Being Street Smart
More On Exchange-Traded-Funds
By Sy Harding, editor
Street Smart Report Online
Exchange-traded-funds (ETFs) offer numerous advantages over traditional mutual funds, but polls show that most investors are not yet familiar with them. The easiest way to expand on the subject may be to pass along some of the questions resulting from a recent column.
Q. I understand that ETFs can be bought and sold
throughout the trading day. But which fund families offer them?
I have some of my money at Dreyfus Funds and some at American
Century Funds, and neither seems to know what I'm talking about.
A. Exchange-traded-funds are not offered by traditional
mutual fund companies, and in fact compete with them. They are
purchased through brokerage firms, including discount and on-line
brokers.
Q. I've searched through all the mutual fund listings
and am unable to find any exchange-traded-funds. Where can I
find out which ETFs are available and their prices?
A. The answer is in their name 'exchange-traded'.
They are not in newspaper listings of traditional mutual funds,
but in the listings of stocks and funds that trade on each stock
exchange. Most ETFs trade on the American Stock Exchange and
can be found in its listings.
Q. It's very confusing that ETFs are scattered around
among the stocks in the exchange listings. Why don't they have
a separate list for them?
A. Not my fault. You'd have to ask them. But I agree
that it is confusing.
Q. Can I get as many sector choices with ETFs as
I can with the traditional funds provided by Fidelity or Invesco?
A. Probably more. The original SPY, which tracks
the S&P 500 Index, has been joined by ten ETFs that duplicate
the performance of sub-indexes of the S&P 500. So an investor
with a knack for anticipating changes in market leadership can
zero in on industry sectors like the S&P Energy Index, S&P
Technology Index, etc. These ten S&P related ETFs are listed
on the American Stock Exchange, under the letter S, and begin
with the prefix SPDR.
Barclays Global Investors,
the world's largest manager of indexed investment products, now
offers 74 different ETFs. They have funds available that track
most foreign markets, numerous S&P and Dow Jones industry
sectors, the various Russell small and mid-cap indexes, the Nasdaq
Biotechnology Index, even the Real Estate Investment Trust (REIT)
sector. All 74 are shown in stock listings of the American Stock
Exchange, under the letter I, and begin with the prefix 'iShares'.
Merrill Lynch offers
modified ETFs that it calls HOLDRS. Some 17 are listed under
H in the American Stock Exchange stock listings in financial
pages.
There are others, but
my space is limited.
Q. I've heard that ETFs have tax advantages over
managed mutual funds. How does that work?
A.
The stocks held by traditional
managed mutual funds undergo frequent change as the manager buys
stocks that are perceived as being under-priced and takes the
profits when they become overpriced. The resulting capital gains
are distributed to the fund's investors near year-end, and are
taxable income to the investor. However, ETFs are continuously
invested in the stocks that make up a market or sector index.
The only time an ETF sells a stock, which could result in a capital
gain is when one stock is replaced by another in the underlying
index.
Q. What is meant by the term "trades like a stock"
that I often hear as an advantage of exchange-traded-funds over
regular mutual funds?
A. ETFs can be bought, like a stock, through any
brokerage firm. There is no need to have your assets at a specific
mutual fund or broker. They can be bought at any time during
the trading day, and you will get the price at the time rather
than the end-of-day pricing of traditional mutual funds. Unlike
many mutual funds, there are no restrictions on holding periods.
You can buy today, sell tomorrow, change your mind and buy back
next week, and there will be no penalty. Additionally, you can
utilize all the portfolio management strategies associated with
stocks, including the use of limit orders, stop orders, short
sales, and margin buying.
ETFs should not be
ignored or misunderstood. They seem to be a product that suits
these volatile times when not only does market leadership change
frequently, but profits can be made from both the upside and
the downside.
Editor's Note:
Sy Harding is president of Asset Management Research Corp., 169
Daniel Webster Hwy., Meredith, NH 03253, publisher of The Street
Smart Report, 1 year, 17 issues, $225 (now in its 14th year of
exceptional market research for professionals and serious investors)
and The Street Smart Report Online at www.StreetSmartReport.com.
Mr. Harding has consistently ranked in the Top Ten Timers by
Timer Digest for the last 10 years. He authored the book,
Riding the Bear How to Prosper in the Coming
Bear Market, $12.95. In Riding The Bear, Mr. Harding explains
not only bear markets, but how bull and bear markets get
started and end; how public investors can break their
pattern of only becoming interested in bull markets in their
final stage, get killed, and then are too scared when the next
bull market begins. He explains in plain English how the market
reacts, how cycles work, and how to take advantage of them to
hold onto your bull market profits - and actually increase
them during a bear market. Harding also explains the Seasonal
Timing System in detail. Available at book stores, and Barnenoble.com
or is FREE as a bonus with a subscription to Sy Harding's Street
Smart Report.
