First off, Happy Halloween. Market futures are looking bright at this hour of the morning. Let's hope the Fed's policy statement at the end of the trading day keeps it that way for tomorrow.

Now, as for the real business of this article... Did you happen to see this Wall Street Journal article by Johathan Clements entitled When ETFs
Are Better Than Index Funds? My first thought on reading it through was that he'd gotten it right. On further inspection and reflection, I'm not so sure.

You probably know that I'm a big advocate of ETFs, also known as Exchange Traded Funds. You buy an ETF the same way you buy a stock. The difference between an ETF and a stock is that the ETF security itself is a share in any number of individual stocks or other securities. The combination of securities that make up the ETF security gives the ETF it's character. For instance, you can buy an ETF which represents the real estate market, or a basket of bonds or even the S&P500.

In that sense, ETFs are a lot like Mutual Funds. Unlike Mutual Funds however, ETFs are not actively managed. Once the basket of stocks is selected for an ETF, the management job has little to do with stock selection. As a result of not having active management, ETFs feature drastically lower management fees. And that's why I favor them for my investment portfolios.

I got a phone call yesterday from a representative of a local investment firm. The caller was not your average telemarketer. She was well spoken. Her delivery was unhurried and respectful. I could tell right away this wasn't your average boiler room operation. Now I don't normally give telemarketers any time at all, but because of the obvious differences between this caller and all the others, this one I decided to listen to.

The pitch was presented as something new and different. She told me her firm's strategies "fly in the face" of traditional investment strategies for superior risk adjusted performance.

Well here we are, another Monday. Are you wondering where the markets will take you today? Nasty weeks like the one we just had make it hard for even the most tried and true long term investor.

Last week's sell off hurt. By my calculations on one of my favorite benchmarks, SPY, the S&P 500 Depository Receipt Exchange Traded Fund commonly known as Spiders, was down 5.6% last week. That's a lot of gain to give up in a week's time. Someone with a $100,000 portfolio might have seen $5000 vanish without a trace. Five grand would have bought a really nice vacation. Putting it in those terms makes one wonder whether it might be smarter to just take the money and go on vacation. After all, a vacation would certainly be more enjoyable than last week's flogging.

Well that felt (just about anything but) good, didn't it? A 311 point haircut. No question, a lot of people, myself included, are seeing a lot more red this morning than they're used to lately.

The bears are lapping it up. If you happened to be in one of the two major Exchange Traded Funds set up to cater specifically for the market bears yesterday, you did just fine. Both the Prudent Bear, BEARX, and the Grizzly Short, GRZZX, were up over 2% yesterday.

If you've been bearish recently, yesterday was a big payoff day for you. In fact, you've been feeling pretty good about your investment choices for a little while now. Looking at the chart below tells me your returns have been ahead of the S&P 500 returns for a few days now. In fact, if I had invested all my money in the Grizzly Short fund a month ago, I'd be ahead of where I am today by well about 10%.

Here is some really good news for ETF investors. Vanguard is on the hunt for EFA investors. They've announced plans to undercut Barclays Global Investors’ pricing for BGI’s flagship Exchange Traded Fund. dominance in the ETF marketplace. ETF investors like you and me can only benefit from this.

In papers filed with the SEC (here's the prospectus at sec.gov), Vanguard has announced plans to launch a new Exchange Traded Fund which will be tied to the MSCI EAFE Index. Vanguard's planned ETF, targeted squarely at Barclays' EFA, will trade under the symbol VEA and be known as the Vanguard Europe Pacific ETF.

The really good news is they plan to offer this new international stock index at a whopping 20 basis points less than EFA. Currently EFA's expenses and fees amount to a nice 0.35% for Barclays. Vanguard proposes to offer essentially the same product for 0.15%.

I made a comment to an article this morning on another blog, All Financial Matters, where the idea that an ETF might not be around long if capitalization doesn't reach $200 million. Capitalization is only one of the factors I'd consider when evaluating an ETF. I thought this morning I'd lay out some of my own decision factors for deciding which ETF to purchase.

Trading Volume goes along with the capitalization metric mentioned in the original post. I'm not particularly concerned with capitalization as much as I am with trading volume because I want to see my ETF priced efficiently.

Granted there are trade-offs. Low volume may reflect a buy-and-hold mentality among investors; but if this is the case it should be coupled with decent return and volatility metrics. And yes, trading volume and capitalization tend to go hand-in-hand.

I'm a big believer in Exchange Traded Funds, or ETFs. I like just about everything about them. They give me a way to invest in "the market" without buying a market's worth of different securities to achieve diversification. They're every bit as liquid as investing in stocks. They're efficient as long as you stay in the mainstream of ETF investments and don't get lured into any of the boutique, or sector, ETFs. And done right, they're inexpensive. Most ETFs have lower expense ratios than mutual funds.

Two of my favorite bond ETF investments are the iShares Lehman Aggregate Bond Fund and the iShares iBoxx $ Investment Grade Corporate Bond Fund. I like these funds for my own portfolio because they are both broad based, low expense and yield decent returns against the indexes they are set up to mimic.

What a heart stopper, eh?

A 416 point drop in the Dow Jones, the biggest down day since 9/11... Is it the end of the world or just a one day aberration?

I wish I knew. Futures this morning are optimistic. We won't know for sure what will happen until the bell rings and real money starts changing hands.

The first thing I did when I heard the news was to have a look at what this extraordinary trading day meant in terms of recent market closes. Specifically I wanted to know just how extraordinary this event was in relation to what we've become accustomed to.

The attached chart illustrates what I'm talking about. Click it to see the full-sized view at the end of this article. The chart shows a rolling 30-day average price change and standard deviation for the ticker symbol DIA, commonly referred to as Diamonds. DIA is an Exchange Traded Fund created expressly for the purpose of tracking the performance of the Dow Jones Industrial Average. As the Dow 30 change, so does the price of DIA.

This quote put a smile on my face I'll be wearing for a long time.

Swensen is troubled about what he sees as the immorality of the American investment business as it's practiced today by both CEOs and the investment management community. He writes, "Overwhelmingly, mutual funds extract enormous sums from investors in exchange for providing a shocking disservice." By that he explains that mutual funds charge their investors big fees and usually fail to deliver returns that beat the market.

To me the same could equally be applied to anyone who would ask you for part of your hard earned money in exchange for his or her advice. It's the most important investing lesson of all. You can't pay someone else to take responsibility for your nest egg. If you do they'll just take your nest egg and tell you the results they're delivering are first rate.