Exchange-traded funds (ETF’s) clarified

 

The Tokyo subway map above is the epitome of clarity, right? (Thanks to Kirsty Stevenson for the idea.) It is in the same league with most explanations of ETFs.  Many of our members are looking for a clarification because ….

… historically, over the long term, properly selected market index exchange-traded funds (ETFs) held in tax-advantaged accounts have been the investor’s best way for growing savings and are likely to remain so for many years.

Properly selected? There are thousands of ETFs – more than individual stocks! What does “properly selected” mean?

Well, we are looking for ETFs which track the S&P 500 market index since it represents the American economy, the strongest economy in history; we want to our fair share. Few ETFs qualify. They are called index ETFs and here are some useful ones:

    1. iShares Core S&P 500 ETF (IVV)
    2. Vanguard S&P 500 ETF (VOO)
    3. SPDR S&P 500 ETF Trust (SPY)
    4. Schwab U.S. Large-Cap ETF (SCHX)
    5. iShares S&P 500 Growth ETF (IVW)
    6. Guggenheim S&P 500 Equal Weight ETF (symbol RSP)

ETFs are similar to the older and better-known mutual funds except that they cost less to buy, less to own and less to sell. Like stocks, they trade throughout the day instead of only at the end of the day like mutual funds do. Since Monday Morning Millionaire Program members do not trade, this feature is of minor importance. The table below compares Index ETFs to mutual funds.

Index ETFs Mutual Funds
Origins 1975 (John Bogle) About 95 years ago
Purpose
-Diversification even for small amounts
-To mirror an index. Not managed.
-Diversification even for small amounts
-Attempt to beat indexes (They almost never do after fees.)
Fees Low (no management costs) High (management costs)
Effect make money for investors. make money for smart money salespeople and managers.
Bought from/Sold to … another investor … a mutual fund salesperson
Available as ETF’s. Derivatives activity possible. Frequently Never
Results … match the S&P 500 exactly … rarely equal the S&P 500

The subject of exchange-traded funds is complex but all that Monday Morning Millionaire Program members and need to know is that primarily SPY, IVV, VOO and RSP are the ones which interest us. All three pay dividends. We discussed that in our Monday, December 10 blog.

Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me

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