| ETFs combine the features of an index mutual fund with the advantages of trading individual stocks, at a very low cost. ETFs are similar to mutual funds, or at least index mutual funds. They represent a sector, style, or a way to invest internationally. [1] [1] There is an exception to the linking of ETFs to various indexes and sectors. Merrill Lynch offers HOLDRs, which is a group of selected stocks focusing on a concept or industry, such as biotech. Most HOLDRs are based on a group of 20 stocks, and the original selection of stocks does not change. They are not subject to diversification rules. These funds must be purchased in 100-share increments . ETFs are being touted as providing three advantages when compared to mutual funds: Tradability, tax efficiency, and lower costs. Let's consider each of the three. Insights Mutual funds offer investors instant diversification, and diversification is the key principle of good portfolio management. Investors need to hold diversified portfolios. ETFs, in contrast, offer investors targeted diversification ”investors can trade in a wide range of sectors or styles, such as small-cap value funds, and hold a diversified portfolio in each case. [2] | [2] This paragraph is indebted to Allison Kopicki, "Innovative Investing," Bloomberg Personal Finance , April 2002, pp. 62 “70. This monthly magazine features very informative articles on investing, and is highly recommended to all interested readers. |
