The Benefits of Investing in ETFs and Bond Funds

There is no magic bullet or guarantees in investing. Investment theory suggests that if your portfolio is diversified you will increase your chances of a rewarding investing experience by decreasing your risk. ETFs simplify your diversification effort and offer you a wide array of investment strategies.

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What are ETFs?

ETFs are investment companies that trade in the secondary market as ETF shares.

ETFs are index-based products, in that each ETF holds a portfolio of securities that is intended to provide investment results that generally correspond to the price and yield performance of the underlying benchmark index.

ETFs add the flexibility, ease and liquidity of stock trading to the benefits of traditional index fund investing. ETFs can be traded intraday. You can buy or sell shares in the collective performance of an entire stock or bond portfolio as a single security.

As an example, the Diamonds (DIA) that trade on the American Stock Exchange is an exchange traded fund (ETF) that represents all 30 stocks in the Dow Jones Industrial Average.You can buy and sell Diamonds like a stock and have the performance and income of the 30 diverse stocks in the Dow Jones Industrial Average.

Over 100 ETFs trade on the American Stock Exchange. Some of the other ETFs are the QQQ for the NASDAQ 100 Index, the SPY for the S&P 500 Stock Tracking Index and the IEF for the ishares of Lehman 7 to 10 year Treasury Bond index. These (and many others) are available to you through MSFS.

ETFs, in general, have significantly lower annual expense ratios than other investment products because they are index-based, not "actively" managed. ETFs do have expenses and brokerage commissions apply to ETF buy and sell transactions.

ETFs began with funds that tracked equity indexes. The ETFs have now expanded to fixed income ETFs that are designed to generally track bond market indexes. You might consider purchasing and holding fixed income ETFs to diversify an equity portfolio as fixed income ETFs often trade in an inverse relationship to equities and have been less volatile than equities.


Dividends paid by companies and interest paid on bonds held in an ETF are distributed to ETF holders, less expenses, on a pro rata basis. Fixed income investments are often used as a source of regular income, and fixed income ETFs declare and pay dividends, if any, on a monthly basis.


ETFs offer individual investors:

   • advantages of stocks and index funds combined
   • lower fees (ordinary brokerage commissions apply)
   • buying and selling flexibility
   • wide array of investment strategies, including core holding and diversification
   • convenient vehicles for allocating assets to both equity and fixed income
   • income opportunities, either dividends or bond interest income


ETF shareholders are subject to risks similar to those of holders of other diversified portfolios.

A primary risk consideration is that the general level of stock or bond prices may decline affecting the value of an equity or fixed income ETF. An ETF represents interest in a portfolio of securities. When interest rates rise bond prices decline adversely affecting the value of fixed income ETFs. The overall depth and liquidity of the secondary equity market will fluctuate.

An exchange traded sector fund may also be adversely affected by the performance of that specific sector or group of industries on which it is based.

Although ETFs are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.


You may wish consider the benefits offered by the simplification, diversification and wide selection of ETFs in designing your investment portfolio.

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