Structured Like a Mutual Fund, Traded Like a Stock

By PAUL SULLIVAN
NYT

Exchange-traded funds seem to be advertised as a magic bullet for whatever ails an investor. They’re easy to buy and sell. Many have low fees. What they hold is transparent. And because there are so many of them — more than 1,000 in the United States, according to Forefront Advisory — investors can invest in very specific ways, singling out telecommunication companies, for instance, or European government debt.

One of the recent claims made by proponents of E.T.F.’s is that they are ideal for the volatile markets we’re in. One reason is that the funds are essentially baskets of securities sold as one stock. And like a stock, the fund is priced throughout the day so it can be bought and sold more easily than a mutual fund. These funds are also so specific that they allow people to invest in particular niches. Investing in E.T.F.’s in general, the argument goes, allows some investors to reduce volatility, while allowing others to exploit swings in the market. But is this true? Can these funds really do for investors what their proponents say they can, or are they just another investment that goes up and down like any other?

E.T.F.’s, like all popular things, have vocal detractors. No doubt these people will send e-mail to note the funds that have shut down or failed to perform in line with the indexes they track. True, but I want to look specifically at the advantages and disadvantages of investing some portion of a high-net-worth portfolio in exchange-traded funds.

Proponents see benefits in a volatile market in investors’ ability to buy and sell the funds quickly and to focus on certain indexes or sectors.

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