Investor Independence via ETFs — Part 4

Dollar StrengtheningIn the previous article, I stated that some investors ought to consider an all-ETF portfolio rather than continuing to invest in mutual funds, where 80% of you are falling behind the market averages due to under-performing portfolio managers and the high fees they charge.

Depending on your risk profile, I believe that large-cap, blue-chip equity Exchange Traded Funds (ETFs) should be a core holding for any all-ETF portfolio, occupying as much as 50 percent or more of your total investments in securities.

The good news is you have several choices for tracking the broad market. They are called Spiders, Diamonds and Cubes.

ETFs came on the scene in 1993 with the launching of the SPDR or “Spider”. The name SPDR represents the Standard & Poor’s Depositary Receipts (AMEX: SPY) that track the S&P 500 index just like any S&P 500 index mutual fund. Although only a small fraction the size of the US$8 trillion mutual fund industry, ETFs are rapidly growing and taking market share.

Currently (April 22), $41 billion is invested in Spiders, and there are even value and growth versions of the Spider. Another $9 billion is invested in Barclays Global Investors iShares S&P 500 (AMEX: IVV), for a total of $50 billion in S&P 500 tracker ETFs, roughly 33 percent of all the money ($150 billion) invested in the more than 120 ETFs.

If you prefer watching the Dow 30 to the S&P 500 index, you can buy the “Diamond,” (AMEX:DIA) where another $7.5 billion is invested. Readers know that I favor the Dow 30 stocks because they are all mature, well-known companies. They are the biggest of all brand names, like General Electric, Microsoft, IBM and Coca Cola. The Diamond represents an investment in them all.

Public interest in ETFs skyrocketed with the early-1999 launching of the Qube (AMEX: QQQ), which tracks the tech-heavy Nasdaq 100 index. Even in the aftermath of the 2000 tech crash, about $24 billion is invested today in Qubes. The Total Expense Ratio for QQQ’s is 0.18% — just like for Diamonds. For the SPY, the Total Expense Ratio is 0.11%. Think about that.

For perspective, keep in mind that just four ETFs — the two S&P 500 ETFs (SPY and IVV), the Diamonds (DIA) and the Qubes (QQQ) — account for about 55 percent of all capital invested (at today’s market open) in more than 120 ETFs.

Tomorrow, I’ll get into the ETFs that track the small-cap and mid-cap stocks. After that, I’ll show you how to direct your portfolio into growth or value-oriented equity investments and specific sectors and international funds.

For investors who have never considered ETFs because they are not sold to you like mutual funds, which are burdened by those huge selling costs, there is a whole new world of prospects out there.

By Bill Cara


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