ETF's Better then Funds?

In planning for your retirement, you can invest in exactly the same thing in either of two ways. One will put tens of thousands of dollars more into your pocket.

This isn't a trick. Exchange-traded funds, or ETFs, are cheaper to operate than mutual funds, meaning fewer of your profits are gobbled up by middlemen.

ETFs are index funds stripped of the back-office expenses of mutual funds and traded like stocks throughout the day. You can plunge into financial markets at the opening bell and exit at the close, which you can’t do (legally) with funds, or you can buy them and hold them to accumulate their higher returns (because of their lower cost) for a lifetime.

More properly, you have to worry only about the market, but ETFs have other attributes that can help you play it like a pro. You can buy them on margin, borrowing cash from your broker to leverage up exposure to markets you like. And you can sell them short, a negative bet in which you borrow shares and sell them, expecting to buy them back later at a lower price.

Not for everyone
Because they trade like stocks, meaning you pay brokerage commissions to buy them, ETFs are economical in bulk, as in established accounts and IRA rollovers. They’re not useful when you’re buying in small quantities, such as monthly contributions to a 401(k). Low-cost mutual funds are clear winners for that strategy, as they are for active portfolio management. But for indexing, ETFs are nearly impossible to beat.

Most popular ETFs
SecurityAssets in $ billions
S&P Spiders (SPY, news, msgs)46.19
Nasdaq-100 Tracking Stock (QQQ, news, msgs) 23.03
iShares Trust S&P Index (IVV, news, msgs)8.49
Diamonds (DIA, news, msgs)7.55
S&P Midcap 400 Spider (MDY, news, msgs) 6.88
Note: As of 6/30/04

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