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Editor's Note

by Charles Rotblut, CFA

Editor's Note Splash image

There are several superlatives I could use to describe the growth of exchange-traded funds (ETFs), but none seems to quite put the industry’s expansion into perspective. So, I will start this month’s issue with a statistic instead. Nearly half of the ETFs currently available have been in existence for three years or less.

The growth of ETFs and their brethren, exchanged-traded notes (ETNs), has caused our annual Guide to Exchange-Traded Funds to increase in size as well. This year, we are including nearly 330 ETFs and ETNs in the printed version of the AAII Journal, a 50% increase over the number we listed in the magazine last year. On AAII.com, we are posting a spreadsheet that contains more than 1,000 ETFs and ETNs.

Though mutual funds still outnumber ETFs, both in terms of the number of fund offerings and the value of assets under management, ETFs are making a lot of headway. For the price of buying a stock, investors can now get exposure to currencies, agricultural commodities and emerging market debt, among other investments. As a result, it has increasingly become a decision of which vehicle best suits your needs—a mutual fund or an exchange-traded fund.

And this is how you should be thinking about it. For pure indexing, an ETF can provide the lowest annual expenses. Active management still remains the domain of mutual funds for most individual investors. (Though there is a move toward actively managed ETFs, the numbers are still small.) Thus you should be thinking about which fund is most appropriate for your needs and goals, regardless of type. For example, my income-related investments include both the SPDR S&P Dividend ETF (SDY) and Fidelity Strategic Income (FSICX), a bond mutual fund I found in our annual Guide to the Top Mutual Funds. (The top funds guide was published in February 2010 and is available at AAII.com.)

To help make such comparisons easier, we have redesigned our ETF guide. This year’s guide follows a similar format to that of our 2010 Guide to the Top Mutual Funds. Where possible, we presented the same type of data and category names. This change resulted in several new data points being added to the ETF guide, including annual returns for 2007 through 2010 year-to-date, bull and bear market performance, yield, tax-cost ratio, average volume, the percentage of the portfolio allocated to the fund’s 10 largest holdings, and the fund’s inception date.

I also asked David Fry, publisher of the ETF Digest newsletter, to discuss what the evolution of the ETF industry means for individual investors. David believes the increased competition has placed downward pressure on fees, which is good. On other hand, he also thinks several of the new ETF offerings have more to do with a fund sponsor’s desire to increase market share than to provide investment products that are necessarily suitable for all investors. David provides guidance on how you can navigate the increasingly crowded ETF waters starting on page 6.

Though the focus of this month’s issue is ETFs, I have not forgotten that October brings third-quarter earnings season. As you look through the various headlines about earnings per share numbers and revenue growth, make sure to take the time to read through the shareholder communications provided by companies, such as in SEC Form 10-Q, as Eric Heyman of Olstein Capital Management suggests. Eric believes there is valuable information to be found in such releases. He explains what he looks for in shareholder letters and other related documents on page 26.

Finally, James Cloonan provides his latest update on the Model Shadow Stock Portfolio. In addition to making one buy and one sell, James eliminated the portfolio’s “two-year rule.” This rule had required a stock to be sold after two years if it no longer qualified as a buy candidate. You can read his rationale for the change and find out how the portfolio is performing on page 30.

Wishing you prosperity, Charles

Charles Rotblut, CFA
Editor, AAII Journal
twitter.com/charlesrotblut

Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


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