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Protect Your Wealth With Exchange-Traded Funds (ETFs)
July 26, 2007 by Pinyo.
In the post Destroy 50% of your wealth investing in mutual funds, I showed you how investing in mutual funds with high expense ratio can cost you 50% of your potential gain. With this in mind, I went back to review my IRA portfolio and found a fund that charges 1.23% (above my 1.0% maximum tolerance). This does not seem expensive, but it can cost me 30% of money invested if I keep it in the fund for 30 years.
I also hinted that I have been looking at another class of investment called Exchange-Traded Funds or ETFs. I did my initial research on Yahoo! Finance and About.com. Here are the highlights:
- ETFs are essentially a hybrid between individual stocks and mutual funds with characteristics of both
- Like mutual funds:
- ETFs are portfolios of many stocks, but their prices do not necessary match the net asset value (NAV) of the underlying stocks. It could be traded at a premium above the NAV, or at a discount below the NAV.
- ETFs are usually set up in categories similar to mutual fund — i.e., small-growth, mid-blend, large-index, specialty-real estate, international, etc.
- ETFs have expense ratio, but usually much lower than mutual funds of the same asset class
- Like stocks:
- ETFs can be traded throughout the day
- Traders can short or buy ETFs on margin
- Brokers charges trade commission to buy and sell ETFs
- ETFs suffer from bid-ask spread, meaning you have to buy at a higher ask price and sell at the lower bid price; effectively, losing the 1/8 spread.
- Lastly, ETFs are more tax-efficient than mutual funds. You can see the chart below — the big drop in HFCGX value is the huge distribution at the end of 2006. Luckily, this fund was in my IRA, so no tax!

Right now, I have enough money invested such that it is more expensive to invest in mutual funds than ETFs. So today, I went ahead and sold HFCGX and traded it for VB.
Here are some related posts from other Bloggers:
- Advanced Personal Finance: ETF Basics - What Everyone Should Know
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I love VB and own that instead of a mutual fund. I also have VTI and Vanguard’s Health care ETF, VHT. I love ETFs.
Lazy - hi again! I am just getting into ETFs. I sold some of my high expense mutual funds and now own some shares of VB, VBR, and VGT. I just love Vangard super low expense ratio, and great high yield / low PE combination.
That’s a great post Pinyo. I am thinking of “owning the world” through 2 etf’s - VTI and VEU. I haven’t gone as far as %-age exposure to bonds yet