Exchange Traded Funds

Passive investing made easy

Exchange-traded funds (ETFs) are individual securities that track specific market indexes, trading throughout the day just like stocks; but unlike mutual funds, they are not priced once at the end of each trading session.

Why should you invest in this type of security?

It’s easy: ETFs simplify your life at a fraction of the cost of most mutual funds.In addition, they are generally more tax-efficient because they rarely produce capital gains.

Passive investing is the act of removing almost all buying and selling decisions from the equation in favor of holding for the long term. Active investors, especially those managing mutual funds, have consistently underperformed the major stock market indexes. In fact, 80 percent have failed to meet their benchmark. Given this type of performance, many investors decide that putting money in securities that mimic an index is far more sensible than always trying to hit a home run with the latest hot stock or fund. It may be boring but it works.

These days there are all sorts of specialty ETFs available but like any other investment, you need to do your homework. Here are some types of ETFs you might consider:

• Traditional ETFs invest in major equity or fixed-income indexes or their sub-sectors. These include the S&P 500, MSCI-EAFE, Dow Jones Industrial Average, Nasdaq, and Russell 3000.
• The next group of ETFsare those based on market capitalization. Included are large-cap, mid-cap and small-cap funds.
• The third group of funds is divided by style of investing: value or growth.
• The next group of funds is by region. These include International, European, Emerging Markets, Latin America, etc.
• Lastly, you have sector funds that invest in specific sectors of the economy, including health care and financial services.

One type of ETF that is particularly popular these days is commodity funds. These funds invest exclusively in energy (like oil), metals (like gold) and agriculture (like wheat), and they are most often structured as exchange-traded funds. A commodity fund may track just one commodity index, or it may be based on a combination of commodities. Although commodities are considered volatile, and therefore risky, investments, historically in recessions commodities recover before other indexes, making commodity funds an attractive option right now.

A portfolio comprised entirely of ETFs is considered by many to be the most cost and tax-efficient way to invest in the markets. Once you’ve established your asset allocation model and done your investment selection, you’ll be able to sit back and relax.

That’s what passive investing is all about. Letting the markets take care of themselves.