The ETF Advantage
Diversify Your Portfolio with these Market-Beating ETFs

On March 21, 1924 three Boston businessmen pooled together $50,000 to form a company called the Massachusetts Investors Trust. The purpose of the company -- to invest in the roaring 1920s stock market boom. 

These three men unwittingly gave birth to a financial revolution. In fact, in the ensuing 80 years, their invention -- the mutual fund -- has come to dominate the retail investing landscape.

As of 2007, U.S. mutual fund assets had grown from that $50,000 seed invested in a single fund into nearly $12.5 trillion invested across more than 8,000 funds. Over 50 million American households now own mutual funds, making them far and away the most popular and common means of participating in the stock market.

Yet despite the tremendous success of the industry, many mutual fund executives are starting to get nervous. Why? Well, after years of unfettered and unchallenged dominance of the retail investing landscape, there's a new kid on the block -- a new asset class that threatens to challenge the pre-eminence of the mutual fund. 

And the mutual fund industry is vulnerable to that competition. One reason funds have become so popular is that they've been the only game in town for millions of Americans. Many 401(K) accounts and other retirement plans mandate investments into a narrow selection of funds. In addition, mutual funds have been, until recently, the easiest way to diversify a portfolio among a broad basket of different stocks.

Mutual funds have taken full advantage of this near monopoly. Fees charged for managing that $12 trillion pie have been creeping up. This has been true even since the advent of no-load funds in the 1970s. From 1990 to 2002, for example, the Investment Company Institute reports that the average mutual fund expense ratio jumped from 1.47% to 1.64%.

And most investors are keenly aware of several other drawbacks of traditional mutual funds. For one, they're only priced once per day, so you can't buy and sell them as freely as you might like. In addition, many mutual funds also have steep minimum investment requirements, making them impractical for some investors.

A New Kind of Fund
So, what exactly is this revolutionary new investment that's challenging the mutual fund industry's dominance? It's called an exchange-traded fund (ETF). These unique financial instruments are essentially passive funds linked to a specific benchmark -- similar to traditional index funds -- that allow investors to purchase a basket of securities in a single transaction. However, unlike conventional funds, ETFs are actively traded on the major exchanges just like common stocks, meaning they can be bought, sold, and even shorted throughout the day. 

From a humble start in the early 1990s, the ETF business has exploded, particularly over the past several years. From 1993 through 2003, approximately 134 new ETFs were launched -- a little more than one per month. However, these cost-efficient investment vehicles have finally begun to catch on, and 290 new ETFs hit the market in 2007 alone -- more than one per trading day. 

Of course, the reason giant investment houses like Merrill Lynch (NYSE: MER) and Vanguard continue to introduce new funds is simple -- retail demand has been insatiable lately, and investors are pouring a fortune into these funds. According to the Investment Company Institute, U.S. investors sunk more than $100 billion into new ETFs last year -- bringing the industry-wide total to roughly $600 billion.

ETFs offer a number of advantages over competing products, and in today's report we'll spell out exactly what those benefits are. And for those looking to cash in on the ETF boom, we'll also take a closer look at several of our favorite funds. 

ETFs boast several major advantages over mutual funds and common stocks. Here's a brief review:

Diversification -- Each ETF represents an interest in an underlying basket of stocks or bonds. Some are even tied to indexes representing several thousand securities, helping investors gain broad diversification in one simple transaction. 

Flexibility -- Given the breadth of choices now available, ETFs give hands-on investors a way to maintain pinpoint control over their asset allocation. For those that want to invest in a single country (like China), a certain sector (like biotechnology), or even commodities (like gold), ETFs are the best way to nimbly target specific areas of the market. With so many styles, strategies, and objectives to choose from, ETFs offer something for almost every investor.

Low Cost -- Unlike traditional mutual and index funds, ETFs can be purchased with zero front or back-end sales loads. In addition, because they are not actively managed, most ETFs charge minimal annual expenses below 0.5%, making them far more affordable than most other diversified investment vehicles. Some even have razor-thin annual expenses of 0.1% or less.

Liquidity -- Unlike traditional funds, ETFs can be bought and sold throughout the trading day and can even be purchased on margin. This gives investors greater flexibility when entering and exiting positions, and it also helps them avoid the late-trading and market-timing scandals that have plagued the mutual fund industry in recent years. 

Tax-Efficiency -- Whereas many traditional funds are actively engaged in buying and selling portfolio holdings, most ETFs tend to remain fairly static -- tracking a fixed index. As a result, ETFs typically have very low turnover and thus trigger minimal capital gains taxes, making them highly tax efficient.

With all of these benefits in mind, nearly every investor could benefit by holding a position in one or more of today's leading ETFs. The main question is, which ETFs are worth your consideration. In today's report you'll find an extensive list of many of today's most popular U.S.-traded ETFs. And in the analysis that follows, we'll bring you a detailed look at a few of our favorite funds. 

I sincerely hope you've enjoyed today's in-depth research report -- The ETF Advantage.

Nathan Slaughter
Editor
The ETF Authority
StreetAuthority.com
http://www.StreetAuthority.com

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