Page 99 - Ready Set Retire

Ready. Set. Retire!

ETFs are similar to mutual funds, but usually track indexes,
commodities, or combination of assets like mutual funds, but
trade on an exchange like a stock. ETFs also come in open-
and closed- ended versions. You might have heard mentioned
the “Four ‘Ts’ of ETFs”: Traded, targeted, transparent, and
tax-efficient. These qualities make them especially good for
tactical investing. Transparency, especially regarding fees, is
crucial to their role. Most mutual funds have costs between 1%
to as high as 5% or more. ETFs are typically in the .05% - .5%
range, since they are generally not managed, though actively
managed ETFs were introduced into the market in 2008.
Oddly enough, it’s the very transparency of ETFs and the
relationship they have with the underlying securities that makes
it more difficult to manage ETFs.

Rather than starting with cash, as with most mutual funds,
custodians like Fidelity, which own billions of shares, carve off
a few million and create a “basket of stocks.” Those baskets
are then broken up into sellable units and offered for sale on
the exchanges like any other security. ETFs typically follow
indexes, or groups of indexes, and once purchased and released
for sale, are typically not managed. They also are not “marked
to market” or priced based on NAV, rather they are bought
and sold on the open market. Like other stocks and closed-end

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