Exchange traded funds (ETFs)
Exchange traded funds (ETFs) are CEFs that own a set group of stocks, often those in an index such as the S&P 500 or the Dow Jones utilities. Most ETFs are also convertible into the underlying shares such that they always trade at or near NAV. The main issue with ETFs is that they only own the overpriced, overowned stocks in the index. When the last buyer is in for overpriced stocks, returns are mediocre at best and volatility increases.
However, ETFs, unlike index funds, are traded all day long. Overconfident investors will trade them, running up commissions and spreads. Internet companies now offer, for a fee, selected groups of individual stocks. These preset stock portfolios are tailored to attract a wide range of investor whims and are designed to give the investor the illusion of control.
With a mutual fund you are taxed on gains you did not incur and can lose value because other investors panic and sell. Internet portfolios allow you to control your gains and do not subject you to the whims of fund managers and fund management companies. Unfortunately, as a group, most of these portfolios will have the same swings as the market. These portfolios are full of the same overowned, overbought stocks that fill mutual funds. When the last buyer is in, return will be mediocre and volatility high. A mutual fund panic will cause your portfolio to drop just as it would if you owned a mutual fund. Powerlessness can lead to anxiety, numbness, depression, and freefloating fears as with any stock product.
