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ETFs take the world by storm

By Sheyna Steiner · Bankrate.com
Thursday, July 17, 2014
Posted: 5 pm ET

Exchange traded funds, or ETFs, no longer qualify as new -- SPY, the first ETF, launched in 1993 -- but in an industry characterized by few innovations in the consumer sector, ETFs still have that factory-new smell.

The ETF industry has blossomed over the past decade. There were 10 times more ETFs on the market in 2012 compared to 2001. Retail investors are increasingly choosing ETFs as an alternative to mutual funds.© JJ Studio/Shutterstock.com

For example, a recent poll of high net worth clients by Fidelity Investments found that 43 percent of investors have plans to invest more money in ETFs in the coming year. Just over a third of those polled say that they like ETFs because they are passive investments that offer easy diversification. Over a quarter of respondents report that they shy away from ETFs as they don't know enough about them.

But ETFs have something to offer many types of investors, according to John Sweeney, Fidelity's executive vice president of retirement and investing strategies.

For instance short-term traders have a lot to like in ETFs.

"(ETFs) have intraday liquidity, so if you want to get in and out of them in the same day, you can -- unlike a mutual fund which closes at 4 p.m. You can purchase (a mutual fund) in the morning, but your closing price will be posted at the end of the day," says Sweeney.

Short-term ETF investors skip the fees often associated with holding a mutual fund for a short period as well.

Long-term investors get an investment that is typically low-cost, indexed and transparent. The holdings of most ETFs are tracked daily while mutual funds report holdings once per quarter.

"You have a good understanding of what you're purchasing. The Diamonds -- the 30 stocks in the Dow Jones Industrial Average -- you are familiar with them and see the exposure you are getting will be roughly equivalent to DJIA," says Sweeney. "Or if you like small cap value or large cap growth, buy an ETF that gives you exposure to those asset classes."

Thinking of dipping a toe into the ETF waters? Some brokers offer a list of ETFs that can be bought and sold free of trading commissions.

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***
Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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