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Letters to the Editor

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To the Editors:

Your recent articles by John Bogle and John Markese on exchange-traded funds (ETFs) versus mutual funds brought to mind the many advantages of ETFs that were not mentioned. [“‘Enhanced’ Index Funds: Can They Beat the Market,” by John Bogle, May 2007, and “Face-Off: Mutual Funds vs. ETFs,” by John Markese, June 2007, AAII Journal.] In general, ETFs provide a more flexible and efficient way to diversify. Here are some reasons for this.

(1) No rules prohibiting selling or redeeming shares. They may be bought or sold at any time during the day.

(2) Buy and sell rules that do not change. For example, ETFs are never closed to new investors. Most ETFs may be purchased and sold in any quantity or dollar amount. Mutual funds, on the other hand, may increase the minimum dollar amount for entry.

(3) Some mutual funds may be purchased only through the fund company that manages them. Other mutual funds may be purchased through your brokerage account, but they frequently have different rules for buying and selling than regular stocks. On the other hand, all ETFs may be traded in your existing brokerage account and the trading rules are the same as those for stocks.

(4) More aggressive investors may use options and short sell strategies with ETFs.

(5) ETFs may be purchased with limit orders and sold with stop orders. Intraday market orders may be placed and executed at anytime.

(6) ETFs generally trade at net asset value.

(7) News is available throughout the day on ETFs and their associated industries and sectors. A watchlist of sector-specific ETFs in Yahoo! Finance is a handy way to get industry news.

(8) Dividends may be reinvested through many broker accounts.

(9) Because continuous price and volume data are available on ETFs, technical analysis may be used to determine entry and exit points.

John Bogle suggested that many of the new ETFs are attempting to beat the market. It is not clear that beating the market is their objective. Certainly they provide increased revenue for their sponsors. But, more importantly, ETFs provide ways of diversifying your portfolio in areas like foreign and emerging markets, utilities, and commodities without committing a large portion of your investing capital.

As for trading costs, ETFs may be much cheaper than mutual funds. If one holds a position in, for example, Vanguard Small-Cap Growth ETF (VBK) for several years, it will cost an approximate one-time commission of $9.95. If, on the other hand, one holds a small-cap Vanguard mutual fund of less than $10,000 in a Vanguard account, Vanguard will charge you a $20 per year maintenance fee. That makes the mutual fund much more expensive than a similar ETF.

Periodic investments made through a payroll deduction plan or other periodic investing mechanism is one place where mutual funds are more beneficial than ETFs.

Jared Bessert
Via E-mail

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To the Editors:

This may be of interest to parents or grandparents interested in direct stock purchase plans for young family members. [“Going Straight to the Source: AAII’s 2007 Guide to Direct Purchase Plans” appeared in the June 2007 AAII Journal and is available at AAII.com.]

I recently signed up for two accounts for grandchildren with American Stock Transfer. They would only accept one of them on-line and said there is a rule about not associating two different Social Security numbers with one bank account. A supervisor told me I would have to charge the second purchase to a different checking account or else get the enrollment form in the mail and send them a check (use of the same account is perfectly acceptable when done this way). I have not found this restriction at other custodian institutions.

Ed Loring
Via E-mail

To the Editors:

While I don’t need “real-time” stock data for my stodgy purposes, the sites listed in Hot Links in the July 2007 AAII Journal have proved very useful to this 81-year-old with his first computer. However, none of the listed sites cover preferred stock. My advisor recommended Reuters.com, which indeed covers them. More importantly, it proved to be a superb site with really extensive coverage of everything imaginable. Those of your readers who don’t know about it may wish to try it.

Tracy K. Hastings
Via E-mail

Editor's Note:

See pages 20–22 of our Guide to the Top Investment Web Sites in this issue for more on Reuters.com and similar sites that offer the best in fundamental stock data.

 

 


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