Sunday, November 07, 2010

ETF’s in a 401(k)?

There has been a lot of talk recently about the new investment du jour, Exchange Traded Funds. The idea is that these provide low cost access, with the implication that it’s the next generation…somehow better AND cheaper.

We believe that there is a place for ETF’s on the investment menu, perhaps, but a lineup of ALL ETF’s may not be appropriate.

Plusses and minuses?

On the plus side, it’s a great way to access a commodity such as Gold.

But on the minus side: there could be trading charges (3-7 cents per share at one vendor), the custodial fees could be twice as much (at another vendor), and there can be a wide variation of returns from funds that track the same index. There are also the issues of how the ETF accomplishes its performance (futures/options/etc) and the participant expectations for an ETF that trades throughout the day in the real world but only once in a 401(k) environment.

A prudent approach would be to “do your homework” before adding an ETF to the lineup