Monday, April 12, 2010


I have a new love of my financial life and they are ETF's.

The company we used for our Roth IRA (and our Roth 401K, but I have no control over what funds I can buy in there), Fidelity, recently started offering a few ETF's commission free, so it costs you nothing to buy them... and it is not just because they each have made me 3% in the week I have owned them (it was a good week), but that always helps :)

ETF stands for Exchange Traded Fund. They trade like a stock, but are like a mutual fund in that they hold a basket of stocks in one fund. You can buy them at anytime during the day, like a stock, but they are like a mutual fund in that they to follow a certain index or sector. There is usually no minimum because you buy the shares like you would any single stock. It is a great way to diversify over an index or sector instead of buying individual stocks without having the minimums that most mutual funds require.

The most important thing about them is that they have a VERY LOW expense ratio! I sold about 3/4 of one of the mutual funds we held in our IRA to buy 4 different ETF's (a large cap, a mid cap, a small cap, and a foreign based ETF's) Large, medium, and small cap, just refers to the size of the companies are involved in that index. The expense ratio for the iShares S&P500 (large cap) one I bought is a measly .09% and already has a YTD performance of a little over 7% (the mid and small cap ones I bought so far have a YTD 12% return! I have only owned them a couple of weeks though)

To put that in perspective, the fund that I sold had a .75% expense ratio. So in a year, let's say I had 10,000 in it, to make it even numbers. I would pay $75 in expenses compared to only $9 with the ETF. $66 a year - or if that money was invested (and you never added anything to that initial 10,000 and it was consistently $66 more a year for the more expensive fund), it would come to a little over $8300 in 30 years!

That is why expense ratio is so important and you should look for funds with good returns and LOW expense ratios (less than 1% is ideal, but as you can see, the lower you can get it and still get a good fund/return, the more overall you will earn) FYI- foreign funds often have higher expense ratios than other funds - but they usually have great returns (But are riskier) and you should have them as part of your overall portfolio - I'll talk about foreign funds more in another post

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