Getting To Know Exchange Traded Funds

2006-07-06

Exchange Traded Funds (also called EFTs) are mutual funds that trade like stocks. Some mimic the returns of broad stock and bond market indexes. While others are similar to the performance of groups of stocks from single industries, like utilities, technology, etc. Some even impersonate niche investments like IPO’s and such.

Exchange Traded Funds serve as a great building block for a portfolio. They can very easily be matched to your investment style. Let’s say for instance you want to create a balanced portfolio while minimizing your risk exposure. Then a combination of both stock EFTs and bond EFTs would be a good fit. An inexpensive way to boost exposure in a specific industry is by choosing an EFT specific to an industry like energy or healthcare.

Another thing you should consider to increase your exposure and boost your return to to choose the right brokerage account to fit your investment needs. For instance, if you plan to invest regularly, say weekly or bi-weekly, you will end up paying a commission ranging from $5 to $25 per trade. If you plan to invest regularly, look into setting up an account with a broker where you pay a one-time annual fee for unlimited trades. Many of these accounts cost around $199 a year, but could save you a couple of hundred dollars in commissions.

If you choose to invest in obscure EFT funds, be aware that the spread between the “bid price” that the buyer is willing to pay and the “ask price” that the seller is ready to accept could be as high as $0.50. To offset this look into setting a limit order which will allow you to get in and get out at predetermined prices.

Beware of the taxes involved with investing in metal EFTs. Generally speaking the sale of exchange traded funds is taxed at the 15% rate just as if you sold regular stocks. The difference occurs when you invest in metal funds like StreetTracks Gold Trust (GLD). The IRS considers these as collectibles and thus tax them at a rate of 28% if you hold them longer than one year.

Related Articles:
» Guide To Choosing Mutual Funds
» Looking To Invest In a Mutual Fund, Dig Deeper Than Past Performance

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