MidCap SPDRS
For a complete list of Exchange Traded Funds go to www.AMEX.com.
Yours in better trading!
Dr. Stephen Cooper
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