With the evolution of investing and the proliferation of online discount brokerage services more and more people are managing their own investments. The invention of mutual funds allowed the average investor to harness the research power and expertise of fund managers and attain attractive returns without having to do extensive research on individual securities. The wild success of the mutual fund model drove the finance industry to create newer and “better” investment vehicles. The exchange-traded fund (ETF) was one such invention.
ETF’s were originally introduced as a means of attaining the performance of a given index. For example, there are numerous ETF’s that track the performance of the S&P 500. Today you can buy shares of an ETF that tracks almost any sector you are interested in. ETFs trade like a stock, which means that you can buy as little as one share and it will trade for the next available price. This allows an investor to purchase the ETF at the intraday price and only purchase a small amount. Conversely, when you purchase a mutual fund you are purchasing it directly from the mutual fund company and the price you pay is the fund’s NAV (the weighted price of each underlying security) at the end of the day. Also mutual funds almost always have investment minimums that are far higher than the price of one share. The other large advantage of ETFs is that the transaction fee is the same as stocks, which is MUCH lower than the transaction fee for mutual funds.
Unfortunately, most of the advantages of ETFs can also be viewed as their disadvantages. Since they are purchased on the secondary market from other investors the next available price can vary greatly from the current price if the ETF is only traded sporadically. Therefore, it is important to know the volume of shares sold of the ETF you are interested in. This information is readily available on sites such as Google Finance. The enormous number of ETFs being offered also means that the spectrum of quality is very large. Another thing to keep in mind is that many are very thinly traded so while it may be the obscure market you want to invest in you must make sure it is the price you want to pay for it.
I write this post not to discourage the average investor from investing in ETFs but to encourage them to do the necessary research before purchasing them. Like most financial vehicles the construction, structure, and intricacies of ETFs are very complex and I have barely scratched the surface in this post. In later posts I will address more specific features of ETFs but this post is meant to alert you that there is more to ETFs than meets the eye.
As we near the one the month to the April 15th tax filing deadline mark some people have filed their taxes but many of us are just beginning to think about it. Free online tax filing services have been the topic of many online blogs in recent weeks and The Oregonian’s It’s Only Money blog did a good review of the available providers. These programs are extremely helpful as they walk you through the confusing forms and help to insure that your taxes are filed correctly. Electronic filing and direct deposit of refunds are additional advantages of using such software.
Many programs have also partnered with various states to offer free state tax return filing. For Oregon H&R Block, TaxSlayer, Turbo Tax Freedom Edition, Tax Hawk, and OnLine Taxes all offer free state filing with various restrictions. Of these H&R Block has the most lenient restrictions. The only restrictions are that your AGI must be $58,000 or less and you must be 51 years old or younger.
The reason I decided to add to the numerous articles already written on this topic is that in order to receive the free state tax return filing service you MUST enter the site through either the IRS website or the Oregon Department of Revenue site. If you enter directly through the H&R Block website you will be prompted through an identical interface with the only difference being that at the top it will say “Free Edition” instead of “Free File”. If you file your taxes with the “Free Edition” you will be charged $27.95 for your Oregon return. The good news is that once you have entered the “Free File” site the interface is straightforward and easy to complete.
Investing is intimidating and confusing. While some people will freely admit this, most feign understanding and rely solely on the advice given to them by their investment professional. While professional advice is important there is one major question you should be asking and that is “how much am I paying you and the investment industry?” As a client you have a right to know this information. If you ask and your investment professional launches into a long-winded complex explanation, ask them to slow down and explain it. Better yet ask for an exact breakdown of ALL expenses in writing. This is not unreasonable and the request should not be met with resistance. If it is, more than likely you are being charged more money than you realize. Now it is easy to say “Well I really like my broker and he/she promises good returns so I don’t mind paying a little extra.” This is a rational thing to think but you should still find out how much that “little bit extra” is.
It is usually quite difficult to figure out the expenses being charged on your account from the monthly or quarterly statements that you are provided with so it is best to ask what the exact fees are. Some basic things to look for are large front-end loads (commissions) that can be high as 5.75% and 12b-1 fees (a very hidden fee). Often it is a useful exercise to quantify in dollar terms the fees you are paying. For example, lets say you have $100,000 and your broker invests it in mutual funds with a front-end load of 5.75%. You just paid $5,750 for your money to be invested. Remember, no matter how much money you have to invest there are options. There are investment professionals who will charge far less than 5.75% to invest your money or with some basic research and professional advice you can do the investing yourself for free. In the end, it is your money and if you are happy with the service and returns you are getting for what you pay then great, just be sure you know how much you are actually paying.