Forbes/Lehmann Income Securities Investor is one of our most successful products for a reason. Editor Richard Lehmann -- "Forbes' Secret Weapon" -- has again and again delivered stock-market beating results for a mind-boggling 5 consecutive years with fixed incomes and preferreds. Now, he has turned his attention to the rapidly growing world of Exchange-Traded Funds (ETFs).

According to Richard, ETFs are quite simply the best investment idea to come along in the last generation. The origins of ETFs can be found in academic studies which support the idea that all managed mutual funds, over time, will under-perform an indexed fund representing a broad cross-section of the market. With some 13,000 funds in existence, the law of averages combined with luck can easily account for a handful of funds having a string of superior results.

On the other hand, ETFs buy a basket of securities representing a cross-section of a particular market. Most important, they make very few changes to that basket of securities. The fund sponsor creates new fund shares as demand requires. Sellers can either sell their shares on the open market, or turn them in to the fund sponsor who will give him the equivalent in underlying securities. This feature means that, unlike closed end funds, the fund will never vary much from the underlying net asset value of its holdings. Over time, such an ETF will outperform all but the most fortunate conventional/open-end funds. Why? Because it has a number of factors working in its favor:

• There is a minimal management fee and no 12b-1 fees for distribution costs, advertising and trailing commissions to the selling brokers.


• There is a minimum of capital gains distributions since the fund hardly trades. In other words, NO unexpected year-end tax consequences.


• The typical mutual fund holds up to 5% or 10% of its assets in cash to meet share redemptions while the ETF holds virtually none. That means that ALL of your investment money is working for you.


• There is no cost for the portfolio turnover so common to conventional mutual funds, nor do you share the costs in buying and selling holdings to accommodate new investors or those who are liquidating.


• Your cost basis in the fund is what you paid for your shares. You don't inherit unrealized gains and losses accumulated from prior years or prior holders and distributed to whoever holds the shares at year end. You also don't end up with taxable gains in years when your fund has declined in value.


• Shares can be bought and sold anytime of the day during trading hours. This can be important in unstable markets.
  
• The investor always knows what the fund holds. Conventional fund holdings are not transparent, being reported only quarterly at most. Hence, when a Merck - Vioxx type situation comes up, you may not know your exposure for three months. Also, you aren’t exposed to short term portfolio style changes a manager may make between reporting periods to try to make up performance shortfalls.

Even if you have avoided mutual funds and made your own selection of individual securities in the past, ETFs provide instant diversification through one purchase versus the cumulative commissions for the purchase of a multiple of positions. Having decided to invest in ETFs is not enough -- you need to decide in which of the hundreds of ETFs to invest. This is where the Forbes/ISA Closed-End Fund & ETF Report newsletter is essential.