ETFs vs. Mutual Funds -
In last month's newsletter you were introduced
to the basic's regarding mutual funds and ETF's.
This month we explore the pro's and con's of each
to see if there is a clear winner.
Without a long discussion on Passive or Active
investment strategies here are some key points:
Investment Strategy: For a typical investment
advisor trying to create "alpha" (outperformance)
for a client the actively traded mutual fund would
have the advantage here. Most ETF's are based
on passive index strategies.
The ETF would win this category as they
are traded like stocks intraday on the exchange.
A mutual fund is only priced at the close of business
each day so that is the only time when a buy or
sell (redemption) can occur.
Tax Advantage: The ETF wins this category
as well for taxable investment accounts. The actively
managed mutual fund creates taxable gains and
distributions inside the fund each year that are
passed on to the shareholder. An ETF has little
if any internal turnover which makes it a more
efficient vehicle for taxable accounts.
Trading Costs: This advantage will go
to the "No Transaction Fee" mutual fund.
This advantage is generally for investors who
dollar cost average into a portfolio each month.
If you use NTF mutual funds there should not be
commissions to get into them. The typical discount
broker will charge a regular transaction commission
for each ETF trade.
Both the ETF and Mutual Fund are tools that investors
can use to complete the asset class category within
their investment allocation. Is there a clear
winner? Maybe for taxable accounts, otherwise
they both can be used with confidence in your
You may have heard the term "options"
or "derivatives" the last time you turned
on CNBC, but just what is an option?
An option is a tradeable vehicle much like a
stock. In fact most all options correspond to
an underlying stock. If an individual buys a "call"
option he is buying the right to purchase a certain
number of the corresponding shares of a particular
stock. Why would someone do this? It is all about
leverage. If someone wanted to own 1000 shares
of Microsoft because they felt the stock price
was going to go up in the very near future, they
could spend $33,490 or they could buy an option
to purchase Microsoft in July at a price of $33..
The option would carry a price based on the "time"
value (that is the premium) and the actual intrinsic
value (the amount the stock is trading above $33
per share). So essentially you could own the stock
for a few thousand instead of $33,000. So what's
the downside? Options expire on the 3rd Friday
of their expiration month. So if Microsoft was
trading at or below $33 on that Friday the option
would be worthless.
Options have additional benefits to. Next month
we will discuss Covered Call strategies to generate
2007 Contribution Limits:
contribution limit is $15,500 and the over
age 50 catchup is $5000.
IRA contribution eligibility phaseout is $156,000
to $166,000 AGI for Married Filing Jointly.
IRA contribution eligibility phaseout is $99,000
to $114,000 AGI for single filers.
contribution limit for 2007 is $4000 with over
age 50 catchup of $1000.