In and Outs of ETFs

Focus: MARKETS

Mark Salzinger Image Mark Salzinger Editor and Publisher, The No-Load Fund Investor

The investment world has changed greatly since the heyday of actively managed no-load mutual funds, which coincided with the Internet boom and established various portfolio managers as near-celebrities.

As that era slips further into the past, investors increasingly realize the importance of cost and the related difficulty of consistently outperforming the markets. As a result, index funds have exploded in popularity, and low-expense index exchange traded funds (ETFs) have been in the forefront of this trend.

Here's some insight into these investment vehicles and how I use them in the context of a broad portfolio that also includes conventional mutual funds.

Blackrock (iShares), State Street (SPDRs), Vanguard, Guggenheim, WisdomTree and PowerShares are the largest providers of ETFs.

These and a few other smaller providers offered a total of 1,646 different ETFs, ranging from those based on broad, mainstream indexes like the Wilshire 5000 and S&P 500 to narrow, industry-sector ETFs, and even many ETFs for individual foreign countries and commodities.

Structurally, ETFs resemble regular index mutual funds internally, but trade on exchanges like stocks. Instead of buying and selling shares of ETFs through mutual fund companies, you buy and sell them through brokerage accounts, basically like you can a stock.

That means instead of putting in your order and getting the price as of the end of the trading day, you get the prevailing market price during the day (a market order) unless you put in types of orders that are executed only at a certain price (a limit order).

This allows investors to take advantage potentially of temporary market dislocations intraday to buy at low prices, or to sell positions at high levels they believe will not be sustained at the end of the day.