Purpose of ETFs
Have you ever wanted to trade shares of an index like the Dow Jones Industrial Average or the S&P 500? Well, you can’t do that directly but you can do it indirectly through ETFs. The managers who run ETFs usually invest in the same stocks or futures that make up an index or commodity in an effort to make the ETF’s value per share track a certain index or commodity up and down. This allows anyone with access to stock trading the ability to easily trade indexes or commodities indirectly.

Example: SPY – SPDR Trust Series I:
One of the most popular ETFs, its goal is to track the price and performance of the S&P 500 index. It will not be the same price as the index but its chart should have the same shape as the index, within one or two percent most of the time.

Example: QQQQ – PowerShares QQQ Trust, Series 1:
The goal of this fund is to track the Nasdaq-100 index by issuing and redeeming shares of all the stocks that make up the index.

Example: EEM – iShares MSCI Emerging Markets Index Fund:
This ETF seeks to track the price and performance of the MSCI Emerging Markets index, which tracks performance of international stocks. This fund is actually non-diversified, which means it is not as safe as other funds because it is focused on a specific sector.

Example: USO – United States Oil Fund LP:
This commodity ETF attempts to track the price and performance of oil prices, West Texas Intermediate light, sweet crude oil, to be exact. This is accomplished by continually trading futures contracts for oil, natural gas, and several other things. It is also non-diversified but a very convenient way to make trades based on oil prices.

Benefits of ETFs
The main benefits of ETFs include diversity, the same tradability as stocks, low costs, tax efficiency, and transparency of assets.

What are ETFs
ETFs are somewhat complicated to explain, but they are funds that can be structured in a few different ways. They are usually passively managed, which means the managers do not have to constantly decide which investments need to be bought and sold in order to increase the value of the fund. Instead, the managers simply have to make sure the fund tracks a certain index or commodity as closely as possible, which can be as simple as owning the stocks that make up an index and adjust the shares accordingly so that the price follows the index’s chart.

Where to Find Them
Many financial websites, including brokerages, offer a free stock screener, along with an ETF screener. Yahoo! Finance has a good one that lets you view a list of the best performers in several different categories.

Do not confuse these funds with money market accounts offered by banks. These are insured, and pay depositors an interest rate that is at the discretion of the bank. Money market funds pay market rates, or prevailing rates (short-term rates), minus modest expenses.

Except for a notable exception in 2008, retail investors (like you and me) have never faced the threat of losing money in these funds. Why? Let’s take a closer look.

Money market funds invest in high quality short-term IOU’s issued by the U.S. government, banks, and major corporations. Examples include T-bills, commercial paper, and short-term CD’s. Average maturity of this short-term debt is less than 90 days. So, when one IOU is paid off with interest, it is replaced by another.

Money funds have historically been viewed as very safe investments. U.S. T-bills are considered the safest investment in the world. High quality short-term debt has a great record for safety. No major corporation issuing debt can afford to default on any debt. That would lower their credit rating and make future borrowing more expensive and difficult.

Money market funds peg the value of their shares at $1. Share price does not flucuate. They pay investors interest in the form of dividends. As short-term interest rates in the economy change, the rate these funds pay track these changes. Money funds are very liquid. You can pull money out of them quickly and easily with no charges or fees. There are no sales charges to invest.

Remember, these funds do not declare interest rates like banks do. They are replacing their portfolio holdings on an ongoing basis. When money rates rise they are buying higher paying securities. When rates fall they are replacing higher rate paper with lower rate paper. They pass the interest onto investors, minus expenses which can be considerably less than one half of 1%. Thus, what they pay investors tracks or follows what money is actually worth in the money market.

So, if rates in the economy go up, investors automatically benefit from these higher interest rates. For example, my money market fund paid 13% in 1980, 17% for 1981, and 13% for the year 1982.

And then there’s the flip side. In early 2009 interest rates were at historical lows and money market fund rates were down to about one-fourth of 1%. The 3-month U.S. T-bill rate was even lower. Meanwhile, many banks were offering higher rates to attract and keep customers.

Some money funds specialize and invest only in U.S. government securities. Others invest in short-term municipal debt and offer tax-exempt income.

Keep in mind that money market funds in early 2009 were paying super low rates because interest rates were at record lows.

Mutual funds are not an investment type or class like stocks and bonds, they are a way to invest in stocks and bonds. In fact, they are the simplest and best way for most folks to do so. When you invest in mutual funds, professional money managers manage a portfolio of stocks and/or bonds and/or money market securities for you. You simply own shares in a large collection of investments.

The cost to you varies, but often amounts to about 1% a year for expenses, maybe 2% for stock funds. You don’t pay these costs directly to the fund company. These expenses are just deducted from the fund’s assets.

Now, you might hear someone say that their mutual funds have been bad investments. Take such statements with a grain of salt. There are some losers out there, and some funds charge more than others for expenses. That having been said, statements like this are usually based on a misunderstanding of the nature of the investment. I’ll illustrate with a short story.

In late 2007, Jack rolled $100,000 into an IRA, where his advisor had him invest in mutual funds. In March of 2009, you and some friends at an informal get-together are discussing how to invest, and Jack gives his opinion. “Don’t invest in mutual funds, they are bad investments”, he says. His friend Mike adds, “now is not a good time to invest in mutual funds, I just lost my shirt”. Jack agrees and announces that he just lost 50% in his funds.

After hearing this exchange of opinions, you decide not to invest in mutual funds, at least not now. You plan to keep your money in the bank until you learn how to invest.

Now, here’s the rest of the story. Jack’s financial planner put all $100,000 into stock funds, because Jack already had money in annuities and bond funds, and wanted higher returns. The financial crisis of 2008 and early 2009 sent stock prices in general down about 50%. Jack owned a variety of stock funds, and lost about 50% as well. Stocks were the bad investment, not mutual funds. Had Jack been in bond funds or money market funds, he’d not taken those losses.

Mike must have been in stock funds as well. Either that, or he was repeating something he’d heard at another party. Now is always a good time to invest in mutual funds, if you know how to select funds that are appropriate to your needs. Better yet, learn how to invest and put together a balanced portfolio of mutual funds.

The alternative is to manage your own investment portfolio of individual stocks and bonds. This is out of the question for folks who have not the knowledge, experience nor inclination to do so.

When you invest in mutual funds, professionals deal with the investment selection and timing issues for you. They manage the investment portfolio, and it’s all wrapped up in a package called a mutual fund. You need only pick the package(s) that’s right for you. Now is always a good time to shop for mutual funds, and a good time to learn how to invest in them.

Our basic investment guide will classify mutual fund investments into four categories based on what a fund invests in, where they invest your money. The vast majority of funds fit into one of these categories: money market funds, bond funds, stock funds, balanced funds.

MONEY MARKET FUNDS are the safest of all mutual fund investments. They pay investors interest in the form of dividends. The price or value of their shares does not fluctuate. Money market funds invest your money in high-quality safe short-term IOU’s of the U. S. government, banks, other major corporations, and/or other government entities. As interest rates go up, interest earned and dividends paid by these funds do also. When rates fall, dividend yields fall. Money market funds offer investors high liquidity. You can get your money out of them quickly and easily, at no cost with little fear of loss.

BOND FUNDS are the second type of mutual fund investment, and are the second safest. They invest in long-term debt instruments called bonds. The bonds held by a bond fund can be long term, intermediate term, or shorter term in nature. They can be issued by the U.S. government, other government entities, and corporations. Municipal bond funds pay dividends that are tax-exempt or tax-free. Investors in search of higher income in the form of dividends often invest in bond funds. Bond fund share prices flucuate, so there is risk involved in these mutual fund investments.

STOCK FUNDS are the most popular and the riskiest type of fund. The price of their shares will flucuate, sometimes going to extremes. When you hold shares in a stock fund you are invested in stocks. Generally speaking, as goes the stock market, so goes the value of your stock fund. The objective of these funds: growth (higher returns), perhaps with modest income from dividends. There are many varieties including growth funds, value funds, international funds and specialty funds.

BALANCED FUNDS are a blend of the other three just discussed. A traditional balanced fund is a mutual fund investment that invests almost 60% of its assets in stocks, almost 40% in bonds and what little remains in short-term debt (the money market). So, if you hold shares in a balanced fund, you are invested primarily in both stocks and bonds. Newer types of balanced funds include lifestyle funds and target retirement funds. These can be conservative, moderate, or aggressive in nature.

MUTUAL FUND INVESTMENT GUIDE SUMMARY

MONEY MARKET FUNDS for high safety, liquidity, current income. BOND FUNDS for higher income, with only moderate safety. STOCK FUNDS for growth, perhaps with income, with significant risk. BALANCED FUNDS for moderate growth and income, risk depends on specific fund.

However, if the truth be told investments are risks. There will always be risks. However, the rewards are even greater especially if one is successful. Although, do not discount the fact that there will always be a chance for failure and that is a fact that all investors should know, even if its mutual funds investment. When about to jump into investing, whatever kind it may be, know all you can about it. Read the objectives, its risks, charges and expenses. A person who is interested in investing should better consult with financial experts. All the documents pertaining to the kind of investment should be read thoroughly before doing so.

If you are new at investing, the easiest form is mutual funds investments. Many investors started out with this form and it reduces the anxiety in some level because you can buy them at small amounts. Thus, you do not have to release a big amount all at once. Plus, you can always look back at previous performance of the bond or stock. Do you know that the movements of mutual funds are predictable? So you can always look back at past performance for future movements. You can always read about it as everything is shown publicly. Therefore, if you want to learn the rope of investing, you can always depend on mutual funds investment.