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5 Misconceptions About ETFs In Retirement Accounts
Investopedia

Fri, Jan 25, 2013 2:35 PM EST

Exchanged traded funds (ETFs) are the stock market darling. There are now thousands on the market and just like apps in the Apple (AAPL) app store, more are constantly added. Not only do professional money managers use ETFs, retail investors use them too. Their simplicity and low fees make them perfect for retirement accounts.

If you're considering ETFs for your retirement accounts, however, you should know how they work - at least in a basic sense. Not all of what you read is true. Here are a few common misconceptions.

Fees Are Always Lower for ETFs
Your 401(k), IRA and other retirement accounts likely have mutual funds as the only option but that's changing. 401(k) managers are slowly adding ETFs as options alongside mutual funds. Often ETFs charge less in fees than mutual funds but not always.

Sure, ETFs such as the Vanguard Total Stock Market ETF (VTI) has an expense ratio of only 0.05%. But, the Teucrium Sugar ETF (CANE) has an expense ratio of 2.93%.

Of the more than 1,400 on the market, only about 50 have fees over 1%. Investors should never assume that ETFs are always cheaper than mutual funds.

If you have the option of ETFs in your retirement accounts, look closely at the fees. The funds might be cheaper than mutual funds but not always.

Exchange Traded Funds That Follow an Index Follow It Exactly
In recent years, there has been a push to load retirement funds with low-cost index funds - either in the form of ETFs or mutual funds. Rather than trying to beat the market, performing with the market produces better gains over time.

If you are tempted to use an ETF that follows an index, understand that it won't follow the index exactly.

Let's look at the most popular ETF as an example. The SPDR S&P 500 (SPY) is designed to mirror the S&P 500 index. Although it is close, it's not exact. That's, in part, because of the fees and expenses. Once expenses are subtracted, the fund may slightly underperform. Higher-cost ETFs may diverge from the index they're designed to mirror more drastically.

Look at the ETFs yearly performance alongside the index's performance. They should be nearly identical. You can do this for the major indices.

All ETFs Are Passively Managed
You might have heard that ETFs are perfect for your retirement portfolio because they're passively managed and that keeps fees lower.

Mutual funds have gained a lot of bad press because of the high fees that come with a manager actively changing the holdings of the fund. Not only do the investors in the fund have to pay the manager, they also have to pay taxes and trading costs associated with the activities of the fund.

Passively managed funds have lower expenses because they do not have to employ a team to constantly research and trade in the fund. That lack of activity does not produce high fees.

Because passively managed ETFs have these lower fees, they're best for retirement funds since fees can severely erode the gains in a long term retirement fund. Be careful. There are actively and passively managed mutual funds and ETFs.

Index ETFs All Work the Same
Some index ETFs such as the SPDR S&P 500, follow their index by investing in all of the stocks available to them. Others, such as the Vanguard Total Stock Market ETF (VTI) invest in a representative sample of the stocks listed in select indices.

The VTI attempts to mirror the total stock market making sampling essential, but what's more important is to read about each ETF before committing money. Different strategies will produce varying results.

Fees and expenses could cost you more than $100,000 over the life of your retirement portfolio. This makes even one tenth of 1% very important. Look at how each index ETF works and compare its performance to the index it follows.

Owning ETFs Means You Are Diversified
Safety is just as important as growth in a retirement portfolio. One of the easiest ways to find safety is by diversifying. You should have a variety of investments in different sectors of the economy.

If you own an ETF that mirrors one of the major indices like the Dow Jones industrial average or the S&P 500, you are well diversified.

If you own a sector ETF such as the Financial Select Sector SPDR (XLF) that is only comprised of financial stocks, you're only diversified in the sector. Most portfolio managers do not consider that to be well diversified.

ETFs range from covering the entire stock market to only investing in small sectors. Since short-term trading in your retirement account is generally not advisable, make your core holdings ETFs that follow the larger market indices.

Don't attempt to pick the sector that will outperform the rest of the market. That strategy isn't likely to produce higher-than-average gains.

The Bottom Line
ETFs are slowly becoming investment options inside 401(k)s. Many IRAs allow for ETF investing already. The funds are perfect for retirement accounts, but don't assume that ETFs are always the better choice. There is no "always" in investing.

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>India May Consider Ending Four-Decade Old Curbs on Sugar Mills

the world’s biggest sugar producer after Brazil, will consider scrapping state curbs on sale of the sweetener by mills in the local market for the first time in four decades, Food Minister K.V. Thomas said.

The food ministry will soon send the proposal to the cabinet that may also end the practice of the government buying sugar from mills at below market rate to supply to the poor, Thomas said in an interview in New Delhi today. The move to end government curbs, introduced in 1972, is based on a report by a panel headed by Chakravarthy Rangarajan, chief of the Prime Minister’s Economic Advisory council, he said.

Bajaj Hindusthan Ltd. (BJH) and Balrampur Chini Mills Ltd. (BRCM), the nation’s biggest mills, and other producers, will earn about 27 billion rupees ($508 million) annually should the government stop buying the commodity at subsidized rates, said Abinash Verma, director general of the Indian Sugar Mills Association. Producers are riled by a government policy that sets limits on sales by each mill for every four-month period to cap sugar prices, while states fix cane rates to help 50 million farmers, a powerful voting block, earn more.

“Scrapping of levy sugar and freeing sugar sales will alleviate arrears and farmers will be paid on time,” said Vivek Saraogi, managing director of Balrampur Chini Mills Ltd. “There will be sustainable production.”

Mills in the northern state of Uttar Pradesh owe as much as 29.87 billion rupees to farmers after cane prices were raised by as much as 17 percent to a record for the 2012-2013 crop, according to the mills association. Producers will lose about 60 billion rupees as they sell sugar below production cost because of a surge in imports, Verma said this month.
Shares Rally

Shares of sugar producers rallied in Mumbai today. Bajaj Hindusthan rose 2.4 percent to 23.40 rupees, Balrampur climbed 4.2 percent to 45.70 rupees, while Shree Renuka Sugars Ltd. (SHRS), the top refiner, rose 3 percent to 29.30 rupees.

The Rangarajan panel asked the government to link the cane price paid to farmers to returns from the sale of sweetener, molasses and fuels to sustain output. Mills should pay 70 percent of all revenue to farmers, it said on Oct. 12.

Production in India, also the largest consumer, will fall next season from 24.3 million tons in 2012-2013, according to the mills association. Drought in the states of Maharashtra and Karnataka, which together account for 45 percent of output, will encourage farmers to cut plantings, M. Srinivaasan, president of the association said.

The cabinet today raised the benchmark sugar cane price by 24 percent to 210 rupees for the 2013-2014 crop season, Thomas said.