Russell Wild - Investing in ETFs For Dummies

Investing in ETFs For Dummies

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Copyright 2016 by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

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Library of Congress Control Number: 2015951533

ISBN 978-1-119-12192-3 (pbk); ISBN 978-1-119-12193-0 (ebk); ISBN 978-1-119-12194-7 (ebk)

1. Table of Contents

Every month, it seems, Wall Street comes up with some newfangled investment idea. The array of financial products (replete with 164-page prospectuses) is now so dizzying that the old lumpy mattress is starting to look like a more comfortable place to stash the cash. But there is one relatively new product out there definitely worth looking at. Its something of a cross between an index mutual fund and a stock, and its called an exchange-traded fund, or ETF.

Just as computers and fax machines were used by big institutions before they caught on with individual consumers, so it was with ETFs. They were first embraced by institutional traders investment banks, hedge funds, and insurance firms because, among other things, they allow for the quick juggling of massive holdings. Big traders like that sort of thing. Personally, playing hot potato with my money is not my idea of fun. But all the same, over the past several years, Ive invested most of my own savings in ETFs, and Ive suggested to many of my clients that they do the same.

Im not alone in my appreciation of ETFs. They have grown exponentially in the past few years, and they will surely continue to grow and gain influence. While I cant claim that my purchases and my recommendations of ETFs account for much of the growing $2 trillion+ ETF market, Im happy to be a (very) small part of it. After youve read this book, you may decide to become part of it as well, if you havent already.

As with any other investment, youre looking for a certain payoff in reading this book. In an abstract sense, the payoff will come in your achieving a thorough understanding and appreciation of a powerful financial tool called an exchange-traded fund. The more concrete payoff will come when you apply this understanding to improve your investment results.

What makes me think ETFs can help you make money?

• ETFs are intelligent. Most financial experts agree that playing with individual stocks can be hazardous to ones wealth. Anything from an accounting scandal to the CEOs sudden angina attack can send a single stock spiraling downward. Thats why it makes sense for the average investor to own lots of stocks or bonds through ETFs or mutual funds.
• ETFs are cheap. At least 250 ETFs charge annual management expenses of 0.20 percent or lower, and 60 of them charge 0.10 percent a year or less. The average actively managed mutual fund, in contrast, charges 1.25 percent a year. Index mutual funds generally cost a tad more than their ETF cousins. Such cost differences, while appearing small on paper, can make a huge impact on your returns over time.
• ETFs are tax-smart. Because of the clever way ETFs are structured, the taxes you pay on any growth are minimal.
• ETFs are open books. Quite unlike mutual funds, an nearly all ETFs holdings are readily visible. If this afternoon, for example, I were to buy 100 shares of the ETF called the SPDR (pronounced spider) S&P 500, I would know that exactly 4.02 percent of my money was invested in Apple, Inc, 2.07 percent in the Microsoft Corporation, and 1.94 percent in Exxon Mobil Corp. You dont get that kind of detail when you buy most mutual funds. Mutual fund managers, like stage magicians, are often reluctant to reveal their secrets. In the investment game, the more you know, the lower the odds you will get sawed in half.

If the book youre now reading were like some (but certainly not all) mutual funds, it would be largely unintelligible and expensive. (It might be doubly expensive if you tried to resell the book within 90 days!) Luckily, this book is more like an ETF. Heres how:

• Investing in ETFs For Dummies is intelligent. I dont try to convince you that ETFs are your best investment choice, and I certainly dont tell you that ETFs will make you rich. Instead, I lay out facts and figures and summarize some hard academic findings, and I let you draw your own conclusions.