Modern financial markets are dynamic and diverse and supply more investment vehicles than many of us can remember. Most of us are familiar with how stocks, bonds and mutual funds work. What about other common securities, such as ETFs and REITs? It may be worthwhile to learn about them.
ETFs. ETFs, or exchange traded funds, “are portfolios of stocks, bonds or in some cases other investments that trade on a stock exchange much the same as a regular stock does”, says CNN.com contributing writer Walter Updegrave. (Updegrave, 2005)
ETFs are very attractive because they have low management fees, yet work a lot like an index fund while trading a lot like stocks on the stock exchange. They are quite flexible in terms of liquidity and provide some tax advantages. The most commonly known ETF is SPDR, it tracks the Standard and Poor’s 500 Index. Like mutual funds, RTFs can have a specialization beyond being fixed or equity funds. The market offers index ETFs, leveraged ETFs, currency ETFs. Commodity (gold, oil etc) and derivative ETFs are also available, along with ETNs – exchange traded notes.
UITs. According to investwords.com, unit investment trust is an SEC-registered investment company which purchases a fixed, unmanaged portfolio of income-producing securities and then sells shares in the trust to investors (Unit Investment Trust Definition, 2010). UITs are similar to mutual funds in terms of investing in a portfolio of securities, but there are several differences. The major one concerns management: while mutual funds are very actively managed, unit investment trusts are not.
One of the UIT varieties that have become more popular after the market collapse in 2008 are structured bond portfolios. In this type of UIT, the bonds are laddered according to their maturity dates, which allows for continuous income. Some of the structured bond portfolios are capable of producing 6-8% returns with a low degree of risk while individual bonds or stocks may be losing money.
REITs. REIT is an abbreviation for Real Estate Investment Trust. By definition, REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages (Real estate investment trust, 2010). In order to purchase shares of a real estate investment trust, one generally needs to have a certain amount of assets – sometimes more than $1mln. The easiest way to invest in REITs is by investing in mutual funds that specialize in them.
The great thing about REITs is that one can own real estate without the headaches of physically buying, insuring and maintaining it. REITs pay dividends, which sometimes add up to be pretty substantial. In fact, REITs must distribute 90% of profits by law and shareholders are entitled to special tax considerations.
While UITs, ETFs and REITs are less common than individual stocks and mutual funds, they represent great investment options and shouldn’t be discounted. They may even be more cost effective and income-producing for some investors. Be sure to familiarize yourself with each individual investment vehicle before you invest and always keep your goals and risk tolerance in mind when choosing how to allocate your money.
Real estate investment trust. (2010, July 18). Retrieved July 18, 2010, from Investopedia.com: http://www.investopedia.com/terms/r/reit.asp
Unit Investment Trust Definition. (2010, July 18). Retrieved July 18, 2010, from Investwords.com: http://www.investorwords.com/5161/Unit_Investment_Trust.html
Updegrave, W. (2005, June 1). ETFs: What are they? Retrieved July 19, 2010, from CNN Money: http://money.cnn.com/2005/05/31/funds/etf_whatarethey/index.htm
Peter is an editor for http://getrichinvesting.com, a website offering tips and suggestions on how to get rich slowly over time through investing.