Exchange Trading Funds (ETF)

Stock investment getting tougher day by day. One single reason would be selecting diverse portfolio. Earlier diversification means, select 5 stocks from US market, 1 from defense, 1 from blue chip, 1 from health care, 1 from technology and 1 from fastest growing stock either technology or pharmacy. If you could spent 8-10 hours per week, you can manage your portfolio efficiently. But due to economy changes and fast adoption of global economy's, diversification becomes very complex and our portfolio should expose to international market stocks and the money we are planning to put in for investment should be more than what we could afford. If we are still maintaining, old way of diverse portfolio, we are prone to loosing money. Due to this factors, last summer after US market hits new highs, lot of part time investors like me sold all US based stocks and settled with mutual funds and ESPPs, which turned out to be wise decisions. Now it is good time to start again since US market is very down but just little money is good and small diverse like 3 stocks from US market mainly large caps because large cap stocks are very cheap now. Stay away from small cap since it is very expensive now.

As I mention above, due to complexity of diverse, there is good opportunity for part time investors to pitch in ETF. Because ETFs are already well diversify. ETFs are well in middle of Stocks and traditional mutual funds. The benefits of ETF are

1. Low cost
2. Instant diversify
3. More transparency (This is one makes difference from mutual funds).
4. Tax Benefits(Because mutual funds managers are very frequently add/remove stocks and capital gains will transfer to stockholders rather ETF will not add/remove stocks frequently)

ETF can be traded as same as stocks or mutual funds. The Net asset value(NAV) would be determine after market close and if you are selling next trading day, you might loose or gain something since you are selling based on previous day NAV.

The only issue with ETF is complex creation and redemption process. But if you are familiar with mutual funds then okay. Normally if you buy a mutual fund, you are dealing with a money manager and he/she could decide to buy basket of stocks on your behalf. To make this process better, money manager could already created a basket of stocks and name it like "Large Cap Fund" as name implies, this fund dealing with large cap stocks so you can buy 25% of your investment money for "Large Cap Fund" and remaining goes for "Small Cap", and "International fund". The same here in ETF, all you can do is by typing "NY" to buy New York 100 Index Fund, which means you are buying a 100 stocks diversify fund on one click. If you are fully buying ETFs, you portfolio would looks like,

1. New York 100 Index fund (25%) - Fully US based and combination of large and mid size companies.
2. S&P Growth Fund(25%) - High growth S&P index.
3. Dow Jones Oil Funds (25%) - Group of oil explore and drilling companies.
4. S&P 50 Asia index(25%) - One fund for all Asian market companies.

Do you see modularity in here? Your portfolio now well diversify as well as you have a choice of modularity, sector wise, index wise, growth wise, geographic wise. If you thing swap oil funds with technology funds, we can easily swap it. The maintenance time to manage portfolio is almost zero.

http://www.ishares.com/home.htm - good one for ETF and well established one.

http://www.fool.com/etf/etf.htm - 60 seconds guide to ETFs.

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