TSP | Thrift Savings Plan - Talk

The ETFs  and mutual funds that I will be referring to here are examples of funds that can be purchased in a self-directed investment account, IRA or Roth IRA and are set up for trading purposes. Some companies offer mutual funds that are directed by their own professionals and have trading limits and/or long minimum investment lengths. I will not be discussing these types of funds.

Mutual funds set up for trading purposes include (but are not limited to) funds from Profunds, Direxion and Rydex fund families. These families of funds offer many different index and sector related funds(long funds) and inverse funds(short funds). Long funds make money when the index or sector they are tracking moves up and short funds make money when the index or sector they are tracking goes down. They are typically either 1X or 2X funds. 2X funds will double your gains or losses. Inverse funds are funds that increase in value when the market declines and decrease in value when the market rises.

You can typically exchange these funds among it's own family of funds as often as you like and not pay any fees unless your brokerage company charges fees and/or has trading limits of their own. You will however pay fees when you buy or sell these funds. Some funds are front-end loaded, meaning you will pay a transaction fee when you buy the fund, and some are back-end loaded, you pay the fee when you sell the fund. Some are even no-load so you will not be charged a transaction fee at all. Also, once you sell a fund, you will have to wait a minimum of two days for the proceeds to settle before they can be withdrawn or used to purchase something else. 
 

When you purchase or sell a mutual fund, you will be receiving the funds net asset value(NAV), or closing price. It is derived by dividing the total value of all the cash and securities in a fund's portfolio, less any liabilities, by the number of shares outstanding. A NAV computation is undertaken once at the end of each trading day based on the closing market prices of the portfolio's securities. 

Also, each mutual fund will have different minimum purchase requirements. A good place to find out more about the fund you are considering is www.finance.yahoo.com. Just get a quote for the fund you are researching and then look at it's profile and performance. 

ETFs (exchange traded funds) are funds that trade more like stocks. They also afford you an opportunity to trade many different index and sector related funds and/or inverse funds. These funds are also available from several different fund families, to include but not limited to Direxion and Rydex. These families offer 1X, 2X and also 3X funds.

The major difference between ETFs and mutual funds is that, unlike mutual funds, ETFs are purchased and sold at the price the fund is when your order is executed. This can be advantageous over mutual funds in that you can sell the ETF mid-day if you think the price might go down later on. Likewise, you can buy an ETF at the lows of the day if you think the price may go up later in the day. If you are able to time it right, then you may increase your over profit. However, it can also exasperate your loses if you don't time it right.

 ETF's have no time limits or required minimums. You can trade them at anytime during normal market hours. Just like a regular stock, you'll will have to pay a transaction fee and/or commission fee when you purchase an ETF and when you sell it. ETFs have lower expense ratios than mutual funds, but as traders, I don't think this is all that important.

Something you will have to watch out for when trading ETF's or individual stocks is what's called a “Free Ride”. When you place an order to sell an ETF or stock, the settlement process starts and it takes three days for the process to complete, or settle. If you purchase another security within this three day period with the unsettled funds, most brokerage companies will allow this under the agreement that you will not sell this security until all funds have settled (three days). If you do sell this security before the funds are settled, it results in a “free ride” and you will be restricted for 90-days from using unsettled funds to purchase any securities. My trading system takes away the risk of free rides occurring because it doesn't sell a security until at least three days after it is purchased.

Deciding to invest in either ETFs or mutual funds is ultimately a personal choice, however there are some things to be considered.

All mutual funds have different minimum requirements. Direxion requires $25000 initial investment in both regular investment accounts and in IRAs (these may be less if purchased directly from the company, I'm not sure) whereas Rydex requires an initial investment of $2500 for a regular investment account and $1000 for an IRA.

If you are going to invest in ETF's, you need to take into consideration the transaction fees if you are investing a small amount. These fees will be cutting into your profits or expanding on your losses.

If you have the time to watch the market throughout the day, then ETFs may be right for you as you will have an opportunity to buy or sell at the top or bottom of the day. This will involve some good timing though. My trading system is based on closing prices so I typically wait until the end of the day to do my trades, although the option to trade intraday is always available. You just need to make sure you give your order time to be executed before the market closes.

If you don't have time to watch the markets, then mutual funds may be better for you in that an order can be placed anytime during the day before the fund's cut-off time. You will get the funds NAV (closing price) no matter what time you trade it.

I hope this info will help you decide if trading is right for you or not.