Bought My Exchange Traded Funds

by Frugal Babe on September 18, 2008

Earlier this week, we made our final 2008 deposit into my Roth IRA.  I had let the money accumulate in a money market all year, in anticipation of buying an ETF once I maxxed out the account (my plan is to buy one ETF per year, in order to minimize the amount I pay in commissions).  I had been searching for a clean energy ETF, and have been researching them for some time.  I looked up “clean energy etf” and read everything on the first two pages of google.  I also referenced this site, which has some good info on mutual funds and exchange traded funds.  By no means do I know everything there is to know about clean energy ETFs, but I know more than I did six months ago (that’s your disclaimer – make sure you do your own homework, and find the fund that works for you).  I settled on Van Eck’s Market Vectors Global Alternative Energy ETF (GEX).  I liked the focus on wind and solar energy, and I liked the level of US vs. foreign holdings (35% US companies – compared with PBW, which holds nearly all US companies, and PBD, which holds mostly foreign companies).  So as of the opening bell tomorrow, I’ll own 115 shares of GEX.  I love saving, and socking money away for retirement.  But picking funds is not my favorite way to spend a day.  Good thing I’m a buy and hold investor – I like only having to do this once a year.   I also had $1800 sitting in my traditional IRA from contributions I made last year, and I used that money to buy shares in PowerShares Global Clean Energy (PBD).  Now I can sit back and let them do their thing.  I have no interest in timing the market.  The money in my IRAs is there for the long haul, so I’m mostly ignoring the downward spiral that the stock market has been in this week.  I figure that the whole landscape will look a lot different 30 years from now anyway.  I’m just glad to have made my choices, bought my ETFs, and closed the book on my IRA for 2008.

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{ 8 comments… read them below or add one }

MITBeta @ Don't Feed The Alligators September 18, 2008 at 7:34 pm

Why ETFs instead of mutual funds? My reading on the subject indicates that getting your money in the market sooner is better than later. Don’t you think keeping your money in a money market account all year potentially reduces your earnings over 30 years?

FrugalBabe September 18, 2008 at 8:16 pm

MITBeta – good question. And one that I’m not entirely sure I have a good answer for, but my reasoning goes like this: Ameritrade (where we have our IRAs) charges $50 to buy a mutual fund, but only $10 to buy an ETF. In my husband’s IRA, we have the money auto-deposited to the IRA every month, and then it is automatically put into an index fund that we bought several years ago. We paid the $50 up front for that fund, and can continue putting money into it every month for as long as we want, with no more fees.
But in my Roth, we wanted to be able to pick and choose, and vary the investment a bit more. So instead of getting an index or mutual fund and contributing to it all year, we decided to buy one ETF each year, and only spend $10/year to do so. Our goal going forward is to try to get the money into my Roth as quickly as possible each year, so that we can buy an ETF earlier in the year. In January, our first priority will be our HSA, followed by my Roth. We’ll continue to automatically invest in the index fund in my husband’s IRA.
It was important to us to invest in clean energy, but we’re not willing to put all our eggs in that basket. So this year’s investment is in clean energy, but next year will be something else. By getting ETFs and only paying $10 for them, we can afford to get a new one each year. Doing that with mutual funds would be a lot more expensive.
Then again, I’m still figuring all of this out.

MITBeta @ Don't Feed the Alligators September 19, 2008 at 6:28 am

Well, that reasoning makes sense, but why keep your IRA with a firm that charges you for purchasing securities? Vanguard, Fidelity, etc. do not charge fees like this to buy mutual funds.

FrugalBabe September 19, 2008 at 10:15 am

MITBeta – wow, really? What do they charge? Is it the same price for mutual funds and stocks/ETFs? That would be a good reasons to change…

MITBeta @ Don't Feed The Alligators September 20, 2008 at 10:42 am

The cost to buy mutual funds is zero (I think this is true in general, but I know it is true for both types of IRAs).

The cost to buy an ETF seems to vary based on how much money in total you have invested. Here is the link to the brokerage accounts at Vanguard:

https://personal.vanguard.com/us/accounttypes/brokerage

I understand that ETFs are great for single, large investments, and that mutual funds are better for periodic, smaller investments.

Hope this helps save you some money!

Frugal Babe September 20, 2008 at 11:08 am

Thanks! I called Ameritrade yesterday to clarify the cost for mutual funds, and they said that there are some that don’t have the $50 fee, but they are loaded funds. There didn’t seem to be a way to get them for free. We’re going to be opening a Roth for my husband next year – I think we’ll go with a different brokerage.

Tom Konrad September 20, 2008 at 9:48 pm

On the fees for buying mutual funds/ETFs, Ameritrade is a discount brokerage, and so is geared towards stocks/etfs. If you go with a mutual fund firm like Vangaurd, you’ll pay less to buy a Vanguard mutual find, but more to buy stocks/ETFs… and Vanguard does not have a clean energy mutual fund.

Typically, although there is always a comission for buying an ETF, the expense ratio for an ETF vs. a comparable mutual fund is lower, and so you come out better in the long run with the ETF- even if you pay an upfront fee. Since you’re not interested in trading, you’re probably better where you are, with a discount broker instead of an mutual fund company…. but this will vary depending on the mutual funds/etfs you are interested in.

In other words, I think your current approach is a good one.

Frugal Babe September 20, 2008 at 10:06 pm

Thanks Tom! I found your site to be very helpful when I went looking for info on clean energy funds, and I feel really good about what we have bought so far. I plan to hang onto my ETFs for the long haul, and the only trading I do in my IRA is one purchase per year, so I’m not spending big bucks on commissions. Thanks for maintaining such a great site! (and for giving free advice to people like me)

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