Market Beat: Exchange traded funds remain popular with investors
Exchange-traded funds or ETFs have exploded in popularity since their inception over twenty years ago. Among the first ETFs were the Spyder, SPY, and the Diamond, DIA.
Today, they are still some of the most popular funds. The Spyder is an index fund that represents the S&P 500 index. The Diamond is made up of the thirty stocks that comprise the Dow Jones Industrial Average. Both funds are very liquid and have low expense ratios.
The difference between exchange-traded funds and open-end mutual funds is that the exchange-traded funds trade on an exchange throughout the trading day, while open-end funds are priced once a day at the end of the trading day.
Index funds can be either exchange-traded funds or open-end funds, and are very good portfolio-building tools due to their low expense ratios and broad diversification.
Today, there are exchange-traded funds for virtually any asset class or strategy. There are funds for other U.S. stock indices, such as the NASDAQ 100, the Russell 2000, and more. A wide variety of bond funds are available that include U.S. Treasury bond funds, corporate bonds, municipal bonds, and high-yield bonds.
Funds exist that represent the major foreign indices as well. The EFA consists of the foreign developed countries in Europe, Asia and the Far East, and the EEM holds stocks from the emerging market countries. Investors can also purchase foreign bond funds and funds that represent foreign currencies, like the Euro and the Japanese Yen.
Commodity-based funds are also very popular today. There are several precious metals funds, including gold, silver, and platinum. The energy funds include oil, natural gas, unleaded gasoline, and coal. The agricultural funds have commodities like corn, cotton and cows.
Investors need to be aware of the difference between exchange- traded funds and exchange-traded notes. The exchange-traded notes, known as ETNs, are backed by the credit of the issuing bank. Exchange-traded funds like the Spyder hold the underlying stocks.
Leveraged and inverse funds are quite popular today as well, but investors should use caution when using them and be sure that they understand how they work. Leveraged funds are designed to move more than the underlying investments. Inverse funds move in the opposite direction and can be leveraged, too. However, they are meant to do that on a daily basis and may not track well over longer time frames.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.