Understanding the Pros and Cons of ETF Investment
Mar0
by: Daniel Webb
This article considers what advantages and disadvantages ETFs offer the individual investor, and what other factors the individual investor should consider prior to making an ETF investment.
Advantages of exchange traded funds
ETFs offer the private investor a number of advantages. These include:
Market access:
As above, ETFs give investors unprecedented exposure to international stock markets, as they span nearly every available indexed equity class.
Cost:
ETFs are a cheap, efficient and direct means for investors to get exposure to equity markets. An ETF investment typically has low transaction costs (avoiding front-end charges, early redemption penalties or exit charges, and high service charges) and can be tax efficient.
Flexibility:
ETFs offer great flexibility for the individual investor, who is now no longer faced simply with the binary choice between direct stock ownership and diversification via mutual funds. The individual investor can trade in ETFs frequently, and can make use of ETFs in an assortment of different ways.
Tradability/Liquidity:
As above, ETFs have stock-like features, as they trade throughout the trading day at prices that generally reflect their net underlying asset value (provided that there is minimal tracking error).
Disadvantages of ETFs
While ETFs offer a number of advantages to the individual investor, it is important to also note their potential disadvantages. These include:
Novelty/Liquidity problems:
As noted above, ETFs are a relatively new financial product, especially for small investors, and this has raised some concerns about their true liquidity (although some commentators have dismissed the liquidity concern by pointing to the size of the markets in which ETFs are traded.) Moreover, there appears to have been some half truths disseminated in the market place relating to ETFs.
The potential for tracking error:
Some experts have claimed that the tracking error with ETFs (i.e. the distinction between the price of ETF stocks and the true price of the asset/s they represent) can be enough, leading to potential losses for the individual investor holding ETF shares.
Fund fees:
These may be substantial (depending on the fund).
Tips for ETF investors
Any individual thinking of investing in an ETF and in ETF trading should ensure that they understand the following:
Market fundamentals and investment goals
As with other types of investment, individuals thinking of investing in ETFs should ensure that they understand the fundamentals of the market, and that they have articulated their own investment goals and concerns. They should understand what risks attach to investing in ETFs (e.g. probable counterparty risks), as no investment is risk free. They should also get to grips with understanding what the underlying assets are that the ETF is seeking to “mirror”.
The different types of ETF
Investors should understand that there are now a variety of ETFs on the market, and should consider which one/s suit their needs best. Novices in the market may be best opting for ETFs that mirror commonly understood stock indices.
The need for risk management
Investors should seek to manage their risks by ensuring that they are happy with each ETF’s counterparty/ies.
As with other types of investment, investors must strive to make certain that their ETF portfolios have the exact assets and that they are adequately varied.
Neophyte investors may want to stay away from “leveraged ETFs”, considering their potential for generating losses.
The need to avoid over-complexity
Novice investors especially would be well advised to keep their ETF investments simple, especially in light of the increasing complexity of ETFs in the market place.
The need for cost minimization
ETF costs can be minimised by using an online broker (which should keep commissions to a minimum).
Investors should also ensure that their ETF portfolios are low fee and tax-efficient.
The need for advice
As always, should they have any doubts, investors should consult a market professional who is experienced in dealing with ETF investments.
Visit my blog for more information, tips and advices on ETF investments and grab some eBooks and e-courses available from time to time: http://www.savvyfinancialtraders.com
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How does an ETF investment work?
Mar0
by: Daniel Webb
What is an exchange-traded fund (ETF)?
An ETF Investment is an exchange-traded fund, a type of investment vehicle traded on stock exchanges. ETF stocks are traded like single shares, with the prices changing all through the day.
An ETF typically holds assets such as stocks (typically a mixture of investments in unit trusts and investment trusts) or bonds. Many ETFs in fact track an overall index, such as the S&P 500 or MSCI EAFE. An ETF’s overall value is usually around the same price as the net value of the asset value of its underlying assets; if it is tracking an overall index, its value typically moves in line with changes in that index. Only “authorized participants” (typically large investors) are in fact allowed to transact directly with the ETF in terms of buying or selling shares from or to the fund manager. Such transactions usually involve the purchase or sale of “creation units” (i.e. groups of tens of thousands of ETF shares. Individual investors then go through these “authorised participants” to buy ETF stocks and to formulate their ETF trading strategies.
How long have ETFs been around?
ETF’s are a relatively fresh product, having been offered in the US only since 1993. In 1992, the American Stock Exchange (AMEX) made use of the SEC’s “SuperTrust Order” to request use of the first authorized ETF. The SEC granted that petition, and established the SPDR Order in October, 1992, allowing the AMEX to consequently list the S&P Depositary Receipts, Trust Series 1 (aka “Spider”) (which was benchmarked to the Standard & Poors’ 500 Index) the following year. ETFs came to Europe a few years later, in 1999. (In the US, in addition to “Spiders”, new ETFs followed benchmarks like the Dow Jones Industrial Average (DIAMONDS Trust Series 1 (“Diamonds”), and the NASDAQ (NASDAQ 100 Index Tracking Stock (“Cubes”) followed in 1998 and 1999 respectively..)
As such, ETF’s have to date been mainly what might be called “index funds” which track entire indexes (as above). While, during their short history to date, ETFs have traditionally been the domain of large and/or offshore investors, with private investors reluctant to trade in them, this trend is changing. At the moment private investors account for just about 40 percent of ETF trades in the US, a proportion that seems set to rise. One reason that private investors have become more interested in ETFs is that they provide access to funds that track assets and sectors that were previously only available to larger investors.
Types of ETF Investments available
From the time of their initial launch, a number of diverse types of ETF have developed in the market place. These include Open-end index funds (products include iShares, Select Sector SPDRs, PowerShares, Vanguard, and WisdomTree), Unit Investment Trusts (UITs) (products include BLDRs, Diamonds, SPDRs, and PowerShares QQQ Trust ), Grantor Trusts (products include Currency Shares, streetTRACKS Gold Shares, iShares Silver Trust, and Merrill Lynch HOLDRs), Exchange-traded Notes (ETNs) (products include iPath ETNs, ELEMENTS ETNs) and Partnerships (products include U.S. Oil). (Source: EFTGuide.com). In 2003 assets held by ETFs in the US alone surpassed US$155 Billion.
To comprehend whether ETF investment is appropriate for you and in selecting as to which specific vehicle to comprise in your portfolio, it is crucial that you know, among other things, its pros and cons.
Visit my blog at http://www.savvyfinancialtraders.com for more information, tips and advices on exchange traded funds and grab some free ebooks and e-courses along the way.
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Choose Your Weapon And Choose Carefully: Trading Among The Various Asset Classes
Dec0
With so many different securities to choose from, investors have a vast array of options with which to trade and boost their portfolios’ returns. But with so many choices, how is an investor to decide? The next part of that question is figuring out if it’s even prudent to limit yourself to just one asset class. Of course we recommend having a diversified portfolio and with some diligent research, you’ll be able to find the right mix of securities to fit your personal comfort level. To do that, your research should include a brief analysis of the advantages of stocks, options, forex, futures and exchange traded funds (ETFs). Let’s take a look at each right now.
Stocks And ETFs: Good Starting Points
Owning stock is the most basic form of investing and even if you don’t stocks directly, you probably own some through a mutual fund or retirement plan. Owning a share of stock essentially makes you one of many owners in a company’s business. When the stock rises, you make money. When it falls, you lose money (unless you’ve sold the shares short). It’s that easy and the simplicity of stock ownership has made it the investment option of choice for millions of investors.
ETFs take stock ownership a step further. Considered a twist on investing in mutual funds, ETFs give investors exposure to a group of stocks in a specific sector or index. That’s a feature many investors love about mutual funds, but ETFs are much more liquid, trading like shares of stock. ETFs are great for investors that want to make long or short bets on a particular sector, but don’t want to pick just one or two stocks.
The bottom line is investors should have both stocks and ETFs in their portfolios. Another advantage of ETFs is there are hundreds of ETFs designed to give investors short exposure without directly shorting a single stock, so ETFs can act as a great hedging tool in your portfolio.
The Leveraged Investment Vehicles
There are certainly advantages (and pitfalls) of using investment choices that thrive on leverage. Futures, forex and options all fit the bill when it comes to using leverage. As leverage pertains to options, investors can control a good chunk of a company’s stock for the life of an options contract without the expense of buying the shares directly. For example, you might be able to buy a call option on Coke for $1 a share and that would equal $100 (100 shares per contract x $1 = $100) when the stock is trading for $50.
Best of all, access to leverage with the most basic options strategies limits risk. When buying a put or call contract, the biggest loss you can sustain is the cost of the contract, but stock ownership (or a short sale) increases our risk profile dramatically.
Don’t forget about leverage with futures and forex. These two trading arenas are home to some of the biggest potential winners and losers you’ll see in trading and that’s due to leverage. Most forex brokers grant traders 50:1 or 100:1 leverage on their capital deposits. That means if you deposit $10,000 in a forex trading account, you’ll have as much as $500,000 (if not more) to trade with. Remembering that each pip on a standard forex lot is worth $10, you quickly see how big money can be made or lost in a heartbeat in forex trading.
Futures instruments trade in a similar fashion to forex and it is important to note that investors can lose more than their initial deposit while trading both futures and forex. Since it is a good idea to have some commodities exposure in your portfolio, we like the use of Emini futures, which come with lower risk, as a way of integrating futures into your investment arsenal.
So What Asset Is Best For You?
If you’re a long-term investor, a mix of all of the aforementioned assets might benefit your portfolio. To get futures and forex exposure, consider managed futures or currency ETFs. For active traders, start with stocks and mix in some basic options strategies on the side before working your way up to futures and forex.
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What Is ETF Trend Trading?
Nov0
The aim of this article is to give you a bit more information about ETF (Exchange Traded Funds) trend trading.
ETFs were first introduced to the world during the 1990’s. Their purpose is to act as an investment vehicle, to be traded as comparable stocks, or to be used as shares on the stock exchanges. Investors are attracted to the funds because of the tax efficiency that they have. They are also attracted to the similarity to stocks and the low costs, which are definite benefits.
When you get into ETF trend trading, you will find that it is similar to mutual funds, in so much that they allow investors to acquire various types of securities through funds. Still, there are enough differences between the two to make them distinguishable.
Most of the features of ordinary stocks, such as limit orders, options and short selling, can also be found with ETFs. As well as those features, you will also find that ETFs offer easy diversification, expense ratios and tax efficiency of the index funds.
During the trading day, ETFs will experience value changes as they are sold and bought. They have a tendency to trade at the same price as the net asset value has been set at. Most of the ETFs will be tracking and monitoring the financial index. As an example, the Dow Jones Industrial Average.
ETFs are known to be the most innovative investment medium of the past twenty years. In fact, about sixty seven percent of the professional investors call it this. Of those professionals, about sixty perfect have reported that the ETFs have changed how they build their investment portfolios.
Many investors have a tendency to invest in the ETF shares as a long term investment, instead of short term one. This is because they have the possibility of being economically acquired. However, some investors do prefer trading ETF shares regularly in order to utilize investment strategies that they have learned.
Speaking of learning investment strategies, there are some courses that you will be able to take on the Internet that will make you a better trader. You should go for one that will be willing to teach you all you need to know along with the tips and secrets of the trade. While you take that course, you need to pay attention to every bit of it as overlooking any aspects of it could result in you losing money once you begin trading.
If you’re serious about earning some extra money, even making a full-time income with ETF trading; go check out the ETF Trend Trading course now.
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What Are the Common Traits of Successful Traders?
Aug0
Those professional traders who are successful do have certain characteristics in common. One such trader, nicknamed Big A, has pinpointed 5 charactristics:
1. It is usual for successful traders to have had a mentor, even after achieving success. That’s why it is so helpful adopting a mentor who has already succeeded in the market. If you can learn a system from a successful trader, that will give you a head start.
2. Remaining emotionally detached is essential to successful trading, and successful traders do just that. Once you enter a trade, are you willing to forget about it until your pre-determined exit strategy is met? While it can be fun to closely monitor a soaring trading account, watching it too closely can in fact be quite dangerous. His after market trading plan eliminates 99% of emotion.
3. Successful traders resist the temptation to make things happen. You may think you you can anticipate the market, but you can’t, and you will get hurt. The key is to be a follower, not a leader. Stick to your system at all times; it is a system that you should not tweak as you go along and try to make things happen. If you have a trigger finger and can’t help clicking your mouse, then do it on a demo account. Just don’t think when you get lucky a few times that it’s ok to “make things happen”. That is exactly why you should stick with the system you are using; deviate and die.
4. All successful trades are pre-planned. It is key to have a plan for your trading activities, and stick to it absolutely. You need to know how to plan each trade quickly and easily. Only 5-10 minutes per evening is needed to trade in BIG A’s ETF trading system.
5. Successful traders expect to become rich. Are you able to imagine yourself rich? Successful traders have had this vision. Do not restrict yourself. Prosperity must be on the inside of you before it is on the outside. If not, your account may suffer as it reaches new heights due to a feeling you do not deserve riches. It is important to learn how to think and overcome any hidden physiological obstacles that are hindering you from success. Your mentor can help you with that.
Big A actually has his own exchange traded funds trend trading course, in which he teaches his own system of day trading for exchange-traded funds.
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