Today, we look at exchange-traded funds (ETFs) as a low-cost, efficient way of investing in the stock market. With ETFs, we recommend that investors keep it simple. Invest only in “plain vanilla” ETFs that mimic the performance of a leading stock market index. The three ETFs we feature here—Dow Jones ETF, S&P 500 ETF and Powershares ETF covering Nasdaq—offer a secure way to invest in each of the major U.S. stock indexes.
Exchange traded funds (ETFs) are set up to mirror the performance of a stock market index or sub-index. They hold a more or less fixed selection of securities that represent the holdings that go into the calculation of the index or sub-index.
ETFs trade on stock exchanges, just like stocks. That’s different from mutual funds, which you can only buy at the end of the day at a price that reflects the fund’s value at the close of trading.
Prices of ETFs are quoted in newspaper stock tables and online. You pay brokerage commissions to buy and sell them, but their low management fees give them a cost advantage over most mutual funds.
As well, shares are only added or removed when the underlying index changes. As a result of this low turnover, you won’t incur the regular capital gains taxes generated by the yearly distributions most conventional mutual funds pay out to unitholders.
Below we update our advice on three ETFs that cover the major U.S. stock indexes—all three buys, although one for aggressive investors only.
SPDR S&P 500 ETF $204.53 (New York symbol SPY; buy or sell through brokers; www.spdrs.com) holds the stocks in the S&P 500 Index, which consists of 500 major U.S. companies that are chosen based on their market cap, liquidity and industry group.
The index’s highest-weighted stocks are Apple, ExxonMobil, Microsoft, Procter & Gamble, Johnson & Johnson, J.P. Morgan Chase, Pfizer, General Electric, Berkshire Hathaway and Wells Fargo & Co. The fund’s MER is just 0.10% and it yields 2.0%.
If you want exposure to the S&P 500 Index, the SPDR S&P 500 ETF is a buy.
Recommendation in Canadian Wealth Advisor: BUY.
SPDR DOW JONES INDUSTRIAL AVERAGE ETF $175.00 (New York symbol DIA; buy or sell through brokers; www.spdrs.com) holds the 30 stocks that make up the Dow Jones Industrial Average.
The SPDR Dow Jones ETF’s top holdings are Goldman Sachs, Apple, IBM, Home Depot, 3M, Nike, Walt Disney Co., UnitedHealth Group, United Technologies and Boeing. The fund’s expenses are about 0.17% of its assets, and it yields 3.3%.
Recommendation in Canadian Wealth Advisor: BUY.
Smart conservative investing at a time of uncertainty
Pat McKeough’s approach to smart conservative investing gives you two big advantages. Your investments are safer when the market is down—and you’re in a stronger position to profit when the markets move up. Pat’s safety-first philosophy is simple and always effective. You can achieve surprisingly powerful results through income and capital gains. And you never need to take big risks.
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Powershares ETF holds shares of leading computer hardware and software firms on Nasdaq
POWERSHARES QQQ ETF $106.09 (Nasdaq symbol QQQ; buy or sell through brokers; www.invescopowershares.com), formerly called Nasdaq 100 Trust Shares, holds stocks representing the Nasdaq 100 Index, which consists of the 100 largest shares on the Nasdaq exchange by market cap.
The Nasdaq 100 Index contains shares of companies in a number of major industries, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial firms. The fund’s expenses are about 0.20% of its assets. It yields 1.0%.
The index’s highest-weighted stocks are Apple, Microsoft, Amgen, Google, Cisco Systems, Intel Corp., Amazon.com, Gilead Sciences, Comcast and Facebook.
Recommendation in Canadian Wealth Advisor: BUY for aggressive investors only.
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