If you’re not, ETF’s have a legion of supporters due to their extremely low management expense ratios. In comparison to similar mutual funds, ETF’s often have significantly lower management fees.

This means that you get to keep more of your investment, vs. giving it away to an investment house. These savings can really add up over time.

The Downside to ETF’s

ETF’s, unlike mutual funds, are traded on the stock market. This means that any time you add or subtract from your position in an ETF, you have to pay your broker’s trading fee.

This isn’t the case with mutual funds. With mutual funds, you pay a one-time charge to buy in to the fund. Any subsequent addition or subtraction of shares does not result in trading costs.

The downside to ETF’s vs. mutual funds is that if you want to start small and add to your position over time as your savings grow, you will incur trading costs EVERY time you purchase additional shares. Those fees can quickly add up over time, offsetting the savings you enjoyed from the lower expense ratios.

Bummer!

There is, however, a way to avoid these fees.

Free ETF Trading

Fortunately, there are a number of investment brokers that offer free ETF trading.

Why would they do this, you may ask?

1. To attract new customers who are interested in ETF’s who don’t want to pay lofty trading fees every time they move in or out of an ETF or simply increase or lower their position in that ETF.
2. To encourage purchase of their own branded ETF’s (if they create and manage them) so that they can profit from the management fees.

Brilliant strategy, no?

Which online brokers offer free trading in and out of ETF’s?

Online Brokers with Commission-Free ETF Trades

I found 7 online brokers at the moment that offer commission-free ETF’s. This has become a very competitive offering as only a few of these brokers were offering this a year ago. Here is a list of the 7 brokers that includes how many commission free ETF’s they offer, which company they offer them from, and normal trading costs.

Vanguard

• # of commission-free ETF’s provided: 64
• ETF provider: Vanguard
• Normal trading costs (outside of commission free ETF’s): varies based on account balance

Schwab

• # of commission-free ETF’s provided: 15
• ETF provider: Schwab
• Normal trading costs (outside of commission free ETF’s): $8.95

TD Ameritrade

• # of commission-free ETF’s provided: Over 100
• ETF provider: iShares, SPDR, Vanguard
• Normal trading costs (outside of commission free ETF’s): $9.99

Fidelity

• # of commission-free ETF’s provided: 30
• ETF provider: iShares
• Normal trading costs (outside of commission free ETF’s): $7.95

Scottrade

• # of commission-free ETF’s provided: 15
• ETF provider: Morningstar
• Normal trading costs (outside of commission free ETF’s): $7

ETrade

• # of commission-free ETF’s provided: 80
• ETF provider: DBX, Wisdom Tree, Global X
• Normal trading costs (outside of commission free ETF’s): $9.99

Firstrade

• # of commission-free ETF’s provided: 10
• ETF provider: iShares, PowerShares, Vanguard
• Normal trading costs (outside of commission free ETF’s): $6.95

Vanguard typically offers the lowest management fees on their ETF’s (not always, but quite often). Looking at this list, Vanguard and TD Ameritrade would seemingly be the two best brokers to house your ETF trading with.

ETF Investing Discussion:

• Where do you trade ETF’s and why?
• Have you created an account with a broker just for the benefit of commission-free ETF investing?

Related Posts:

• Zecco Review
• TradeKing Review
• ETFs Versus Index Funds

7 Online Brokers with Commission-Free ETF Trades is copyrighted by 20somethingfinance.com without consent to republish.

Newbie: “What are some good stocks or funds I should invest in?”

Me: “Well, I don’t really give specific recommendations. What are you investing in now?”

Newbie: “A and B mutual funds.” (more commonly…”Nothing Yet”)

Me: “Have you looked at ETF’s?’

Newbie: “What is an ETF?”

Me: “A cheap way to distribute your risk.”

Newbie: “Oh.”

(P.S. – There is nothing wrong with being a “newbie” and I’m definitely not a “pro”).

As you can see, ETF’s are not easy to explain in a conversation, so I tend to just focus on the benefits. ETF’s are often misunderstood at best, or avoided out of fear at worst, despite the fact that they tend to outperform mutual funds and have similar risk distribution. They are a relatively new kid on the block in the investing world and aren’t as well known as mutual funds. So I wanted to take some time to go into detail on what they are and why they are not something to fear, despite their weird name.

What is an ETF?

An ETF (short for Exchange Traded Fund) is a type of investment fund that combines elements of a mutual fund and elements of a stock.

ETF’s are like mutual funds in that each has ownership in a number of assets (i.e. stocks, bonds, currencies, etc.). The ownership of multiple assets diversifies the risk for the investor, much like a mutual fund is intended for.

Where they differ from mutual funds is in how you can buy and sell them. Here, they are similar to stocks in that they are traded throughout the day on the market like a stock is.

I thought I’d go through each individual attribute of an ETF as it relates to you and compare it to other investments to break it down for you:

Investment Diversification:

• Mutual funds/index funds: Diversified in that they invest in a group of securities like stocks, bonds, currency, etc.
• Stocks: Not diversified. It is only one company.
• ETF: Diversified like mutual/index funds by investing in a group of securities.

Share Price:

• Mutual funds/index funds: Share price is determined by calculating the NAV (net asset value) of all the holdings in that fund, once at the end of the trading day.
• Stocks: Share price is determined throughout the day based on buy and sell trade volume for that stock’s shares.
• ETF: Share price is determined throughout the day based on buy and sell trade volume for that ETF’s shares. Market price may be influenced by the NAV of the holdings (i.e. investors may see value, leading to higher demand for shares and an upward movement in price), but it is based on the actual trading and not the value of the holdings.

Trade Price:

• Mutual funds/index funds: Can be bought directly through the managing mutual fund company, usually without a fee. If bought through an online broker to consolidate, some are free (no load funds), but others require a one-time buy and sell fee (no fee to buy additional shares). For example, Zecco charges $10 to buy in or sell out of most mutual funds while TradeKing charges $9.95.
• Stocks: You pay a trading fee every time you buy or sell shares. Zecco and TradeKing both charge $4.95 per trade.
• ETF: Same as stocks. You pay every time you buy or sell shares. Zecco and TradeKing both charge $4.95 per trade.

Ownership Fees (Expense Ratio):

• Mutual funds/index funds: You pay a % of total assets to the mutual fund manager. This fee generally ranges between 0.5% and 1.5%, but index funds are almost always cheaper than mutual funds because the investing is more automated based on the index.
• Stocks: There are no ownership fees with stocks.
• ETF: You pay a % of total assets to the ETF manager. ETF’s have historically had significantly lower management fees than similar mutual/index funds. For example, Vanguard’s S&P 500 ETF, VOO, has an expense ratio of 0.06% while its S&P 500 index fund counterpart has a 0.17% fee. Meanwhile, Vanguard’s REIT ETF, VNQ, has a 0.12% expense ratio, while its REIT index fund counterpart charges 0.26%. The more infrequently you buy or sell shares, the more ETF’s come out in your favor.

Reasons to Buy an ETF (or Not):

ETF’s are one of my favorite investment vehicles in that they are diversified, yet have lower management costs than index funds or mutual funds, are tax efficient, and they offer flexibility that can’t be found with index or mutual funds. For example, if I wanted to execute a trailing stop loss order, I can’t do that with a fund, but I can with an ETF. That type of flexibility is important in a volatile market and important for investors who are a bit lazy in keeping up with their investments (guilty as charged).

With all that being said, you have to watch the number of times you buy or sell shares of an ETF. If you don’t hold on to them for long periods like you would with a mutual or index fund or you frequently add to your position, the trading fees can add up quickly. If you don’t have that type of discipline, you may want to opt for index funds instead.

Related Posts:

• Passive Index Investing
• Zecco Review
• TradeKing Review
• ETFs Versus Index Funds

What is an ETF? is copyrighted by 20somethingfinance.com without consent to republish.

As is often the case, bubbles are made to burst (and they always do).

The rise and fall in the price of silver presents an excellent learning opportunity for all investors.

The Silver Price Rise

Silver (SLV) peaked at 48.35 on April 28th, it’s highest price in decades, after a meteoric 500%+ increase since late 2008.

Here’s a look at SLV’s price chart over the last few years:

At one point or another a little voice in my head and many others watched this rise and kept saying “You have to get in now, this is a golden opportunity!”.

The Silver Sell-Off

As is often the case when the speculation herd jumps on the bandwagon and drives prices upwards, they are bound to come crashing back down to reality.

The silver sell-off was triggered through a combination of profit-taking, the herd heading for the exits, the Comex raising contract prices, and the renewed strength of the U.S. dollar, on the heels of Osama Bin Laden’s death.

The result was an astounding drop of over 31% in a little over a week:

What Can the Drop in Silver Teach Amateur Investors?

This big one-week drop is similar to others that play out in the market time and time again. And it teaches some important lessons:

• Herd Mentality: When everyone else is piling in and results seem too good to be true, that’s when it is time to get out or avoid getting in to a particular investment.
• Nothing Lasts Forever in Investing: All good things do come to an end. Witness real estate’s decades-long rise as evidence.
• Diversify, Diversify, Diversify: Had you had a huge investment in silver, you would have lost over 30% in one week, and if you piled in late, you’re probably in the hole in a big way. Going so heavy in one company stock or one commodity can leave you open to a lot of risk. That’s why passive index investing, which offers diversification through investing in entire indexes, is so appealing. Sure, you miss out on some meteoric rises like SLV had, but you also miss out on meteoric declines and usually win out in the long run.

Have you ever been burned by joining the party late?

Related Posts:

• How to Start an Online Broker Account
• Pay off Debt or Invest?
• 10 Free Financial Services
• Zecco Review
• TradeKing Review

Silver (SLV) Selloff Highlights Dangers in Following the Herd when Investing is copyrighted by 20somethingfinance.com without consent to republish.

I later polled readers as to why they had not started investing outside of a 401k. And now we’re hitting each of the reasons why. The first part in the series dealt with the question of whether you should pay off debt or invest. The second on how to start an online broker account like Zecco or TradeKing. And the third on how to get over the fear of investing.

In this fourth part, we’ll discuss investing theory, particularly why I prefer passive index investing over any other strategy.

Now that you have an online broker account, you’ve funded it, and you’re armed with knowledge and motivation to not let your money sit in a hole in the ground, it’s time to get out there and trade like a pro!

Not so fast…

The Market is Dominated by Institutional Investors

According to John Bogle, the founder of Vanguard, institutional investors own 70 percent of American corporations, up from 35 percent in 1975. An institutional investor is a person or group that manages a large pool of money – such as a hedge fund, mutual fund, pension, bank, or insurance company. Why should that matter to you?

An institutional investor’s job is to get good returns for the people who are giving them money to manage. As a result, they have resources available to them that an amateur like you or I do not.

They have:

• insider knowledge (legal or otherwise)
• ability to negotiate on their trades
• technological trading tool advantages
• time & knowledge: it’s 100% of their focus
• the ability to visit companies first hand, to see what they do and talk to their executives
• the ability to heavily influence the market

We have none of that.

Even if we spent 40 hours a week studying every stock we wanted to trade in and out of, we’d still be at a disadvantage to them.

So don’t do it! To buy and quickly sell (trading) stocks, is like saying, “the price of these stocks, mostly determined by institutional investors, is wrong and I know better when to buy and sell than they do”. While that may very occasionally be true, 99.9 times out of 100, it is  not.

From personal experience, I have tried this strategy and failed massively with it. Occasionally, I made some quick money. But more often than not, I lost money, and whether I profited or lost, it was very stressful. I was watching that ticker go up and down multiple times every day, and my mood would swing based on whether a stock was in the green or red at that moment. Quite addicting. Kind of like gambling. And not a healthy way to live.

A Better Investment Strategy

So, I’ve basically shot down stock trading. Kind of depressing, isn’t it?

Don’t let it be – there is a better way. It’s called passive index investing. And it’s not sexy or thrilling, but that may be just what the doctor ordered when it comes to making money.

To explain what passive index investing is, I’ll first need to explain what an index is.

A market index measures the value of a group of investments, pooled together. Much like a mutual fund, it is a way to diversify through investing in a number of different securities (stocks, bonds, etc.).

For example, one of the more popular indexes is the S&P 500, which is a committee selected group of 500 large cap (market value) stocks, mostly domestic, that are meant to resemble the market as a whole. Another example of a market index is the Russell 2000, which includes 2000 small cap stocks.

You’ll also find indexes that measure different sectors of stocks such as international, health care, real estate, REIT’s, and just about any other way you can group stocks.

Passive Indexing

Passive indexing is investing in market indexes through one of two vehicles – an ETF or index fund. In their simplest sense they are both meant to diversify, track an index, and be a low cost alternative to actively managed mutual funds.

So how do they perform?

Actively Managed Funds Vs. Indexes

We’ve established the many disadvantages that amateur investors are going to have versus institutional investors. But how does passive index investing perform against institutional actively managed mutual funds?

Let’s take a look. This should be eye opening. What you see here is % of U.S. equity funds that were outperformed by their comparable index over one, three, and five years.

Source: Standard & Poors CRSP

Enlightening! In not one category did an actively managed fund classes outperform an index over the last 1, 3, or 5 years. And in some cases, more than 80% of actively managed funds were outperformed by the index.

This has historically almost always been the case. Mutual fund managers are humans, just like you and I. Even though they have more tools and resources available to them, they are still prone to error and making subjective emotional decisions. They are good, but are they as good as the market as a whole? Not often.

Index Investing Strategy Takeaways

I’m obviously a fan of index investing. You’re free to make your own conclusions and invest how you see fit and your mileage may vary on how this strategy performs (in other words, invest at your own risk and get the opinions of others). However, index investing has some clear advantages that you should consider:

• it’s passive: it doesn’t take much work or research to buy and let it sit for a while
• it’s diversified: your risk is much more spread out than a comparable mutual fund and definitely more diversified than a handful of stocks
• it’s low stress: because it’s diversified, you’ll sleep better at night
• it’s cheaper: than managed funds b/c expense ratios are lower
• performance: as evidenced by the table above, indexes, on average, outperform managed funds

What’s not to like about that?

Passive Index Investing Discussion:

• What do you think of passive index investing? Is it the investment strategy you use?
• Have you traded in and out of stocks? How has that worked for you over the long run?
• Does everything I’ve presented here make sense? We’re moving into the complex world of investing and it’s hard to cover in one post what entire books have been dedicated to.

Related Posts:

• 10 Free Financial Services
• Zecco Review
• TradeKing Review

How to NOT Invest Like a Pro (and beat them) with Passive Index Investing is copyrighted by 20somethingfinance.com without consent to republish.

He’s become so good at it that most sports bookies will not take his bets.

Billy Walters Is Better at Calculating the Odds than the Odds-Makers

How has he done it? An insane amount of data. He has used consultants to compile databases that predict outcomes and betting lines for games. And his team has done it so well that they’ve been able to out-predict the professional odds-makers in Las Vegas. He considers what the data is showing for each game, compares it to the actual betting line, and then makes a call of how much he wants to bet on each game.

And it has worked for him. Billy Walters claims that he has never had a losing year. I’ve embedded the interview for you to watch, or you can check out the Billy Walters Interview on 60 Minutes site.

My Gambling Caveat

Before I continue with this story, let me give the caveat that I am not advocating professional gambling in any way. Billy Walters is one exception to the rule, and it took an entire team of data consultants and sports experts to develop his system in order to beat the odds. The fact that he’s become famous and well respected in sports betting circles highlights how rare his case is. Continue reading for the true moral of the story here.

Billy Walters Compares Wall Street to Las Vegas

Where this story took a very interesting turn is when Walters began comparing Las Vegas to Wall Street.

Here is the dialogue between Billy Walters and 60 Minutes reporter, Lara Logan.

“I’ve been swindled out of quite a bit quite a bit of money on the stock market. And I bought a lot of Enron stock once. And I got swindled. I bought a lotta WorldCom stock, got swindled. I bought a lotta Tyco stock. I got swindled,” he told Logan.

His disdain for Wall Street is one of the reasons Walters decided to talk to “60 Minutes” – a chance he says to make the point that the gambling world is not as shady as most people think.

“I ran into a lotta bad guys, a lotta thieves. I mean, they’d steal the Lord’s Supper. But I can tell ya, percentage-wise, I ran into many more with suits and ties on than I have with the gamblers,” he told Logan.

“So you would say that the hustler from Vegas got hustled by Wall Street?” Logan asked.

“There’s no doubt about it,” Walters replied.

Why was this so interesting to me?

Billy Walters, the most revered sports better in history – a man who methodically pours through data and has never lost over the course of a year in over 30 years of GAMBLING, has been absolutely taken to the house when trading stocks on Wall Street. He’s not the only one. I’ve covered Mark Cuban’s Wall Street rants in the past.

The Takeaway: If Billy Walters and Mark Cuban, both with insane amounts of money, resources, business knowledge, and inside connections can’t succeed by trading stocks on Wall Street, how can you or I expect to? If you’re ‘making bets’ on stock trades, odds are that you will not succeed. The ‘house’, or in this case professional traders and insiders, will win 6 times out of 10. Slow, steady, low-fee, diverse investments like ETF’s and index funds are probably the only hope the amateur investor (your or I) has.

Related Posts:

• Index Funds vs. ETF’s
• Index Funds vs. Mutual Funds
• Zecco Review
• TradeKing Review

Billy Walters: The Most Feared Sports Better in History Tells 60 Minutes why he Avoids Wall Street is copyrighted by 20somethingfinance.com without consent to republish.

ETF’s (exchanged traded funds) and index funds. The comparison between the two is kind of like deciding to pull over to a restaurant that you see off the side of a road in a region of the country you’re not familiar with. If it’s called ‘Marco’s', the chances are that it’s Italian and it has some pasta, marinara, alfredo, and garlic bread inside. In much the same way, if you see an index fund and an ETF that track the S&P 500, you can reason that each is going to have some large, well-known U.S. based corporations inside.

However, since you’ve never eaten at ‘Marco’s', you’re not sure what type of dining experience awaits, how much it will cost, or what kind of gastric issues you’ll have afterwards. These differences are going to take a bit further explanation.

Differences Between Index Funds and ETF’s

1. How they Trade

• Index Funds: Index funds are a type of mutual fund. You purchase shares from the fund management company. Index funds do not trade on the open market throughout the day. Share purchases can only happen once a day – at the close of trading.
• ETF’s: Shares are purchased through a broker and are traded on the market throughout the trading day.

2. How they are Priced

• Index Funds: Are based on the fund’s holdings rather than a perceived value of that fund. Shares are priced based on their Net asset value (NAV), the same way all mutual funds are. Net asset value is (assets-liabilities)/shares outstanding.
• ETF’s: NAV is used to evaluate the ETF by investors and market forces (supply and demand) influence the share price through trading. When an ETF’s share price trades at too much of a premium or discount to it’s NAV, savy investors will typically come in to purchase or sell their shares, often-times bringing the price close to the NAV.

3. Cost

• Index Funds: Cost whatever the broker charges to get into that fund and any loads charged by the fund company, plus an ongoing expense ratio that is typically higher than its ETF counterpart. For instance, while the Vanguard REIT ETF (VNQ) has an expense ratio of 0.10%, the index fund tracking the same index (VGSIX) has an expense ratio of 0.20%.
• ETF’s: Cost is whatever your broker charges to make a trade (buying and selling) plus an expense ratio that is typically less than its index fund counterpart.

4. Functionality

• Index Funds: Generally have much less functionality than ETF’s. For starters, when you buy or sell you do it at the NAV price at the end of the trading day (you don’t have an option). If you buy or sell during trading hours, you have no knowledge of what that price is going to be on your trade. Also, funds can be limiting in that many of them have high minimum and subsequent investment amounts when purchasing.
• ETF’s: Much more functionality. You can make any type of trade that you are able to make with regular stocks, including limit orders, short selling, etc. Meanwhile, you set the price and can trade at any point during the day.

5. Tax Efficiency

• Index Funds: When you own a mutual fund you are often forced to pay capital gains taxes every tax year, even if you don’t sell any shares. Bummer, right? This is because any taxes are passed on to you when a fund sells a security for a gain.
• ETF’s: The structure of ETF’s tends to cut down on capital gains taxes that fall on you. However, you may end up paying capital gains taxes when you sell anyways. In general, ETF’s are said to have less of a tax burden, but I couldn’t find any quantifiable data behind this (if you can, please post in comments).

Conclusion on Index Funds Vs. ETFs:

If you’re not sure whether to go with an index fund or its ETF counterpart, your line of thinking should probably go something like this:

1. Can I even afford to get into the index fund with how much I have to invest? If not, going with an ETF is a no brainer.
2. Does the index fund provide the functionality I’m looking for (i.e. a short sale). If not, go with the ETF.
3. Other than that, it is up to you to do an analysis on which of the two options is going to cost you less for how you plan on investing with it. Think about how often you will be purchasing more, how much your broker charges, and compare the expense ratios between the two.

Regardless of which you choose, I personally use and highly recommend Zecco(for individual non-sheltered trading accounts) andfor IRA’s.

Fund Versus ETF Discussion:

• Do you tend to prefer index funds or ETF’s? Why?
• What other reasons, pro or con, have you found for buying index funds and ETF’s?

You May Also Find the Following Articles of Interest:

• Zecco Review
• TradeKing Review
• How to Start an Online Broker Account
• Passive Index Investing

ETF’s Versus Index Funds & the 5 Big Differences to Consider is copyrighted by 20somethingfinance.com without consent to republish.