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Promise and Peril

Individual investors are showing a lot of interest in exchange-traded funds (ETFs).  There are more than 940 US ETFs presently, up from just 154 in 2004.  In the same time period, ETF assets under management have more than tripled, to $742 billion.  While this figure is miniscule compared to the $7.14 trillion in assets held by mutual funds, one driver of ETF growth is that the average ETF annual fee is 55 basis points (0.55% of assets), a fraction of the average mutual fund charge (1.5% of assets).  Since an ETF mirrors some market index (however obscure), it can outperform 80% of mutual funds--only 20% of mutual fund portfolio managers beat the index they're tracking.

It's not all good news, however.  For instance, market guru John Bogle denounces the fact that so few ETFs are broad market; the more obscure an ETF's index, the more it costs to run it.

Before jumping on the ETF bandwagon, consider some sources (such as Steadfast Finances and ETF Market Pro) that are objective enough to realistically list pros and cons.  And be very careful--and knowledgeable--if you are considering leveraged, commodity-based, derivative-rich, or inverse ETFs; if you don't understand them, then you very likely shouldn't be in them!

A screener is often helpful in narrowing possibilities under consideration.

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