Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) are all the rage.  They trade like a stock and depending on the ETF you purchase, may be comparable to a mutual fund (in terms of the basket of stocks or bonds owned) and the fees charged are very minimal.

The problem with ETFs, from my perspective, is one has to pay a commission whenever one purchases shares, just like individual stocks [except if you have a  no-fee DRIP – Dividend Reinvestment Plan – the topic of a future post].  If you are a very small or tiny investor, those commissions can add up quickly, particularly is you’re dollar cost averaging [contributing a fixed amount of money each month].

Ric Edelman, host of The Ric Edelman Show, a radio program, is a big proponent of ETFs.  So I decided to call his show.  I called the program about two years ago.  I told Ric, “I understand the reasons why you don’t like the mutual fund industry.  But I’m a small investor who dollar cost averages and I’m uncertain if ETFs are for me. ” Ric explained why ETFs are so great.  He acknowledged, for a small investor like me, the cost of commissions if I dollar-cost average, would be significant.  Ric gave me his solution, which I predicted before he even said it.   He told me to save up the money I would dollar cost average monthly and buy shares of an ETF once a year.

WRONG ANSWER.  Ric’s suggestion is, in effect, timing the market.  If I followed Ric’s suggestion, when is the best time, once a year, to purchase an ETF?  I could be purchasing shares of ETF at the worst time of the year, the best time of the year, or somewhere in between.

Although Ric rails against the “mutual fund industry,” after my conversation with Ric Edelman I decided I was sticking with index funds offered by the mutual fund company The Vanguard Group.

About a year ago Rick Edelman changed his tune.  He now recommends index funds (mutual funds) for the small investor instead of ETFs.  I wonder what caused him to change his mind?

Of course I do find it ironic that Ric Edelman is now recommending index funds.  Years ago, he was telling listeners that actively traded mutual funds were better than passively traded mutual funds (otherwise known as index funds).  Funny, I didn’t agree with him then either (I’ll explain why in a future post).

ETFs may be a good investment vehicle for you.  But please make sure you understand all the costs.

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