Kirby on Finance

An ETF Primer, Part #2

For the next installment of my ETF Primer, I’ll be discussing ways to evaluate ETF’s and how to go about purchasing them.

One of my goals is to keep this as basic as possible. Keep in mind that analyzing ETF’s can be as complex as analyzing any particular stock.

Essentially, you evaluate an ETF by looking at the stocks that comprise the fund. Just for an example, here are the top five holdings of the streetTRACKS Morgan Stanley Technology ETF:

Broadcom Corp. – 4.11%
Nvidia Corp – 3.45%
Cisco Sys Inc. – 3.21%
Accenture Ltd. – 3.20%
Jabil Circuit Inc. – 3.15%

Of course they’re invested in more companies than that, but you get the idea. As I write this, the above fund (Symbol: MTX) trades for about $53 per share. By buying a share of this ETF, you’re buying a proportional interest in the shares you see above. I also should add that this fund tries to replicate as closely as possible the performance of the Morgan Stanley Technology Index, but without the high costs.

Just as you would any fund, you need to keep costs in mind. Thankfully, almost all ETF’s are rather cheap investments – with many being as low as 0.20%. This is a terrific figure considering how we’ve seen costs in mutual funds eat up performance in past years. They key is that when you’re given two similarly allocated ETF’s, such as two that cover basically the same technology stocks, you ought to give some thought into going with the cheaper of the two.

One fantastic thing about ETF’s is that they’re awfully easy to buy and sell. You don’t have to worry about loads or any of the hassles you get with mutual funds. You just by them like you would a regular stock. You’d buy MTK (listed above) just like you would any of the stocks that comprise the fund. All you’ll pay are you regular brokerage fees. This makes ETF’s a great way to cheaply diversify your investment into a sector.

Next post I’ll suggest a few ETF’s that I think are prime for a nice run as well addressing a few questions that have been sent my way.

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