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The world of exchange-traded funds

Carol Perry
Special to the Appeal

Those of us in the financial services business have been noticing how many new exchange-traded funds are being launched every month. I remember this happening with mutual funds back in the 1990s. I would see so many new funds with every objective and risk tolerance imaginable coming on line that I could not keep up with them.

After a while, I noticed that the funds were coming out with funds that invested in other funds instead of stocks and bonds. These were called fund of funds and allowed investors to diversify portfolios with fewer mutual funds than before. Now the ETF (exchange-traded funds) markets are trying the same thing. These ETF’s are diversified and very global in nature , but there are critics out there that claim that these new ETFs – made up ETFs – may not be such a good thing. Many advisors are not that excited about them and the expense ratios could get pricey, but they could be a good way to diversify just like the funds are.

Investors need to keep in mind that these are not lifestyle funds like the Fidelity products I have seen on TV that rebalance themselves over time. The asset mix of each ETF is not supposed to change over time, so the buy and ignore strategy would not work. There are some new ETFs that are balanced global asset portfolios much like mutual funds that invest in 60 percent stock and 40 percent bonds and cash, but again, it may not meet every investor’s needs and objectives.

One thing to consider when investing in an ETF is that it could be used as a core in which an investor could build around. It may take some time for this concept to catch on in a market with way too many new products chasing too few dollars right now. I have used ETFs for many years and will be keeping an eye on this strategy to see how the returns shape up. In the meantime, I am going to have to go to ETF school to keep up with all the new products coming to market these days.

If you would like to learn more about using ETFs in your portfolio contact us at 841-4277.

• Carol Perry, a Northern Nevada resident since 1983, represents the firm of Wachovia Securities in Carson City.