May 11, 2005
If you're used to a full-service sit-down investing meal of actively managed mutual funds, trying out the drive-through of individual investing might seem daunting.
Don't let it be. Exchange-traded funds (ETFs) are a great starter stock for the white-tablecloth crowd. Like regular company stocks, ETFs can be bought or sold any time the market is open via a brokerage account. And they have ticker symbols -- quite snappy ones, in fact, like Cubes (Nasdaq: QQQ ) , Spiders (AMEX: SPY ) , and Diamonds (AMEX: DIA ) . They resemble their mutual fund brethren in that they hold dozens, hundreds, or even thousands of companies under one umbrella, unified by a particular investing theme (such as companies that comprise the Dow, biotech companies, even French companies -- well, France's MSCSI Index (AMEX: EWQ ) , anyways).
But unlike actively managed mutual funds, ETFs tend to be cheap; annual expenses range between 0.1% and 0.65% and are deducted from dividends. While some mutual funds demand a chunk of money from shareholders to get a seat at the table, ETFs don't require a minimum investment. All you need is a brokerage account and an idea.
As with drive-through fare and microwave meals, you sacrifice service for the sake of cost controls. There's no fund manager calling the shots, adding or subtracting to a position to balance the portfolio pie when the market sways to and fro.
You don't need to abandon your pampered investing ways entirely. Holding baskets of stocks in a particular sector or index, instead of just an individual company, helps spread the risk around -- just like a good mutual fund manager. ETFs let you add a shot of instant diversification to your portfolio without having to leave a hefty tip for the service.
For a second helping on ETFs:
Dayana Yochim's a big fan of indexing but owns none of the ETFs mentioned in this article.