I've been hearing good things about Exchange Traded Funds. What do you think? How do I get started?

I hear this is a wonderful alternative to regular Mutual Funds, very low fees, etc. What are the pros & cons?

As a professional financial planner, whom you may consider biased because I am paid by fees, I rank the amount of fees you pay, as a determinant of success in investing no higher than #9 on my list.

Thye product you choose: investment funds, stocks or ETF's really is irrelvant to much more important behavioural strategies. Don't spend more than a few minutes deciding on which product to use. Sepnd your time finding that rare financial advisor who can save you thousands of dollars every year in countless other ways, protect your family in case you cannot, put your kids through school, save your marriage and even your life insome cases.

Using a good "asset allocation" and over-weighing in some sectors as they're doing well will work great. If you don't use "stops" you'll kill any advantage you have (increase the stops as it grows).

BTW: Don't over-weigh by more than 10% in any given sector. (ie, if you allocate $10,000 normally to small cap international, you may want to increase it to $11,000).

Exchange traded funds can be great investment tools.

Pros:
- Low Fees
- Track Certain Indexes
- Very Liquid (can be traded just like stocks)

Cons:
- There are "worst of breed" stocks in the index
- You'll never Beat the index


What's important here is that you'll have to have the right mix of ETFs to do well. You still want to be diversified, and have a long term investment plan.

However, sometimes ETFs can set you up for a great trade. For example, if you think that the financial stocks are getting ready to go higher - you can load up of the "XLF", an ETF that tracks financials.

You can get started by opening up an investment account with an online brokerage, or a brokerage firm with a financial advisor.

They can be great, just know what you are doing!

I'm going to assume that you have some understanding of mutual funds, because they have been around a long time, so I'll make a comparison.

ETFs and mutual funds have different expense ratios, even when run by the same management company with the same goals. You could start with a no-load fund and end up paying more in expenses than if you paid a one time commission in and a one time to get out at a discount broker but got the ETF with lower ongoing expenses. this makes it sound like the no-load fund would be better for someone with an active in-and-out strategy, but many fund companies restrict active trading in their funds.

An ETF has a quoted price while a mutual fund does not. When you want to buy a mutual fund, you enter an order to buy which is held and filled at the end of the day with the price for the day. You have to call back and find out how much you paid. If the market makes a big jump near the end of the day and the price goes way over what you think it's worth, too bad, your order got filled anyway. Same thing happens when you sell. An EFT trades like a stock; you can get your order filled right now.

An ETF trades like a stock, so you can put in stop and limit orders. Mutual funds won't let you do this.

If you have a margin account, you can short or borrow against the ETF.

With mutual funds, if you hold the shares directly with the fund company, you have a delay in getting the money back if you want to change investments to anything other than another fund from the same company. If you hold the shares in your brokerage account, you get the flexibility, but they are frequently shares of a class with a higher expense ratio so the fund can pay the brokerage house a fee. (You didn't really think that the brokerage wasn't making any money on the no-fee, no-commission, no-load funds, did you?) With ETFs, you can move your money from investment to investment easily within you brokerage account.