What Are Exchange-Traded Funds (ETFs)?

What Are Exchange-Traded Funds (ETFs)? They are essentially a hybrid between individual stocks and mutual funds with characteristics of both. After some research on Yahoo! Finance and About.com, here are some highlights of Exchange-Traded Funds:

ETFs are similar mutual funds

ETFs are similar individual stocks

Moreover, 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!

VB versus HFCGX

Why I Like Exchange-Traded Funds (ETFs)?

In the post How Expense Ratio Affect Long-Term Performance?, 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. Also, as I mentioned earlier, ETFs tend to be more tax efficient than equivalent mutual funds making them more appealing in a taxable account.

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.

Pinyo
Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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3 Comments

  1. gravatar
    Lazy Man and Money
    July 31, 2007, 9:39

    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.

  2. gravatar
    Pinyo
    July 31, 2007, 10:34

    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.

  3. gravatar
    Online Dividends
    June 27, 2008, 18:29

    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 :-(

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