Exchange-traded funds add a new wrinkle to securities

Dollars & Sense

March 25, 2001|By JANE BRYANT QUINN

TECH INVESTORS who've been "buying the dips" for the past year may have been buying it with Qubes. A Qube is a stock whose ticker symbol is QQQ. It mimics the price performance of the top 100 Nasdaq stocks.

As the tech and dot-com stocks crashed, Qubes looked ever-more interesting. Investors could fish for what they hoped was a market bottom without having to guess whether Amazon, Microsoft or Broadcom was now "cheap enough." Qubes effectively let you buy the Nasdaq as a whole.

The amount of buying and selling in Qubes has risen to more than 97 million shares a day, compared with an average of 46 million for the year as a whole. For dedicated Nasdaq lovers, Qubes are a smart way to go.

Qubes belong to a new group of securities known as "exchange-traded funds" or ETFs. They combine the traits of stocks with the traits of index mutual funds.

A classic index mutual fund tracks the performance of a particular market index. For example, Vanguard's 500 Index Fund tracks the performance of Standard & Poor's index of 500 leading U.S. stocks.

ETFs track indexes, too. Qubes mimic the Nasdaq 100. An ETF called a "Spider" (ticker symbol: SPY) mimics the S&P 500. It's the second-most-popular ETF, with a current trading volume of 19.9 million shares a day.

The "Diamond" (DIA) mimics the Dow Jones industrial average, on a volume of 9.4 million shares a day.

There are 78 other ETFs. They track the performance of different industries (biotechnology, drugs, utilities), asset types (small stocks, value stocks) or the markets in different countries.

Here are some of the differences between ETFs and mutual funds:

You can trade an ETF at any time during the day. That makes it a good vehicle for active stock traders. You also can sell it short (that's a bet the price will drop) or place a limit order (an order to buy or sell at a particular price).

An ETF is a stock just like any other stock. You buy through a broker or your online brokerage account, for whatever commission or fee is normally charged. Every time you make a new purchase you pay a new commission, so ETFs are costly for people who add money regularly.

ETFs charge lower annual expenses than mutual funds do. But when you add the sales commission or fee to the annual expenses, ETFs might cost more than comparable index funds.

When you buy an ETF, you also have to pay a "spread." That's the difference between the ETF's buying and selling price at that particular moment. Because of the spread, trading ETFs costs more than trading mutual funds.

Some index funds produce taxable capital gains at the end of the year, even if you sold no shares. The gains come from profits inside the fund that are passed along to you.

ETFs that follow the same market index will also have taxable gains, but they might be a little smaller. Of course, you always owe taxes when you, yourself, sell shares at a profit.

When you want to cash in an ETF, you sell it just the way you'd sell any other stock - by calling your stockbroker or using your online brokerage account. By contrast, you redeem mutual fund shares directly from the fund itself.

Most ETFs trade on the American Stock Exchange. If you're speculating and want to bet that the Nasdaq has seen its worst, Qubes are an easy buy. "But trading costs can quickly add up," says Morningstar senior analyst Christopher Traulson.

If you want to buy into a broader index, such the S&P 500, a low-cost index mutual fund would make more sense. Washington Post Writers Group

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