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ETF Talk: Oh, How I Love Thee

December 23, 2009
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Subscribers to my investment newsletters and trading services know about my passion for exchange-traded funds (ETFs). Over the past year, I have provided you with features relevant to investors who are looking to improve their portfolios with a variety of funds that are both diversified and cost efficient. Now, I want to get back to the basics of ETF investing. Or, to say it more poetically, “ETFs, oh, how I love thee.”

One of the top reasons I love ETFs is their modest cost. ETFs offer low expense ratios, and annual expenses typically are deducted from dividends. ETFs also produce fewer capital gains and are more tax efficient than mutual funds.

In addition, ETFs offer diversification that reduces risk. The funds typically track indexes that are made up of a basket of stocks. Investors can find ETFs that cover every major index, asset class, and sector. Whether you favor commodities, healthcare, technology or real estate, there is a diversified ETF available to you.

ETFs also are transparent, since they are required to disclose their exact holdings and the percentage of each asset that a fund owns. Because ETFs are traded on exchanges just like stocks, the funds provide liquidity to investors who want to buy and sell them in the open market. But remember to be sure a fund’s trading volumes are adequate to provide liquidity. While not a strict rule of mine, I generally do not recommend ETFs that have an average volume of less than 100,000 shares a day.

Finally, I love the simplicity and variety of ETFs. You usually can find a bull market someplace, no matter what markets elsewhere are doing. The challenge is choosing the sector or the region that investors will begin to favor next.

In my advisory services, I analyze the moving averages of sectors and different stock markets to help determine the best places to invest. It is a system that has served three generations of the Fabian family well. Once you combine our trend-following approach with the instant diversification offered by ETFs, you gain the dual benefits of a proven strategy and one of the most attractive investment instruments to be introduced in years.

If you want advice from me about which ETFs to buy and to sell, I encourage you to check out my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.