What The Heck Is An ETF?

What’s an ETF? This NYT article is a good introduction to exchange-traded-funds (ETFs). Mostly, ETFs are mutual funds that are pegged to financial indexes, but unlike a mutual fund, they can be traded throughout the day like a stock.The takeaway:

f you are making regular contributions over time – say, investing a certain dollar amount each week or month – buying an index fund is more cost-effective. If you are rolling over a lump sum, however, you might choose an E.T.F.

Exchange-Traded Funds: What You Need to Know [NYT]

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  1. jamesdenver says:

    i owned a couple foreign ones for a few years – (before everything bad happened.)

    it’s nice for an investor to be able to consolidate a group of stocks by industry or country, and easily makes you an “international investor.”

    Mine were through Morningstar/iShares

  2. rachmanut says:

    Consumerist has trained me so well I can’t interpret ETF as anything but “early termination fee”. You’re messing with my mind! What’s next, an in-depth discussion of Enhanced Equitable Collateral Bonds (EECBs)?

    • alexcassidy says:

      @rachmanut: And to make it worse, the functions they serve are the exact opposite- one makes you a theoretical fortune, the other costs you a real one!

  3. Apeweek says:

    The stock market, and especially index funds, have always been a scam. Look at this chart, where the Dow is adjusted for inflation:

    [www.ritholtz.com]

    So – looking at the chart – if you bought an index fund, tracking the Dow in 1966 – that’s over 40 years ago – you might barely be breaking even today (when adjusted for inflation.)

    Unless you are into gambling – or you understand either stock selection or market timing, you shouldn’t be anywhere near the stock market.

    • wrjohnston19283 says:

      @laserjobs:

      You need to be careful with GLD and SLV regarding taxes – they are taxed up to 28% vs the 15% capital gains rate.

      WRJ

    • johnfrombrooklyn says:

      @Apeweek: Extremely poor example here. You’re picking a moment in time – right now – when the market is way way down. That exact same chart drawn 18 months ago would have shown the stock market to be a fabulous investment over the past 5, 10, 20, or 40 years. Index funds are BY FAR the best investments for the average investor because of their low fee structure. Managed funds of any kinds are lousy choices because they have huge rip off fees. Somehow I think you probably know that.

    • Fineous K. Douchenstein says:

      @Apeweek: The whole basis of your argument is folly. The reason you invest in the market to begin with is so that after inflation, you’re still in the black. It’s a fairly well-known fact that money in savings loses its value year-over-year because the interest can’t keep up with inflation.

      Not only that, but the graph is heavily out of scale, because the distance from 100 to 1000 is the same as 1000 to 10000, so the data is compressed vertically to look smaller.

      • Apeweek says:

        @wagenejm:
        @johnfrombrooklyn:

        Of course I’m ‘picking a moment in time’. That’s the point. Timing matters. If you don’t understand something about market timing, stocks are a very risky place to be. If your retirement age happens today, this is a very unfortunate ‘moment in time’ indeed. Even if you adjust the 1966 entry point one way or the other, it’s a very poor return for over 40 years of investment.

        How can index funds be “BY FAR” the best investment when most people who invested in index funds in the last 10 years are in the hole? This is a peculiar definition of a good investment.

        I’ve participated in a lot of discussions like this, where very plain and indisputable numbers are simply ignored. I think a lot of people treat their rules of investing like a religion – they must be correct, even if they’ve lost half of their money following them.

        Regarding the chart scale, it’s not “heavily out of scale”, its a logarithmic plot, which is common for stock charts because it makes the representation of percentage changes more linear.

        • Anonymous says:

          @Apeweek:

          You clearly don’t know what you’re talking about. The advantage of ETFs is that they outperform the average mutual fund or a random sampling of stocks because they replicate the performance of a market/index without a lot of fees/costs/overhead.

          ETF’s may down in the timeframe you’re looking at, but an average investor or even most mutual funds stocked with “professionals” did even worse.

          If your argument is “the market is really bad zoinks!” then yes, ETF’s are “bad”… just like almost every stock, mutual fund, index fund, etc. was “bad.”

          The only debate for the average investor is between ETFs and Index Funds and the answer to that has to do with how much you have to invest and some tax questions.

          Do research. Either A) read the econ academic journal articles comparing the returns or B) take a more accessible route and read something like “Random Walk Down Wall St.”

          It’s a shame so many readers have the potential to be misled by your comment since it is near the top.

          • Apeweek says:

            @LaurenceYak:

            You hit the nail on the head. My argument is indeed, “the market is really bad zoinks!” Which is why most people should NOT invest in index funds (or ETFs) unless you KNOW WHAT YOU’RE DOING, and have some clue about either market timing or stock selection.

            Too bad for you that my comment is near the top. Once in a while a little truth gets through to counter the idiotic propaganda.

            As for who “knows what they’re talking about”, take an adventure looking through my comment history here. You’ll see that I called for a course of action – widely derided by other clueless commenters like yourself – before the market meltdown – that protected my assets. My money left the market before that fiasco happened, and it’s all documented here in my comments.

            What happened to your investments in the crash?

    • redclear55 says:

      @Apeweek: you are referencing a chart which was designed to show today. Let’s roll back the clock to 1983 and argue we’re at the same level as 1943. Looking back from today (2008), your recommendation to leave the stock market would have been proven foolish.

      Also, you are defining the stock market as only being 30 stocks large. While the Dow is a popular index to quote, it is argued as not the best indicator of the “stock market” (see Criticism at [en.wikipedia.org]). I could track Ford, GMC and Chrysler and argue they represent the entire automotive industry.

      @ OP: Finally… I arbitrarily chose three car companies to represent an industry. So too are stocks arbitrarily chosen to represent a market. While ETFs are low cost alternatives for investing in the market, they are only different from active managers in how often the portfolios are adjusted. If you plan to use ETFs, it’s extremely important to diversify and re-balance periodically to manage the portfolio risk.

      • redclear55 says:

        @redclear55: today is obviously 2009… I just prefer to live in the relative past.

        • Apeweek says:

          @redclear55:

          While we’re on the topic of that inflation-adjusted DOW chart from my original post – take another look at it – imagine you had invested, as a young man, at the peak of the market in 1929, just before the crash. If you then weren’t smart enough to get out when you broke even in the 1960′s, it would take until the early 1990′s to make an inflation-adjusted profit – that is, assuming you lived to be almost 100 years old.

          Timing matters! If you don’t understand timing, investing = gambling.

      • Apeweek says:

        @redclear55:

        The year is not 1983. Your assumption that my advice would be exactly the same then does not necessarily hold. I am not anti-stock market, in fact I am an experienced trader. This is my point, you need to understand timing. Most people don’t, and are media-led to believe that bull markets never end.

        My decision to leave the stock market in 2008 was most decidedly not foolish, as I didn’t lose half my money.

        Did you leave your in? Go ahead, spin this some more, tell me how smart this makes you.

        Is now a good time to invest? Maybe. But compare a chart of the recent market to the market after the great depression. The market may not have hit its lowest point yet. At the very least, the market will be a roller coaster experience for a few more years before really going anywhere. Unless you want to make money by timing the peaks and valleys (which is what I do), do your stomach a favor and stay away from the market for a while.

    • Apeweek says:

      @Apeweek:

      To all the people here pointing out that choosing different entry and exit points, or using different index funds or ETFs than my example produces much better results, congratulations – you are missing the point.

      If I point out that gambling is not a very good way to make a living, and you say – “but how about if win a million dollars?”, it’s pretty obvious you’ve missed the point.

      Yes, some people do make a living gambling. For most people, it’s a really bad choice.

      Now, investing is not inherently as risky as gambling. But if you trust your entire life’s savings this way (something you would never do while gambling), it can be far worse.

  4. laserjobs says:

    GLD SLV and USO is all you need to know with the insane Ben Bernake running the printing press.

    You can all pay me back for this advice in karma.

  5. dumblonde says:

    I was very confused by this at first. I saw ETF trading and was like what? Now there’s a market for Early Termination Fees like for mortgages? Then I realized that was completely silly and actually understood what you’re trying to say.

  6. t0ph says:

    I just got out of one that was based on a financial index – 3x’s leveraged…whew, not for the faint of heart..

  7. sasquatch28 says:

    lol…I first thought it meant Early termination fee. Guess I’m just used to getting screwed by the phone company.