What Are Exchange Traded Funds

Kevin McCormally: I am Kevin McCormally of Kiplinger's, and with me is Manny Schiffres, the chief investment editor of Kiplinger's Personal Finance magazine. Manny, let's jump in the alphabet soup, what is an ETF? Manny Schiffres: Kevin, an ETF is an Exchange Credit Fund, it is a mutual fund, always an index fund of some sort, that trades on the exchange, it is just like a stock. Kevin McCormally: What are the advantages of an ETF over a mutual fund? Manny Schiffres: Okay. An ETF trades continuously throughout the day, you can buy or sell one anytime of the day ,as opposed to a traditional mutual fund which is priced just once a day at 4 PM Eastern time. Also, in some case, the expenses for ETFs are lower than those of similar funds in the traditional fund universe, and the third advantage is that there are some ETFs that are not available in traditional fund universe. Kevin McCormally: Why don't you talk about different flavors of ETFs, what flavors of ETFs can you buy that you can't get in mutual fund? Manny Schiffres: Okay. There is an ETF that tracks the price of gold for -- not gold stocks, but rather the price of gold bullion itself, and if regularities are approved, it will prove soon the ETFs to track the price of silver, and the Euro currency. Kevin McCormally: So you can sort of slice and dice the market however you want? Manny Schiffres: Yes. There are more than 150 ETFs, and almost all of them cover either a broad part of the market, or a very narrow part of the market. Kevin McCormally: Okay, and what are the disadvantages of ETFs? Manny Schiffres: The main disadvantage of ETFs is that you have to pay brokerage commissions each time you buy them, and sell them as well, and that makes it difficult for people who're engaged in systematic purchasing, that is people who practice stock or establishing and invest a fixed amount of money at a regular basis. You invest $100 or $200 a month, and you can hit with an $8 or $10 brokerage commission every time you trade. That takes a big nick out of your returns. Kevin McCormally: So it's good really for people with bigger amounts of money to invest at in a lump-sum. Manny Schiffres: Absolutely, if you have $10,000 or $20,000 to invest off, an ETF makes more sense, than to invest in a similar index fund in the traditional fund universe. Kevin McCormally: Okay. Thank you Manny.