Comments on: Using Exchange-Traded Funds: How to Put Your Index Mutual Fund on Steroids

By: Avoid Mutual Funds

Avoid Mutual Funds — Tue, 07 Jul 2009 16:42:29 +0000

[...] of your pockets is to take an active roll in your finances and manage your money yourself. Choose index funds or ETFs over mutual funds or pick individual [...]

By: Buying Gold & Silver

Buying Gold & Silver — Thu, 09 Apr 2009 13:50:25 +0000

[...] way to buy gold or silver is through an exchange-traded fund (ETF). The SPDR Gold Trust (NYSE: GLD) and iShares Silver Trust (NYSE: SLV) are great ways to add [...]

By: Dr. Scott Brown

Dr. Scott Brown — Tue, 17 Mar 2009 01:46:35 +0000

The tax issue comes from index mutual funds you purchase directly and pass on the capital gains tax bill to you when others sell out while you sit patiently over the long haul in a set it and forget it strategy. ETFs do not have this tax problem.

By: Dr. Scott Brown

Dr. Scott Brown — Tue, 17 Mar 2009 01:42:56 +0000

There is a tight relationship here between the underlying index, the indexed mutual fund, and the exchange traded fund (ETF) where the index fund and ETF both derive their pricing from the underlying index — NOT the other way around. If there was an opportunity to move the underlying index you would have large investment banks speculating in the index fund (called positive feedback trading). Professor Goetzmann and Massino from Yale and Insead, find no evidence of positive feedback trading in index funds in their 2003 Journal of Business article entitled Index Funds and Stock Market Growth. Josh Cherry, University of Michigan at Ann Arbor, in his 2004 article The Limits of Arbitrage: Evidence from Exchange Traded Funds shows that ETFs are about 17% more volatile than the underlying index. So, it’s actually the other way around. Speculation in the ETF creates volatility in the ETF NOT the underlying index. So, it’s not the ETF inducing the volatility in the index — remember that the number of shares the ETF holds is set from the start — it’s the less liquid nature of the capital market, commodity, or segment thereof that the index is tracking that moves around. Small cap companies and especially those that have share prices under $10 have significantly higher volatility than the reverse. My point is that small, obscure indexes underlying an ETF or indexed fund should be watched with greater caution — greater volatility is simply to be expected from the nature of the underlying market itself.

By: Dr. Scott Brown

Dr. Scott Brown — Tue, 17 Mar 2009 00:58:38 +0000

The key consideration in deciding between ETFs and Indexed Funds is the size of the individual’s investment. If an investor dollar cost averages $100 a month into a standard or Roth IRA with a $7 commission there will be a $70 reduction in account value from the start for the 10 allocations in the Gone Fishin Portfolio —70% of the $100 investment eaten up in commissions hurts! Indexed funds, on the other hand, can be purchased directly — circumventing the brokerage commission. But, if an investor puts the annual maximum into the account in one shot each year — $5,000 for 2009 — then that same $70 is only 1.4% of the total investment — and in this case the investor can reap the enhanced advantages of owning ETFs; daily trading, options, no bogus tax bills, etc.

By: Alexander Wissel

Alexander Wissel — Wed, 11 Mar 2009 13:52:35 +0000

You’re absolutely correct in your questioning and we can understand you confusion. In a general comparison, we prefer ETFs hands down over mutual funds for the reasons listed above. However, ETFs haven’t reached the breadth of numbers or performance history we require for our investment choices. In those cases we will always err on the side of caution when recommending investment options.

By: jim gentile

jim gentile — Wed, 11 Mar 2009 05:37:20 +0000

Double and triple leveraged ETF’s are causing the wild volitility on the upside and the down side.
If you were around in 1987 you know what portfolio insurance did to the markets.

By: joseph wilkonski

joseph wilkonski — Wed, 11 Mar 2009 00:48:01 +0000

I found it interesting that you favor ETF’s over mutual funds, while on the same page is Alex Greens book that promotes nothing but Indexed mutual funds.
My understanding is that mutual funds are generally held for longer periods of time, and therefore the tax issues shouldn’t be a consideration. If using Vanguard, you make the purchase directly and avoid broker fees and have the lowest management fees in the industry.
Where am I going wrong with this thought process?

By: Some ideas on ETF’s | Stock Capitalist

Some ideas on ETF’s | Stock Capitalist — Wed, 11 Mar 2009 00:21:36 +0000

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