YW Blogcast 14 - Should you invest in an ETF?

While Electronically Traded Funds (ETF) aren’t the best investment in history (look to real estate for that), they are something the beginning investor should be aware of, if for no other reason than beneficial tax consequences when compared to other stock market strategies.

As a collection of investments like stocks, bonds, commodities, or even real estate, an ETF is similar to a mutual fund in that it can be purchased through an investment company or brokerage house. Compared to mutual funds, ETF’s have a lower turnover rate of their holdings which, in turn, reduces your tax burden. Remember, any time a fund buys or sells a holding it triggers:

1. taxes
2. commissions
3. transaction costs

All the above are passed on to the investor so, all other factors being equal, it makes sense to invest where there is little turnover. With a mutual fund, you can normally expect to pay about 1.5% of your total yearly return just for the management fees. An ETF is substantially lower. ETF’s also offer the ability to target certain segments of the economy with your investing.

There is a transaction cost of $10 to $50 every time you buy or sell an ETF, so keep in mind this should be a buy and hold type of investing. Hyperactive traders need to look elsewhere for their gambling fix.