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Contributed by mm | October 3, 2006 6:49 AM PST
Here is why rapid trading does not affect ETFs in the same way as they affect mutual funds:
From CNN Money:
But ETFs differ from index funds in a crucial way. Whenever you invest in a regular index fund, the manager has to accept cash and buy more stocks (or sell shares for cash to pay you if you're redeeming shares). That trading can boost transaction costs and hurt performance.
ETFs, however, trade on an exchange just like stocks. So when you buy or sell ETFs, you're buying or selling shares from another investor - the manager doesn't have to trade.
There are times when ETFs must create new shares or redeem shareholders outside the exchange system. But even then ETFs have a unique system absorbs costs.
As a result of their unique design, rapid trading in and out of ETFs on the part of some people doesn't jack up transaction costs for more conservative investors. This design also has some tax advantages that result in ETFs generally being a bit more tax-efficient than regular index funds. As a practical matter, however, the size of this advantage can vary greatly and I don't think it should be a deciding factor for most individual investors.
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How To Use ETF Effectively? (October 8, 2006)
I totally agree. While the ETF industry is creating new fancy ideas every day, you should only stick to those ETFs that track a broad segment of the market.
Some ETFs To Avoid (October 3, 2006)
As correctly advised by Morningstar, ordinary investors should avoid these types of ETFs.
"Total Capital Market" ETF (October 1, 2006)
By fitting everyone to one capital allocation scheme, this fund wishes to create a one-size-fit-all, but it is destined to fail.
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