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Index Investing Writ Large: How ETFs Can Be Employed

ETFs got their start in the United States by tracking some of the largest stock indexes—in particular, the S&P 500, the Dow, and the NASDAQ. Since then, ETFs include everything from the smallest public companies to currencies.

Not only are ETFs sprouting up in the areas mutual funds are already covering, but they’re expanding into new ones that were previously unavailable to individual investors, such as foreign currencies and commodities.

Indexes can give you diversified ownership in entire markets in one package, including products that are difficult to invest in outside of futures exchanges. At one time, only the wealthiest of investors could trade in commodities. But ETFs have made it possible for anyone to get in on the game.

Not only can ETFs give you access to investments that mutual funds can’t, but they can be solid, long-term investment vehicles—if you follow our iMoney strategy. ETFs offered in 401(k) plans aren’t widely available yet, although they are becoming more widely known (see Chapter 12, “iMoney ETF Portfolios”). One forward-thinking fund manager created software enabling him to manage a variety of ETFs in 401(k) plans while keeping costs low and active management to a minimum. We think it’s the wave of the future.

The next chapter explains the mechanics of indexing and shows you how it works.

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