Exchange Traded Funds – Better than Stocks?

The stock market didn’t exactly do its image as an investment option any favors in the 2008-2009 crash. Wall Street in particular left a bad taste in people’s mouths with its apparent inability to comprehend the needs of investors. Those who’ve been watching the Dow Jones in its various states between amateur bungee jumping and comatose immobility at low levels are less than impressed. Anyone who’s ever bought car insurance would probably agree that it’s a more transparent process than investing in the stock market’s tantrums.

Anyone who’s ever bought stock will have probably bought something they wish they hadn’t, at some point. The trouble with buying individual stocks is that they’re basically one trick wonders. They go up or down. You’re effectively stuck with their performance as the value of your investment. You’re also at a distance from the markets, and can find yourself reading about the fallout from some deal which has decimated your holdings value. Exchange Traded Funds, (ETFs) may be the answer to what you’re looking for in the investment choice quandary.

ETFs basics

Exchange Traded Funds currently have a bit over a trillion dollars under management around the world. They were first introduced as “boutique” investments with high unit prices, but have evolved since the crash into high volume trading commodities at lower prices.

The basics:

  • ETFs are professionally managed.
  • ETFs charge management fees, typically around 1-2%
  • ETFs are groups of stocks, “baskets”, usually based on particular indices.
  • Some ETFs are based on performance values, offering “3x” or three times the value of the index performance over time.
  • ETFs are far more diverse than mutuals in terms of holding options.
  • ETFs can be traded on the stock exchange like normal stocks.
  • They pay dividends, and occasionally split.

ETFs and performance issues

To give an example of how ETFs perform:

During the housing crash, the prices of ETFs holding mortgage securities also went into a nose dive, purely by association. They then went straight into reverse, returning to their original prices, unlike the rest of the mortgage market, when investors realized the mortgage-based ETFs were holding excellent assets which weren’t even scratched by the mortgage securities fiasco. They sailed through the 2008-2009 crash pretty well, too.

There have been investor issues with the short selling ETFs and some other individual ETFs. If you’re thinking of investing in this complex market, you need to make comparisons of performance of similar ETFs and check any information about your ETF interests thoroughly.

Check out in particular:

  • Price bandwidths over time- This particularly useful in assessing a median value.
  • Trading bandwidths- These are used as “high-low” measures for traders.
  • Dividend performance- Some pay well, others don’t.

Compared to the stock market itself, ETFs are as transparent as car insurance quotes. All information is upfront, and these funds are managed by major players like Vanguard and Deutsche Bank. Even the mutuals are starting ETFs, trying to catch up, so you have a lot of investment options.

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