by Archie M. Richards, Jr., CFP^®
September 3, 2001

New developments are pouring out of America's laboratories. The first image has recently been taken, for example, of the glue that holds atoms together. Amazing!

Biotech discoveries are mind-boggling. Rather than a person undergoing a CAT scan so that a radiologist can detect the image of a tumor, the individual need only spit into a paper cup. New, gene-based tests will diagnose tumors far sooner, with greater accuracy, at a fraction of the cost.

For every person on earth there are over three million digital switches. A microprocessor installed in a robot's knee and containing one million transistors costs only two dollars. The Internet is spreading at high speed from China to Brazil. All of this adds up to human conditions improving immeasurably, not to mention profits.

Yes, the bear market hurts. But the market bottomed with panic selling in April 2001. Since price action usually precedes the news, the bad news is arriving right on time, five months later, causing the Dow to fall back temporarily to 10,000 and below.

I call this a buy spike. Conditions are ripe for an advance. In addition to fabulous discoveries coming down the pike, the Fed is more accommodating, the world's governments are leaning more toward liberty and free markets, and investors are bearish. By year end, the stock market could easily be higher by 20 percent.

Exchange-Traded Funds (ETFs) represent aggregations of stocks. But they trade throughout the day like regular stocks.

Some ETFs represent broad indexes of the U.S. market, such as the Russell Indexes. Others track just the growth or value segments. There are ETFs for foreign markets, bonds, financials, healthcare, REITs, utilities, technology, and other sectors.

ETF operating costs range from 0.09 percent to 0.99 percent per year, lower than those of index funds and a lot lower than those of managed mutual funds.

But commissions must be paid. If commissions are $8, an investment in the iShares S&P 500 ETF, which charges only 0.09 percent, would have to be held for about two years to beat the Vanguard 500 Index Fund, which charges 0.18 percent. But when ETFs are held for many years, commissions hardly matter.

Dividends, reduced by the small operating costs, are paid out to shareholders. Except when they're sold, ETFs almost never generate capital gains. If you hold for years, the appreciation compounds for years, much to your advantage.

Each exchange-traded fund is priced at a fraction of the index on which it's based. Diamonds are priced at 1/100th of the Dow Jones Industrial Average, for example. Spiders are priced at 1/10th of the S&P 500 Index. The most popular ETF, based on the Nasdaq 100, is priced at 1/40th of the underlying index.

You can acquire ETF shares on margin. This I don't advise. The risk rises faster than the returns.

You can sell ETFs short. I don't favor this either. Except for hedging, short selling is a chancy business.

All in one convenient package, an ETF closely tracks the index on which it's based. Don't try to beat markets. Most mutual funds fail at it, and they spend full time trying. If you're a beat-the-chest kind of person, whip the other guys at work, at golf, or at the dating bar. But if you try to whip markets, you'll lose.

Instead, buy the markets for the long pull with exchange-traded funds. You'll outperform the others and enhance your retirement income to boot.

In early-2000, Alan Greenspan opined that the continued rapid growth of productivity would lower unit labor costs. This, he felt, would increase corporate profits and raise stock prices. These increases, he continued, would raise household net worth, which would make demand exceed supply and increase inflation. In other words, rising productivity would bring on inflation.

Because of these views, the Fed Governors stepped on the monetary brakes to make America poorer. Nice going, guys. It worked.

Pardon me, but Greenspan's long line of reasoning contains a whopping disconnect. Rising productivity does not increase inflation. It makes supply exceed demand. It reduces inflation.

Before trying to make America poorer, the Federal Reserve Governors should stop trying to be so smart. The stupider government policymakers are, the less harm they do.