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New calculator compares mutual funds with exchange traded funds

- Alan Lavine and Gail Liberman

Should you choose mutual funds or exchange traded funds?

To help determine which is better for you, Rydex Investments, Rockville, Md., has launched an online trading expense calculator. The calculator, at www.rydexfundsfp.com, is not limited to Rydex funds either.

With the calculator, you enter such factors such as number of trades, holding period, transaction or commission costs, annual expense ratio, share price and bid and ask spreads. The calculator provides an estimate of expenses.Of course, your objective is low expenses.

Both mutual funds and exchange traded funds may share the advantages of low costs, diversification and tax-efficiency.

Plus, both investment vehicles pool money to invest in a mix of securities. A chief difference: Exchange traded fund shares can trade during the day much like stocks, while mutual funds are priced once daily at the market close.

Like stocks, exchange traded funds also permit stop orders and limit orders to protect against losses, while mutual funds typically don't.

Exchange traded funds, launched in 1993, currently have over $300 billion in assets. By contrast, mutual funds have more than $8 trillion.

Typically exchange traded funds are more attractive for large investors, who can absorb greater risk and spread commission costs across sizable sums.

The smaller size of exchange traded funds today, according to some analysts, could work to the investor's advantage cost-wise over the long term in certain cases, regardless of trading commissions.

For example, expenses for the Barclays iShares S&P 500 index exchange traded fund run half the expenses of Vanguard's 500 Index mutual fund, which long has been hailed for record-low expenses.

But the advantage of exchange traded funds--the ability to trade during the day--also could be one of their chief disadvantages.

It can translate into greater investment volatility. "In fact, at any moment, the market price of an (exchange traded fund) may be above or below the total market value of the securities it represents," according to a recent report by Vanguard Group. That difference can be quite small. But it can become significant in volatile markets.

In some instances, there have been temporary gaps between the market value and trading price. That gap typically disappears. Nevertheless, your purchase price may be poorly timed and hit when there are price gaps. That can lead to buying at a price that's too high or selling too low.

Research by Weiss Ratings Inc., Palm Beach Gardens, Fla., found that overtrading of exchange traded funds is one of the biggest mistakes investors make. It also warns against over-allocation to the hottest exchange traded funds.

"Although (exchange traded funds) provide more diversification than individual stocks, most are narrowly specialized in one industry sector or region of the world," said a Weiss report. "For proper diversification, investors should consider a broad range of (exchange traded funds)."


Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Rags to Retirement (Alpha Books)." You can e-mail them at MWliblav@aol.com.

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