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By DUNSTAN PRIAL
AP Business Writer
NEW YORK (AP) via NewsEdge Corporation -
Exchange-traded index funds are causing a stir
in the mutual fund industry because they allow
investors to move quickly in and out of the
market, a strategy that runs counter to the
original intent of mutual funds as long-term
investments.
Clearly, exchange-traded funds, or ETFs, are
popular.
Witness the recent announcement by big index
fund company Barclay's Global Investors that it
plans to introduce 40 additional ETFs this year to
bring its total to 57.
Moreover, in a move that brought ETFs into the
mainstream, Vanguard Group, which introduced
the first traditional index fund back in the
mid-1970s, announced last month it will offer its
customers five ETFs, probably by the end of the
year.
But what are they and why are they growing in
popularity?
ETFs are in many ways similar to individual
stocks in that they trade all day just like a
stock, and the price moves up and down based
on investor demand. Mutual funds, meanwhile,
are priced once each day at 4 p.m., and their
share price is based on the value of the stocks
included in the fund.
Also, investors don't trade traditional mutual
fund shares. Instead, those shares are either
bought or redeemed (sold) through a fund
company.
ETFs are, however, similar to index mutual funds
in that ETFs are designed to track the
performance of the various benchmark stock
indexes used to gauge the performance of the
stock markets.
Among the indexes tracked by ETFs are the Dow
Jones industrial average, the Standard & Poor's
500, the Nasdaq 100 and the Russell 2000 index
of small companies. Still other ETFs track
specific sectors, such as technology and
financial services.
ETFs have been around since the mid-1990s,
when they were introduced by the American
Stock Exchange. But the recent increase in
market volatility has made them popular because
they give investors the same exposure to a large
group of stocks as mutual funds, while at the
same time allowing investors to quickly get in
and out of the market.
``They're very popular with short-term traders
who want to take advantage of quick swings in
the market,'' said Burt Greenwald, a mutual fund
consultant in Philadelphia.
Greenwald said ETFs may provide investors with
certain tax benefits because they aren't subject
to the same capital gains taxes as traditional
mutual funds. In addition, ETFs' expense ratios _
or the operating charges assessed investors _
are lower than those of traditional mutual funds.
Nonetheless, both of those savings could be
offset by the brokerage fees required to buy and
sell shares of ETFs, according to Greenwald.
As it stands, analysts said the products are
probably best suited for large institutional
investors, such as pension companies and mutual
fund managers, who can afford to move in and
out of the market quickly because it's cheaper to
make trades when huge volumes of stock are
involved.
Sophisticated investors may also benefit from
using ETFs if they are used in tandem with
complicated investment products such as
derivatives.
``For the typical investor who wants a
long-term stake in a core holding such as the
S&P 500 index, the safest way to go is a
traditional mutual fund that has a track record of
successfully replicating the movements of the
index,'' Greenwald said.
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