If you are looking for an investing innovation that clubs the ideal features of index mutual funds with flexibility in trading of individual securities, Exchange-traded funds (ETFs) are the best option. ETFs serve a multitude of objectives. But to invest in ETFs, a well-studied approach is needed. Tax efficiency and low expense ratios are the hallmarks of ETFs.



Not long ago, mutual funds were considered as the best forms of investment for those interested in stocks. ETFs have scored an advantage over them. They are good for both short-term and long term investment options.

Index investing, with which the entire scheme of ETFs operates, covers and takes into consideration the entire gamut of the activities related to stocks. It is a carefully studied and created package with proper regard for the important activities related to stocks like buying, selling, the timing of selling and the growth prospectus of a particular share.

It covers both the fronts-the equity and the fixed-income front. As for the first option, it covers the S & P 500, the NASDAQ 100, the Dow Industrials and all other major market indexes. As for the later, it tracks short-term and long-term and indexes like the Lehman 20 year treasury, the Lehman Aggregate Bond Index and the Lehman 1-3 Year Treasury.

ETF, by its very structure, will go a long way to provide one with the maximum benefit that a normal investor expects from the stocks. By prudently managing the ETF, you can optimize your gains. With 2-3 ETFs, you are in a position to cover the whole of equity market and also the fixed-income market. Once the trades are over, you can wait and watch your funds grow by holding on to your investment and your portfolio will progress according to the level of its benchmark.

Apart from the wait and watch policy, you can adopt the active-management strategy. You not only create a diversified portfolio but you actively involve yourself in management of the ETFs. From a passive Manager, you become the active Manager.

If according to your study and estimate of the stock market, you feel that short-term bonds are set for a meteoric rise, you may sell your bonds from the broad bond market, and buy an ETF of short-term issues, jus as you do for your investment in stocks.

This question relates to your taking timely-well studied decisions. The alertness required is more or less the same as you need for trading stocks. But the risk is much less as you always get the opportunity to interact with the specialists in the stock market trading. You continuously draw hints from their vast and varied experience, while conversing and dealing with stock brokers.

To sum up, ETFs have all the ingredients of a good investment portfolio. They are flexible, tax efficient, cost efficient and convenient. At the introductory level, one may find difficulty in grasping their intricacies, but once you understand their basics, they are easy to follow. Their popularity is their credentials. They are about to beat back the mutual funds, and they are bound to surpass all forms of investments. Once an investor is introduced to the virtues of ETFs, one will adopt them, because the temptation to own them for valid reasons is difficult to resist.