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Financial Planning Newsletter• March 29, 2011 



Financial Planning Newsletter
March 2011

Investing 101:

In this month's financial planning newsletter we will discuss two of the most common investing vehicles out there: mutual funds and ETF's.

Long term readers will remember that we touched on these topics way back in 2007, however it never hurts to give everyone a refresher course.

Mutual Funds: According to the Investment Company Factbook there are over 7600 Mutual Funds traded on the US Exchanges. Once you factor in different share classes and closed end funds my Morningstar Database has over 20,000 listed. This is fairly interesting number because we know that a mutual fund is comprised of a basket of individual stocks, correct?

Care to guess how many individual stocks trade on the 3 major US Exchanges (Amex, Nasdaq and NYSE)? 5598. Yes, that is correct. There are more mutual funds than there are individual stocks!

It seems that the mutual fund has become the investing vehicle of choice for investors, so let's explore how it works: The Mutual Fund was created by MFS back in 1924 with the idea to create a professionally managed vehicle that would pool money from many investors to collectively buy a portfolio of stocks, bonds or other investments. With the increasing popularity of investing through the years (it wasn't just the wealthy anymore) and workplace retirement plans, mutual funds became an easy way for investors to get market exposure without having to select individual stocks themselves. The majority of mutual funds are still "actively" managed funds whereby the fund manager tries to select a basket of stocks that will beat whatever benchmark he is graded against. In the mid 70's the first "index" mutual fund was introduced by the Vanguard Group as they felt that the odds of beating an index was very slim, so investors would be better just trying to track the major indexes.

ETF (Exchange Traded Funds): The ETF got its start in 1993 with the introduction of the Standard and Poors Depository Receipt which later became known as the SPDR (and now the SPY), which tracks the S&P 500. This vehicle trades like a stock throughout the day but moves based on the overall movement of the S&P 500 index which is made up of a basket of 500 stocks. Over the years ETF's have been formed to track every index imaginable and some indexes were created for the sole purpose of developing an ETF to go with it. ETF's have exploded in popularity in recent years as a lower cost way to build portfolio's and to get very specific within different sectors of the market. The ETF can be thought of as a type of index mutual fund with the benefits of low internal costs, buying and selling flexibility (can be traded throughout the day from 9:30 to 4pm EST, whereas mutual funds are only traded at the close of each day) and diversification ability.

One thing to remember when someone refers to a mutual fund or ETF. These can be stock based funds, bond based funds or some other investment such as commodities. Although we tend to hear "mutual fund" and think stocks, that may not necessarily be the case.


While ETF's have taken business from the traditional mutual funds over the past couple of years, mutual funds are not going away. Investors and Advisors alike are always searching for new opportunities to build better diversified portfolios and this is just one more way to achieve.

Having tools such as Mutual funds and ETF's along with individual stocks and bonds allows each investor to create a customized portfolio that is diversified and meets their risk / return objectives.

TAX Reminder:

The IRS extended the tax filing deadline to April 18th for your 2010 taxes.


James A. Daniel,

This newsletter if for informational purposes only. The information contained within should not be considered as financial advice nor soliciation for financial services. Consult with your financial professional if you have any questions.

The Advisory Firm, LLC is a fee-only financial planning company and registered investment advisor.

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