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Wall Street Charmer

By MP Dunleavey Thursday May 27, 2010
This post is about investing

businessmanWorth a second look
You know that low-key guy—the one in the next cubicle, or down the street—who's not exactly a hottie, but... he has something going on?

In the investing world, that quiet charmer would be the exchange-traded fund—known by his varsity nickname: ETF.

Profit in your pocket
We've talked about mutual funds (a basket of stocks, bonds, etc.). We've talked about index funds (which track a certain market sector). And you've heard of stocks. Wink.

ETFs are an agile hybrid of all three.
  • They're built like mutual funds—to carry a load of investments.
  • They trade like stocks, which means you have more control over your buying and selling price.
  • More important: ETFs have the internal combustion engine of an index fund: They track a certain sector (U.S. stocks, big companies, real estate, etc.)—and they do it without live managers, so their expense ratios are loooow.
In your portfolio, cheap is good because, over time, your gain is higher. And ETFs just got even cheaper, as a number of firms (including Fidelity and Vanguard) have dropped the trading fee investors once had to pay.

Bottom line
Many investors don't realize the fees they're paying for the mutual funds in their retirement or investment accounts. Do you? Call your fund company and ask. Or grab the ticker and look it up on Morningstar.
Comments (3)add
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Written by Petunia, June 01, 2010
This is a timely article for me. I have a traditional IRA at Vanguard and I am not currently contributing (feeding my Roth instead). I have never considered ETFs because I have not wanted the additional costs of a having a brokerage account and paying a commission to buy/sell ETFs. However, I had heard that Vanguard has recently eliminated those fees, I have been meaning to take a closer look at replacing index funds with their equivalent ETFs.

Have I actually done it yet, uhhhhm, well, no. But I resolve to give it a look and make a decision this month. If there is a savings to be had, I don't expect it to be much (over Vanguard's index funds). But I am not a high wage earner, and I need my limited dollars to grow as much as possible. If I can reduce costs and end up with a bit more in my account, I am all for it. You are so right that watching those investment costs is important.


Written by Petunia, June 03, 2010
I crunched the numbers yesterday. I hold 5 funds in my Trad IRA, and 3 of the 5 are available as ETFs. By switching those 3, I will save about $70 in one year! So, I opened my brokerage account this morning. In a few days, I will be able to sell mutual fund shares in favor of the less expensive ETFs.
Written by Petunia, June 08, 2010
My switch to ETFs is complete! There were exact ETF versions of 3 of my 5 funds, and I found replacements for the other 2 funds as well, not exact but very close. I was able to reduce my weighted average expense ratio from .24 to .15, a savings of approximately $90 the first year.

Well worth the effort! Thanks for this motivational kick in the pants.

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