Students across the country can take advantage of the ailing U.S. economy and invest now to obtain long-term gains, according to Lawrence Carrel, author and founding journalist of www.wallstreetjournal.com.
The focus of the lecture that took place Monday afternoon in Jacobs Hall in the School of Management was Carrel's book, ETFs in the Long Run, which encourages students to invest in exchange-traded funds (ETFs).
Summed up in four points, ETFs are a more beneficial investment option than individual stock options or mutual funds because they are cheaper, more flexible, transparent and tax-efficient.
"The idea is that ETFs are like the mutual funds for the 21st century," Carrel said.
ETFs are the best choice of investments for students, Carrel noted.
By cutting out the expenses in paying for a broker to handle the money, ETFs are cheaper than other investment options.
"ETFs can be changed all day, whereas mutual funds cannot be bought or sold until the end of the day," Carrel said.
Mutual funds, on the other hand, are professionally managed investment funds put together by many different shareholders to have greater purchasing power.
For example, one student's savings of $300 in the investment world may not accrue the substantial returns of a larger pool of investors.
After the money is pooled together, there is no guarantee that everyone will know where to invest their money and if a consensus will even be reached. The pool of money will be given to a professional broker to divide up the money and invest appropriately, according to Carrel. However, they are not the best investment options people can choose to take advantage of.
"The fees spent on the broker are fees you can forgo by investing in ETFs," Carrel said.
Waiting until the end of the day to make a trade can cost people a lot of money if a stock option's worth decreases throughout the day. With ETFs, the stock can be dropped within minutes of hearing bad news, while mutual funds can only be sold at the lowest value when the day is over.
Being able to pull out or purchase at the investor's discretion portrays the flexibility of the ETF.
"Transparency is noted in the fact that ETFs will tell you exactly which stocks are being invested in straight from the get-go, whereas mutual funds will only update you every two to three months," Carrel said.
Not being able to keep track of where funds are being spent can be pretty frustrating for investors. ETFs, Carrel explained, will allow for total clarity in terms of where the investors' money is going.
"There are a lot of costs found in purchasing fees for mutual funds, as dollars to shares is a taxable transaction," Carrel said.
Mutual funds entail actual money being spent on shares, which accrues tax expenses.
"ETFs remove that factor by having an authorized participant (AP), a specialist that is paid a low fee, to take on the risk," Carrel said. "The AP is the only person that buys the ETF shares directly."
Investors do not purchase ETF shares because they are not authorized to do so. Instead, investors give their money to the AP, who makes the transaction so that investors do not have to pay the taxable transaction fee, as they are not directly purchasing anything.
Carrel added that by investing in ETFs, which are built on index funds, investors are ensured to make at least what the market makes, and the market has a positive return built into it.
"ETFs allow for diversification in stock options, whereas if a person were to invest solely in a single stock, all the weight of their money would depend on how well the one stock does," Carrel said.
The diversification relieves investors of unique risks that each individual company has because they are compensated by other companies that fare the opposite way, according to Carrel.
"ETFs offer very diverse investment strategies for anyone looking to plan for the future," said Dan Kowal, a senior economics major and president of the Financial Management Association (FMA) and event organizer.
"This was a great success for what we're trying to accomplish," said Orjon Jasa, a junior finance and international business major.
