Exorbitant Fees: In a stock fund, it is common to pay up to 1.5% of your total amount in the fund to a fund manager who has no idea who you are. In addition, if you have a broker or financial planner to help you select the funds, you are probably paying “loads” and “advisory fees” and most likely advertising fees that all add up to a significant percentage of a dentist’s hard-earned invested capital. Information Gap: When you go to purchase a mutual fund, you have very little idea of what you are actually getting. Most mutual fund managers are required to disclose their holdings twice a year. The disclosure of hold-ings can have an additional 30-60 day delay. Advantages of Exchange Traded Funds ETF’s Are Liquid! Anytime the markets are open, you can buy and sell an ETF in a regular brokerage account. You can see the last quoted price, just like any stock, and you may use stop-loss and limit orders. ETF’s Are Inexpensive! Almost all ETF’s have annual expenses of less than 1% per year, and most are much less: the first ETF (SPY), which 28 July/August 2010 JAOS represents the Standard & Poor 500 stocks, has a fee of only 0.09 percent. Several of the Vanguard ETF’s charge only 0.07 percent. ETF’s Are Transparent! You will never have to worry if your ETF owns something you know nothing about; all ETF’s are based on publicly available market indexes. Spreading & Controlling Our Risk Further With Foreign ETF’s Ownership of any financial instrument involves risk. Dividend yield is “the only acceptable” risk of ownership. A cash dividend policy is the only insurance an investor has that a business will be operated for the benefit of shareholders. (3) Although non-dividend paying stocks can often be attractive, ownership in these companies should be viewed as speculation rather than investing. As dentists who would like to have a secure retirement, speculation should be kept to a minimum in our portfo-lios. There are several foreign, inter-national, global or region and coun-try specific ETF’s. It is our recom-mendation that approximately one third of a portfolio be placed in high dividend, outside of the U.S. ETF’s. Please do not get us wrong here. We love our country; we just hate to see what the treasury department is doing to our money. The dollar is being devalued and dollar denominated U.S. corpora-tions may have to pay the price. We just do not want our wealth savaged by inflated dollars. Generating Monthly Incomes An additional big advantage of ETF’s is that the owner has the abil-ity to write covered calls against them in order to generate monthly income. Unlike mutual funds, the ETF’s can be purchased anytime during the day that the market is open (9:30am – 4:00pm EST). Many ETF’s also pay an excellent monthly dividend. The dividend and the covered call premium go directly into your cash holdings of your brokerage account and start earning interest immediately. Writing Covered Calls Writing or selling a covered call involves selling to another person the option to purchase a stock or exchange traded fund that you own at a specific price (the strike price) at a date in the future. The call is covered because you are selling an option on a security that you own. The other party has the right, but not an obliga-tion, to purchase your stock at a future date. For the right to purchase your stock, the counter party will pay you a fee, called the premium. If your stock is over the strike price that was agreed upon, then the second person will buy your stock at the predeter-mined price that you have selected. Your stock is then “called away”. Writing covered calls has the advantage of generating monthly
Journal of the American Orthodontic Society July-August 2010/Buyer's Guide: Page 28
