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Posted: 3:49 p.m. Tuesday, Oct. 26, 2010

ETF Guide

Clark's guide to Exchange Traded Funds



ETFs (exchange-traded funds) are the fastest growing area of investing, and Clark likes to call them "a mutual fund for the next era." You buy ETFs exactly like you would a stock, preferably through a zero-commission broker, and you can sell them at any time. They're set up so they're very favorable tax-wise.

Usually, ETFs are just a different method of buying an index fund. What's an index fund? That's simply where you buy a basket of stocks or bonds. The most popular kind of index fund is a stock index fund. You can buy the 500 Index Fund, where you own little slices and dices of the 500 largest companies in the country. There's also the Total Stock Market index fund, which Clark prefers. Each of these has a cousin in the ETF.

So what makes an ETF potentially better than an index fund? ETFs tend to have lower costs over time than an index fund, so they're ideal if you get a big bonus and you're putting a lot of money in at once. However, you're better off doing an index fund if you're doing dollar cost averaging by putting in little dribs and drabs of money, month by month. Basically, ETFs and mutual/index funds are the same thing for different purposes, just managed a different way.

One you buy direct, no commission, from a mutual fund company. With an ETF, you have to use a broker to buy one. There are brokerages now that are commission-free to buy and sell ETFs with ultra-low management fees -- even lower than a mutual fund!  

Want more info on ETFs? Check out Vanguard's ETF page.