In this book, I find a particular chapter very interesting “The Exchange Traded Fund”. Extract from Chapter 15 :
Traditional indexing was being challenged by a sort of wolf-in-sheep’s clothing, the exchange traded fund (ETF). Simply put, the ETF is a fund designed to facilitate trading in its shares, dressed in the guise of the traditional index fund.
The first exchange traded fund, created in 1992 by Nathan Most, was named “Standard & Poor’s Depositary Receipts” (SPDRs) and quickly dubbed “Spider”. It was a brilliant idea. Investing in the S&P 500 Index, operated at low cost with high tax efficiency, and held for the long term, it held the prospect of providing ferocious competition to the traditional S&P 500 Index Fund. (Brokerage commissions, however, made it less suitable for investors making small investments regularly.)
All stock market ETFs are the only instance in which an ETF can replicate, and possibly even improve on, the five paradigms of the original index fund listed earlier. But only when they are bought and held for the long-term,. Their annual expense ratios are usually – but not always- slightly lower than their mutual fund counterparts, although commissions on purchases erode any advantage, and may even overwhelm it.
~ All index funds are not created equal. One example : the difference between $122,700 and $99,100. ~
~ Hint: money flows into most funds after good performance, and goes out when bad performance follows ~
~ The real money in investment will be made not out of buying and selling but of owning and holding securities ~