By Ken Faulkenberry

Exchange Traded Funds (ETFs) are an investment vehicle; a hybrid of stocks, mutual funds, and closed-end mutual funds. ETFs are a basket or portfolio of stocks much like mutual funds or closed-end funds. Much like a stock or closed-end fund, on a given day each EFT trades on an exchange with a number of shares outstanding that investors buy and sell. But unlike closed-end funds which can trade at a discount or premium to their NAV (Net Asset Value), ETFs typically trade close to their NAV. Most ETFs track a specific index, in other words they are passively managed. Like mutual funds and closed-end funds ETFs can segment to very specific or targeted indices or sectors.

Here are 7 important advantages of ETFs:

ETFs have low costs. Since ETFs trade like stocks, you can buy a diversified portfolio with the same low commission (typically $8 - $12) as a stock. Also, ETFs typically have lower expense ratios than mutual funds. Why pay up to a 2% a year management fee when an ETF will do it for as little as 0.13%?

ETFs provide Instant Diversification. Whether following a broad index or a specific sector, an ETF provides a basket of stocks with one purchase.

ETFs Are Liquid.  ETFs trade on a market exchange so they can be traded (intraday) anytime stocks trade, not just at the end of the day.

ETFs are Tax Efficient.  Since most ETFs are not actively managed, but are programmed to follow a specific index, they don’t have realized capital gains and income that are required to be passed on to owners each year. This means you won’t be taxed until you sell your ETF, giving you more control.

ETFs can invest in specific sectors. ETFs can segment to very specific or targeted sectors of the economy. This allows investors to have a diversified position in a small slice of a sector you want to be invested in.

ETFs can be purchased in small amounts. Since ETFs trade like stocks, small positions can be purchased either to dollar cost average into a large position by taking a single small position in a particular sector.

ETFs are available in alternative investments.  ETFs allow investors to take positions in alternative or even exotic investments that are unavailable in any other form to small investors. New products become available regularly and already include ETFs in commodities, hedges, and leveraged short positions in indices and sectors.

The advantages of ETFs are so strong that the Arbor Investment Planner no longer uses mutual funds in the Arbor Asset Allocation Model Portfolio (AAAMP).  With a combination of stocks and ETFs the portfolio can capitalize on the advantages of combining these two investments for an optimum risk to reward ratio.  

Like any investment, ETFs require research and knowledge to be able to place them in a properly diversified asset allocated portfolio. If you could use help in assembling your personal portfolio consider hiring a firm with a successful record such as the Arbor Investment Planner.

More information available at: www.ArborInvestmentPlanner.com
Or contact Ken Faulkenberry at KFinvest@aol.com or 281-719-8904.