"Of Mutual Interest"-Spiders
Tuesday, September 18, 2007SUZANNE PRATT: Wall Street is known for its bulls and bears. But, spiders dwell there, too. We're not talking about the creepy crawler ones, but the securities that are similar to indexed mutual funds. Erika Miller has details in tonight's "Of Mutual Interest."
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is what most people think of when they hear the word spider. But it's not insects these traders are buying and selling at the American Stock Exchange. Spiders are Standard & Poor's depositary receipts and they are the best known exchange traded fund. Like index mutual funds, ETFs track market benchmarks. In the case of spiders, it's the S&P 500. As Lee Kranefuss, CEO of I-shares points out, ETF's have some advantages over index funds.
LEE KRANEFUSS, CEO, ISHARES: You don't have to wait until the 4 o'clock settlement cycle to find out what the price is. You can go place an order right now for an S&P 500 fund and get it in the next 10 seconds.
MILLER: In addition, ETFs typically have lower expense ratios than index mutual funds. There are also tax benefits since ETFs do not have to sell securities to accommodate shareholder redemptions. But one potential disadvantage is that they must be bought and sold through a broker for a trading commission, not true of mutual funds. In addition, dividends cannot be automatically reinvested, though investors can elect to do so at the end of the quarter. Financial planner Stacy Francis says another big difference is that an ETF can trade higher or lower than the actual value of the underlying securities.
STACY FRANCIS, FINANCIAL PLANNER, FRANCIS FINANCIAL: An index mutual fund trades at what's called net asset value, NAV whereas a ETF of the same exact holdings can be trading at a premium and it's because of perception.
MILLER: Spiders are not the only investments designed to compete with index funds. There are roughly 600 ETFs traded around the world. There are ETFs tracking bonds, commodity and other indexes. Roughly half of ETF investors are big institutions and hedge funds. They account for the majority of the trading volume.
KRANEFUSS: Often these people are reducing risk, just putting cash to work and the like, but they're dealing in very large quantities. So there's a lot of turnover.
MILLER: So how should individual investors decide whether an index fund or an ETF is the better investment choice? Most experts advise investors who put money into the market regularly to stick with index funds.
FRANCIS: Every time you purchase that ETF, you are going to have to pay that commission. That could be $19. It could be $39. So, if you're buying and selling quite often, that's going to take a big bite out of your gains.
MILLER: On the other hand, if you plan to invest one lump sum into the market and leave it there, financial planners say an ETF may be the way to go. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
