Thursday, August 28, 2008

Mutual Funds and ETF’s

If you do not want to do the work, index funds or ETF’s might be for you. There are pros and cons to both mutual funds and ETF’s. Most index funds are mutual funds, but some are ETF’s.

Mutual fund managers often have to deal with lots of money to invest when the market is high and requests for unit surrenders when markets are low. This is what forces mutual funds to buy high and sell low. This is the opposite of what they should do. ETF’s do not have this trouble.

The advantage for ETF’s is that you can buy or sell your shares immediately on the open market. This can be helpful if there is a lot of volatility in the market. A disadvantage of ETF’s is that ETF’s may sell at a discount or premium. That is if you ad up the value of all the shares in the ETF and divide it by the number of shares you get a price for the ETF shares. Say this price is $20.90. The fund is selling at a premium if the market price for the ETF is $22. The ETF is selling at a discount if the market price for it is $19. The market price of an ETF does not exactly track the market price of its shares.

A mutual fund’s share price does exactly track the market price of the underlying shares, as the mutual is valued before any shares can be bought or sold. If you ask to buy any units in a Mutual Fund, you put the buy order in today, the fund will be valued at the close of the market that night and your order to buy will be placed at the fund’s unit value determined at the market close. If there is a lot of volatility, this can be a problem, especially if you want to sell and have to wait until the market closes so it can be determined at what price you can sell your units.

In buying mutual funds and ETF’s there is the problem that some of the companies in the Mutual Fund or ETF can be over or under priced. In order to make money on any company it is helpful to buy all your shares at least at a reasonable price. Over or under pricing a company’s shares is just the way the stock market works. It is only just in theories that a company’s share price is a fair price. This does not happen in real life.

I personally like to buy set up my own stock portfolio. I think that this is the best way of investing in stocks. I have this blog to share my experience in investing to those you would like to go this route.

I have updated it with the figures from the June 08 quarterly report.
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website at for a list of the stocks for which I have put up spreadsheets on my web site.

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