Just two of the 178 iShares ETFs are expected to make year-end distributions this year. Instead, most ETF investors pay capital gains based on the gain or loss of the fund's stock price at the time they sell. That gives ETF investors more control over when they want to take their capital gains.
"You're getting a cheaper product. You're getting a more tax-efficient product. And you're getting a product that has more transparency," because it typically is based on an index, rather than a fund portfolio that is only disclosed twice a year, Carrel says.
Yet ETFs have some disadvantages, too. Because they trade like a stock, investors must pay a brokerage commission to buy them. While that can be as little as $10 or so for investors using a discount brokerage, the commissions can make it too costly for investors who like to make smaller purchases at regular intervals.
That strategy, known as dollar cost averaging, is popular with small investors because it is budget- friendly and it also imposes a discipline through its regular purchases that allows them to buy fewer shares when prices are high and more shares when prices are low.
Fund tracker Morningstar Inc. estimates that an investor making a $5,000 initial investment and $200 each month for the next 10 years, would pay $374 in fees to buy a low-cost Vanguard S&P 500 index fund that earned a 10 percent annual return.
But making the same investment in an ETF that tracks the S&P 500, at $13 in commissions per trade, would run up $1,801 in costs over the same 10-year period.
"To pay a commission on $100 or $200 every month, an ETF may not be your best investment," says Carrel, who will be giving a lecture on ETFs at the University at Buffalo School of Management at 5:30 p. m. Monday in Room 122 of Jacobs Hall.
ETFs have steadily gained popularity over the last decade. This year 114 ETFs were launched, with an average market capitalization of just $25 million. By comparison, the biggest and oldest ETF, known by its ticker SPY, which tracks the Standard & Poor's 500 index, has $79 billion in assets.
In October, ETF trading volume totaled a record $3.3 trillion, or 38 percent of all U. S. stock trading volume, according to National Stock Exchange research.
But at a time when virtually no investments can escape losses, all the big ETF competitors have seen the value of their ETF assets fall sharply along with the markets.
Assets in ETFs were down to about $440 billion in late October from $620 billion at the end of last year, according to a report from Morgan Stanley. But at a time when investors are pulling cash out of stock mutual funds, ETFs saw a net inflow of $100 billion in investor cash through the first 10 months of the year.
ETF advocates expect money will continue flowing into the ETF market as a whole.
