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Want a diversified portfolio without exorbitant fees? Add to ...

One of the best ways to get a well-diversified portfolio is by investing in mutual funds. But the price you pay for active stock-picking is often high, eating into your returns. What's the best way to avoid that, while enjoying the benefits of investing in a wide range of securities?

Try exchange-traded funds, or ETFs. They track all sorts of indexes, sectors and countries, and come with management expense ratios (MERs) that are a fraction of what you'd pay for a mutual fund.

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What's the best way to use ETFs in your portfolio? What are the advantages and pitfalls? And how do you find the one that's right for you?

Ask Gordon Pape, a well-known writer on investing and finance, who joins us for a live online discussion at noon (ET) on Monday. Get a head start by submitting your question here. Your questions and Mr. Pape's answers will appear in the space below.

Mr. Pape is the editor and publisher of four : Mutual Funds Update, a monthly publication on mutual fund investment strategies; the Internet Wealth Builder, a weekly e-mail investment advisory; The Income Investor, a monthly report on income securities; and The Canada Report, a monthly newsletter for U.S. residents who want to invest in Canada. He has also written and co-authored many books, with total sales in Canada and the U.S. exceeding one million copies. His latest book is Tax-Free Savings Accounts: A Guide to TFSAs and How They Can Make You Rich, published by Penguin Canada in January 2009.



Editor's Note : globeandmail.com editors will read and allow or reject each question/comment. Comments/questions may be edited for length or clarity. HTML is not allowed. We will not publish questions/comments that include personal attacks on participants in these discussions, that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Sonali Verma, Globe Investor: Hello, everyone, thanks for joining today's discussion. We've got Gordon Pape standing by for your questions, and there are many, so let's get going.

Brad Brien writes: While I agree that ETF's are a better choice than most mutual funds, does active daily trading of ETF's cause long-term investors too much anxiety ? Price gains and slides to the extreme can cause many less experienced market investors to bail, without giving ETF's true regard .

Gordon Pape: ETFs were never originally intended to be actively traded. They were created as classic buy-and-hold securities which, over time, would provide investors with the long-term gains of whatever underlying index they tracked. Proponents of ETFs maintain they can do this more effectively and with less cost than actively-managed mutual funds.

There are two major problems with this, however. The first is that some investors may lose their commitment to stay the course when markets drop sharply as they did last fall and winter. They bail out, thereby defeating the whole purpose of buy-and-hold ETF investing.

The second factor is the proliferation of specialized and leveraged ETFs, which must be tracked on a regular basis and traded like stocks. Specialized ETFs include those that focus on specific market sectors, such as energy or healthcare. We have seen how volatile the energy sector can be so obviously if you invest in an oil and gas ETF you'll experience the same effect. The idea is to buy when oil is cheap and take profits as it moves higher.

Leveraged ETFs magnify the movements up or down of an underlying index of commodity. They are really suitable only for experienced day traders. Anyone who buys without understand them will certainly endure the anxiety symptoms you describe.

R. Sulyak writes: Mr Pape, what can you recommend in terms of an ETF portfolio for my 6 and 10 year old children who just each inherited $20K from their grandmother. I have opened an in trust discount brokerage account for each of them. Both children already have RESP accounts close to their maximum so the objective of this inheritance money would be long term aggressive growth. Being a faithful IWB subscriber, your advice is very valued and respected.

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