Magazine article Newsweek

Money: Cheaper by the Bucket

Magazine article Newsweek

Money: Cheaper by the Bucket

Article excerpt

Byline: Linda Stern

Here's a Wall Street riddle: what's highly technical, dry (some would say boring), and very hot this summer? If you follow the money, you already know the answer: exchange-traded funds, or ETFs. These index-fund clones are raking in cash faster than traditional mutual funds, and new versions of ETFs are coming to market as quickly as financial firms can push them past the Securities and Exchange Commission.

What's the big deal? Exchange-traded funds are baskets of securities, like mutual funds, that track various indexes. Funny names go with the territory. There's the Spider (formally known as the SPDR 500 Trust), which tracks Standard & Poor's index of the 500 largest companies; Diamonds, which track the Dow Jones industrial average, and Cubes, which track the top 100 NASDAQ-listed companies. Unlike traditional funds, they trade like stocks, so you can buy or sell them all day, through a broker. That makes them more transparent, liquid and cheaper than most traditional mutual funds.

But leave it to Wall Street to take a beautifully simple idea and complicate it. Now there are about 170 ETFs that slice and dice the market in ever-smaller sectors. (You can find most of them analyzed at morningstar .com and etfconnect.com .) And though the industry was built on the idea of funds that follow indexes, the new ones are moving closer to active management, in which fund managers pick and choose the stocks they like. You can already buy ETFs that invest only in gold bullion, or shares of dividend-raising companies. If the newest proposals make their way through the SEC, you'll be able to buy ETFs that focus solely on euros, on silver and other commodities and on junk bonds. But should you? Maybe. Here are some thoughtful ways to approach what's been called the no-brainer market.

The Core Portfolio . …

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