As years have passed since the appearance and surge of ETF investing some investors tend to loose the
perspective on the optimal application of these investment assets. ETFs (Exchange Traded Funds) as the
name suggests are funds that can be bought and sold throughout the day since its price and availability is
based on the fact the fund is listed the same way that stocks are. What is entirely missed from its name is the
fact that with few exceptions all ETFs are index funds, meaning that they replicate closely a given market
index, thusly enabling access to a portion of a given market independently of purchase and cost limitations
afforded by mutual funds.
As you may have gathered by now, the fact that ETFs are index funds allow an average investor to access an
unprecedented array of specialized markets, including international stock exchanges, U.S and World market
sectors and even commodity sectors. As such a portfolio that invests in even a limited number of ETFs does
in fact access an ample collection of individual issuers that normally could not be afforded. As an additional
benefit to the average portfolio is not only granted a better chance of diversification but a more diluted
exposure to the typical market pitfalls that investors of individual stocks encounter. At most, fairly
concentrated ETFs like the QQQs (investing in the largest 100 stocks listed in the Nasdaq market), its largest
holding represents around 10% of the index, although not immune from market variations from such stock, its
impact is quite smaller than actually holding that single issuer. Added to the known benefits of owning an
index fund is the remote possibility that an index may go bankrupt, since indexes are periodically updated and
stocks with poor outlooks discarded, an index does have the possibility to avoid a complete loss of value.
The outmost advantage to investing in ETFs resides in its cost; unlike mutual funds (with the exception of noload
funds) the expense ratio of an average ETF is at least half of its counterparts. Although trade fees should
be added to the overall cost, the convenience and availability of ETFs will offset the additional cost in most
investors mind; do try to avoid to actively trading ETF funds if low cost is what you are looking for.
Any disadvantages? Although a lot has been written about the misgivings of some commodity ETFs that do
not necessarily mimic, nor ever intended to follow the price of a given commodity, in general ETFs present
two main disadvantages to the long-term investor: the cost of actively trading a given ETF can be prohibitive
and results may vary widely, and the second, may be the actual yield of index ETFs which on average will not
be far from the market performance (S&P500) on any given year. This is both an advantage and
disadvantage since being at par with the S&P500 is not bad especially in current market conditions, yet the
effort of building a portfolio that is highly diversified only to match overall market performance is almost selfdefeating.
Indexes are by nature self-fulfilling in the sense that most will tend to match market performance
rather than deviate from the norm. An ETF investor should take into account the benefits of high
diversification (is there such a thing as too much diversification? We believe there is…) with lower volatility
and affordability compared to picking individual stocks.
Contact:
TRADEX Inc.
Ramon Castro
www.tradexdirect2.com
800-849-0590
mailto:info@tradexdirect2.com
TRADEXdirect © 2008

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