Diversification

[Mike]

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What are people's thoughts here on ETF's as opposed to mutual funds? Considering that mutual funds carry transaction fees, redemption fees, management fees, and loads, wouldn't it make more sense to use ETF's to diversify one's portfolio - particularly in areas such as commodities / natural resources / real estate - whose funds tend to be pricier?

Spaf, I know you actively use ETF's on scottrade, so I'm curious to know what your experience has been with them.

 

[azanon]

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Considering that mutual funds carry transaction fees, redemption fees, management fees, and loads, wouldn't it make more sense to use ETF's to diversify one's portfolio

Who buys mutual funds with transaction fees, redemption fees, and loads?

I admit i know practically nothing about ETF so couldnt really explain why there's no management fee. With a mutual fund, you're paying a manager to use his time and expertise to buy and sell at the right time. Of course, that service wouldnt be free. I highly doubt ETF's offer a similar service for free.

 

[pyriel]

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Mike, What is ETF? P.

 

[tsptalk]

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Mike -
Looks like you need a shave.

I could be wrong but I would think the major benefits of EFT'sare that they are more liquid in that you don't need to wait until the end of day to trade them. Also, I don't believe mutual funds care for the active trading thing where EFT's are like stocks and can be actively traded.

I know that doesn't mean too much to you because you are less active in your account but that's what I see as the differences.

Someone else can help me out here but I don't believe you'd have to worry about capital gains distributions either with EFT's.

 

[coolhand]

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Mike wrote:

Considering that mutual funds carry transaction fees, redemption fees, management fees, and loads,

Perhaps as a general rule, but I'm only paying a modest management feewith Vanguard; no loads, transaction fees or redemption fees.

 

[Birchtree]

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Pyriel,

An exchange traded fund is a passive form of a unit investment trust. They pick stocks by category and that gives the buyer the opportunity to concentrate in a particular area that perhaps may outperform. For example: if you wanted to get involved in the offshore drilling industry you could build a portfolio of individual drilling stocks to your liking - buy as many as you like. The etf does the same thing - only now you are concentrated for only one price and the portfolio moves in tandum, and can be sold at anytime and repurchased at any time during active hours. There are now well over 300 I believe of these funds. I Shares, Holders, Vipers, etc, each sponsoring company has their own offerings. Just another way to play - a new wrinkle - that is becoming popular.

Dennis

 

[Birchtree]

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Pyriel,

An ETF is exchange traded fund - basically a concentration of sector stocks located in one portfolio that allows you to actively buy and sell during market hours. The price fluctuates as the prices of the underlying stocks move up and down. Rather than accumulating a portfolio of individual stocks by themselves - you can purchase an ETF with the positions already built. Allows you to leverage an industry or an index for trading or long term holds - whatever your preference. There are probably over 300 such funds now available. Each sponsoring company has their own funds for example: I Shares, Holders, Vipers, etc. They are becoming very popular, with a new group of letter writers now following the funds with buy and trade recommendations.

Hope that helps. By the way, you are absolutely correct when you say everyone should have a Roth IRA - you just can't get any more flexible than with this type of program - always available for any rainy day problems - borrow as much as needed without penalty or paper work. Regards,

Dennis

 

[Mike]

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I'll flesh this out a bit:

Since I have an account with scottrade, it costs $17 to buy (and sell) any mutual fund that is not on their no transaction fee list (which includes funds such as Vanguard's). My general approach to investing is to buy indexes, since it's cheaper over the long haul and I don't have to worry about my gains being eaten up by active management (whether that be in higher management fees or via all that trading which consumes money via commissions).

I'm very curious about ETF's though, since they would only cost $7 to trade and obviously have no management fees associated with them. Unless I'm missing something here, it would look like they are a better deal, particularly in a brokerage account.

I'll have to yell at Spaf to read this thread the next time I see him on - I know he has ETF's.

Tom - actually, I did just get my head shaved the other day. :l

 

[tsptalk]

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Mike wrote:

Tom - actually, I did just get my head shaved the other day. :l

Better stick with the rodent.

 

[Spaf]

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I heard you Mike........Been working late!

ETFs exchange traded funds. 300 such funds and growing. Can be traded daily with a discount broker, or you can make long term investments with them. Barchart.com list them all out with charts, opinions, performance, etc. You can rank them by their performance. Market watch has a ETF section. Mainly ETFs are in indexes, growth, and value for the market (large, med. and small funds)and by sectors i.e., realestate, natural resources, etc, and by countries or groups.

http://www2.barchart.com/mktetfx.asp



You can't trade or frequently reposition mutual funds because via their prospectus your trading and interrupting something. Maybe the fund managers rules, whatever.

Where ETFs make money is their ask price. the market may say the fund is worth 100.00 per share. However, they are asking 100.10. Then they ask 100.09. Well you wait and buy at the lowest ask price. It also works the same on the bid price, what you sell for. Maybe they will give you 99.95, then 99.96, then 99.98, then 99.99 and finally 100.00.

There is also money made on the trade through your broker. Each trade is X$.

I generally stay with iShares. http://www.ishares.com IVV = S$P 500, IJR = S fund of sorts. And you are familiar with AGG and EFA.

Generally I stay with 4-5 funds and have 2 or 3 as replacements. TLT is a 20 yr treasury that has been a good offset to stocks. When TSP funds were down real estate in IYR picked up a good run, however it topped out recently.

Rgds Spaf

 

[Spaf]

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Diversification

You can have diversification in many ways and terms. You can diversify your TSP account i.e., 20% in all 5 funds. You can diversify your finances, with property, savings, investments, etc. I like diversification. I would not put all my monies in TSP, nor would I put it all in the house where I live. Finances should be proportioned out in accordance with needs and goals. Before investing, one should have an emergency fund, minimum of 10K.

TSP is for the long haul. You can't liquidate your TSP account, unless you get a loan, etc. Nor can you liquidate property quickly! Investments with mutual funds, exchange traded funds, and others can be liquidated over night. Not that you would want to, but in an emergency, sure.

Rgds Spaf

 

[Mike]

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I knew that you'd find this thread, spaf.

I think I'll use ETF's as a small / flexible part of my overall strategy... probably in the neighborhood of 10-15% of overall holdings. :^

Emerging markets and natural resources - those are the two areas I'll hit first. I'll also consider taking a short position on REIT's. Mortgage rates cannot sit this low indefinitely - they will come up, and a lot of people will pay the price on those interest only / ARM loans. :shock:

 

[MB550]

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ETF'sDO charge management fees--comparable to index mutual funds and almost as cheap as TSP funds.

I use a combination of ETF's and TSP funds to achieve a low cost, tax efficient, indexed portfolio.

I hold as much equity as possible in taxable accounts and hold taxable fixed income investments and tax-inefficientreal estate, dividend and microcap ETF's in tax deferred accounts.

And of course you have to invest in TSP for matching funds andfree dollar cost averaging and rebalancing.