It is similar to a mini-mutual fund and has many of the same characteristics. A regular fund is composed of many stocks. There are index funds that have hundreds of stocks with the same equities as the S&P500. Almost all major funds have several index funds and there are ETFs with the same composition.

If the investor buys an index mutual fund he must wait until days end to have the entry price calculated. Not so with an ETF. It can be purchased during the day at any time and the buyer receives the prices of the stocks at that moment. Each mutual fund family has their own managed S&P500 index mutual fund whereas the SPY (the ETF of the S&P500) is the same for all brokerage companies. The only difference for the trader is the amount of commission charged that can be as low as $7.00 to as much as the brokerage company wants.

Expenses of a “good” fund are about 1.5% or less. Expenses for ETFs run about 2/10th of 1%. Big difference.

Brokers want you to buy a regular mutual fund because he has a trailing commission every year. It may only be 1%, but most people who buy mutual funds don’t trade so this is better than a poke in the eye. ETFs have no trailing commission. Brokers will tell you these commissions are bad, but when you figure it out you are way ahead.

Suppose you put$10,000 in an ETF. The total commission might range from $7.00 to $25, maybe a little more depending on the broker. It is a one time buying charge. Even if you buy a no-load fund other than an index fund there is still the 1.5% annual expense fee. That’s $150 every year. You don’t have to be a rocket scientist to see why he wants to switch you into a mutual fund.

You can’t put stop loss protection on a mutual fund, but brokerage houses will accept Good Till Cancelled stops on ETFs. Never rely on any broker to “watch your account”. He won’t. Never invest without stop loss protection.

The majority of mutual funds have adopted redemption fees. These are extra fees to discourage the investor from selling. They may be as short as 30 days or as long as one year with a fee as high as 2%. There is no solid reason for this. That fee goes in the fund manager’s pocket. He wants to keep your money because he gets paid on the amount of money in his fund and not on performance. Whether you win or lose he makes money.

The mutual fund industry has a serious and progressive case of Alzheimers. They are chasing customers away in droves with excess charges and high commissions.

It is time to look into ETFs.

Al Thomas' book, "If It Doesn't Go Up, Don't Buy It!" has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he's the man that Wall Street does not want you to know. Copyright 2006 All rights reserved.

Copyright 2006 Albert W. Thomas All rights reserved. Author of "IF IT DOESN'T GO UP, DON'T BUY IT!"