Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Four Reasons to Invest in ETFs And Five Ways to Get Started

Companies / Exchange Traded Funds Sep 24, 2010 - 05:51 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleLarry D. Spears writes: A mere 15 years ago, selecting the right exchange-traded fund (ETF) was no big challenge. That's because the first ETF wasn't introduced until 1993, and the second didn't follow until 1995. Since then, however, the growth rate among these versatile investment vehicles has been exponential - so fast, in fact, that the monitoring firm Morningstar now tracks the performance of 854 ETFs, with new funds being added almost weekly.


So, from this mushrooming roster of new ETFs - now covering virtually every market sector, both domestic and international - how do you select the right one (or, more likely, ones) for your portfolio?

If you're not already familiar with ETFs, here are four

Reason #1: ETFs allow you to better focus your investments.
While many ETFs represent large portfolios of stocks or bonds, typically tracking major indexes, many others are more narrowly focused than traditional mutual funds. These instruments represent small market sectors, sets of foreign stocks, or even individual commodities that are hard to access via futures or individual stocks.

For example, lithium is generally considered a fuel of the future, since it has multiple uses in "green" energy systems and batteries for powering hybrid and electric cars. However, there are no lithium futures, meaning you can't trade in the metal directly, and most of the lithium mining and production companies still have stocks mired in the high-risk "penny" class.

You can, however, make an easy play on lithium by buying shares of the Global X Lithium ETF (NYSE: LIT), which invests in lithium mining stocks, shares of battery makers and stocks of the metal's other end users.

Reason #2: ETFs give you access to markets or investment areas that might otherwise be restricted, too expensive, or highly risky to trade.

There are a limited number of traditional mutual funds and single-country funds targeting the secondary overseas markets or specific sectors within the larger foreign bourses. However, there are now roughly 300 international, regional, and foreign-country ETFs listed on U.S. exchanges that you can use to add a global perspective to your portfolio.

That means you can make a play on an entire major foreign market such as China with a fund like the iShares FTSE/Xinhua China 25 (NYSE: FXI). FXI tracks China's leading stock index, has $8.2 billion in assets and is up 5.6% since hitting yearly lows in mid-July.

You also can target a specific segment of China's market, such as the top manufacturers, with an ETF like the Global X China Industrials(NYSE: CHII). Started in December 2009, CHII mirrors China's S-BOX Industrial Index, has a market capitalization of $26.6 million, and is up 19.9% from its early July lows.

You can move into smaller, high-performing foreign markets as well with ETFs like the iShares MSCI Thailand Index Fund (NYSE: THD). Formed in March 2008, THD bottomed in December of that year amid the global financial turmoil, but has been on a tear ever since, returning 45.6% over the past year. THD's market cap is now over $552 million.

If you can't find an ETF for the country you want, just wait a bit - new ones are coming online at a frantic pace. For example, the Market Vectors Vietnam Fund (NYSE: VNM) just turned one-year-old last month and the Market Vectors Poland ETF (NYSE: PLND) is barely nine months old.

There's also a growing array of broader ETFs that track multiple foreign markets, both developed and emerging.

A top performer among the first group is the iShares MSCI EAFE Growth Index ETF (NYSE: EFG), which tracks major stocks in the biggest markets in Europe, Asia, Australia and the Far East. With a market cap of $1.3 billion, it's been weighed down somewhat by the recurring European debt crisis, but it's still managed a 2.53% return over the past year.

A good example in the broad emerging-markets class is the Vanguard Emerging Markets ETF (NYSE: VWO). One of the older and larger funds, VWO has a market cap of $27.8 billion and holds shares of more than 700 companies in 23 developing countries around the globe. Size hasn't hurt its performance, however, as it has returned a healthy 14.81% over the past 52 weeks.

ETF designers are also moving beyond the world of equities and into the realm of hard assets - from precious and industrial metals to currencies, real estate and even agricultural commodities, which until now have been off limits to many smaller investors because of high risks and margin requirements.

One of the first "pure play" agricultural ETFs is the Teucrium Corn Fund (NYSE: CORN), which tracks the daily closing prices of the three nearest corn futures contracts on the Chicago Board of Trade (CBOT). Announced in April, it began trading in early June and has risen steadily ever since - along with corn prices - gaining 27.29% in three months.

Despite the trouble in the U.S. housing market, real estate ETFs have been hot over the past year, with the sector listed No. 1 in Morningstar's 52-week performance review. In fact, the Direxion Daily Real Estate Bull 3X Fund (NYSE: DRN) - a highly leveraged ETF that tries to triple the performance of the MSCI REIT (real estate investment trust) Index - topped Morningstar's most recent individual yearly return chart (up 78.3%).

If you want a real estate component in your portfolio but don't like the risk DRN's high leverage entails, you might take a look at the iShares Dow Jones US Real Estate fund (NYSE: IYR). With a $2.62 billion market cap, IYR tracks the Dow Jones REIT Index, but merely tries to match its performance, not triple it. Still, it's up 19.73% over the past 52 weeks.

Reason #3: ETFs give you more trading options than regular funds.
There are a number of "inverse" ETFs, which track major market indexes, but produce the opposite result - that is, funds that increase in value as the index they're tracking falls.

There's even an interesting new fund that invests based on "contrarian" principles: The JETS Contrarian Opportunities Index ETF (NYSE: JCO) looks to buy value when everyone else is thinking the worst. JCO began trading in April at $35 and now stands around $33.50.

What's more is that, unlike regular funds, ETFs can also be sold short, giving you two ways to profit from falling prices. And since they're not classified as pure equities, ETFs are exempt from the so-called "uptick rule," meaning you can sell them short without waiting for an upward move in prices - even when the market's in freefall.

You can also use limit orders to buy or sell ETF positions - not possible with regular funds - and protect yourself by using stop-loss orders, key tools in effective risk management.

Finally, ETFs can be purchased on margin, unlike regular funds and many lower-priced stocks.

This lets you get greater diversification and added opportunity with fewer funds, and the leverage that buying on margin provides greatly compounds your gains when you get it right.

Reason #4: You get better pricing efficiency with ETFs.
Exchange-traded funds can be instantly bought and sold at clearly quoted bid and ask prices on the major exchanges and electronic trading network. That differs from many smaller stocks and foreign issues, which are thinly traded with wide price spreads, and most regular mutual funds, which can only be bought or sold through the fund-management company or designated brokers at end-of-day prices.

Commissions and fees are also generally lower than with regular "load" mutual funds, and the annual management fees and expenses are extremely modest by fund industry standards. ETFs also have a tax advantage over other funds, because you only pay taxes on your own capital gains and dividends, with no taxable distributions generated by the actions of other investors.

Fives ETFs to Get You Started
Given those four key points, you should have no trouble seeing why ETFs belong in your portfolio. But, if none of the aforementioned funds meet your needs, here are five more ETFs that are fairly new and show strong promise in their respective sectors:

1.Claymore BulletShares 2012 Corporate Bond ETF (NYSE: BSCC), recent price: $20.55 - This is one of seven corporate bond funds, all introduced in June, with targeted maturity dates ranging from 2011 to 2017, at which time the funds will close and pay out their net asset value to shareholders. The funds are more diversified and thus less risky than holding individual bonds, and can be used to build a personal "laddered" bond portfolio to meet specific future cash-flow needs. Expense ratio is just 0.24%.

2.PowerShares Zacks Small-Cap ETF (NYSE: PZJ), recent price: $18.57 - Started in 2006, this fund invests in a portfolio of small-company stocks that it feels have the greatest potential to outperform the passive benchmark small-cap indexes. The fund took a major hit in the market collapse of 2008-2009, but has moved steadily higher since rising 4.9% from its June market lows.

3.Internet Infrastructure HOLDRs ETF (NYSE: IIH), recent price $3.78 - This fund has been around for a while, but it appears to be here to stay, having gained 41.7% so far this year on steadily rising volume. The fund holds a fixed portfolio of stocks in a range of companies that service the infrastructure of the Internet, including providing software, management services and communications. Originally established as a trust, the fund is scheduled to terminate in 2040 unless circumstances dictate an earlier closure.

4.iShares MSCI All Peru Index Fund (NYSE: EPU), recent price: $40.74 - Just over a year old, this ETF provides exposure to the South American markets without having to go through Brazil, where most of the money has historically been focused. The fund has been slow to pick up volume and traded fairly flat prior to July, when it began a rise that's carried it to new highs. The fund is managed by BlackRock Advisors and invests 90% of funds in stocks based in Peru or with the majority of their operations there.

5.First Trust ISE Global Copper Index Fund (NYSE: CU), recent price: $32.04 - Opened in March of this year at $30 a share, the fund took an early slide with the metal itself, plunging to a low of $23.83 in June. Since then, however, it has forged a nearly straight upward slope to its current price, and should rise even further as copper demand continues to grow. All the fund's holdings are in companies engaged in copper mining, refining or exploring.

Source : http://moneymorning.com/2010/09/24/invest-in-etfs/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in