ETF Thoughts

I already pointed out that dollar-cost averaging is very expensive with ETFs, but don't worry, there's a great alternative that will still allow you to follow the exact same strategy. The alternative is Index Funds. Dollar-cost averagers can mix a few Index Funds into their ETF portfolio so that they can make small and frequent contributions to their portfolio without losing a lot of money in transaction fees. Even if you're trading through an online brokerage rather than dealing directly with a fund family, most Index Funds will still allow you to contribute money as often as you like without ever charging a fee.

Exchange traded funds (ETFs) are generally considered to be tax efficient. Unlike traditional mutual funds that are actively managed, ETFs don't involve a lot of reshuffling throughout the year. With constant selling, ETFs are less likely to trigger capital gains taxes until you, the shareholder, actually sell your shares.

What are leveraged and inverse ETFs?

ETFs that seek to produce a return that is a multiple of the return of its benchmarked index are commonly known as "leveraged". There are currently more than 100 different funds in this category with benchmarks that track commodities, currencies and various stock indexes. Some leveraged ETFs have multipliers of double or triple the benchmark (i.e., 2x or 3x), while others target returns that are based on the inverse of the benchmark (i.e., -1x, -2x or -3x). It is critical to understand the time period for which the leverage applies. Each fund explicitly states this time period in its prospectus.

At the time of this writing, all leveraged and inverse ETFs are designed to generate daily returns that are a positive or negative multiple of the daily return of a specified index. They are not designed to match the return for a holding period that is longer than the objective stated in the prospectus. Therefore, the daily compounded return of a leveraged ETF over one year, one month, one week, or even a two-day period may be significantly different from the returns produced by simply applying the stated multiple to the index’s total holding period return. Daily monitoring and adjustment (buying and selling) by the investor could modify the return to match its stated objective over time.

Daily leveraged ETFs may be unsuitable for investors who seek an intermediate-term or long-term holding period. Instead, this type of leveraged ETF may be better suited to traders who wish to increase or hedge their market exposure over a short period of time. Investors are encouraged to consult with their financial advisors or registered representatives to help determine if leveraged or inverse ETFs are suitable for them.

What are the additional concerns an investor should review before investing in a leveraged or inverse ETF?

Inverse ETF fund managers may, at times, be unable to fully carry out their short-selling strategy as a result of difficulties in the derivatives markets, regulatory restrictions, or their inability to locate and borrow shares or for other reasons. This could cause the market price of the ETF to vary from its index target and NAV.

Many leveraged ETFs (of both the long and the short varieties) rely on the use of futures, swaps and other derivative securities, along with other securities or commodities, to achieve their target returns. Some of these derivatives, such as swaps, are unlisted securities that depend on the swap issuer’s ability to pay. Therefore, the leveraged ETFs that depend on such swaps may not be able to achieve their stated returns if a swap counterparty should default.

Leveraged and inverse ETFs may be less tax efficient than other ETFs. It is possible for investors to have a tax liability, even in a year in which the leveraged or inverse ETF had a negative overall return. This outcome can result from the fund managers "rebalancing" the investments each day with derivatives to maintain the ETF’s multiple. Such rebalancing can produce realized taxable gains with no offsetting losses. As with any potential investment, an investor should consult with his or her tax advisor and carefully read the prospectus to understand the tax consequences of leveraged or inverse ETFs.

While exchange traded funds have been an established, widely used investment instrument for many years in the U.S., they have only acquired greater importance in Europe over the last number of years. Europe has now surpassed the U.S. and taken the title as the largest ETF market in the world in terms of number of ETFs.

According to a report by the Investment Company Institute, the combined assets of all US-based exchange traded funds (ETFs) exceeded $336 billion. For anyone that thinks ETFs are a passing fad, this number should change their minds.

I have to admit that the massive decline in values for most, if not all, exchange traded funds through 2008 and 2009 has got me thinking about exit strategies. At the moment I'm relatively young, gainfully employed, and I have a comfortable cash buffer. However, I can see a day when I'm old, not so gainfully employed, and scared about about being in the market during a major crash. As someone who likes to be prepared, I've spent considerable time thinking about just what needs to be considered when it comes to an exit strategy for ETFs.

When ETFs were first introduced, most only tracked the largest and broadest Indexes, but in recent years, they've grown in sophistication and popularity. Today you can buy ETFs that track just about any index or sector, and even some that try to emulate a strategy rather than following a specific group of investments.

I want some growth, but I also want to protect my nest egg. How do I optimize Risk Vs Return?

Experienced ETF Investors track their allocation and diversification mix because they know this is the difference between a good portfolio and a well-balanced professional grade portfolio. Why is this so important? If you master asset allocation and diversification, you can lower risk AND improve returns at the same time that's a pretty good combination.

We're finally getting to the fun stuff, the actual buying and selling of ETFs. The ETF Checklist below is a great ETF buying guide for beginners. Answer each question on this list every time you buy an ETF. Why? Every ETF worthy of your portfolio will have the following high-potential characteristics in common.

There are many advantages to ETFs but they aren't suited to every investor, especially not if you're a dollar-cost averager. Dollar-cost averagers contribute small amounts of money on a regular basis, and this can be disastrous if you're buying ETFs because every buy and sell order creates a transaction fee. For example, if you contribute $100 per month to a particular ETF and each transaction costs $10, you are instantly losing 10% of your investment every month. Index Funds are a great alternative for dollar-cost averagers. Like ETFs, they track broad indexes but don't charge transaction fees when you contribute more money (more on Index Funds below).

Most people that are new to investing are curious why there has been such an explosion in ETF popularity in recent years. Part of this is because of their flexibility, you can find a coinciding ETF for just about any type of stock, industry, geographic region or strategy that you'd like to try. You can usually own a share of the Wilshire 5000 or any other index that ETFs track for as little as $50. Can you imagine the cost if you tried to buy one share of every stock in the Wilshire 5000? Even if you could afford to buy a few shares of all 5,000 stocks, the transaction costs would make it a waste of time.

Dollar cost averaging means investing a fixed amount of money on a regular basis. For example, if you invest $300 every month regardless of market conditions, you are dollar-cost averaging. The benefit is that you wind up buying more stock and reducing your cost basis. Huh? Yeah, it's a little confusing. Over time, the market trend is usually up, the S&P 500 average annual return since 1975 has been 10.75%. If you invest a fixed amount every month, especially during bear markets and corrections, you are buying stock at lower prices which allows you to buy more shares. When you combine a positive trend with buying low, you get more stock at a lower cost basis.

Ever wonder how ETF share prices remain in line with the current prices of the underlying stocks? The process is quite simple really although the execution might be quite complex.

The MotleyFool.com site is run by investors and promotes itself as being THE source of information for the individual investor. I used to read the articles religiously. But after a year or two, I started to notice that the articles were all the same with one stock symbol swapped out for another.

Generally you want to avoid any investment tips that start off with "getting around..." But this time, I think you should pay attention.

One of the often cited advantages of exchange traded funds (ETFs) over mutual funds is that you can buy and sell them whenever the market is open. Still, most investors, in my opinion, would be better off not engaging in day trading with ETFs.

I spent 6 weeks in the first quarter of 2006 rebalancing my investment allocations so that my holdings would be inline with my targets. The idea of rebalancing once or twice a year is now a generally accepted tactic among many investment professionals and it seems to make sense to me. Also, from what I've seen, even 401K plans allow contributors to easily rebalance their portfolio adding more legitimacy to the practice.

This first edition includes a handful of articles about an investor's psyche and how it relates to that of a student. In addition, there is commentary on gold and biotech ETFs along with a general overview of this week's ETF trends.

There's a lot of good investing content out on the web be it in the form of traditional articles or on blogs. Today, I look at two fairly recent commentaries that I've found to be very informative.

I'm taking my first step in to the world of blog carnivals. What is a blog carnival, you ask? Here's the official description from Blog Carnival.

Tom Lydon manages $65 million dollars. In my books that makes him a smart guy. I have no doubts that anyone who can get others to pony up that amount of money must know a thing or two about making money in the stock marketing.

Apparently marketing is a live and well even in the world of exchange traded funds (ETFs). Aside from the typical advertising you might come across on TV, in a newspaper, or on the web, ETF providers are purposefully targeting specific ticker symbols for that little extra name recognition.

If you've read my other posts about commodity exchange traded funds (ETFs) you'll know that they make up part of my portfolio. My reasoning behind these holdings is the benefit of diversification offered by returns that are, in theory, uncorrelated to other asset classes. The Economist says this might be bunk.

If you've done any searching on the web for exchange traded fund (ETF) information, you've undoubtedly come across many sites and many opinions. Maybe you even found this site from a search at Google, Yahoo, or one of the other search engines. I too often look for alternative views. It's not prudent to live in a bubble of your own making.

If you're reading this, you undoubtedly invest in the stock market. Like me, you've probably been doing a lot of hang wringing lately as markets around the world have been shedding billions seemingly every day.

If you're an old time exchange traded fund (ETF) investor, you've probably been witness to fairly significant declines in various sectors of the stock market. Typically, such declines trigger selling across the board which of course exacerbates the decline. What do you do under such situations?

Every now and again the debate of equal-weight vs. market capitalization-weight ETFs (exchange traded funds) takes center stage. Depending on who you talk to, one is often cited as being better than the other. I disagree. Both styles provide different investments. So maybe one is better for YOU, but there isn't one style that is better for EVERYONE.

Years ago I thought I could time the market. I'm not sure what it is about people that makes them think they know something everyone else doesn't. It's a curious thing, but I guess that's part of what makes the stock market interesting.

I have to admit that I can't resist checking out the history of any ETF that I buy. But my decision to buy an ETF is rarely influenced by historical prices. At most I may pick up some new shares during a dip if I also happen to need to do some rebalancing.

Greg Newton wrote an interesting piece recently about using an ETF to hedge your gas consumption.

I generally favor Barclays' ETF (exchange traded funds) offerings over others both in my portfolio and in my postings on this site. My reasons for this are quite simple.

I write a lot about Barclays Global Investors on this site. That's because they're the largest provider of exchange traded funds (ETFs). They also offer a diversified collection that comes very close to providing access to all the asset classes I'm interested in.

Asking what the best exchange traded funds (ETFs) are is the wrong way to approach the subject. There is no single ETF that suits everyone for all situations. Although there are investment managers that offer portfolio building services by using ETFs. But what would be the point in paying someone to go out and buy ETFs when you could do it yourself?

Recently over at Unauthorized Participant there was a discussion of the difference between exchange traded funds (ETFs) and closed-end funds (CEFs). A couple of years ago I was looking in to this matter myself. I knew they were different, but at the time I didn't know how.