ETFs: Introduction.

I'm going to start a series on the basics of investing in Exchange Traded Funds {ETFs}. Eventually this fall we'll transition this to my concept of risk in investing. We're going to start tomorrow by looking at the basics of ETFs.

A few points to note as we get started:

I will try to source as much independent literature as I can find. This is important since I'm talking my book when it comes to these investments. Often however, the sources that we will use have their own points of view. For example some of the basic information we are going to cover comes from an investment website called ETFguide.com. While I think they bring up many valid points, it is hard for me to claim that they are unbiased. These sites will be noted at the bottom of the posts. Any comments I want to make will be at the end of the article and look like this.

While I prefer ETFs to Mutual Funds, there should be no implication that mutual fund investing, especially if it is based on a sound investment strategy cannot achieve desired client results over time. While many mutual funds underperform the markets or their benchmarks, their are many that do quite well over time. I think we will see that for the most part clients pay excessive fees for that outperformance but then so do investors in hedge funds.

Therefore nothing here should be regarded as saying that mutual funds are always poor investments. We'll have more to say about this over time.

Finally ETFs ARE NOT RISKLESS INVESTMENTS. ETFs for the most part remove single stock risk from a client's portfolio. They do not remove market risk or execution risk or other types of risk inherent to their functionality. THAT IS YOU CAN LOSE MONEY WITH THESE INVESTMENTS AND THEY ARE NOT SUITABLE FOR EVERYBODY. ETFS are not some "Holy Grail" of investments. They must be used in a strategic and tactical manner. If they are not used this way then they can cause significant damage to a clients investment portfolio. Clients or friends of our firm have been given an explanation of what these are and how we use them in client accounts. Anybody else, especially casual investors should do their own research or consult their own advisers before investing in these type of assets. Also please note that I am describing in this series the ETF market as it stands today and as I understand it. Any future changes to their structure or how they are managed could change my views of these investments over time. There is therefore no guarantee that what exists today will work as well or in the same manner going forward.