Of course I will take this with the required grains of salt, but does anybody who is financially minded have any general thoughts on the relative merits and relevant consideration in investing in ETF's (exchange traded funds; SPDR's, HLDR's, that kind of thing) vs. investing in regular old mutual funds? Edit: Buy low, sell high?, yes, I already know that one.
There are some really good one's, you just have to do your DD. Some have done really well over the past year. If you want any more info, take a look at the April 12, 2004 issue of Barron's. They did a really great cover story on ETF's. Actually, it's Buy high, sell higher. (The price of sugar once fell from $1.5 to .02, people bought all the way down and still lost)
Well I don't know a whole lot about this, but ... ETFs are open-ended, with a unique Creation and Redemption feature that only provides for the creation of large blocks of ETF shares by Authorized Participants to satisfy investor demand and provide market liquidity. A creation requires the deposit with the trustee of a specified portfolio of stocks or bonds closely approximating the composition of the specific index and specified amounts of cash in return for a Creation Unit aggregation of shares of a specific exchange traded fund. The redemption process is the same but in reverse. Creations and redemptions are restricted to large transactions, typically in creation unit multiples of 50,000 shares, but ranging from 25,000 to 600,000 share creation units. Pricing Accuracy—The Creation and Redemption process prevents significant premium/discount. Although supply and demand determine the market price of an exchange traded fund, just like any other security, arbitrage helps keep the traded price of an ETF much more in line with its underlying value. By simultaneously buying (or selling) the ETF "basket" and selling (or buying) the ETF shares in the secondary market, then creating (or redeeming) ETF shares to be delivered against the sale, arbitrageurs can capture the price discrepancy and make a profit. Liquidity—The Creation and Redemption process is also able to infuse the ETF marketplace with considerable liquidity, as its open-ended structure permits it to capture liquidity from the underlying shares, futures, options, etc., at any time during trading hours. As a result, for exchange traded funds, volume in the ETF is not necessarily a good indicator of liquidity. New shares can be created readily to meet demand, so the specialist and market makers typically are able to provide greater liquidity than the volume in the ETF would indicate. ETF Structure ETFs are open-ended registered investment companies under the Investment Company Act of 1940 that have been granted certain exemptive relief from the SEC to allow secondary market trading on the Exchange. ETFs vs. Futures Many institutions use futures to buy or sell exposure to an index for the short term. However, to gain exposure for a longer period, costs associated with trading ETFs may be lower. ETFs avoid the basis point risk and additional transaction costs that are required in rolling futures positions forward each quarter. Futures also face daily variation margin calls that must be met with cash, while ETFs, unless margined, are purchased outright with no threat of a margin call. ETFs also serve as an alternative for institutions or money managers seeking to trade index exposure, but do not use futures or are subject to policy restriction prohibiting the use of futures in their strategy. Exchange traded funds may also provide exposure to specific indexes or market segments not accessible with futures, and may offer more choices than futures for achieving exposure to international, country, domestic stock or bond markets or stock industry indexes. The advantages of ETFs Tax efficiency ETFs, like index funds in general, tend to offer greater tax benefits because they typically generate fewer capital gains than actively managed funds due to low portfolio turnover. Generally, an ETF only sells securities to reflect changes in the composition of its corresponding index. Exchange trading of ETFs further enhances their tax efficiency. Investors who want to liquidate shares in an ETF simply sell them to other investors, thus not requiring the fund to sell securities and generate capital gains tax liability. In addition, the creation and redemption process involves an “in kind” transfer of securities, a transaction that is not a taxable event for the fund or trust. This means that imbalances between supply and demand for ETF shares can be satisfied through the creation and redemption process and will not have an adverse taxable effect upon existing ETF shareholders. Lower costs Lower turnover costs--Because they are index-based, ETFs require few portfolio changes, resulting in much lower transaction costs than actively managed portfolios. Lower expense ratios--As passive investments, ETFs also have lower operating expenses and lower management fees, resulting in lower annual expense ratios than many other registered investment products. Lower operational costs--Since ETFs trade on an exchange and use "in kind" Creation and Redemption, they are insulated from the costs of buying and selling securities to accommodate shareholder purchases and redemptions. Lower trading costs--Spreads on many ETFs tend to be narrow making them inexpensive to buy and sell. Of course, some ETFs will have much wider spreads and the cost of these spreads, as well as commission costs, should be taken into account when assessing the overall costs of exchange traded funds. Transparency To facilitate an ETF's unique Creation and Redemption process, the composition file for each ETF creation unit is published daily. Since an ETF's holdings are designed to provide performance similar to its underlying index, investors will essentially know the securities that are held in an ETF and their weightings. Buying and selling flexibility Because they are exchange traded, ETFs can be: bought and sold at intraday market prices purchased on margin sold short, even on a downtick traded using stop orders and limit orders All day tracking and trading Investors can track ETF prices throughout the trading day and adjust portfolio holdings to capitalize on changes in the market. Diversification Because each ETF represents a basket of stocks or bonds, it inherently provides diversification across an entire index. Additionally, the expanding universe of ETFs available at the American Stock Exchange offers exposure to a diverse variety of markets, including: broad-based equity indexes (such as total market, large-cap growth, and small-cap value) broad-based international and country-specific equity indexes (such as Europe, EAFE, and Japan) industry sector-specific equity indexes (such as healthcare, energy, and real estate) U.S. bond indexes (such as long-term Treasury bonds and corporate bonds) Dividend opportunities Dividends paid by companies and interest paid by bonds held in an ETF are distributed to ETF holders, less expenses, on a pro rata basis. Of course, not all companies will pay dividends. Based on past performance, few, if any, distributions can be expected from certain ETFs. There may also be opportunities for reinvestment of distributions. Wide array of investment strategies Money managers use ETFs as a hedging vehicle, a means of equitizing cash or maintaining market exposure during periods of transition. Financial advisers like ETFs because they are tax efficient, easy to trade and relatively inexpensive. Effectively, the convenience of ETFs enable the pursuit of a wide variety of investment strategies. Equitizing cash—Institutions with temporary idle cash can put it to work in an ETF while determining where to invest for the longer term. Investors can maintain allocations or establish new allocation targets to a benchmark or sector, investing and liquidating as needed to fulfill redemption requests. This can minimize cash drag or trading risk. Managing cash flows—Investment managers can take advantage of ETFs' liquidity during periods of cash inflows and outflows. A portfolio manager can establish a position in an ETF that corresponds to the portfolio's benchmark or investment strategy, investing inflows into the ETF and liquidating the position as needed to meet redemptions or invest in specific stocks or bonds. Equity/fixed income asset allocation—Divide assets among baskets of stocks and bonds with the ease of stock trading. Sector/country equity exposure—Exchange traded funds offer institutions immediate diversified exposure to a sector or country. For example, managers can quickly and easily purchase ETFs for instant and extensive international exposure, compared to the expense and difficulty of assembling a portfolio of foreign securities. Hedge strategies—Since ETFs can be sold short (even on a downtick) they provide easy to employ risk management strategies. In a declining equity market (or rising interest rate market for fixed income ETFs), profits from a short position can offset some of the losses in a portfolio. A money manager can use these strategies to protect a portfolio from overall market losses and preserve it or capitalize on negative volatility of a market segment, specific sector, or interest rates. Hedging involves additional and specific risks and does not guarantee protection from loss of principal or ensure a profit. Completion strategies—Fund or money managers can use ETFs to quickly establish or increase exposure to an industry or sector to "fill holes" in an overall investment strategy. Relative value, long/short strategies—Institutions can take advantage of ETF features to combine long and short strategies aimed at increasing returns. For example, an institution can establish a long position in a broad-market, country, sector, or bond index expected to outperform while shorting an index expected to underperform. Doubling the size of the long position versus the short position can leverage the total position. Transitions—Pension plan assets can often lay dormant during times of investment manager appointments, replacements or shifts. Institutions can use ETFs as a cost effective method to keep assets invested in the interim. Risks and other considerations ETF shareholders are subject to risks similar to those of holders of other diversified portfolios. A primary consideration is that the general level of stock or bond prices may decline, thus affecting the value of an equity or fixed income exchange traded fund, respectively. This is because an equity (or bond) ETF represents interest in a portfolio of stocks (or bonds). When interest rates rise, bond prices will generally decline, adversely affecting the value of fixed income ETFs. Moreover, the overall depth and liquidity of the secondary market may also fluctuate. An exchange traded sector fund may also be adversely affected by the performance of that specific sector or group of industries on which it is based. International investments may involve risk of capital loss from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, or economic, political instability in other nations. Although exchange traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.
AAA rated muni bonds: slightly lower interest rate, but tax free. You may only earn 4-5% a year, but the effective yield is 2-3% points higher because you don't pay tax on your interest earned like you do with corporate bonds. You can usually find a big list of them out there and they are still rated just like corporate bonds. (plus you can infuse much needed money into local improvement programs by buying munis...if that means anything at all to you). They are also generally safer than corp. bonds because if they are on the verge of defaulting, many times the states or fed will bail them out so you don't lose your money...but they do carry some risk depending on rating.
I am a huge fan of ETFs. Of course I strongly believe in indexing for Midcap and Large Cap stocks. As such, I am invested in SPY and MDY. For small cap and foreign stocks, I use mutual funds. After these recent mutual fund company scandals, I try to avoid using them wherever possible.
Screw ETFs, go for the leveraged index funds from ProFunds or Rydex. Oh, and Blue Horseshoe loves Anacott Steel.
With ETF's you cant beat the market, you are the market. With mutual funds there is a chance you can beat the market's returns. But as a hedge fund partner, I would always promote hedge funds, if you can afford it. There are indeed some safe hedge funds which have very consistent positive returns over the past 5 to 10 years.
Interesting concept but I was looking at Profunds performance and it looks pretty crappy -- their "classic" funds lagged behind the corresponding Indices and the "ultra" growth funds managed to lose value both long and short term.
Rydex and Profunds, huh? Those must come with a heart transplant! Those funds are great if you know an individual sector. And by know, I mean you would have to know exactly what goes on because the 200% inverse funds can be awesome if you know what is going on. Personally, I only play micro's (penny stocks). Lots and lots of risk, and when the market is down, the tend to get hit the hardest. However, I do believe that there are some gems out there. Good luck with your investing though, it's a tough market.
I guess it all depends on one's involvement, etc. Over the long term, VERY few funds have beaten the market. Since the chance is so small, stick to ETFs. As for leveraged funds, tread carefully as risk/reward go hand in hand. Greed, for lack of a better word, is good.
Yes, I don't have the time or expertise to shoot for the small chance of beating the market, and am not a large scale enough investor for it to matter much if I did -- simply not worth it for me.
well if you are going for ETFs and SPY, DIA, QQQ, iShares and such then you will be the overall market for those stocks...you won't be outperforming the market. i don't know about the return v. mutual funds but 80% or so of mutual funds DO NOT beat the market....but the same could be said of a lot of stocks. if you do look for a mutual fund to get into then research it and make sure it is one of the top performing mutual funds. you don't want guess work...performance is the bottom line. secondly, we are in a secular bear market which means longer term. that is not just my opinion, the crazy daytrader, on things. why do you think buffet has so much in cash and not in stocks right now? because he can't find anything he wants at a good price. so my point with that is...do not expect returns that we saw during the 90's or anything close to that. right now you could easily see your investment depreciate by 20% or even be flat for the next decade. lastly...if you got into those leveraged funds then you will experience a significant amount of volatility. i wouldn't be opposed to investing in a bear market fund over the course of the next year as a hedge against investing right now...like here http://biz.yahoo.com/p/tops/bm.html the day to day actions of those leveraged funds are crazy, but the market is not going up anytime in the next year. but that is just one crazy man's opinion...
For once I agree with Robbie. With earnings looking pretty good we may get a small rally in the very near term but overall I think we are in for a down market through the summer. We could be seeing a slowing in the liquidity that can be pumped into the market by tax cuts and the Fed. Interest rates have atleast bottomed and should drift up, how fast depends on if corporate earnings. Inflation is back, no matter what the republican administration says. The economic bubble in China is causing a surge in commoditie prices. And the elephant in the closet is the possibility of a major terrorist event that could change everything overnight. I'm still in the market but I plan on taking money out on any rallies and I am keeping my stops very tight . I would not put any new money in this summer but would wait atleast until next fall. It's a lot better to just make your 1% on all your moneymarket than to lose 10-15% in a stock market correction. Read Lance's newsletter at http://www.streettalklive.com/. It's free.
If you believe inflation is back, which I do too, then stocks are the way to go. Money market funds won't help you stay ahead of inflation. Of course your premise is a little more based on timing whereas I think of buy and hold. Timing is another thing that is very tough to do and after transaction fees/short term taxes, even less profitable. About the only timing I do is market averaging...ie., If I've got 20k to invest, put in 2-3k a month. Again, if you do this for stocks, fees get high. Mutual funds on the other hand can be no transaction fee funds, so you can ease into the market....
I'm bored at work right now since nothing is really going on and I am trying something different with my trading so I felt like disagreeing and starting a conversation. I just had to say that I disagree about this small rally you talked about because of earnings. A ton of things were selling off last week even with good earnings. The market as a whole is down since these good earnings have started coming out which isn't good for the short term of things. I am very bearish short term and I am expecting some sort of huge breakdown in the short term meaning a month or 2. Normally that is longer term for me but the overall markets move so much slower that things play out in that sort of fashion. The market has been staying too close to too many key breakdown points for too long and the sell off last week only seemed to reinforce my sentiment about that. But in reflection a breakdown in a month or 2 would put us in the summer so that bring me back to my point of disagreeing for the sake of disagreeing. One more thing....yes inflation is back but that is good for the market. Deflation would be much more destructive. Ok 2 more things...A terrorist attack would only serve as a one time event. Yes it would effect certain companies but the overall market would recover relatively quickly. 9/11 served as a catalyst to a sell off, but the market also got back in line with its general downtrend pretty quickly. That's one thing I love about the market...trends have a way of staying in effect. When you see something go outside of the trend you generally see it come back to that trend.
Huh? I'll just give you my Harrisdirect account info which contains the answers to all the personal info about me that you desperately seek...and you can manage my money as well: UserID: JorgesDaddy Password: TJisownd
