Invest in ETFs (Exchange Traded Funds)
Welcome to the world of Investments. If you’re new to ETFs, it’s probably time you considered them as part of your investment portfolio. So what is an ETF?
An ETF is an index fund that is listed on a stock exchange and trades intraday (you can buy and sell it at any time of the day just like a stock). Therefore, ETF can be described as a mutual fund that trades like a stock.
Although there are some very important differences between them, it’s easy to understand ETFs if you think of them as mutual funds.
But unlike mutual funds, which try to outperform indices like the S&P 500 every year, ETFs try to track them.
For example, if the S&P 500 trades 10 percent higher, the ETF that follows it will also trade 10 percent higher. If the S&P 500 Index trades 12 percent lower, the ETF that follows it will also fall 12 percent.
In case you don’t know what a mutual fund is, let me define it for you as well. A mutual fund (also known as a Unit Trust in Asia) is an investment vehicle that pools money from many individual investors. A professional fund manager then invests and manages these funds in a broad diversification of stocks, bonds, and other securities.
The main problem with mutual funds or unit trusts is that they tend to have high administration fees and are highly restricted in how you can buy or sell them. With the explosion of ETFs in recent years, I personally have decided not to bother investing in mutual funds (investment trusts) anymore, except for a few investment-linked policies that I currently hold partly for protection purposes.
Why did I propose that you should consider ETFs as part of your investment portfolio in today’s context? As ETFs are relatively new compared to mutual funds, that also means that there are currently few investors with the skill and knowledge to invest in them, which provides a great opportunity for early investors in this field of investment.
Imagine that you are one of those early investors who have invested in and benefited from the rise of China or the rise of early stage mutual funds. You could be reaping a big return on your investment portfolio right now…
This will help put things in perspective: In the early 1970s, there were approximately 270 mutual funds in existence, with total assets of around $48 billion.
By 2006, the total number of mutual funds was approaching 7,000…with total invested assets of over $9.2 TRILLION!
Imagine you know all the ins and outs of mutual fund trading in 1970 and were able to follow that trend for the last 30 years or more.
Do you see that in ETFs? I hope you will…
Ok, if I’m interested, let’s talk now about ETFs…
Who issues ETFs?
Want to find a complete list of ETFs currently on the market?
A fairly complete list can be found on Yahoo! Finance. If you go there, you will find a section on ETFs under the “Invest” tab. Drill down using the menu on the left until you reach “View ETFs”. It’s not necessarily 100% current, but again, it’s the best resource on the internet right now.
For the most detailed information on ETFs, you’ll want to visit the websites of the issuers of those ETFs. There you will find much more information to help you identify ETFs that you are comfortable buying.
Some of the major emitters include:
Barclays – iShares
State Street Global Investors – SPDR (Spiders) and streetTRACKS
Merrill Lynch – HEADLINES
Rydex Financial – Rydex ETFs
Vanguard Group: Vanguard ETFs (formerly known as VIPER)
ProFunds: Inverse and Leveraged ProShares ETFs
Bank of New York – BLDRS (based on ADR)
Some of the common ETFs:
Standard & Poor’s Certificates of Deposit, Series 1 (SPDR): (Ticker Symbol: SPY) A word about ticker symbols: Every stock ETF or index mutual fund has a ticker symbol assigned to it. For example, the ticker symbol for “Citigroup” is C and the ticker symbol for “S&P Depository Receipts (SPDR)” is SPY. Whenever you want to trade a security, you must type the ticker symbol.
The SPDR (also known as SPIDER) is an ETF that tracks the performance of the S&P 500 Index. They are listed on the American Stock Exchange (AMX) and you can buy and sell them just like any other company’s stock.
DIAMONDS Trust, Series 1 is intended to track the performance of the Dow Jones Industrial Index. They are listed on the American Stock Exchange (AMX) and can be easily bought or sold like shares of any other company.
Back in my home country of Singapore, if you want to grow your money at the same rate as the Straits Times Index, which measures the Singapore stock market, then you can buy the STI ETF. You can buy a minimum of 100 shares through any local broker. STI ETFs are priced at approximately 1/1000 of the STI index. So if STI is at 2100, the STI ETF will be priced at $2.10 per share. The great thing about ETFS is that it also pays you cash dividends of 3% to 4% per year on top of the appreciation of the ETF’s stock value.
Some personal recommendations:
If you have excess cash liquidity after setting aside emergency cash for 3-6 months and have an investment horizon of 3-5 years, you can invest some of your surplus in the STI ETF. I have been recommending buying the STI ETF since it fell to the 1600 level. Despite the fact that there may be some reversal of the STI to the 2000 level, you may want to accumulate the STI ETF on any weakness or pullback in this particular STI ETF. With the next 02 Integrated Resorts due to open by the end of this year and next, Singapore, with a strong government and political stability, is poised for a strong economic recovery in the next 3-5 years.
Another ETF you would like to investigate is the Oil Services Sector (SYM: OIH). From my previous blog on how the US economy is performing with inflation likely to rise in the near future, one can easily deduce the direction of future oil prices and hence this ETF. in particular. Do your sum and take advantage of this trend.
You can also check out the Mining and Metals ETF (SYM:XME) below. The price is currently around $35 and this was the price in 2006. Investment guru Jim Roger had put a lot of emphasis on commodities and I think there must be a reason why he does. Sometimes it pays to just follow the Guru after you’ve done your homework.
Resume
In short, the ETF is a great investment tool not to be missed at this time when the market is battered after the credit crunch and is on the mend for recovery in the coming years. The beauty of ETFs is that they allow you to allocate money like an institution does, that is, sector by sector. This used to be the Big Boy’s Game, but with ETFs, small investors like us can afford to join the game now. Like I always said this crisis is once in a lifetime for you to make big profits on your investment portfolio, don’t miss the boat this time, remember to accumulate any weakness and stay invested for years to come.
In my next blog, I will share how you can use OPTIONS to multiply the returns on your ETF investment and how you can buy at a lower market price. Stay tuned and we’ll talk to you soon.
