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On March 21, 1924 three Boston businessmen pooled together $50,000 to form a company called the Massachusetts Investor's Trust. The purpose of the company: to invest in the roaring 1920s stock market boom. These three men unwittingly gave birth to a financial revolution. In fact, in the ensuing 80 years their invention, the mutual fund, has come to dominate the retail investing landscape. By 2004, U.S. mutual fund assets had grown from that $50,000 seed invested in a single fund into $7.4 trillion invested across 8,126 funds. Over 50 million American households now own mutual funds, making them by far the most popular and common means of participating in the stock market. So with all that success, why then are mutual fund executives so nervous? After years of unfettered and unchallenged dominance of the retail investing landscape, there's a new kid on the block, a new asset class that threatens to challenge the mutual fund's pre-eminence. And the mutual fund industry is vulnerable to that competition. One reason funds have become so popular is that they've been the only game in town for millions of Americans. Many retirement funds mandate investments into hand-selected funds. In addition, mutual funds have been, until recently, the easiest way to diversify a portfolio among a broad selection of different stocks. Mutual funds have taken full advantage of this near monopoly. Fees charged for managing that $7 trillion pie have been creeping ever higher. This has been true even since the advent of no-load funds in the 1970s. From 1990 to 2002, for example, the Investment Company Institute reports that the average mutual fund expense ratio jumped from 1.47% to 1.64%. And most investors are keenly aware of several other drawbacks of traditional mutual funds. For one, they're only priced once per day. As such, you can't buy and sell them as freely as you would a regular stock. In addition, most mutual funds have large minimum investment requirements, making them impractical for small investors. A New Kind of Fund According to TrimTabs, nearly $55 billion flowed into U.S. ETFs in 2004. That's almost half of the $130 billion or so that flowed into U.S. equity mutual funds in 2003. Particularly amazing is how quickly this industry has grown. After all, the first ETFs hit the investment scene only a little over a decade ago. ETFs address some of the problems inherent with mutual funds, but that's not the only reason why their popularity has exploded in recent years. ETFs are also starting to open up an exciting new avenue of growth for U.S. investors, an avenue that until recently has been all but closed -- investing abroad. Passport to Growth Although this enormous size and dominance has created some incredible opportunities for investors, it also gives us reason for caution. As the old saying goes, "Trees grow upwards but never reach the heavens." With this in mind, the U.S. economy, just by virtue of its enormous size, is unlikely to grow at an above-average clip in the coming decades. After all, the bigger a company or nation gets, the harder it becomes for it to post stellar growth. Consider that if the U.S. economy were to grow by +10%, that would mean adding nearly $1.1 trillion to GDP. To give you some perspective on what that means, consider that $1.1 trillion is far more than the entire value of Spain's economy at $836 billion or that of Canada at around $834 billion. These are also staggeringly large figures when you consider that total world GDP is estimated at less that $37 trillion. By contrast, China's economy is worth about $1.4 trillion. For China to grow by 10%, the nation would need to add just $140 billion to its annual GDP. To put that number in perspective, America's largest company, ExxonMobil, weighs in a little over $400 billion in market value. Bottom line: The U.S. economy, while still the largest in the world, will not be able to match the growth of smaller, rapidly modernizing economies like India and China over the next few decades. In fact, China is already seeing double-digit expansion in GDP, and that growth is likely to continue for some time to come. Until recently, it's been tough for U.S. investors to participate in this tremendous growth overseas. If you don't believe us, call your broker and try to buy a Chinese stock or even a stock from an industrialized country like Britain or Australia -- you'll find it a tough and expensive task indeed, even if your broker understands how to complete the trade. Yes, you could buy a foreign mutual fund. Unfortunately, most don't offer specific exposure to a single, foreign market. What's worse, international funds tend to sport higher fees than domestic funds, making diversifying abroad a difficult and expensive task.
The good news for investors is that thanks to the introduction of dozens of foreign ETFs in recent years, ETFs have changed all of this. There are now ETFs that offer exposure to entire regions like Latin America and Europe. Meanwhile, other ETFs focus on single countries and markets such as Australia, Hong Kong and even China. And unlike foreign mutual funds, these foreign ETFs don't carry ridiculously high fees. For the first time, Americans have a chance to diversify their assets abroad and take full advantage of the tremendous growth the rest of the world has to offer. The ETF Advantage Diversification -- Each ETF represents an interest in an underlying basket of common stocks. This allows investors to gain broad exposure to a large group of companies in one fell swoop. This diversification also makes ETFs much less volatile than common stocks. Low Cost -- Unlike traditional mutual and index funds, you can purchase ETFs with no front- or back-end loads. In addition, because they are not actively managed, most ETFs charge minimal annual expenses of under 1%, making them much more affordable than most other diversified investment vehicles. Liquidity -- Unlike traditional funds, ETFs can be bought and sold throughout the trading day, and many trade hundreds of thousands (and in some cases millions) of shares per day. Dividends -- Many ETFs pass through the accumulated dividends paid by the stocks held in their basket. StreetTRACKS Wilshire REIT Fund (RWR), for example, pays a healthy 5% dividend. Choices -- The American Stock Exchange alone lists well over 100 different ETFs. Some of these funds track broad U.S. equity market indices. Meanwhile, others track specific sectors or industry groups. Still others represent an interest in baskets of foreign stocks. And finally, others invest exclusively in the bond market. With so many options to choose from, you're certain to benefit from ETFs no matter what your investing/trading style. Returns -- Many ETFs have done extremely well in comparison to the broader market over the past few years. As such, they deserve strong consideration for a place in your trading and investment considerations. With all of these benefits in mind, nearly every investor could benefit by holding a position in one or more of today's leading ETFs. The main question is, which ETFs are worth your consideration? Below you'll find a comprehensive list of many of today's most popular U.S.-traded ETFs. In the analysis that follows, my staff and I will bring you an in-depth look at four of our favorite funds.
Our favorite international funds from the list above are... Important: To view the remainder of this article, in which StreetAuthority.com founder Paul Tracy and his staff provide an in-depth profile of three of the most promising international ETFs from the list above, you'll need to subscribe to our premium Market Advisor newsletter. Please visit one of the following links to continue...
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