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Richard Groh, CFP (800) 495-2075 (California)
Certified Financial Planner, Richard Groh, explains the new trend in using EXCHANGE TRADED FUNDS -- as an alternative to traditional mutual funds..
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WHAT IS AN ETF?
Exchange Traded Funds (ETFs) are index funds that trade on stock exchanges. They are fairly new. While traditional mutual fund trading is marked by price inefficiencies, ETFs mirror and track their underlying indices very closely without the risk of market manipulation.
ETFs GAIN IN POPULARITY
Because of the recently revealed scandals in traditional mutual funds, some investors have switched to ETFs as an alternative.
ADVANTAGES OF ETFs OVER TRATIONAL MUTUAL FUNDS
Unlike mutual funds, whose prices are set once at the end of the trading day at 4 p.m. (New York time). an ETF trades continuously on exchanges throughout the trading day.
Priced throughout the day, ETFs are not subject to price manipulations and timing strategies when stock exchanges are closed.
SELLING SHORT
Also unlike mutual funds, ETFs can be sold short -- a strategy betting that prices might fall. And unlike stocks when sold short, ETFs can avoid the "up-tick rule. Ordinarily, equities requires a price rise before another transaction in the same security can short a sale. The "up-tick rule" was designed to prevent massive declines that may result from unabated short selling. This rule does not apply to ETFs. ETFs can be shorted -- whatever the market conditions. Up. Or down.
VARIETY
There are indexed and sector ETFs. ETFs like SPDRs and DIAMONDs seek to resemble the Standard & Poors 500 or Dow Jones Industrial Average. There are also ETFs that act as sector proxies for individual industries such as utilities or banks. There are even country-specific ETFs like those for France, Japan and Australia, among others.
QUBES
For investments in smaller cap stocks, there's an ETF commonly referred to as Qubes from its ticker symbol QQQ. It invests in the NASDAQ 100 index.
SPDRS
There are various Standard & Poor's Depository Receipts known as as SPDRs t.hat track various wide ranging Standard & Poor's indices as well as particular industry sectors.
iSHARES
iShares are a family of ETFs that track the performance of different indicies and sectors, such as the Russell 2000 or the Dow Jones US Consumer Cyclical Sector Index.
DIAMONDS
DIAMONDS are still another example of an ETF that tracks the Dow Jones Industrial Average (DJIA) for investors in large cap stocks.
HOW TO USE ETFs IN YOUR PORTFOLIO
Index ETFs expose investors to broad markets. They cover a range of styles, sizes and sectors to help diversify portfolios for different risk tolerances and different investment horizons. With ETFs individual investors gain diversification that would otherwise be cost-prohibitive and extremely complex to build from scratch.
HEDGE
ETFs can be an excellent hedging vehicle. They can be borrowed and sold short, creating new risk management approaches that -- until now -- were available only to large institutional investors. The smaller denominations in which index ETFs trade (relative to most derivative contracts) can match up with a more accurate risk exposure particularly for small investment portfolios.
FOR A PERSONAL ASSESSMENT ON USING ETFs IN YOUR PORTFOLIO
Call Certified Financial Planner, Richard Groh (800) 495-2075. We can discuss how ETFs can help diversify your investments, control risk and possibly enhance portfolio performance.
Or e-mail:
Richard_Groh@verizon.net
to request more written material.
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