Portfolio diversification aided by exchange traded funds

|tab|

Exchange traded funds offer a different way for investors to diversify their portfolios. In these funds, the investment advisor has purchased stock to replicate an index. |ret||ret||tab|

When an investor purchases a unit of the fund he or she is buying into the basket of stocks that the fund represents. This is a simple way for investors to diversify a portfolio.|ret||ret||tab|

Exchange traded funds may offer in-vestors some new choices in the market. These funds give investors the diversity of index mutual funds coupled with the characteristics of stock trading. |ret||ret||tab|

Fluctuations in ETFs, like stocks, are represented on the ticker, so investors can get up-to-the-minute reports on their funds.|ret||ret||tab|

It should be noted that not all ETFs are the same. Some allow investors to continually reinvest dividends, while others allow investors to invest dividends only on a quarterly basis. ETFs are not actively managed and they tend to be more tax-efficient.|ret||ret||tab|

ETFs have grown rapidly in both popularity and number since their initial introduction in 1993. Brokerages have introduced funds that represent the technology sector, the telecom sector and the pharmaceutical sector, among others. As popularity in ETFs continues to grow, investors will most likely have a greater selection from which to choose.|ret||ret||tab|

There is a wide range of ETFs available for investors to look into. Five options are listed below.|ret||ret||tab|

Holding company depository re-ceipts, also known as HOLDRs. These focus on narrow sectors like biotechnology or semiconductors. HOLDRs are unique because they can be exchanged for their underlying stocks at any time and they can be purchased or sold only in quantities of 20.|ret||ret||tab|

Diamonds are ETFs that track 30 stocks in the Dow Jones Industrial Average.|ret||ret||tab|

Qubes track 100 heavily traded NASDAQ stocks.|ret||ret||tab|

Spiders track a variety of stocks listed on the S&P 500.|ret||ret||tab|

Webs track a wide variety of foreign stocks.|ret||ret||tab|

Keep in mind that an investment which focuses on a particular sector may react with more volatility to changes in market conditions than a more diversified portfolio.|ret||ret||tab|

One thing you may want to watch out for is that ETFs do not always trade at the net asset value of their underlying holdings. |ret||ret||tab|

The forces of supply and demand that exist in the marketplace determine the market price of an ETF. This demand is driven by the underlying value of the portfolio. These funds, like stocks, each bear a differing level of risk that in-vestors should be familiar with before they invest.|ret||ret||tab|

You may not be very familiar with ETFs, and data and analysis is still evolving for this comparatively new product. Investors may have to dig for more detailed information. Price quotes and historical price movements are easy to find, given that these funds trade all day. As these funds continue to evolve, information about them will be easier to find. |ret||ret||tab|

Your financial consultant can help you locate information to better inform you on this investment.|ret||ret||tab|

(The preceding article was provided by Timothy M. Reese, vice president of investments with A.G. Edwards & Sons, member SIPC.)[[In-content Ad]]