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Archive for the ‘Exchange Traded Funds’ Category

One of the major factors that deters me from investing in Unit Trust has always been the high sales charges and annual management fees. In Malaysia, sales charge averages at 5.5% and annual management fee at 1.75%. This also means that on the first year of your investment, you have lost at least 7.25% whether you like it or not.. So does it really make sense to invest in Unit Trust or Mutual Funds?

Where do I invest then?

Nowadays, I prefer investing in Exchange Traded Fund (ETF) which follows the performance of an index.

What is ETF?

ETF is an index fund that is listed on the stock exchange and trades just like any other stock. There are hundreds of ETFs created to track the different market indexes. For example, if you wanted to profit from the expected growth in the China economy, you could buy United SSE 50 China ETF.

This is United SSE 50 China ETF moves closely to the actual Shanghai Stock Exchange, hence the name SSE. So, when you buy a share of SSE 50 China ETF, it is the equivalent of you buying all 50 largest stocks of good liquidity listed on the Shanghai Stock Exchange (SSE).

And of course, I’m just using United SSE 50 China ETF as an example to show you what ETF is all about because this is one of the ETFs that I’m buying in Singapore Stock Exchange. There are hundreds of ETFs created by different investment banks which tracks different market as well as sector indexes.

If you like mutual funds to a point, but hate extra fees and not being able to enter and exit as you like, exchange traded funds are for you. When you buy an ETF, you’re getting a basket of securities, which is why many people like them. They have many great points to them. More so, than individual stock picking.

Did you know that you can by exchange traded funds just like stocks? Yep. There is not management fee or expense ratio like you would have in a traditional mutual fund. For example, if your broker charges $7 per stock trade, you’d pay $7 to buy an ETF and $7 to sell an ETF. ETFs, like stocks, bounce around and hopefully go up over time.

When you want to buy or sell an ETF, it’s as simple as putting in an order. With traditional mutual funds, you are confined to buying into them once at the end of the trading day. Don’t limit yourself. Mutual funds are a thing of the past. Missing out on moves intraday can be costly. I love ETFs.

Small cap investors will want to check out the exchange traded fund, symbol:IJS. It follows the S&P Small Cap 600.

Again ETF’s have similarities to mutual funds as well. You can find an ETF for virtually any and every investing approach these days. If you want to just invest in the technology sector, there is an ETF for that. One great ETF for today is “GLD”. That’s the gold investing fund of choice for the pros. Check it out. If you want to invest in the S&P 500, there is an ETF that tracks that. You’d have a hard time finding a mutual fund that isn’t available in exchange traded funds form.

Exchange traded funds have grown in popularity over the last several years, and with good reason. There’s so many advantages to using them, even if you like picking individual stocks too. Best of all, you can trade them like stocks right though your stock broker, which is great. You can also check out companies like Vanguard and BlackRock iShares to get product information on a variety of ETF’s.

Gold is hot right now. Make sure you check out symbol:GLD for the best gold exchange traded fund. This is the one I’ve invested with and you see mentioned all the time on shows on CNBC and other stations.

Exchange Traded Funds, or ETF’s as they are commonly referred to, are quickly becoming the new darlings of Wall Street. The first U.S. ETF was the Standard & Poor’s Depository Receipt, or “Spiders”, which was introduced on the American Stock Exchange in 1993. Since then they have grown in number. ETFs grew from 100 ETF funds at the beginning of 2006 to over 400 funds by the end of that year. Their original design was intended to compete with index funds.

So what exactly are ETFs? An ETF is similar to a mutual fund in that each ETF share gives the investor a tiny piece of the numerous companies that are held in the fund. Like an Index Mutual Fund an ETF is a type of investment company which invests its funds in stocks that mirror some particular market index, such as the S&P 500 or the NASDAQ 100. The ETF fund’s portfolio of public company stocks is packaged into Creation Units, which are sold to large investors (i.e. institutional investors) in the primary market. The institutional investors then split up these Creation Units into smaller units, or shares, which are then sold as ETF shares to smaller investors on the secondary market. All ETFs seek to achieve the same returns as the particular market index it mirrors. For example “Spiders” invest in all of the stocks contained in the S&P 500 Composite Stock Price Index.

The main attraction of ETFs for investors is their very low expense ratios (fees charged by the fund, expressed as a percentage) compared to that of mutual funds. An ETF fund typically charges between .1%-1%, whereas mutual fund fees can range from 1%-3%. Also, ETFs have a much lower turnover ratio (the sale of company-owned stock that is sold within the fund during the year, also expressed as a percentage) as compared to traditional mutual funds. This lower turnover ratio means less capital gains distributions to investors and thus lower taxation. ETF investors generally only realize capital gains when they sell their ETF shares. For this reason ETFs are considered tax efficient investments.

The main advantage of ETFs over mutual funds, besides the low expense and low turnover rates, is that ETFs trade just like stocks. Their stock-like features include the ability to sell short, use stop-loss orders or buy on margin. ETFs also have the capability for options to be written against them. Another important difference is the fact that ETFs are more liquid investments than mutual funds. ETFs trade throughout the day, whereas mutual fund investors can only purchase or sell units at the end of the day.

While ETFs may appear to be an ideal investment there are some disadvantages. Like stocks, ETFs charge a commission every time an investor buys or sells an ETF. Commissions make ETFs somewhat unattractive, due to their high cost. One of the biggest advantages of mutual funds is the ability to buy and sell them without incurring any commissions. ETFs often trade their shares more rapidly to maintain a higher cost basis of their underlying shares and this can result in ETF dividends failing to be treated as qualified dividends. Qualified dividends have a low 15% tax rate.

ETFs can be grouped into four basic categories: Broad-Based ETFs, Fixed Income ETFs, International ETFs and Sector ETFs. Broad-Based ETFs follow specific indexes styles such as growth indexes, value indexes, small-cap, mid-cap and large- cap indexes. Fixed Income ETFs track indexes for corporate and Treasury bonds. International ETFs track indexes for foreign countries as well as international regions (i.e. Asia). Sector ETFs track indexes for specific industries such as health care.

ETFs can minimize market risk by allowing a broad investment opportunity. Imagine having the opportunity to invest in 3,000 companies at once. It would take some disaster to the entire U.S. market to negatively impact your ETF investments. ETFs offer diversification, liquidity and tax efficiency like no other investment. Individuals work hard for their money and oftentimes rely on their financial advisors to provide them with as much upside potential as possible while limiting the downside. ETFs help both Financial Advisors and their clients sleep better at night.

Exchange traded funds or the ETFs are the index tracking funds. They are listed on the stock exchange and can be traded like single equities. An ETF tracks the value of a stock index or the market as a whole. They are liquid funds and can be easily bought or sold exactly like a stock of an individual company throughout the trading day. ETFS provide a wide range of investment options. They can help investors build a diversified portfolio that’s easy to track.

Most ETFs represent a portfolio of stocks designed to track the performance of the market indexes. Since the indexes constantly drop poor performers and pick up the good ones, a trader is always investing in the best performers that the market has to offer. Therefore, your index tracking ETF delivers returns in accordance with the general market trends.

The advantages of ETFs over Mutual Funds

Investments in ETFs are considered better investment options than mutual funds. Even a good mutual fund may stop performing as well as the market over a period of time. There are several reasons for this:

1. There are hundreds of mutual funds in the financial market. An ordinary investor may find it difficult to analyze and compare the functioning of these funds. Moreover, every fund may not have competent fund manager.

2. Mutual funds generally have high fees and overhead charges. They cumulatively tell adversely upon the real performance of the fund. The returns fall dramatically over the time.

3. The portfolio manager of a mutual fund showing good performance may leave it for better chances elsewhere. The successor may not be as good as his predecessor.

4. Mutual funds are actively managed. A fund that delivers 30% in the first year may not perform well in the next year. The company may well tell you boldly how they delivered 30% in the previous year, but in reality will not reveal that their actual return was much less if you factor into the losses. Even the star performers in mutual funds may fall within a matter of two years. Remember the super performance of the dot.com stocks and the funds that heavily invested in them.

5. Mutual funds have the history of performing poorly over the long term except for brief periods where only 50% of them could beat the market.

In contrast to the mutual funds, the index tracking exchange traded funds perform like the market. It shows an overall gradual but positive uptrend. ETFs do not employ the high profile expensive managers like the portfolio managers in the mutual funds. They do not incur maintenance costs, fees for paper work or function from posh offices. An index tracking ETF is, in fact, only an instrument that tracks a market index like the NASDAQ 100 or the S&P 500. Of course, you cannot expect instant dream profits, but you do not have to suffer huge losses as well. The reason for this is that an ETF market rises historically. Moreover, you can buy an index trading ETF at the fraction of the cost of a mutual fund and yet expect a much higher return.

The pro and con arguments about ETFs versus Mutual funds boil down to whether you want a low probability of an amazing return, or a high probability of a good return. This can be explained by an example:

Suppose you invest $ 10,000 with a popular market-tracking index ETF with a historical return of 10%. Your total return over a decade should be $25,937. Let us say you invest the same amount in a mutual fund for the same period, Chances are that only one or two out of ten, or around 15% would beat the market index fund. This means that out of ten possible investment returns, only one or two would surpass the return offered by the exchange traded funds. The odds evidently are 5 to 1. There is also a possibility that your investment in a mutual fund may end up in losses. Even if you earn profits, they may be more than nullified by their heavy fees and overhead charges.

Exchange traded funds (ETF) and mutual funds are diversified portfolios of securities, representing an ownership of assets that generate earnings. A very distinguishing characteristic for both funds is their diversification. It gives investors the opportunity to place their money in investments with not entirely correlated returns, which significantly reduces the volatility in the value of the portfolio.

Both are powerful investment tools that help investors to achieve their profit objectives. It is very important for the investor to be familiar and have a fundamental understanding of the strengths, weaknesses, opportunities, and treats related to each investing fund.

ETFs offer several advantages over mutual funds. First of all, an ETF is an investment vehicle that allows investors to trade portfolios as they do shares of stocks on an exchange. Therefore, ETFs trade continuously- their price can change every second, while traditional fund types can be bought or sold once a day- the transaction is completed after the market closes. Like other shares, but unlike mutual funds, ETFs can be sold short or be traded through market order, limit order or stop- loss order. All these trading choices serve as risk management tools that eliminate the price uncertainty involved with placing an order for a mutual fund and not knowing what will be the actual price until the market day is over.

ETFs are typically cheaper than mutual funds too. Investors who buy or sell an ETF place an order through a broker rather than buying directly from the fund. In this way, the fund saves the cost of marketing itself directly to small investors, which translates into lower management fees. Even more, mutual funds face additional odious fees like: sales charges, redemption fees, fund operating expenses, and recurring fees used to pay for the expenses of marketing the fund to the public.

ETFs also offer a potential tax advantage over their more traditional cousin. When mutual funds investors decide to redeem their share, the fund must sell securities of the underlying portfolio to meet the redemption. This can cause large capital gains taxes, which are distributed among the remaining shareholders. In fact, investors end up paying tax twice on their mutual fund investment: once a year and then when the shares are sold and capital gains are incurred. In contrast, ETFs are tax- friendly. Similar to shares, the ETF investors are taxed only one time- when shares are sold. Therefore, the amount that would have been paid for taxes can continue to accumulate wealth for the ETF investors.

Despite all listed above advantages the exchange-traded funds have over mutual funds, there is a significant disadvantage that should not be neglected- lack of professional money management. One of the greatest benefits of mutual funds is the ability to delegate the portfolio management to investment professionals. This frees the individual from many of the administrative burdens of owning individual securities and reduces the risk involved with easy loss of money due to bad investments in poorly chosen stocks. As the old adage goes, “In order to win you have to risk loss.”

Investing in gold is a great way to secure your investments and hedge them to survive the fallout of a turbulent economy. But not everything about gold bullion glistens. Gold is heavy, it is hard to transport, it will set off a metal detector. Selling gold often means the buyers inspecting the gold in person, testing for purity, and weighing each and every piece. Some countries require you report any gold purchases over a certain amount, and still others prohibit owning gold at all! But it’s not just the inconvenience of owning and selling gold, it’s also dangerous to keep around. Gold is attractive, and if various unscrupulous parties find out that you are storing gold bullion in your house, your life could become an awful lot like a spy thriller movie real fast. Minus the expensive cars, super model scientists, and cool gadgets.

Due to these inconveniences, many bankers and brokers will advise you to invest in gold in an easier way. Gold exchange traded funds are one of those easier means. Commonly called a Gold ETF or GETF, gold exchange traded funds can be bought easily online through a brokerage account. Funds like GLD and others allow you to buy this “almost gold” and keep it in your brokerage account as it if were a stock, which legally speaking- it is stock. Because of this gold exchange traded funds are often called the Gold Stock Market. You are not actually buying physical gold bullion here, no matter how much your banker wants you to believe it. With an ETF you are buying stocks in a company that invests in gold. The EFT’s track the quoted spot gold price.

However, a GETF is a short term investment. You buy the ETF on the gold stock market, you wait tell the prices rise, then you sell the ETF through online gold trading. This scheme is not a long-term recession proof asset protection strategy. And it should never be treated as such. Actually, over long periods of time, the EFT will depreciate in value do to various factors unique to storing and managing the gold. Now, there’s nothing necessarily wrong with investing in gold exchange traded funds, if you want to play the markets for the short term hikes on gold spot prices, go right ahead. Many have made a good bit of money doing this, and many have lost a good portion of their investments as well. If you already have a brokerage account, playing in the Gold Stock Market and partaking in online gold trading is pretty easy.

However there is a major problem in this method as a secure financial investment. You do not directly hold the gold, and you are relying on the banking system to treat you fairly. You KNOW how well that has played out so far. In the case of ETFs, you are actually buying shares in a company that owns gold. Those shares are managed by a Custodian – Barclays iShares in the case of GLD, the biggest ETF. Those shares are then registered in the name of a nominee, then allocated to your brokerage account. What you have is not gold at all – just electrons and promises!

This strategy is relying on at least three financial institutions that could fail at a moments notice, effectively destroying any chance you would have at getting back your investment in the gold ETF. You just bought stock in a company, and the company has gone under. Or look at the case of e-gold for a chilling example of what could happen if the government decides to put their foot down. Gold EFT’s are good for short term investment prospecting, but they are not a safe haven investment that many are looking for.