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2016_09_18_Appian_ETFConsidering ETFs for negative costs and positive returnsWhen it comes to investing, most of us are familiar with mutual funds and individual stocks, but have you ever considered investing in Exchange Traded Funds (ETFs)?Relatively new to the marketplace, ETFs are a hybrid: in effect, a cross between mutual funds and individual stocks. Investopedia counsels us to think of them as mutual funds that trade like stocks, but where mutual funds have their net asset value (NAV) calculated at the end of each trading day, ETFs undergo price changes throughout the day, fluctuating along with whatever index they are tracking (traditional ETFs have the ability, depending on the product, to track almost every index available).ETF investors enjoy low turnover, low cost, and broad diversification with low expense ratios, and are a good choice for people who want to diversify their portfolios while actively realizing negative costs. There are other advantages too: ETFs can be bought and sold throughout the day, much like individual stocks, whereas mutual funds, while tradeable, are less based on daily NAV calculations and don’t always move in line with the market. Unlike mutual funds, there is no minimum investment, and ETFs can be purchased through either a broker or an online brokerage. One can short sell them, buy them on margin, and purchase as little as one share.Of particular interest are ETFs that are typically passively managed, unlike mutual funds and individual stocks. And while one usually has to pay a small fee, or commission, this is sometimes offset by the gains realized, resulting in both negative real expense ratios and higher returns than the benchmark index the ETF is following. Some of the more popular ETFs that carry negative real expense ratios are iShares Micro-Cap (IWC) with a negative $115 cost over 10 years; Schwab Small Cap ETF (NYSE: SCHA) with a 10-year negative cost of $95, and Vanguard’s Small-Cap (VB) and Extended Market (VXF) ETFs with a negative $13 and $7 respectively. Appian Road currently holds the Schwab Small Cap ETF, which lends assets in the passive portfolio ETFs, and we also screen for ETFs that have a good market cap as well as good liquidity, choosing those with the lowest expense ratios and optimal asset lending. A recent Forbes article listed ETFs that were weighted by market capitalization, showing the Schwab US Small Cap ETF, with over $3 billion in assets and high liquidity, as one of the most cost-effective with a negative overall 10-year cost. The benefits of investing in ETF’s are hard to ignore. The ease with which they can be traded makes them a better choice than mutual funds, and an active investor can use them for short selling and trading on margin. They are tax efficient, and help the holder to maintain a diversified portfolio. In short, you’d be a little crazy not to include some EFTs in your investment strategy.(1 per $10,000 invested) (Source: Forbes: “Best ETFs: Small- and Mid-cap”.) ................
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