Beat And Battered

After reading my introduction to exchange-traded funds, I know you are dying with anticipation to find out the best exchange traded funds on the market. There are many quality exchange-traded funds, but first you must know the different types of funds. An ETF wears many different hats just like mutual funds. Here are the four major categories of exchange traded funds.

Index ETF

The index ETF is similar to a traditional index mutual fund. It buys company stocks or bonds that mirror a particular stock index such as the S&P 500 or the Russell 2000. According to Wikipedia, as of February of 2008, there were 415 domestic equity index ETF’s, 160 global/international equity ETF’s, and 53 bond ETF’s. This is one of the biggest categories for an ETF, and they typically carry the lowest expenses, just like index mutual funds.

Commodities ETF

This ETF invests in commodities such as precious metals, and natural resources such as oil, coal, and food. One of the first of these funds was the gold exchange-traded fund. Commodity exchange-traded funds are typically index funds that track a commodities index. Make sure you do your research on these funds, because they are not regulated by the SEC like traditional investment companies.

Actively-Managed ETF

These are the newest type of exchange-traded funds. They became available to the public in March of 2008. They have higher expenses, because there are broker fees that you will pay. The response has been minimal so far, because many investors are looking to see which funds will post the best returns. I am interested to see which of these funds emerge as the front-runner. They have the chance of boasting higher short-term returns than the index ETFs.

Now that you are familiar with the different types of exchange-traded funds, let’s take a look at the best funds on the market. There are hundreds of great ETFs on the market, but here are ten funds that shine above the rest.

Top 10 Exchange-Traded Funds ( no particular order )

1. iShares MSCI Japan Index fund: Japan’s economy is growing exponentially. This is a no-brainer.
2. Powershares FTSE RAFI Fund: The fund tracks the 1000 largest domestic companies based on the size of the firm, book value, sales and dividends, and cash flow. It’s emphasis on cash flow will help it pick winners.
3. Vanguard Total Market ETF: An anchor for your portfolio.
4. iShares Lehman Aggregate ETF: A broad fund with potential for strong, steady returns.
5. Vanguard European Stock ETF: Diversify your portfolio and take advantage of Britain’s strong currency.
6. Vanguard Growth ETF: extremely low fees and Vanguard’s stellar reputation for growth funds make this a winner for the long-term.
7. iShares Dow Jones U.S. : It tracks the Dow Jones, and the Dow has boasted 10% returns over the past 80 years.
8. Powershares Dynamic Mid-Cap Growth: This stock will give you great long-term returns once the market picks back up.
9. iShares MSCI Brazil Index: Brazil’s economy continues to grow, has a strong currency, and record-low inflation. Not to mention they have an abundance of natural resources.
   
10. Powershares WilderHill Clean Energy: I threw this one in as a wild card. Alternative energy is the most important issue of our time, so this fund could make you a millionaire if the proper technological advances are made over the next 10 years.

I picked these ETF’s based on their potential for long-term growth. Don’t take this list as gospel. it is merely my opinion, so don’t come track me down if they end up tanking. There are a ton of trendy exchange-traded funds. Energy ETFs are hot right now, but I don’t think it will last. Make sure you don’t get caught up in trendy investing, unless you have a great deal of time to invest. Now is your chance to rip me apart based on my picks. Comment below with your thoughts and questions.

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Mutual funds are the investment vehicle of choice for retirement accounts of many Americans, but there is a new kid on the block. The Exchange Traded Fund or “ETF”, isn’t exactly new, but it has grown in popularity over the past five years with many amateur investors. So, what is it? Is it the right investment for you? Is it better than a mutual fund? I’ll be writing a three-part series covering many of the questions you might have about the exchange traded fund.

What Is An Exchange Traded Fund?

it’s just like a mutual fund, but it trades like a single stock on an exchange. Most exchange traded funds tracks an index such as the S&P 500, but they are traded in real time on an exchange throughout the day. An ETF packages a large amount of investments, and it allows you to trade it like a single company stock. ETF’s package together stocks, bonds, commodities, or a combination of all three.

The Difference Between Mutual Funds and the ETF

When you purchase a mutual fund, you are purchasing it at the net asset value of that fund at the end of the day. When you purchase an ETF, you are purchasing it at the current market price for that given moment in time. This allows you to set up limit and short orders with your broker. Philosophically, mutual funds and exchange traded funds differ in their approach. A mutual fund is born with a pile of cash and a team of analysts who pick a mix of stocks to mirror a given investment strategy. An exchange traded fund starts with an idea, to track an index, and are born from stocks instead of money. At the beginning of the year, exchange traded funds were granted the ability to be actively managed by a fund investor, but there are still very few of these funds.

The Minimum Investment

How many of you decided to buy an index fund? Did you cringe when you saw the minimum investment of $50,000? The minimum investment is usually much lower when you purchase the mutual fund in a retirement account, but it still brings some barrier to entry for those using a dollar-cost averaging method of investment. The ETF has no minimums. You can buy 1,000 shares at a time or just 1 share at a time. Just make sure that your broker doesn’t destroy you with fees.

Taxes and the ETF

They have tax advantages, but it’s complicated to explain. An ETF still incurs capital gains that you need to pay taxes on, unless you bought it in a retirement account. Mutual funds incur capital gains even without buying or selling a single share, and exchange traded funds have a similar thing happen but with a better tax advantage. I have hard time putting the concept into my own words, so here are some notes about why an ETF might pay less tax than a mutual fund from the Motley Fool:

• In general, the structure of ETFs tends to avoid the kind of outright selling that would trigger undistributed capital gains and other IRS nightmares. To understand why, think back to the ETF structure. For every ETF seller, there’s a buyer.
• On the other hand, if a flood of investors decide to dump a mutual fund, the fund may need to sell the underlying holdings in order to raise the cash to pay out, and that would bring Uncle Sam with hat in hand. ETFs may also have to drop a few schillings into the taxman’s cap, for instance, when the underlying index is changed.

Is the ETF right you?

Hopefully, I will help you figure this out over the next two parts of the series. The bottom line is that an ETF is more attractive to those who actively manage their own investments and retirement account. If you like to buy funds and let them sit and grow for the next 30 years, then a traditional no-load index fund is best for you. But, if you like the idea of shifting your investments to match the trends of the economy, then the ETF is a nice addition to your overall investment portfolio. Stay tuned for the ten best exchange traded funds and strategies for investing.

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