Types of stock
Under this form of identification we come across terms such as Utilities, Reits, Financials, Blue Chips, and Technology, Our investment industry has invented terms to help identify the characteristics of certain kinds of stock. The one of the oldest in use is perhaps the term 'utility', which referred to electric companies and was once thought of as something for "widow and orphans" because they were considered safe and paid high dividends. REITs (Real Estate Investment Trusts) have to a large degree, stepped into this role. The under lying asset here is real-estate and this kind of investment typically pays a high dividend. Currently rising interest rates are causing some concern for REITs and conservative investors are once again talking utilities. Financials are made up of banks, brokerages, mortgages companies and insurances. Blue chips refers to old established companies that faithfully pay, and regularly increase their dividends.

The industry has created indexes to follow the different kinds and types of stocks. These divisions are useful to us as an additional tool in diversifying our portfolios. We discuss them in more detail in both the Mutual Fund chapter and Asset Allocation.

Below are two graphs which illustrate asset classes and sectors:

Exchange Traded Funds (ETFs)
ETFs also known as ‘closed end funds’ are a relatively new product that is rapidly growing in popularity. They trade on the exchange like a single stock but the underlying asset is a bundle of individual stocks, or bonds or REITs. They are created by investment companies such as the widely advertised I-Shares, Diamonds or Spiders, and with a single purchase you own numerous specialized investments. The underlying investment assets are not ‘managed’ but rather held as a bundle without management trading unless a situation develops which mandates some action such as merger or bankruptcy.

ETFs are essentially an easy trading, low cost mutual fund. We use them to focus our allocation into specific areas that we feel will do well and help us diversify. Examples we use are foreign country investments where we have limited research capability and feel safer owning 40 companies as opposed to one or two. We like to be able focus on small caps or mid caps, and be able to own as many as a hundred companies with one purchase.

The operating expense is lower than the traditional mutual funds and when buying an ETF to own the S&P 500 or other index, the operating cost is a fraction of one percent. At tax time you do not face the danger of large capital gains because there was little or no trading.