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...your money in an ETF, you're basically beating 80% of the mutual-fund managers out there." ETFs are also more liquid than mutual funds, because they can be bought, sold or shorted throughout the trading day, just like stocks. By contrast, mutual funds offer only a single price at the end of the trading day. (See TIME's Person of the Year 2009: Federal Reserve Chairman Ben Bernanke...

Author: /time Magazine | Title: Exchange-Traded Funds: The Hidden Risks | 1/22/2010 | See Source »

...their benefits, ETFs come with their own set of risks. For example, Tad Borek, an attorney and registered financial adviser in San Francisco, advises clients to avoid oil-and-gas ETFs because they track futures indexes. "You can lose a lot of money [in futures] even though the price of oil is going up," he says...

Author: /time Magazine | Title: Exchange-Traded Funds: The Hidden Risks | 1/22/2010 | See Source »

Advisers also warn investors to choose larger ETFs over smaller start-up ones, especially when it comes to global and emerging-market funds. Unlike mutual funds, investors face price spreads when buying and selling ETFs, and these spreads can be quite wide - spanning several percentage points in some cases - when the ETF is small or its underlying stocks don't trade much...

Author: /time Magazine | Title: Exchange-Traded Funds: The Hidden Risks | 1/22/2010 | See Source »

More recently, the investor spotlight has been shining brightly on a new line of ETFs - ones that are actively managed. Firms ranging from Invesco to Pimco have launched about 12 of these funds over the past two years; others, such as T. Rowe Price Group and John Hancock Funds, are preparing to roll out similar funds, all in an effort to go head-on against actively managed mutual funds. "It's clearly a category that's attracting more interest among ETF providers and mutual-fund companies," says Standard & Poor's Tom Graves. "It combines the characteristics of a passive, index...

Author: /time Magazine | Title: Exchange-Traded Funds: The Hidden Risks | 1/22/2010 | See Source »

...Although this makes the ETF more transparent, it also opens up the ETF to the risk that savvy hedge funds and others may snap up shares in a stock that an ETF is known to be moving into. This practice, known as front-running, could drive up the stock price and thereby dull the ETF's performance...

Author: /time Magazine | Title: Exchange-Traded Funds: The Hidden Risks | 1/22/2010 | See Source »

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