Exchang traded funds
In planning for your retirement, you can save tens of thousands of dollars over the long run by investing in exchange-traded funds (ETFs) rather than mutual funds. This is possible because exchange-traded funds are cheaper to operate which translates to lower expenses than mutual funds. Part of the reason ETFs are less expensive to operate is that the back-office expenses are reduced.
ETFs are like mutual funds but can be traded like stocks throughout the day. You can buy at the market open and exit at the close, which you can’t do with traditional mutual funds. You can buy them on margin, borrowing cash from your broker to leverage up exposure to markets you like. And you can sell them short, a negative bet in which you borrow shares and sell them, expecting to buy them back later at a lower price.
This flexibility in ETFs means you can find them one for almost every equity index. Common items include the S&P500 Index, but they can also be used to diversify your portfolio to include indexes for regions like Europe and the Far East. The largest domestic bond indexes are also included.
Since ETFs trade like stocks, you pay brokerage commissions to buy them. They can be inexpensive in to use for established accounts and IRA rollovers. But because of the initial transaction costs, they are not useful when you’re buying in small quantities, such as monthly contributions to a 401k. Stick with a low-cost mutual funds provider such as Vanguard for that strategy.
The significant growth of ETFs bely their popularity. Recent data indicates there were 143 ETFs with combined assets over $174 billion, a 49% increase from one year ago. During this same period, assets of mutual funds advanced just over 7%.