Monday Morning Quarter-Buck 02-27-2017

Weekly Focus – Think About It - “With rushing winds and gloomy skies, the dark and stubborn Winter dies.” – Bayard Taylor

Two months down!  It’s almost March - wow!  It’s time to think of that Spring cleaning, which should include password “cleaning” too!  Change those passwords, just like you change the battery in your smoke detector - not convinced this is necessary, if you get a moment, mozy on over to my website for the latest video on CyberCrime

I want to say thank you for all the great feedback on this month's blog series!  For those of you just joining in on the blog, in late January, I had a great conversation with a client about “learning” how to invest so that our conversations would be more engaging.  This prompted me to ask a few more clients if they would be interested in an investment 101 series for the month of February; the feedback I received was a resounding YES. So, I decided to break the series down into four-parts:

I’ll start in the traditional manner - what is an exchange -traded fund (ETF)?  It works similar to a mutual fund (explained last week), but it usually follows a specific index (doesn’t try to outperform it, just mirrors it) and a mutual fund generally (except for closed-end funds) trade only at the end of the day; whereas an ETF trades throughout the day (like a stock does).  So it combines the diversity of a mutual fund, with the trading flexibility of a stock.

One feature that is unique to ETF’s is that they may be trading above (at a premium) or below (at a discount) to the actual underlying assets within the fund.  For example, look at the ETF below - notice the “prem/discount” is listed at -0.04%?  What that means is that if you purchase this at $85.85, you are actually buying the fund at $0.03 cheaper than if you went out and bought each of the underlying positions individually.  Most mutual funds don’t have this feature (but again, closed end funds do); personally, I like to use ETF’s for this reason.


Another feature that I like about ETF’s has to do with taxes; have you ever been “surprised” after having your tax return completed and you find out that a mutual fund has distributed a capital gain distribution.  Where did this distribution go - it likely got reinvested into the fund - but you had to pay tax on that action that someone else did.  ETF’s don’t have that feature for the most part, so you gain control of the capital gain distributions.  You may still have to recognize gains, but you can decide when you take them.

One other benefit of an ETF is their low cost - for the most part, the underlying cost is lower than a mutual fund - which means you may get to keep more of the profit.

Which one should you use?  I would generally recommend you use ETF’s in a taxable (non-IRA) account to avoid the unexpected taxable gains, but I wouldn’t rule out using mutual funds in IRA or Roth IRA accounts.  Some sectors warrant hiring a good mutual fund manager to make specific selections, versus just trying to follow an index.

I hope you enjoyed this week's blog, wishing you a wonderful week!

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