On Growth Track

ETF’s Have recently gathered a lot of interest and attention all over the financial world. But what does it mean for the individual investor?

For an individual investor, the most important thing is to preserve capital and reduce cost and tax implications while making regular investment. Overly aggressive investing require lot of time and resources and cost more in trading and taxes.

The basic old school of ETF’s remains attractive because of the following reasons.

• It offers the benefit of indexing at low cost. This can compare with index mutual funds also. The low cost structure comes from the fact that there is no need to keep paying fund mangers to actively allocate stocks. The ETF SPDRs (SPY), which tracks the S&P 500, charges investors 0.09% and the similar index fund Fidelity Spartan 500 Index Fund (FSMKX), charges investors just 0.1% annually.
• Tax structure benefit for ETF’s is because they don’t sell the underlying stocks when investors depart, wile the Mutual Funds sell the stocks to pay the investors and that means a capital gains tax hit for remaining investors.
• Instant pricing offered by ETF’s is desirable over pricing at timing of market closing which is typical of Mutual Funds as one can take real time action instead of waiting for the day to end. HoweverETF prices have Ask-Bid spread (nice analysis @mymoneyblog) at any time and are not traded at NAV as the mutual funds. High ask and bid price difference can mean accumulating trading loss for active traders but even buy and hold investors should be watchful of spread and track the patterns in historic data.
• ETF’s have no restrictions on amount to invest, number of times it can be traded, exit cost and financial penalties as associated with Mutual Funds which ask for minumum investment, front load, back load or early redemption fees.
• ETF’s offer a way for diversification in foreign markets, and commodities. This when linked to an established index is transparent enough and still offers the benefit of low cost.

There has been a proliferation of ETF’s recently, its best for individual investors to stick to established indexes and ETF’s in which the cost is low. A low cost ETF usually means a large investor base so that they can over the expenses of running the ETF easily. This has been a problem for some ETF’s and they had to close down while their long therm investors had to take unexpected tax hit. Also individual investor can look up at the historical data for a longer time for a well established ETF in terms of Ask-Bid Price.

With the brokerage costs coming down the old school ETF’s can be attractive for individual investors. Do your research and let ETF’s or low cost index mutual funds out you ongrowthtrack.

PN

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