Warming Up to Funds That Trade Like Stocks

For most of her investing life, Reta Richardson managed money in a conventional way: she sought the advice of a broker, in her case a Merrill Lynch adviser. When she retired in 1999, Ms. Richardson of Ninety Six, S.C., decided to pilot a portfolio of individual stocks on her own.

Now, at 68, she is experimenting with a third approach. Tired of spending six hours a day researching stocks and mutual funds, and wanting to spend more time with her 17-month-old grandson, Richardson is selling what had been a 102-stock portfolio, worth about $211,000, and putting the money into a low-cost and low-maintenance collection of about nine exchange-traded funds.

“By June or July, I hope to be near my goal of making a total ETF portfolio,” she said.

Exchange-traded funds, or E.T.F’s, are hybrid securities that have characteristics of both stocks and mutual funds. Like stocks, these funds trade on an exchange, so investors can buy and sell shares throughout the day, not just once a day at the closing price. But. like those of traditional index funds, the shares represent a basket of dozens — or even hundreds — of securities, typically those that make up an index like the Standard & Poor’s 500 or more specific benchmarks like the Dow Jones consumer noncyclical sector index. Moreover, like index funds, they charge low annual fees.