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Rob Carrick

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The ETF alternative

Rob Carrick

TORONTO (GlobeinvestorGOLD) The universe of exchange-traded funds is like a shopping mall for investors looking for something new and interesting to stuff in their portfolios for the year ahead.

ETFs are a low-cost alternative to mutual funds and they're hot enough these days to have generated a wave of new product introductions that play off of today's biggest investing trends. For adventurous types, there is a new fund that tracks the price of gold bullion and a pair of funds that offer exposure to the Chinese market. For the conservative investor, there's a brand-new Canadian ETF that offers broad bond market exposure, as well as a new option for investing in U.S. dividend stocks.

China's phenomenal economic growth has generated a lot of excitement among investors lately, although the country is now trying to control the boom to prevent overheating. There are a growing number of mutual funds that focus on China, and a pair of ETFs that offer stiff competition. One is the iShares FTSE/Xinhua China 25 Index Fund, which is a way to own a piece of China's 25 largest, most liquid corporations. The other fund is the just-issued PowerShares Golden Dragon Halter USX China Portfolio, which follows the Halter USX China Index of 38 U.S.-listed stocks that do most of their sales in China. The iShares China fund has attracted a reasonably strong following so far as measured by its daily trading volume.

Gold prices tend to move inversely to the U.S. dollar, which is a way of saying that gold prices have been strong lately. One way to capitalize on further gains is the StreetTracks Gold Shares ETF, which is designed to track moves in gold bullion. Owning bullion directly can be a costly hassle for small investors, so this ETF has some definite appeal. Already, it's generating daily volumes that make it among the most actively traded ETFs.

For conservative investors, the new ETF to watch out for is the iUnits Canadian Bond Broad Market Index Fund. This product is a reconstituted version of the iUnits Government of Canada 10-Year Bond Fund, or iG10, which was designed to track the yield on 10-year Canada bonds. Unitholders of the iG10 were to vote in December on the change, and the new fund was to begin trading late in the month. The broad market bond ETF will a very useful tool for index investors who want to buy exposure to the entire Canadian bond market in one low-cost product.

Investors who favour dividend stocks will want to take a look at the new PowerShares High Yield Equity Dividend Achievers Portfolio. Based on the Mergent Dividend Achievers 50 Index, this ETF exposes you to 50 high-yielding stocks with 10 or more straight years of dividend increases. This fund is a competitor to the iShares Dow Jones Select Dividend Index Fund, which includes stocks that have a high yield, a record of dividend increases and a dividend payout ratio of no more than 60 per cent, among other factors.

These and other ETFs are an obvious alternative to mutual funds because of their low fees and the flexibility you enjoy in owning them. If you buy a China mutual fund and want to lock in some gains after a few months, you'd probably face short-term trading fees. An ETF, by contrast, can be bought and sold any time because it trades like a stock. As for fees, the management expense ratios on China funds are a great example of how ETFs shine. China-focused mutual funds typically have MERs close to 3 per cent, while the iShares China ETF has an MER of 0.74 per cent. That's somewhat expensive for an ETF, by the way. You can buy exposure to the S&P 500 index through the iShares S&P 500 Index Fund at just 0.09 per cent.

The ETF fee advantage suggests a guiding principal as you prepare your investments for the year ahead. When looking at any mutual fund, whether it be a straight equity fund, a China fund or a precious metals fund, check the ETF alternative.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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