How Do You Feel About Spyders (ETFs)

[FRPLG]

Originally Posted by SmootSmack

So I had my semi-annual sitdown with my financial advisor to take a look at my investment portfolio and re-evaluate my retirement plan.

I have the basic 401k, Roth IRA, and an individual account. The individual account is more of a "rainy day" fund that I can pull money in case of an emergency. So I go a bit more conservative there, with a fair portion of it being bonds.

For my 401k and Roth I'm a bit more aggressive going heavy on the mutual funds (both domestic and foreign).

Anyhow, it was suggested that I look into ETFs as a more passive aggressive approach. So, for example, my 401k might be heavy on the mutual funds while the Roth is heavy on ETFs.

So my question is what are the pros and cons of ETFs (or exchange traded funds)? Anyhow have experience with these? What are your thoughts?

I think my general feeling on investing is that with proper effort and due dilligence anyone can own a diverse set of 6-10 stocks that can out perform the market. Now this requires know how(via experience and learning usually) and some time. Maybe a couple hours a week per stock. That actually works out to a lot of time though. If that time is an issue or there isn't much motivation to actively manage your money then you can look at Index funds, Mutual funds and ETFs. Of those three I'd be least likely to go with an ETF. They are essentially sector based mutual funds so they bring along the cons of the mutal funds plus they add the risk component of not being very diverse. The cons of Mutual funds are that good ones won't out perform the market over the long haul and bad ones will suck you dry. The good ones are good because they have good managers but inevitably they become basically Index funds because as they grow in reputation they grow in money and as they grow in money the more they have to buy and the more stocks they get into. That brings me to Index funds. They have the cons of basically being about half good stocks and half bad stocks. So essentially your money is half bad.

It comes down to a relative relationship. If you have the wherewithall and time to manage a smallish set of diversified stocks you can and probably will out perform the market on a regular basis. It does take time but I like the idea that you can make your own decisions, even when it comes to taxes.

But if you don't want to do this then good Mutual funds are the way to go. They are diversified and somewhat better than Index funds when it comes to bad stocks. I would totally avoid ETFs and only go into Index funds if you simply want very small risk but are OK with average return.

[saden1]

You're better off going with Index Funds over ETFs. ETFs aren't mature yet and unless you're going to do some hands-on work yourself in managing them I would stay away.

Also, I remember reading a while ago in SmartMoney that half of the ETFs are suppose to fold within the next few years due market forces and a lack of initial investment assets...not exactly appealing.