Chapter 5. Exchange-Traded Funds and Other Fund Lookalikes

In This Chapter

  • Making sense of the hoopla of exchange-traded funds

  • Understanding unit investment trusts

  • Creating your own customized funds

The hallmarks of the investment and economic system are constant change, innovation, and choice. Index mutual funds, which track a particular market index (see Chapter 10) and the best of which feature low costs, have been around for decades.

Exchange-traded funds (ETFs) represent a twist on index funds — ETFs trade like stocks do and offer some potential advantages over funds. However, some cheerleaders pitching ETFs gloss over drawbacks to ETFs and fail to disclose their agenda in promoting ETFs.

Some other fund wannabes compete for your investment dollars too. This chapter offers the straight scoop on these alternatives.

Understanding Exchange-Traded Funds

For many years after their introduction in the 1970s, index mutual funds got little respect and money. Various pundits and those folks with a vested financial interest in protecting the status quo, such as firms charging high fees for money management, heaped criticism on index funds. (As I explain in Chapter 13, index funds replicate and track the performance of a particular market index, such as the Standard & Poor's 500 index of 500 large company U.S. stocks.) Critics argued that index funds would produce sub-par returns. Investors who've used index funds have been quite happy to experience their funds typically outperforming about 70 ...

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