Index Funds and ETFs
An index fund is a subspecies of Mutual Fund that tries to “track the market.” A pure “index fund” is an almost unattainable, theoretical creature. Why? There are just too many securities in the market to buy. It would take a huge stack of cash to buy a reasonable amount of every security. Some choices have to be made. Logically, the fund managers want to spend money on the “best stocks,” so the index concept gives way to the stock-picking impulse pretty quickly. We compromise — the managers will buy a whole lot of stocks — they will diversify their investments in a sensible way.
There are lots of variations on the Index Fund theme. One of my favorites is what some call rule-based asset management. This means that the fund managers spend their time studying the market and developing a set of rules that dictate when stocks and bonds will be bought or sold. This takes some of the emotion and guesswork out of the process, but developing the rule set has got to be a challenging task. Still, some of these funds, especially those managed by Dimensional Fund Advisors, have done very well historically, and are worth a look if you have enough money to get into them.
Exchange Traded Funds (ETFs) are a variant on the index fund theme that accommodates our impulse to engage in stock-picking with our desire to diversify our purchases. ETFs are funds that gather money and invest it in a particular, focused investment field. Some, for example, will buy only stocks of Korean companies. Others will focus only on Mexican companies. Some will only buy European bonds or Chinese computer companies. Whatever your fancy. It may totally make sense to buy into one of these funds if your specialized knowledge tells you that a particular sector is going to boom. You could have bought an ETF, no doubt, to invest in the new-home construction boom that swept the United States from 2003 - 2006. Or, you could've gotten into Mexican stocks via an ETF during the same period, and you would have seen some substantial capital appreciation. Of course, ETFs can just give us another opportunity to follow our hunches, in which case your results will be about as good as your hunches.
One of the good things about ETFs is they do adhere to Bogle's principle that good returns come from low expense ratios. Additionally, as I mentioned in the section on Gold and Silver, you can buy ETFs for these precious metals, thus enjoying upturns in their value without having to shoulder the costs of securing them from theft, and the costs of high commissions down at the precious metals shop. Of course, an ETF is only going to shine on your balance sheet, and not on your wrist like a Rolex would, so there's one more portfolio decision to make!
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There are lots of variations on the Index Fund theme. One of my favorites is what some call rule-based asset management. This means that the fund managers spend their time studying the market and developing a set of rules that dictate when stocks and bonds will be bought or sold. This takes some of the emotion and guesswork out of the process, but developing the rule set has got to be a challenging task. Still, some of these funds, especially those managed by Dimensional Fund Advisors, have done very well historically, and are worth a look if you have enough money to get into them.
Exchange Traded Funds (ETFs) are a variant on the index fund theme that accommodates our impulse to engage in stock-picking with our desire to diversify our purchases. ETFs are funds that gather money and invest it in a particular, focused investment field. Some, for example, will buy only stocks of Korean companies. Others will focus only on Mexican companies. Some will only buy European bonds or Chinese computer companies. Whatever your fancy. It may totally make sense to buy into one of these funds if your specialized knowledge tells you that a particular sector is going to boom. You could have bought an ETF, no doubt, to invest in the new-home construction boom that swept the United States from 2003 - 2006. Or, you could've gotten into Mexican stocks via an ETF during the same period, and you would have seen some substantial capital appreciation. Of course, ETFs can just give us another opportunity to follow our hunches, in which case your results will be about as good as your hunches.
One of the good things about ETFs is they do adhere to Bogle's principle that good returns come from low expense ratios. Additionally, as I mentioned in the section on Gold and Silver, you can buy ETFs for these precious metals, thus enjoying upturns in their value without having to shoulder the costs of securing them from theft, and the costs of high commissions down at the precious metals shop. Of course, an ETF is only going to shine on your balance sheet, and not on your wrist like a Rolex would, so there's one more portfolio decision to make!
Go to>>Options and Futures