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Consider Exchange Traded Funds

Radio Transcript, 2 minutes 30 seconds, for use during week of Dec. 10.

Description: Penny, Susan, and Ira discuss exchange traded funds.

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection Trust, providing investor education on the web at: investorprotection.org.

Ira: Penny, we’ve talked about managed mutual funds and index funds and I know there are advantages to each of these types of funds for the individual investor.  Are there other investment funds we should consider in our investment planning?

Penny: There’s a new type of fund available now called exchange traded funds, or ETFs.

Susan: Penny, what’s an exchange traded fund and how does it differ from the other types of investment funds we’ve been discussing?

Penny:  Exchange traded funds are similar to mutual funds in that they hold a basket of securities--stocks, bonds, currencies and commodities, among others.  The first exchange traded funds included the securities that make up an index such as the S&P 500.  The newer exchange traded funds target specific market sectors such as transportation stocks.

Ira: Are there advantages to these exchange traded funds over managed mutual funds or index funds?

Penny: The expense ratio of exchange traded funds is, on average, even lower than that of index mutual funds.  They are also tax efficient, similar to index mutual funds.

Susan: That sounds like something we might be interested in.  Are there other advantages to exchange traded funds?

Penny: Unlike mutual funds, ETFs are traded on exchanges where you can buy and sell them throughout the day, like stocks.

Ira: So, an exchange traded fund is tax efficient, has a low expense ratio, and can be traded like stocks.  Are there any drawbacks to investing in this type of fund?

Penny: The biggest drawback to exchange traded funds is the brokerage commission you pay each time you buy or sell.  If you’re an investor who dollar cost averages by regularly putting a smaller amount into an investment, you might be better off using a no-load index mutual fund than an exchange traded fund.

Susan: Thanks so much, Penny.  This is really helpful information.

Penny: You’re welcome.  And remember, for more information visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’

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Updated December 3, 2007