Introduction to Exchange Traded Funds (ETFs)
Posted by admin on Jun 10, 2009
An Exchange Traded Fund (or ETF for short) trades on stock exchanges just the like any other stock. ETFs are usually linked to a stock, bond or commodity index. The underlying basis for an ETF is that it is backed by assets in the same proportion as the index to which it is linked. This process is known as replicating the index.
Some stock-index ETFs undertake “representative sampling”, in which case the ETF comprises of the key stocks which represent the index. The ETF price therefore moves up and down in line with the index it is tracked to. Essentially investing in an ETF is like investing in the market as a whole (for a particular index) as against investing in specific stocks.
ETFs were introduced in the United States in 1993 and up to 2008 were all index funds. Subsequently the creation of active managed ETFs has been allowed.
To the layman, ETFs would seem to be similar to mutual funds. This however is not entirely true. There are a number of key differences between exchange traded funds and mutual funds as explained below:
- The first difference is with regard to hours as well as manner of trading. While exchange traded funds are traded like stocks through the day, mutual fund orders are executed at the end of the day based on the NAV (net asset value) of the fund at the close of trading hours.
- Mutual funds are considered to be an active investment as they have a fund manager who actively manages and churns the portfolio of stocks and other investments held in a particular fund. ETFs, on the other hand, are passive investments, as they are tracked to a particular index and move in line with the index.
Typically exchange traded funds are categorized based on the nature of investment and the category of asset it is tracked to. ETFs are normally classified as per the following nomenclature:
Index ETFs Tracking Market Indices
These funds are the most common types of ETFs and are usually actively traded on the market they tracked. Typically they replicate a stock market index’s performance and are backed by securities in the same proportion as the stock market index they are linked to. The objective of such a market index ETF is to follow the direction of the market.
Investors choose to buy into market ETFs when they want exposure in a particular market. For example, an investor wishing to build an exposure to the German stock market can buy into an ETF linked to the DAX average. Similarly there are ETFs tracking the S&P500, Nasdaq 100, Brazil’s Bovespa, Korea’s Kospi and many other indices.
ETFs Based On a Investment Strategy
Exchange Traded Funds created on the basis of market capitalization of stocks fall into this category. Separate ETFs exist for large-cap, mid-cap or small-cap stocks. These ETFs are also sometimes called style ETFs as their purpose is to copy a particular investment strategy or style. These ETFs generally track growth or value investment style indexes such as the Barra’s composite, Russell and Standard & Poor.
Industry Or Sector ETFs
Exchange traded funds which are linked to a specific sector index which comprises of stocks belonging to a particular industry fall into this category. These include specific funds for industries such as pharmaceuticals, real estate, utilities, technology, etc.
Commodity ETFs such as oil exchange traded funds or gold exchange traded funds also come into this category. Commodity exchange funds are typically index funds but track indexes which are not securities based. Thus a gold exchange traded fund would track gold prices.
Country Or Region Based ETFs
These funds track the performance of a region or country and are tracked to a primary index of a country.
Currency Based ETFs
A currency based exchange traded fund was first launched in 2005 to track the Euro. Subsequently numerous ETFs have been launched which track all major currencies like the Yen, Pound, Swiss Franc, Aussie Dollar, etc. As is obvious, these are linked to the value of the currency they track.
ETFs offer significant advantage over investment in individual stocks particularly when market behavior is erratic and it is hard to assess which stock to invest in. Individual stocks move up and down on announcements by the company, by the government, changes in the market scenario, and so on.
Thus many investors favor ETFs over other market related investment option such as individual stocks or mutual funds because of the features they offer. Advantages of investment in ETFs are listed below:
- ETFs typically have a lower cost than other funds such as mutual funds as they are not actively managed.
- Trading in ETFs can be undertaken at current prices at any time throughout the trading day.
- ETFs are considered to be more tax efficient than other classes of securities.
- Exchange traded funds allow for a large degree of diversification in an investor’s portfolio as the investment is spread out over the entire market. For instance, if one was to buy into an S&P 500 tracked ETF; one would effectively be buying all stocks which make up the S&P 500 index.
All of this sounds very technical and complex for an individual investor. And it throws up a host of other questions like :
- How does one figure out which ETFs are performing well?
- How does one go about buying into an ETF?
- Which brokers should one use for these ETFs?
- When should one sell an ETF?
- Which ETFs can be used to profit from down markets?
- How many ETFs should one invest in to create a diversified portfolio?
- How to use trailing stops to minimize risk in turbulent markets?
This is where an investment newsletter like the ETF Global Investor can help, where sophisticated computer models analyze close to 900 ETFs every week and tell you exactly which ones to buy, sell and hold.
In the current market scenario, where uncertainty reigns supreme and practically all mutual funds have lost massive amounts of money since 2007, investment in some well chosen ETFs can not only diversify your portfolio but also help optimize your returns by using a mix of domestic & foreign markets.
The ETF Global Investor system simplifies the entire investment process for you by choosing 10 ETFs which make up your model portfolio. A 30-day trial subscription with 7 free gifts is available for just $4.97.
You may not have considered investing in an ETF till now. But it is never too late to start, and now is a perfectly good time. Start with a trial subscription to the ETF Global Investor and learn to profit from an increasingly globalized world markets.
Not only can ETFs generate double and triple-digit returns in ANY market — but they’re also a great way to diversify your portfolio. With ETFs, you’re not putting all your eggs in one basket by investing in a single stock. It’s no wonder informed investors are looking to ETFs for safety and profits. Check them out right now.
ABOUT THE AUTHOR — Roger Williams is an investment expert specializing in the timing and selection of ETFs to optimize returns in both bull & bear markets. He has been researching and fine-tuning these flexible investment strategies for the past 18 years and helping investors by publishing the recommendations through his various newsletters. Roger believes that most investors have been brain washed by their financial planners and mutual funds to follow the buy & hold approach which has led to huge losses in the recent stock market collapse. Visit WeeklyWealthLetter.com to get Rogers latest Mutual Fund, ETF and Stock picks.
How to Safeguard & Grow Your Wealth During a Recession?
Posted by rwilliams on May 28, 2009
Most of us think that recession is a time when we cannot make good money by investing in the markets. But in reality this is not true. If you look at history, you will find that many great businesses were born during recessions. Recession offers many hidden opportunities and you need to seize them by understanding the basic rules on how to prosper in uncertain times. During this economic crisis, you can make some good long-term investments that will yield you fantastic returns in years to come. However, you should never put all your eggs in the same basket. Diversifying will help to protect your investments and will also give you great returns in good times or bad. There are certain golden rules of acquiring wealth that work in all times. Let’s explore the various investment avenues:
Bonds and Bank Deposits
You should place some of your cash in some safe instruments like bonds and bank certificate deposits. Since these certificate deposits give you predictable and fixed returns, it is a good idea to park some cash in them. This can be that portion of your money earmarked for emergencies but not required on a day-to-day basis. You can also consider investing in US treasury bonds that give you low but guaranteed returns if you hold them till maturity. Investing in corporate bonds is also a good option. However these are riskier because of the possibility of default by the company issuing the bonds.
Invest In Company Stocks
You should invest some money in stocks of publicly traded companies. But do not expect immediate returns. This is the time when many good stocks are available at dirt-cheap prices and buying them can help you earn very good returns when the stock market recovers. Since, it is very difficult to exactly time the stock market and find a bottom you should invest regularly in the stock market. You should buy stocks of blue chip companies as they usually have high probability of growing at a good rate. But if you have any lemons in your portfolio, get rid of them. Some people do not prefer to sell stocks at loss. If you do not trust the business, it is best to sell its stock even if you are at loss.
This is also a good time to reshuffle and realign your portfolio. You can also hire portfolio management services to help you in this. Many portfolio management services have reduced their fees in order to improve their business. Some financial market web sites also offer good advice on investing. They regularly give you stock picks, buy and sell signals that can help you to earn maximum profits. You can also earn good amount of money by short selling in this volatile market, which means you sell when stock price is high and buy again when the price is low. The traders use this strategy to make money in the stock market. However, the amount of money you should invest in stock market depends on your risk appetite and age. Young people can have a larger portion of their portfolio invested in the stock market.
Exchange Traded Funds (ETFs)
You should invest some part of your money in Exchange traded funds or ETFs for short. These ETFs are similar to mutual funds but trade like stocks on an exchange. There are different types of ETFs. Some ETFs represent a particular segment of the industry like biotechnology, energy, agriculture or gold, while some represent stock indices like Dow Jones Industrial Average, S & P 500, Brazil’s Bovespa or the German DAX. There are also some ETFs that solely consist of stocks of dividend paying companies. It is necessary to choose ETFs that can earn good returns and beat the market. Since these ETFs diversify their holdings over stocks of different companies, the risk is comparatively lesser as compared to investing directly in stocks of individual companies.
It is important to invest some money in precious metals like gold and silver as they provide you hedging against inflation. When inflation is low, gold prices are low and when inflation is high, gold price soars. So investing in gold provides you insulation from inflation. Since, it is not possible for individuals to purchase gold in bulk to make considerable gains from changes in the gold prices; it is good to buy a gold exchange traded fund. The fund buys gold bars and then deposits it in a bank on behalf of their investors. The investors can thus earn profits using the changes in the gold prices.
Index ETFs invest in the stocks that are part of a particular index like S & P 500 or the Japanese Nikkei. These funds have their portfolio in such a way that their returns closely follow the index, which means they give returns in accordance to the changes in the index they track. The investments in such ETFs are relatively low risk as compared to investments in individual company stocks due to their diversification. The operating cost of Index ETFs is low and hence you can enjoy better returns.
Mutual Funds
If you are new to the stock market, have a low risk appetite or do not have time to closely track the market, then you should consider investing in mutual funds (or ETFs) only. Over a long period of time these funds give better returns than bank certificate deposits or bonds. There are different kinds of mutual funds available. You should check the track record of the mutual funds before investing in them. A beginner should invest regularly in a mutual fund to average-out the costs of acquiring these units. This means you can buy more when stock market is under performing and less when stock market is moving up. This strategy also works well during periods of high volatility when it is difficult to time the market. It is advisable for beginners to invest in those mutual funds whose portfolio comprises of global blue-chip companies. These funds will give you a more stable return with less volatility.
If you invest your money regularly in the above given instruments, you can earn good returns. You should remember that many rich people acquired their wealth by investing during a recession because they followed the aforementioned golden rules of acquiring wealth. So, forget about all doom and gloom flashing everywhere on business channels, newspaper and magazines. Use your wisdom and take help of financial planners to invest wisely.
You can subscribe to weekly wealth letter at their web site www.WeeklyWealthLetter.com to get a regular update and guidance on investments and to get tips to bring the law of attraction into your life. Wishing you all the best in your investment endeavors.
Get access to your FREE Weekly Wealth Letter now by visiting WeeklyWealthLetter.com and get the latest Mutual Fund, ETF and Stock picks. This free newsletter is written by Roger Williams, a reclusive market analyst who has spent the last 18 years studying market trends and the best strategies to employ during the various phases of a typical stock market cycle. In it you’ll find the top stock, fund and ETF picks plus vital information on stock, bond, gold and currency trends. There is also one stock pick of the week for buying and one for short-selling.
Buffet Explains
Posted by rwilliams on Apr 22, 2009
In just the past 18 months, banks and financial institutions have eroded a huge amount of investor wealth. Warren Buffett opines that this is because the banks have done dumb things while running an otherwise smart business.
The Oracle of Omaha is one of the largest shareholders in one of the best American banks — Wells Fargo. In a recent interview to CNN, he explained how banks really have a simple business and can are capable of generating huge earning power.
Equating that to the earning power of companies like Coca Cola, Buffett explained that you cannot take away the potential in the growing customer base of a bank. As long as the spreads — difference between borrowing and lending rates — on assets are wide enough, the bank will have to do really dumb things to not make profits.
Buffett also believes that return on assets is the best yardstick to judge the earnings ability of a bank but there should be an intelligent review of the quality of earnings and any off-balance sheet items.
China to lead economic recovery?
Posted by rwilliams on Apr 15, 2009
“Derivatives weren’t the straw that broke the camel’s back. The current crisis is the result of a combination of problems. We shouldn’t reject the need for innovation in financial services merely because it carries some element of risk with it.”
These are the words of Jian Jianqing, the Chairman of ICBC (Industrial and Commercial Bank of China) and they perfectly epitomize the approach that the dragon nation has taken with respect to Western practices. Embrace them but with caution.
Speaking to McKinsey quarterly, Mr. Jianqing, who has done a splendid job in turning around what is now regarded as the largest bank in the world, was of the opinion that although most Chinese banks have escaped the recent financial crisis virtually unscathed, it would be foolhardy to call the Chinese banking system perfectly developed.
But he does think that there are a lot more inherent flaws in the Western system of depending very heavily on incentives. According to him, balancing short - and long-term profits, as well as short - and long- term risks is the key.
“Effective governance is the means of building and maintaining the qualities that are at the foundation of all commerce — confidence and public trust. It’s disheartening to see how many financial institutions lost sight of these basic truths,” is how the articulate Chairman chose to put it across.
And while we are on China, the billionaire Li Ka-shing, who predicted that China’s stock-market bubble would burst in 2007, is of the opinion that the country will lead a global economic recovery. He believes that China will be the fastest in the world to recover while the recovery in the US will not be too late either.
Also known as the ‘Superman’ by the Hong Kong media, Li believes that investors, who have cash, should consider buying shares and real estate. Also, while he admits that the current crisis is the worst since the Great Depression, he has refrained from predicting whether the worst is over for the stock markets.
Alarming Implications
Posted by rwilliams on Apr 6, 2009
In what could mean dire consequences for the rest of the world, a Washington Post report throws up some alarming implications of President Obama’s ambitious plans to cut middle class taxes, revamp health care and increase access to education.
An independent analysis of Obama’s budget proposal by the Congressional Budget Office (CBO) has concluded that the government would require massive borrowing over the next decade, leaving the nation encumbered far deeper in debt than previously estimated.
Further, it would cause spending to swell above historic levels even after costly programs to ease the recession and stabilise the nation’s financial system have ended.
Tax collections would lag well behind spending, producing huge annual budget deficits that would force the nation to borrow nearly $9.3 trillion over the next decade.
Also, the CBO predicts that deficits under these policies would exceed 4% of the overall economy over the next 10 years, which could be unsustainable.
The result would be an ever-expanding national debt that would exceed 82% of the overall economy by 2019 and threaten the nation’s financial stability.
On this, a senior Republican on the Senate Budget Committee Judd Gregg said, “This clearly creates a scenario where the country’s going to go bankrupt. It’s almost that simple.”
Guess its time for everyone to learn an alternative investment strategy.
