ETFs Offer More Innovation than Other Options

Innovation: Another Reason to Choose ETFs

There are myriad reasons why investors should choose exchange-traded funds (ETFs) over mutual funds. Factors such as much lower expense ratios (i.e. lower costs), greater tax efficiency, increased access to targeted markets and much more transparency are just some of the headline reasons why I recommend investors choose ETFs as their primary investment vehicles.

Yet one very important reason why I’ve come to really love ETFs, particularly during the past several years, is product innovation.

Now, most ETFs still are index-based, traditional funds that are pegged to particular market indexes such as the S&P 500 or the NASDAQ 100. Yet these funds, known as “vanilla funds,” are by no means the only types of ETFs out there. There are leveraged ETFs, actively managed funds, inverse funds, funds that track relative strength and even funds with an “ethical” focus.

These days, there’s an ETF for just about every flavor of investor, not just the ones who like the taste of vanilla.

One fund that I find a particularly interesting example of ETF innovation is the LocalShares Nashville Area ETF (NASH). Launched less than a year ago, NASH is designed to offer investors a targeted focus on companies headquartered in the boom town of Nashville, Tennessee. Some of the current holdings in NASH are LifePoint Hospitals (LPNT), HCA Holdings (HCA) and Dollar General (DG).

This city-focused fund is one great example of how diverse ETFs have become of late. The fund’s outstanding gain of nearly 12% since inception also demonstrates how well an extremely targeted ETF can perform.

The bottom line here is that when it comes to innovation, all of the action seems to be in the ETF corner. Mutual funds just aren’t doing the kinds of things ETFs are doing right now, and that’s another reason why investors should choose ETFs.

Pointing Out Tax Hypocrisy

“A democratic government is the only one in which those who vote for a tax can escape the obligation to pay it.”

–Alexis de Tocqueville

When it comes to true chutzpah, there is nothing like being subject to pay a tax that’s been voted on by your neighbor — and one that your neighbor doesn’t also have to pay. The great Alexis de Tocqueville knew this and warned us all of the dangers nearly 200 years ago.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week about why you should assess your ETF situation. I also invite you to comment in the space provided below.