Investing in ETFs For Dummies. Russell Wild

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tax) back – in the form of lower fees and tax efficiency – in no time at all.

      ✔ Investing in ETFs For Dummies is tax-smart. Yes, the money you spent for this book, as all other outlays you make for investment advice, may be deducted from your federal income taxes (provided you itemize your deductions). Go for it!

      ✔ Investing in ETFs For Dummies is an open book. We’ve already established that!

      If you’ve ever read a For Dummies book, you have an idea of what you’re about to embark on. This is not a book you need to read from front to back. Feel free to jump about and glean whatever information you think will be of most use. There is no quiz at the end. You don’t have to commit it all to memory.

      Icons Used in This Book

      Throughout the book, you find little globular pieces of art in the margins called icons. These admittedly cutesy but handy tools give you a heads-up that certain types of information are in the neighborhood.

      

Although this is a how-to book, you also find plenty of whys and wherefores. Any paragraph accompanied by this icon, however, is guaranteed pure, 100 percent, unadulterated how-to.

      

The world of investments offers pitfalls galore. Wherever you see the bomb, know that there is a risk of you losing money – maybe even Big Money – if you skip the passage.

      

Read twice! This icon indicates that something important is being said and is really worth putting to memory.

      

If you don’t really care about the difference between standard deviation and beta, or the historical correlation between U.S. value stocks and REITs, feel free to skip or skim the paragraphs with this icon.

      

The world of Wall Street is full of people who make money at other people’s expense. Where you see the pig face, know that I’m about to point out an instance where someone will likely be sticking a hand deep in your pocket.

      Beyond the Book

      In addition to all the material you find in the book you’re reading right now, this product also comes with some access-anywhere goodies on the web. Check out the Cheat Sheet at www.dummies.com/cheatsheet/investinginetfs for helpful insights and pointers on utilizing ETFs successfully. You also get some additional articles that would have kept this book from fitting into a portable size at www.dummies.com/extras/investinginetfs.

      Where to Go from Here

      Where would you like to go from here? If you wish, start at the beginning. If you’re interested only in stock ETFs, hey, no one says that you can’t jump right to Chapter 6. Bond ETFs? Go ahead and jump to Chapter 7. It’s entirely your call.

      Part I

      Getting Started with ETFs

      

Visit www.dummies.com for more great Dummies content online.

       In this part …

      ✔ Find out how ETFs work, and how they’re different from other investment options.

      ✔ Look into the plusses and minuses of ETFs to determine whether they’re a good fit for you.

      ✔ Get the pieces into position for ETF investing, from starting an account to finding a broker.

      ✔ Understand the indexers and exchanges.

      Chapter 1

      The (Sort of Still) New Kid on the Block

       In This Chapter

      ▶ Distinguishing what makes ETFs unique

      ▶ Appreciating ETFs’ special attributes

      ▶ Understanding that ETFs aren’t perfect

      ▶ Taking a look at who is making the most use of ETFs, and how

      ▶ Asking whether ETFs are for you

      There are, no doubt, a good number of pinstriped ladies and gentlemen in and around Wall Street who froth heavily at the mouth when they hear the words exchange-traded fund. In a world of very pricey investment products and very well paid investment-product salespeople, ETFs are the ultimate killjoys.

      Since their arrival on the investment scene in the early 1990s, more than 2,300 ETFs have been created, and ETF assets have grown faster than those of any other investment product. That’s a good thing. ETFs enable the average investor to avoid shelling out fat commissions or paying layers of ongoing, unnecessary fees. And they’ve saved investors oodles and oodles in taxes.

      Hallelujah.

      What the Heck Is an ETF, Anyway?

      Banking your retirement on stocks is risky enough; banking your retirement on any individual stock, or even a handful of stocks, is Evel Knievel-jumping-the-Snake-River investing. Banking on individual bonds is typically less risky (maybe Evel Knievel jumping a creek), but the same general principle holds. There is safety in numbers. That’s why teenage boys and girls huddle together in corners at school dances. That’s why gnus graze in groups. That’s why smart stock and bond investors grab onto ETFs.

      

Just as a deed shows that you have ownership of a house, and a share of common stock certifies ownership in a company, a share of an ETF represents ownership (most typically) in a basket of company stocks. To buy or sell an ETF, you place an order with a broker, generally (and preferably, for cost reasons) online, although you can also place an order by phone. The price of an ETF changes throughout the trading day, which is to say from 9:30 a.m. to 4:00 p.m. New York City time, going up or going down with the market value of the securities it holds. (Sometimes there can be a little sway – times when the price of an ETF doesn’t exactly track the value of the securities it holds – but that situation is rarely serious, at least not with ETFs from the better purveyors.)

      Originally, ETFs were developed to mirror various indexes:

      ✔ The SPDR S&P 500 (ticker SPY) represents stocks from the S&P (Standard & Poor’s) 500, an index of the 500 largest companies in the United States.

      ✔ The DIAMONDS Trust Series 1 (ticker DIA) represents the 30 underlying stocks of the Dow Jones Industrial Average index.

      ✔ The NASDAQ-100 Trust Series 1, which was renamed the PowerShares QQQ Trust Series 1 (ticker QQQ), represents the 100 stocks of the NASDAQ-100 index.

      The

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