Exchange traded funds have gained so much in popularity over the past few years that their asset growth on a percentage basis has far exceeded that of traditional mutual funds. The first exchange traded fund was started in 1993, called the S&P 500 Depository Receipts, commonly called Spyders. Currently, there are over 100 exchange traded funds covering many of the popular stock indicies, as well as individual industry sectors, foreign markets and fixed income funds. Here is a brief overview of exchange traded funds and our top five picks based on our relative strength analysis. For detailed information regarding ETF's go to www.amex.com.
       What are exchange traded funds?
       Exchange traded funds (ETFs) are index funds or trusts that are listed on an exchange and can be traded intraday. Investors can buy or sell shares in the collective performance of an entire stock or bond portfolio as a single security. Exchange traded funds add the flexibility, ease and liquidity of stock trading to the benefits of traditional index fund investing.
       The American Stock Exchange lists ETFs on more than 100 broad stock market, stock industry sector, international stock, and U.S. Treasury, and corporate bond indexes, providing a wide array of investment opportunities. ETFs provide a simple and effective way to invest in equity markets worldwide and the U.S. bond market. Investors can establish long-term investments in the market performance of the leading companies in the leading industries in the United States or abroad, or tailor asset allocations using diversified investments in stocks in particular industries or countries or in U.S. bonds. For the complete list of American Stock Exchange-listed ETFs.
       The advantages of ETFs: Tax efficiency, Lower costs (ordinary brokerage commissions apply) No sales load, Transparency, Buying and selling flexibility, All day tracking and trading, Diversification, Dividend opportunities, Buy on margin and Sell short, even on a downtick.
       How easily can I buy or sell exchange traded funds?
       As easily as buying or selling shares of stocks. Exchange traded funds are listed on an exchange and can be traded intraday, making it easy for investors to buy or sell ETFs.
       What is the minimum size purchase of an exchange traded fund?
       Investors can purchase as little as one share.
       Why invest in an index?
       Indexing often called "passive management," involves investing in a group of securities that represent the composition of a broad stock market, stock industry sector, international stock, or U.S. bond index. Index funds offer "market level" performance; they aim to generally match the performance of a specific index. Index funds generally have lower management fees and operating expenses than actively managed funds.
       Q: Are ETFs guaranteed or insured?
       There seems to be little risk of abuse of the ETF structure as an investment vehicle. In the US the Securities Exchange Commission thoroughly examines any application to create an ETF, and only large and closely watched firms are allowed in on the creation and redemption process of an ETF certificate. Finally, the same government agency (the Depository Trust Clearing Corporation) that ensures that individual stock certificates end up in the right investor's hands after a trade also ensures the ETF certificates are assigned correctly in a trade. In a decade of trading billions of dollars worth of ETFs, to our knowledge no US investor has ever lost money from fraudulent ETFs.
       The risk of the underlying asset is quite another matter. Each asset class must be examined separately, and risk profiles of assets may change over time. Stocks are clearly risky, and ones in technology or emerging markets particularly so. Long-term bonds and real estate are also risky in their own way. Short-term investment grade bonds, however, have generally proven quite safe.
       Q: Are ETFs only for stocks?
By no means. Any class of asset that has a published index around it and is liquid can be made into an ETF. Bonds, real estate and gold ETF's are available now.
       Q: Is it possible ETFs are just a fad?
       This is not likely. As of July 2004 ETF assets in the US topped $180 Billion and are still growing in double digits, far faster than traditional mutual funds.
       Editor's Note: Dan Sullivan is editor of The Chartist, P.O. Box 758, Seal Beach, CA 90740, 1 year, 17 issues, $175. Dan Sullivan's investment strategy is dictated by an iron-clad discipline: profits are allowed to run, losses are quickly cut. And, he uses relative strength for his stock selection process. Sullivan has successfully utilized these techniques since 1969. For more information on this newsletter go to www.TheChartist.com.