NEW YORK – You like a company’s prospects but are nervous about buying its stock. You believe strongly that growth in a certain country or region is going to boom in the coming years but don’t know how to buy in.
Mutual funds have long been the preferred choice for such investors. They’re the tried and true way of spreading your dollars broadly – or more narrowly, for example, in biotech or Russian stocks or corporations that pay big dividends, without sharpening your focus to an investment in a single company.
But the past few years the number of ways Americans who could invest this way has grown dramatically.
Money held in exchange-traded funds – which are similar to mutual funds but trade moment to moment, like stocks – are on track to pass $500 billion this year. Growth in recent years has been extraordinary, although it was quite slow at first.
The first American exchange-traded fund was launched in 1993 and tracked the S&P 500 index. Although ETFs, as they’re called, were made available to individual investors they were not an immediate hit. Two years later, only two portfolios were available in this country and their combined assets totaled just about $1 billion.
What changed? New companies entered the field and started marketing a slew of narrow, specialty portfolios. The variety of choices is impressive.
You can now buy ETFs that track stocks in Austria, South Africa or about two dozen other countries and regions around the globe. If that’s too wide a path, you can choose from at least two exchange-traded funds that track Japanese small-cap stocks.
Want to put money on (what may be) the next big thing? ETFs exist that track nanotechnology, alternative energy producers and Internet networking stocks.
Tired of stocks? ETFs let you put your money on gold, silver, crude oil, Japanese yen or Swedish krona. Or you can use ETFs to simply bet on (or against) the U.S. dollar on world currency markets.
Should you plunge into these ETFs?
“Just because there are a lot of people doing backflips over this doesn’t mean that you have to, too,” said Dan Culloton, editor of Morningstar ETFs 150, an annual guide to the portfolios from the investment research company. “It’s best for the vast majority of individual investors to keep things simple.”
For most people, Culloton said, the best choices are broad-based ETFs in core sectors such as domestic stocks, foreign holdings and fixed-income investments.
Also watch out for costs. Although most ETFs have lower annual operating costs (what Wall Street calls expense ratios) than comparable index mutual funds, these portfolios must be traded on an exchange.
That means brokerage commissions every time you buy and sell, a key difference with mutual funds, which often don’t charge every time you add money to a fund you already own. In this case, unless you have a large sum you want to invest all at once, traditional index mutual funds would likely be a cheaper alternative.
