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Advantages of ETFs Over Mutual Funds

August 22, 2011 By Leave a Comment

Most investors still don’t know about Exchange Traded Funds (or ETFs) and their advantages over traditional mutual funds. Even many seasoned investors are still clamoring over which one to go with. Lets take a look at Exchange Traded Funds, their history, performance and advantages. This will give you a better understanding of how much better ETFs are than mutual funds

ETF 101: A Quick Look

Exchange Traded Funds can most accurately be described as the happy marriage of a stock with a mutual fund.

Like mutual funds, when an investor buys an ETF, he is buying a pool of securities at one time. For instance, an ETF known as DIA, or “Diamonds.” allows the investor to take a position in the Dow Jones Industrial Average.

Like a stock, an ETF can be purchased through a brokerage account, can be traded throughout the day, can be bought on margin and offers stock-like trading features such as limit orders, stop orders and short selling.

ETFs come in many different flavors. They track all the major indexes like the Dow, S&P 500, NASDAQ 100, Russell 2000 and others. They’re also available in a number of different sectors, many of which are hot at some point so it is your job to keep an eye out. Investors who want to trade sectors like energy, technology, precious metals, financial, health care, emerging markets, interest rates, real estate and many more have the ability to do this.

Introduced over 17 years ago, ETFs were initially mostly used by professional traders, but in recent years, have experienced rapid growth as a popular investment vehicle with public investors. Now everyone is trading them, including investors on all scales of the financial spectrum.

ETFs have gained such widespread acceptance and popularity because they provide significant advantages over mutual funds. The advantages of ETFs over mutual funds include:

  • Continuous pricing throughout the day compared to end-of-day pricing for mutual funds
  • Can be sold short like a stock, which isn’t possible with mutual funds
  • Can be bought on margin
  • Can use limit and stop orders so you can exit or enter during the trading day
  • Have lower expenses than mutual funds and no management fees

Adding it all up, it’s easy to see why Exchange Traded Funds have been growing at a rate of nearly 50% per year since 1993. This is pretty rapid growth, and will continue at a rate close to this for the foreseeable future.

Conclusion

It’s easy to see why Exchange Traded Funds have steadily grown in popularity over the last seventeen years. By combining the benefits of a mutual fund with the benefits of a stock, they really do offer investors an optimum combination of flexibility and potential profit.

Of course, the large mutual fund companies don’t like ETFs but have had to adjust to their new popularity and so many fund families have introduced ETFs of their own in recent years.

For investors, ETFs offer considerable advantages of flexibility, cost and diversity, and therefore, this makes them a clear choice over mutual funds. Do some research and get yourself invested in ETFs today!

Filed Under: ETF General Information, Investing Tips, What are ETFs Tagged With: , , ,

Five Benefits of Investing in ETFs

August 19, 2011 By Leave a Comment

ETFs usually come up pretty quickly when people ask for investing advice, because they are so heavily marketed and trumped by the industry. Exchange-traded funds, or ETFs, are an easy way to diversify a small investment, but to get the most out of your investment, it is important to understand how they operate.

ETFs are like mutual funds, in that they are a collection of investments, but they are traded on an exchange, such as the NYSE, instead of purchased directly from the issuing company. They also differ in their redemption structure and tax efficiency from traditional mutual funds.

Here are five benefits of ETFs over mutual funds:

1. Tax Efficiency: Upon redemption, mutual funds must sell its underlying securities, and the capital gains are then distributed to the owners of the funds. Since ETFs trade on an exchange and investors are selling to other investors, no underlying securities are sold, and no capital gains are distributed. If the makeup of the ETF changes it will, occasionally have to distribute gains, but it should be less frequent than with traditional mutual funds.

2. Lower Fees: ETFs are no-load funds, and you won’t be slapped with a redemption fee when it’s time to liquidate your position. Further, ETFs typically have lower annual fees than traditional Mutual Funds, making them an attractive alternative. (NOTE: In rare cases where a very small amount is being traded, broker’s fees may be a higher percentage of the investment than a mutual fund’s expenses would be, but in most of these cases the invested amount would not meet the minimum investment required by most mutual funds).

3. Liquidity: The exchange-traded structure of ETFs generally allow for liquidation of a position faster than a mutual fund, which must be liquidated at end of day. Further, the ability to set a limit order allows flexible trading that no investor could get from a mutual fund. Not all ETFs have the same liquidity, however, and it is important to review trading volumes and the ETF prospectus to determine whether you are comfortable with the frequency of trades.

4. Intraday Pricing: Because ETFs are traded on active stock exchanges, purchases and sales happen at market prices, rather than end-of-day Net Asset Value, which mutual funds use. As a result, one may purchase ETFs at a premium or a discount to the value of the underlying assets, and arbitrage is frequent.

5. No Minimum Investment: When starting investing, diversification can be cost prohibitive if you’re using traditional mutual funds, which frequently have a minimum investment of $2500 or more. Because ETFs have no minimum investment (other than the market price of one share), they are a good vehicle for diversified investing.

Of course, many of these benefits could be liabilities if not used properly. For instance, the intraday pricing feature of ETFs could lead an investor to buy an ETF at a premium or sell it at a discount to the value of the underlying securities. Also, brokerage fees may have a greater impact on some investors than traditional mutual funds’ management fees and loads would have.

Used wisely, ETFs can be a good vehicle for widely diversifying a small or initial investment. Even if you are a veteran of ETF investing, it is usually still a good idea to seek professional investing advice.

Filed Under: ETF General Information, Investing Tips Tagged With: , ,

Tips for Maximum ETF Success

August 19, 2011 By Leave a Comment

Managing a global portfolio of exchange-traded funds (ETFs) is a great way to build a diversified portfolio with exposure to equities around the globe. Fortunately, you need not be a rocket scientist to do this, but many investors fail to observe some basic guidelines, and it can get them into real trouble. Follow some of these ETF tips steps to achieve maximum success.

Liquidity Comes First

Before you even think of building an investment portfolio, you should set aside about six months of income in a “rainy day” account. This could be put into a money market fund or U.S. Treasury securities. Having this money set aside will ease your mind and allow you to be more open and creative with your global portfolios.

Separate Your Portfolios

You should separate your core conservative portfolio from your growth portfolios. With the core conservative portfolio, your top priority is capital preservation, and growth is a secondary consideration. Your growth portfolios are more speculative, with capital growth as the primary goal.

Diversify Your Portfolios

You need positions in your portfolios that are likely to offset each other as unexpected events and market movements become a reality. This is not accomplished with different sectors of ETFs or a mix of small-cap, mid-cap and large-cap ETFs. Rather the goal is to have some investments that are on both sides of risks.

For example, if the U.S. dollar declines, have some investments in precious metals or denominated in other currencies, such as Switzerland or Australia or Singapore ETFs. If inflation heats up, have some investments that hedge this risk such as timber, gold or Treasury inflation-protected bonds (TIPs). If political events or policies in one country take a turn for the worst, it is helpful to have investments in other well-developed countries to offset any loss of value. You get the idea, spread your risk and avoid having one ETF account for more than 5%-10% of your core portfolio.

Do Research and Pick the Best Countries

You need some guidelines to help keep you from getting carried away and having too concentrated a position in a particular country or region. In particular, take a good look at the following:

  • The stability and overall political and corporate governance.
  • The legal environment, respect for contracts, low levels of corruption, due process and rule of law.
  • The macroeconomic environment including fiscal discipline and currency strength.
  • Political risks that could affect financial markets.

Keep in mind that the quality of the countries you choose to invest in is the primary but not the only factor. The price or valuation of a country’s stock market is also extremely important. Oftentimes, the best time to buy into a country’s stock market is when it is beaten down, but there are signs that its economic and political problems will sharply improve. If you have a long-term perspective, you might consider annuities specially structured for ETF portfolios.

Monitor ETF Country And Company Exposure

Be careful to look under the hood of ETFs to see where your money is going. For example, let’s look at the iShares MSCI Emerging Markets ETF. It invests in 26 different countries, so it is natural to think that you will get broad exposure to all 26 countries. You would be wrong: 50% of your investment in this fund is going to four countries: South Korea, South Africa, Taiwan and China. In addition, incredibly, 7.5% is going to one company, Samsung Electronics of South Korea.

The same is true for the MSCI Europe, Asia and Far East index. It contains 21 developed countries, but 48% of the money you invest would go to just two: Japan and the United Kingdom. Meanwhile, less than 1% would go to Singapore and Ireland! Country specific ETFs such as the new iShares FTSE/Xinhua China 25 Index can also have a fair amount of concentrated risk. Although the China ETF tracks a basket of 25 companies, the largest five companies account for nearly 50% of your exposure. Right now anything that China is involved in financially, you will probably want to get involved with as well.

Cut Losses With A Trailing Stop-Loss Policy And ETF Put Options

We have all been there. You buy a stock or fund, and it appreciates in value rapidly. Then it stumbles and begins to decline. What do you do? Should you buy more, let it ride, or sell? Save yourself a lot of pain and agony by following a simple rule. If a position ever falls more than 20% from its high, sell it immediately and reassess the situation. If you invest in an ETF with a sizable downside risk, why not spend a few hundred dollars to purchase a put-option as an insurance policy?

Rebalance Your Portfolio

At least annually, you need to make some changes so that you are not overly exposed to countries that have higher risk factors and volatility. One way is by selling some shares of your winners and increasing exposure to under performers. This accomplishes another goal, locking in gains and taking some money off the table. Remember, only a fool holds out for top dollar, especially in the more volatile emerging market countries.

Building your portfolios with low-cost, tax-efficient ETFs is a smart strategy, but don’t set it on autopilot. Be sure that you are constantly reassessing all of your ETFs and making sure you are invested in what will work best for you.

Filed Under: ETF General Information, Investing Tips Tagged With: , , ,

Consider China Focused ETFs for Your Portfolio

August 3, 2011 By 1 Comment

News is constantly breaking about how China is becoming a huge player around the world of finance. Recently though it has come to many people’s attention that maybe they should consider China-focused ETFs for possible inclusion into their portfolio. Here is what we say about that.

You need to make sure that your company is on the ball and is considering China as an important part of its growth plan. If they aren’t, then they are going to be left behind. Why? Because no US company can compete with China’s dirt-cheap wages. Don’t believe your company should look into these options with China? Consider this list of American companies that have already jumped on board:

  • Starbucks
  • Boston Scientific
  • Apple
  • Yum Brands
  • McDonalds
  • Volkswagen
  • Vale SA

Just to name a few. This is a trend that all American companies should follow. If Apple is doing it, then it is probably a great idea.

Remember, always do your homework and research when deciding if something like this is right for your personal financial goals. Either way, this is something that should be considered, as China continues to become more and more relevant within the greater financial market and overall scene.

Filed Under: ETF Hound News, Investing Tips Tagged With: , ,

When should you invest in ETFs?

February 24, 2011 By Leave a Comment

As per the recent news, the ETFs (Exchange Traded Funds) have become the fastest growing sectors in USA. Investors have invested around $1 trillion in ETFs and have made it the most important funding sectors till now. You would want to know the correct time as to when you should invest in ETFs. If you are a good manager or an ace investor, you can go for investment in ETFs. The returns will help you pay off your debts and you’ll be able to consolidate debt professionally. If you want to trade in currencies and other commodities that give you good returns, you may go for ETF trading.

Learn the lessons in ETF trading before you go for it

ETFs are mutual funds that trade on stock exchanges such as the huge stalwarts like IBM and Apple do. Even closed-end funds have traded on stock exchanges. But the ETFs are really different from the closed-end funds. The seasoned investors usually buy large and huge blocks of stocks from an ETF and it’s called the creation unit. In order to make huge profits, these investors can exchange a creation unit for another block of stocks from an ETF. Then they sell off the stocks in the creation unit for making profits. For this the previous ETF must be selling off on a discount.

There are certain good and bad things about the ETFs that you must know before you fall into any problems. You can easily sell or buy ETF at any time of the day and also bet on the prices and short sale. If you believe in investing in exotic areas such as currencies, commodities or any merging markets, you can easily get an ETF that does similar thing to you. The returns you get from an ETF trading hardly goes into capital gains taxes.

The bad aspects of an ETF trading are that you may not always get the best returns from the ETF trading and some of the ETF funds are not that tax-efficient. You must try to consult the experts before you dive into the investment. The returns generally depend upon the market and if you think that it’s not the correct time to invest in ETFs, you can research on it beforehand.

Advice to the ETF traders

You must try to remember certain points so that you don’t incur much loss while creating an ETF portfolio. Try to go big but try not to invest a lot of money in it. Try to create a portfolio mix of basic funds and bonds with at least 3 or 4 ETFs. This way, your returns won’t suffer much. If you get a return of around 5% from one, you may get return of 5% from another. That way, you get a return of 10% in total which would have been less if invested in one type of funds or bonds.

You must remember certain golden rules of investing in ETFs. When an ETF crosses above the average price, you must buy it then and sell it off when it crosses below the average price. If there is longer average, you may get less trading days and fewer chances of falling into losses or debts while moving in and out of the market. Buy those ETFs that are consistently performing well over a large span of time. Sell them off when the performance goes down. If you invest in taxable accounts, the tax officials may want a portion of your returns. This usually reduces the Profit that you earn.

If you invest through a broker, then also you need to give an amount of your returns to the brokers. This further reduces the profits that you earn. Whenever you invest or trade in ETFs, you must try to consult experts as you may not understand the nuances of the market fluctuations. Get to know the real nature of the ETF funds for your own good and to avoid debts.

Filed Under: Investing Tips