Investing Trends

Q: Ric Edelman have a book out called The Lies About Money, and in the book, he rubbishes the retail common monetary fund industry, and states that exchange-traded funds are the manner to go. In your book, Mutual Funds for Dummies, (which is the best book I've read on common funds), you state that there will be people out there against index common finances and for ETFs. Did you read Ric's up-to-the-minute book, and were you referring to him?

A: I was not, but prompted by your note, I did reappraisal his book and position on common finances and ETFs.

Exchange-traded funds are relatively new. While the first 1 was created back in 1993, they've gained some grip in recent old age (however, they still only throw about 5 percentage of the sum assets of the common monetary fund industry).

A figure of fiscal advisors are cheerleading for ETFs. In my observation, this advocacy is self-serving, because such as advisors have got investment-management mercantiles built around using ETFs. And, in a competitory marketplace, they desire to be different and look current to appeal to novitiate customers.

In Edelman's case, he have written a purposely provocative and hyped book telling his readers the following:

"The retail common monetary fund industry is ripping you off. You necessitate to sell all your retail common funds. The fact is that the retail common monetary fund industry is now flush with liars, criminals and charlatans. Daily concern activities include deceit, concealed costs, unrevealed risks, delusory trade practices, struggles of interest, and cardinal misdemeanors of trust — all at your expense. Since September 2003, the retail common monetary fund industry have paid out more than than $5 billion in fines."

That makes indeed sound pretty awful, doesn't it?

Well, $5 billion in mulcts is a pittance. See that the monetary monetary monetary fund industry averaged about $8 trillion under direction per twelvemonth and that these mulcts spanned about a decade's worth of activity in the fund industry, so the $5 billion amounts to just 0.00625 percentage of the fund industry's assets under management.

The common monetary fund industry, like any other concern or industry (brokerage firms, dentists, coverage houses and fiscal advisers) isn't perfect.

Unlike many industries, thanks to state and federal oversight, the industry actually returned the $5 billion they should have got to investors.

What's ironic and hypocritical of Edelman's remarks is that he said in a anterior book, "I detest index funds." Well, ETFs are index finances that you merchandise on a stock exchange!

ETFs are similar to common funds, with the most important difference being that in order to invest, you must purchase into an ETF through a stock exchange where ETFs trade, just as individual pillory do.

Thus, you necessitate a brokerage firm business relationship to be able to put in ETFs.

ETFs are most like index common finances in that each ETF generally tracks a major marketplace index. (Beware that more than than and more ETFs are being issued that path more narrowly focused indexes, such as as an industry grouping and little country).

The best ETFs might also have got slightly less operating disbursals than the lowest-cost index funds.

However, you must pay a brokerage firm fee to purchase and sell an ETF, and the current marketplace value of the ETF may pervert slightly from the implicit in marketplace value of the securities in its portfolio.

Eric Tyson, writer of Let's Get Real About Money! and Investing for Dummies, have e-mail at .