Index Investing Index Funds Vs ETFs

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Index InvestingIndex Funds Vs ETFs

• Index Funds Open-End Mutual Funds that track an
  index (Vanguard SP500 Index Funds, 1976)
• ETFs (exchange traded funds) Closed end Funds
  whose traded shares track an index.
• SPDR (93) VIPER iSHARES QQQQ

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Merits of ETFs

• ETFs are continuously priced throughout the
  trading day, whereas mutual fund sales take place
  at the end of the day price.
• In theory, ETFs should be able to more closely
  track an index than a mutual fund. Index fund
  managers are confronted with the need to provide
  liquidity to buyers and sellers of their fund's
  shares, which requires them to hold a percentage
  of their assets in cash.

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Merits of ETFs

• Because ETFs trade like a stock, an investor can
  employ a wider range of trading techniques with
  them, such as stop loss and limit orders, and
  short sales. Increasingly, futures and options
  are becoming available on the more liquid ETFs,
  which creates more potential trading strategies.

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Merits of ETFs

• The operating expenses on many ETFs tend to be
  lower than on index mutual funds which track the
  same index, because ETFs don't provide the same
  level of service to their owners that mutual fund
  owners receive (e.g., telephone service centers,
  free fund transfers, check writing privileges,
  etc.).

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Merits of Index Funds

• Operating expenses are only part of the story.
  When you buy an ETF, you also pay a brokerage
  commission, which you usually avoid when you buy
  an index mutual fund (which rarely carry front
  end sales loads).
• For people who dollar cost average -- investing
  an amount of money each month into the index fund
  or funds they own, the ability to avoid trading
  commissions makes mutual funds a much better deal
  over time.

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Merits of Index funds

• If you are a long term, buy and hold investor,
  the ability to trade ETFs throughout the day, and
  to employ a wide range of trading strategies
  really isn't very useful. Mutual fund companies
  provide a range of services that many discount
  brokerages do not (this assumes that, in order to
  minimize sales commissions, people buy ETFs
  through discount rather than full service
  stockbrokers).
• In practice, many ETFs have had larger tracking
  errors versus the index than comparable mutual
  funds.

7
REIT ETFs

• REITs are companies that own and manage
  properties in subsectors such as apartments,
  malls, warehouses and offices. As an asset class,
  REITs can reduce portfolio risk, since they tend
  not to move in step with stocks and bonds.

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Merits

• As a portfolio diversifier, however, REITs can
  provide the right stuff in choppy stock markets.
  For example, the MSCI REIT index added 26.8 in
  2000 while the Standard Poor's 500 Index fell
  9.1.
• When stocks are strong, however, REITs tend to
  weaken. The SP gained 21 in 1999, while the
  REIT index lost 4.6.

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Some REIT ETFs

• ETF investors can choose among four REIT
  offerings, each tracking a different index
  StreetTracks Wilshire REIT Vanguard REIT Index
  Vipers iShares Cohen Steers Realty Majors, and
  iShares Dow Jones U.S. Real Estate.
• The iShares fund tracking the Cohen Steers
  index has the fewest number of stocks, with 31
  holdings, and focuses more on the large-cap
  segment of the market.