Trading for a Living

If anyone is having the notions of investing in the stock market, the most convenient way of doing that would be through the S&P 500 index fund. S&P 500 holds the top 500 American companies and can track how the index is performing. The reason that buying the shares of SPDR S&P 500 ETF (NYSEARCA:SPY) is a safe bet is because it directly relays you to the biggest U.S stock.

The companies that make up SPDR S&P 500 ETF (NYSEARCA:SPY) are among the most powerful companies of the U.S stock market and make 80 percent of the U.S stock market on the basis of market capitalization. So we can say that S&P 500 is like a junction where all big U.S companies with large capital meet. The investor can be looking at 5.14 trillion dollars, benchmarked to the index, along with assets up to 1.6 trillion dollars. 423 out of the 500 companies are dividend paying so the shareholder can expect heavy payout in dividends.

The benefit that comes with SPDR S&P 500 ETF (NYSEARCA:SPY) is that it is an exchange traded fund hence you can buy as little as a single share. Mutual funds are hard to procure for some, such as Vanguard 500 index needs minimum initial investment of 3,000 dollars. SPDR S&P 500 ETF (NYSEARCA:SPY) is inexpensive, that is to say, the annual fee is of the stock is 0.09 dollars. In contrast, 10,000 dollar investment would cost you about 9 dollars per year. Who wouldn’t want to invest in a fund that is such a safe bet?

One good thing about investing in S&P 500 is that it usually beats all the large cap mutual funds. And this has become a precedent. Most often than not, S&P 500 outperforms the large cap mutual funds by as high as 87 percent. If our word doesn’t count for much, you’d be happy to know that Warren Buffet is a fan of trust funds and prefers them over mutual funds. In fact he made it very clear that an average investor should put 10 percent in government bonds and 90 percent of his money in the S&P 500. Trust fund comes with long term results whereas mutual funds don’t offer that sort of sustainability.

So now you’ve heard it from the man himself. If you’re thinking that investing in the inexpensive trust fund would not beget you anything, you’re definitely wrong. S&P 500 has always taken care of its shareholders; as for the large cap mutual funds, there is no telling when they’ll plummet. Besides it is obvious S&P 500 outperforms the large-cap mutual funds just about every time. An investor who is looking to invest in the large-cap mutual funds must be looking for a short cut to make money but that’ll also tell you that he’s a rookie. As for those who invest in the trust funds, they are in it for the long haul and are patient enough to watch the stock rise quarter by quarter and then get a healthy return at the end.

Labels: ETF

Since ETFs exploded onto the investment scene, it is easier than ever to open up a market hedge at any time, and in a matter of seconds.

In the old days, the best you could do was to short a stock or buy tons of put options. Shorting, however, had to be on a uptick, which wouldn’t happen much during a correction. But ETFs give you that instantaneous ability to hedge your portfolio if you have cash or margin available, and to do so without selling out on long holdings.

The simplest and most obvious move is to buy the ProShares Short S&P 500 (SH), which does just as it says — you short S&P 500 index. Most investors are long the same index, so by buying an equal amount of this ETF to balance out your long position, you’ll become “market neutral.”

I like the market neutral position because it just means you are sitting on the sidelines. You aren’t losing or gaining anything, and you may not have to deal with constructive short sale rules (shorting against the box), which can be complex.

Of course, if you really feel we are in the midst of a significant correction or crash, you can purchase more of this ETF than you hold on the long side and earn money on the downside. SH costs 0.89% in expenses, or $89 for every $10,000 invested.

Another choice is the ProShares Short QQQ (PSQ), which allows you take a short position in the Nasdaq-100. During a correction, tech stocks tend to get hit harder. The Nasdaq-100 tends to have high volatility and offers a good way to make money on the way down. If, for example, you have a neutral position on the S&P 500, having a short position on the Nasdaq-100 is where you may make some money during the correction. PSQ charges 0.95%.

You also can use leverage on this play, by buying the ProShares UltraShort QQQ (QID), which gives you a double short position on the Nasdaq-100. QID, like PSQ, charges 0.95%.

If you want to go with an even broader short position, consider the ProShares Short Russell 2000 (RWM); small-cap stocks tend to get hit hard, particularly in crashes, so the RWM is a good way to play that. You also can buy the relatively illiquid ProShares Short Small Cap 600 (SBB); both charge 0.95%.

Lastly, if emerging-market stocks are swooning and you want a market hedge for the rest of the world, you can try the ProShares Short MSCI Emerging Markets (EUM), which was a great play earlier this year. Like most of this lot, EUM charges 0.95%.

Labels: ETF, Inverse ETF, Risk Management

巴菲特透露，他已成立了信托，来打理未来留给太太的遗产。巴菲特在遗嘱中特别指示了遗产的投资方法，他说：“我给信托人的投资指示再简单不过：拿出10%的资产买短期政府债券；剩余的90%全部投资到低手续费的标普500指数基金。“

巴菲特的遗嘱简直是难以置信- 谁能想到纵横股市几十年，号称史上最伟大的投资大师，在管理身后留给老婆遗产时，竟然只选择了两项简单到有点过分的投资方式！
惊奇之余，我们这些为退休而投资的散户，可以从中得到什么启示呢？

首先，巴菲特相信被动指数基金回报要高于积极选股型基金。虽然巴菲特号称股神，而且他毕生的成功就是建立在替管理的基金挑选股票。但连他都认为，普通投资者支付高额手续费给基金经理挑选最佳股票的做法得不偿失。长期历史统计说明，只有25%的基金经理，其挑选股票的业绩能打败股市的平均回报。6年前，巴菲特曾经和一些著名基金经理们打赌100万美元，赌他们所管理基金10年后的平均回报超不过标普500。现在这个赌局只剩下4年了，截至目前的业绩，还没有人可以赢走这100万。

其次，巴菲特认为股票回报超过债券等其他投资方式。巴菲特拿出高达90%的遗产投资在属于高风险投资的股票上，远远超出了一般投资组合中高风险投资所占的比例。我想，除了因为股票投资回报高以外，还一定是因为巴菲特相信10%的政府债券，已经足以保障老婆不会在股市大跌时因生活所迫被迫卖掉股票变现，从而避免股市波动造成重大损失。这一点，我们这类投资总金额相对较小一般退休投资者要慎重。决定股票的权重，关键在于，我们必须保证足够的现金应付股市的波动，不会为生活所迫在大市低点时被迫变现。

最后，巴菲特认为美股的表现会比其他市场好。在遗嘱中，股票100%投资于标普500，而没有像一般投资组合一样针对全球市场，均衡考虑发达国家和新兴国家。巴菲特本人的观点是，从美国建国以来，两百多年的历史中还没有和任何一个国家竞争失败，而股市是美国的经济基础，也不会败给其他国家的股市。这种想法是否正确，当然是仁者见仁，智者见智。不过，至少从近期看，投资于美国及欧洲等发达国家，回报很可能会高于投资于新兴国家股市。

说实话，我个人对巴菲特只用两个投资来打造投资组合有一点点的不以为然。而且，每个人情况不同，天底下也没有放之四海皆准的统一投资组合管理方式。尽管如此，我们在管理退休投资时，还是可以从他的遗嘱中学到一些重要原则的。至少，对我来说，我就决定以后要尽可能多采用低手续费被动指数基金，而不再热衷于选股。另外，我也决定在即使大市狂跌也不会影响基本生活来源的前提下，增加发达国家股票的权重，然后长期持有。

Labels: ETF, Warren Buffett

理想：我们不能把鸡蛋放在一个篮子里， 投资股票或债券，必须拥有一个风险分散的投资组合。
现实：大多数业余投资者都没有可靠的信息渠道，很难做到客观冷静地从不同行业里挑选20-30只股票来建立自己的投资组合。而且，大多数业余投资者还要上班，照顾家人，也不可能有精力来打理由众多股票组成的投资组合。
由于上述原因，不少人只好转而依赖专业基金经理管理的积极管理型基金。另外，如果你去银行或者见你的投资顾问的话，他们一般也会推荐你购买各种类似基金的- 原因很简单，积极管理型基金给他们的佣金高。
当然，我不能说积极管理型基金就不好- 也有不少优秀的基金经理能够做到基金回报率大大高于市场平均回报。但是，我们也必须清醒地了解两个长期统计事实：
1. 根据长期统计的客观数字，要长期取得超过市场平值的回报非常困难。只有25%左右的基金回报能够超过市场平均水平。
2. 不少基金以或明或暗的名目，收取每年1.5% 到 3.5%的手续费。根据历史资料证明，大多数基金的长期年回报大致等于市场平均回报扣掉手续费。高额的手续费，也是积极管理型基金负担得起向银行或者各类财务顾问支付慷慨的佣金原因。
以上的事实说明，我们投资积极管理型基金就好像玩老虎机一样，虽然也有可能赌赢 （获得超过市场平均水平的回报），但赢的概率只有25%左右。概率学告诉我们，只要玩的时间足够长，输赢的实际频率就会大致等同于输赢的概率。
那么，如果我们不愿意付出高额的手续费，又想拥有风险分散的投资组合，有没有什么简单易行，成本低廉的途径呢？有！那就是买 Index Tracking Funds (指数基金)或者ETF (上市交易指数基金）。
你可能已经注意到了，上述两种投资方式其实很类似，共同点就是和指数挂钩。所谓和指数挂钩，就是指基金通过预订的方法，例如按相同权重拥有某一指数成分股等方法，来保证基金的回报基本上等同于该指数的回报。在这两种被动基金管理方式下：
1. 费用低：从选股到重新平衡权重，均可用电脑程序完成，不需要人工干预。这样，不需要支付基金经理昂贵的管理费用。
2. 透明：指数型基金的目的很明确，就是拥有和指数构成类似的股票来取得和该指数几乎相同的回报。投资者只要了解该指数，也就明白了该基金，简单明了。
3. 交易频率低：这里所说的交易频率是指基金经理为了管理基金而买、卖股票的频率。交易频率低，不但意味着基金本身需要付出的手续费低，而且在不少国家还能降低资本增值税。
根据一项统计，过去15年，在美国，如果你投资于指数挂钩的基金或者ETF，扣掉手续费和资本增值税以后，投资者的回报大致相当市场平均长期回报的87%；而如果同时期投资于积极管理型基金，投资者回报只相当于市场平均回报的47%。差距高达40%！
可见，在大多数情况下，投资于指数基金或者EFT的回报，大大超过投资于积极管理型基金。
至于指数基金和EFT二者之间的区别，主要在于：
1. 指数基金的买卖必须通过基金本身进行。买卖价格每天一次由基金经理在闭市后确认，交易每天只有一次。而ETF是上市交易的，可以和其他股票一样，在开市期间随时交易，价格由买卖双方自行挂单觉定。
2. 一般来讲，指数基金的年管理费比 ETF的年管理费率高。但EFT必须通过股票经纪买卖。很多经纪会收取每单最低手续费，导致购买小金额ETF时费用较高。但注意，这不是绝对的，投资者应该根据自己的单次投资金额、股票经纪费率，综合比较基金年费加买卖手续费的合计，来确定自己到底适合做指数基金还是ETF。
当然，两者还有其他的细微区别，例如基金本身的交易频率，税收影响等等。但对非专业投资者来说，没有必要太操心每种细微差别，只要记得综合比较二者的全部手续费，哪种便宜就选哪种好啦。
由于指数本身就是有很多股票组成的，因此，单看指数所代表的行业，风险就已经分散。一般来讲，投资者买3-4个不同行业的指数，或者购买如S&P500这样的综合指数，就足以做到风险分散了。
底线是：投资于和指数挂钩的指数基金或者ETF不但费用低，省却了挑选股票的烦恼，还能轻松实现风险分散。更重要的是，从概率上讲，还有更大的可能取得较高的回报。因此，采用指数基金或者ETF，一名懒惰的业余投资者，很可能会打败所谓的投资高手。
无怪乎，巴菲特给入门级投资者的建议之一就是：分批建仓，买S&P500的指数。
如果你投资的目的是退休的话，这种不需要专业知识，不需要太多时间打理的被动投资方式就更适合了。

Labels: ETF

“Chuck” Schwab, founder and chairman of Charles Schwab Corp.


In case you were wondering, Charles Schwab really likes index funds.

The founder of Charles Schwab Corp. SCHW -0.14% talked with reporters about the “power of indexing” on Thursday, just after publishing a new note on the subject.

He didn’t throw actively managed funds and other stock pickers completely under the bus.

But Schwab did say low-cost, diversified funds that track indexes are the best approach for 95% to 98% of Americans.

Given that Vanguard launched the first index fund nearly 40 years ago and Schwab put out its own Schwab 1000 Index Fund SNXFX in 1991, you might wonder why Charles R. “Chuck” Schwab is talking about indexing now.

He said it’s important to point out indexing to investors who are just returning to stocks today after fleeing the market during the financial crisis – and desperately need to build up their nest eggs.

“We need to get the word out because people now coming back in the market here in 2014, some who got out in 2008, 2009 – what’s an easy way for them to get in? What’s a cheap way to get in?” he told reporters during a conference call.

Schwab emphasized research showing how active managers struggle to outperform their benchmark indexes, especially after fees. So MarketWatch asked if he felt bad about the Schwab platform enabling a lot of use of active funds and active trading — and therefore underperformance.

“Well, I don’t think that means that,” Schwab said. “You can pick individual stocks and do extremely well, having done so many times. We’re talking about someone like me who spends 99.9% of my time thinking about stocks, researching companies.”

He added: “We’re talking about for the 95% to 98% of the population of America, what is the best way for them to get started in investing and participate.”

Earlier in the conference call, Schwab handled the active-versus-indexing debate in a similar way.

“There are places in your portfolio for active funds. I don’t completely beat ‘em up,” he said.

“But that’s when you pick the best managers. Of course, there’s somebody out there I know who can pick the best managers. It may not be me,” Schwab said, laughing. “That’s why I stick to index funds.”

Schwab also said he’s speaking out about indexing now because people still don’t get it.

“There’s so many misunderstandings about indexing,” he said. For example, index funds aren’t as passive as you might think, because companies do enter and leave indexes like the S&P 500 SPX each year.

“There is a dynamic process going on,” he said.


BloombergWarren Buffett
Another investing luminary, Warren Buffett, just recently revealed that he’s recommending the Vanguard 500 Index Fund VFINX for his wife. Well, Schwab said Thursday that 21 years ago he helped get his wife into the Schwab 1000 Index Fund.

“That investment is up seven times in value,” he said. “It’s proven itself. All index funds, I think, have proven themselves as great vehicles for the individual.”

Labels: ETF

ETF P/E Ratio Assets YTD Return

Listed Private Equity (PSP, A) 3.86 $585M -0.92%
Market Vectors Russia Small-Cap ETF (RSXJ, C) 4.85 $36M -28.9%
iShares MSCI Russia Capped ETF (ERUS, B-) 4.99 $233M -21.6%
iShares Mortgage Real Estate Capped ETF (REM, B-) 5.37 $1,231M 12.8%
iShares MSCI Emerging Markets Eastern Europe ETF (ESR, B-) 5.85 $134M -15.6%
Energy AlphaDEX Fund (FXN, B+) 5.97 $700M 8.4%
India Small-Cap Index ETF (SCIF, C) 6.12 $188M 19.8%
China Financials ETF (CHIX, C+) 6.75 $16M -14.1%
Egypt Index ETF (EGPT, C) 7.11 $75M 33.2%
S&P International Developed High Quality Portfolio Fund (IDHQ, B) 7.85 $22M 3.0%
Financials GEMS ETF (FGEM, C) 8.11 $3M -6.6%
iShares China Large-Cap ETF (FXI, B) 8.32 $4,681M -9.6%
WilderHill Progressive Energy Portfolio (PUW, A-) 8.59 $46M 1.5%
MSCI Emerging Markets EMEA Index Fund (EEME, B) 8.62 $10M -6.5%
China Materials ETF (CHIM, C) 8.63 $2M -7.3%
FTSE China (HK Listed) Index Fund (FCHI, B-) 8.96 $27M -9.7%
Market Vectors Junior Gold Miners ETF (GDXJ, B+) 9.16 $1,879M 19.4%
MSCI BRIC Index Fund (BKF, B) 9.20 $385M -4.4%
iShares MSCI China ETF(MCHI, B+) 9.32 $862M -9.3%
S&P 500 Pure Value ETF (RPV, B-) 9.33 $864M 5.1%
SPDR S&P China ETF (GXC, A) 9.47 $758M -9.4%
SPDR S&P BRIC 40 (BIK, B) 9.48 $154M -7.5%
MSCI Emerging Markets Financials Sector Index Fund (EMFN, C) 9.54 $6M 0%
MSCI Turkey ETF (TUR, B+) 9.57 $551M 13.4%
iShares MSCI China Small-Cap ETF (ECNS, A+) 9.62 $31M -3.8%
iShares Asia 50 ETF (AIA, A-) 9.67 $266M -3.2%
Emerging Markets Equity Income Fund (DEM, A-) 9.69 $3,772M -3.0%
Pure Gold Miners ETF (GGGG, C) 9.74 $4M 26.3%
China All-Cap ETF (YAO, B+) 9.77 $54M -10.6%
iShares MSCI South Korea Capped ETF (EWY, B-) 9.90 $4,319M -3.3%
SPDR S&P Emerging Markets Dividend ETF (EDIV, A-) 9.91 $488M 1.3%
Market Vectors-Africa Index ETF (AFK, B+) 9.96 $120M 7.1%
Financials Sector Fund (RWW, B) 9.99 $32M -0.6%

Labels: ETF

If all else is equal, an exchange-traded fund's expense ratio is often times the deciding factor when it comes to investing. A fund's expense ratio is the measure of the cost to run the fund. These operating expenses are taken out of the ETF's assets, thus lowering the return for the investors. The lower the expense ratio, the lower the cost of fund ownership. Here are the 100 exchange-traded funds with the lowest expense ratios in the industry. This data may include leveraged and inverse ETFs.

Symbol Name Expense Ratio ETFdb Category

TFLO Treasury Floating Rate Bond ETF 0.00% Government Bonds
SCHB U.S. Broad Market ETF 0.04% All Cap Equities
SCHX U.S. Large-Cap ETF 0.04% Large Cap Blend Equities
SCHZ U.S. Aggregate Bond ETF 0.05% Total Bond Market
VOO S&P 500 ETF 0.05% Large Cap Blend Equities
VTI Total Stock Market ETF 0.05% All Cap Equities
SCHP U.S. TIPS ETF 0.07% Inflation-Protected Bonds
SCHM U.S. Mid-Cap ETF 0.07% Mid Cap Blend Equities
SCHH U.S. REIT ETF 0.07% Real Estate
SCHG U.S. Large-Cap Growth ETF 0.07% Large Cap Growth Equities
ITOT Core S&P Total U.S. Stock Market ETF 0.07% All Cap Equities
IVV Core S&P 500 ETF 0.07% Large Cap Blend Equities
SCHD US Dividend Equity ETF 0.07% All Cap Equities
SCHV U.S. Large-Cap Value ETF 0.07% Large Cap Value Equities
SCHO Short-Term U.S. Treasury ETF 0.08% Government Bonds
AGG Core Total U.S. Bond Market ETF 0.08% Total Bond Market
TUZ 1-3 Year US Treasury Index Fund 0.09% Government Bonds
SCHF International Equity ETF 0.09% Foreign Large Cap Equities
SPY SPDR S&P 500 0.09% Large Cap Blend Equities
SCHR Intermediate-Term U.S. Treasury ETF 0.10% Government Bonds
VNQ REIT ETF 0.10% Real Estate
VB Small-Cap ETF 0.10% Small Cap Blend Equities
VBK Small-Cap Growth ETF 0.10% Small Cap Growth Equities
SCHA U.S. Small-Cap ETF 0.10% Small Cap Blend Equities
VO Mid-Cap ETF 0.10% Mid Cap Blend Equities
VIG Dividend Appreciation ETF 0.10% Large Cap Value Equities
VOT Mid-Cap Growth ETF 0.10% Mid Cap Growth Equities
IBDD iSharesBond 2023 Corporate Term ETF 0.10% Corporate Bonds
IBCB iSharesBond 2016 Corporate ex-Financials Term ETF 0.10% Corporate Bonds
IBCC iSharesBond 2018 Corporate ex-Financials Term ETF 0.10% Corporate Bonds
VTIP Short-Term Inflation-Protected Securities Index Fund 0.10% Inflation-Protected Bonds
VTV Value ETF 0.10% Large Cap Value Equities
BND Total Bond Market ETF 0.10% Total Bond Market
VYM High Dividend Yield ETF 0.10% Large Cap Value Equities
VV Large-Cap ETF 0.10% Large Cap Blend Equities
VUG Growth ETF 0.10% Large Cap Growth Equities
IBCD iSharesBond 2020 Corporate ex-Financials Term ETF 0.10% Corporate Bonds
VOE Mid-Cap Value ETF 0.10% Mid Cap Value Equities
IBDC iSharesBond 2020 Corporate Term ETF 0.10% Corporate Bonds
IBDB iShares 2018 Corporate Term ETF 0.10% Corporate Bonds
IBDA iSharesBond 2016 Corporate Term ETF 0.10% Corporate Bonds
IBCE iSharesBond 2023 Corporate ex-Financials Term ETF 0.10% Corporate Bonds
BIV Intermediate-Term Bond ETF 0.11% Total Bond Market
BSV Short-Term Bond ETF 0.11% Total Bond Market
BLV Long-Term Bond ETF 0.11% Total Bond Market
VCLT Long-Term Corporate Bond Index Fund 0.12% Corporate Bonds
VCIT Intermediate-Term Corporate Bond Index Fund 0.12% Corporate Bonds
VMBS Mortgage-Backed Securities Index Fund 0.12% Mortgage Backed Securities
VCSH Short-Term Corporate Bond Index Fund 0.12% Corporate Bonds
VEA Europe Pacific 0.12% Foreign Large Cap Equities
VGIT Intermediate-Term Government Bond Index Fund 0.12% Government Bonds
VPL FTSE Pacific ETF 0.12% Asia Pacific Equities
VGK FTSE Europe ETF 0.12% Europe Equities
VGLT Long-Term Government Bond Index Fund 0.12% Government Bonds
VONE Russell 1000 ETF 0.12% Large Cap Blend Equities
SCPB SPDR Barclays Capital Short Term Corporate Bond ETF 0.12% Corporate Bonds
FMAT MSCI Materials Index ETF 0.12% Materials
FIDU MSCI Industrials Index ETF 0.12% Industrials Equities
MGC Mega Cap 300 ETF 0.12% Large Cap Blend Equities
FSTA MSCI Consumer Staples Index ETF 0.12% Consumer Staples Equities
ISTB Core Short-Term U.S. Bond ETF 0.12% Total Bond Market
ILTB Core Long-Term U.S. Bond ETF 0.12% Total Bond Market
FTEC MSCI Information Technology Index ETF 0.12% Technology Equities
FUTY MSCI Utilities Index ETF 0.12% Utilities Equities
FNCL MSCI Financials Index ETF 0.12% Financials Equities
MGV Mega Cap 300 Value 0.12% Large Cap Value Equities
MGK Mega Cap 300 Growth 0.12% Large Cap Growth Equities
FCOM MSCI Telecommunications Services Index ETF 0.12% Technology Equities
FHLC MSCI Health Care Index ETF 0.12% Health & Biotech Equities
SST SPDR Barclays Capital Short Term Treasury ETF 0.12% Government Bonds
EDV Extended Duration Treasury ETF 0.12% Government Bonds
FDIS MSCI Consumer Discretionary Index ETF 0.12% Consumer Discretionary Equities
FENY MSCI Energy Index ETF 0.12% Energy Equities
BIL SPDR Barclays 1-3 Month T-Bill ETF 0.13% Money Market
ITE SPDR Barclays Intermediate Term Treasury ETF 0.13% Government Bonds
TLO SPDR Barclays Long Term Treasury ETF 0.13% Government Bonds
VPU Utilities ETF 0.14% Utilities Equities
VXUS Total International Stock ETF 0.14% Global Equities
VOX Telecom ETF 0.14% Communications Equities
VXF Extended Market ETF 0.14% Mid Cap Blend Equities
VIS Industrials ETF 0.14% Industrials Equities
VDC Consumer Staples ETF 0.14% Consumer Staples Equities
VCR Consumer Discretion ETF 0.14% Consumer Discretionary Equities
VAW Materials ETF 0.14% Materials
VGSH Short-Term Government Bond Index Fund 0.14% Government Bonds
VDE Energy ETF 0.14% Energy Equities
VHT Health Care ETF 0.14% Health & Biotech Equities
VGT Information Tech ETF 0.14% Technology Equities
IEFA Core MSCI EAFE ETF 0.14% Foreign Large Cap Equities
TLH 10-20 Year Treasury Bond ETF 0.15% Government Bonds
SHY 1-3 Year Treasury Bond ETF 0.15% Government Bonds
SHV Short Treasury Bond ETF 0.15% Money Market
VONG Russell 1000 Growth ETF 0.15% Large Cap Growth Equities
LQD iShares iBoxx $ Investment Grade Corporate Bond ETF 0.15% Corporate Bonds

Labels: ETF

As the world of ETFs has expanded from a closet industry to a mainstream investment vehicle, the number of funds has skyrocketed, meaning investors have more ETF options than ever before. Sorting through all of the funds offered today can be a daunting task, particularly with recent innovations to the industry that have introduced increasingly complex and unique ETFs. Fortunately for ETF investors, there are dozens of useful free web-based resources to help you research potential ETF investments and determine which fund is right for you.

Bonus Tool

ETF Database recently launched ETFdb Pro, a line of premium content including all-ETF portfolios, ETFdb Category research reports, a monthly ETF newsletter, and monthly mailbag session with ETF experts. A free seven day trial to ETFdb Pro offers a complete look into this ETF resource.

Screeners

What's in your ETF toolbox?The ETF industry may have started small, but it has expanded rapidly in recent years, and the number of exchange-traded products available to investors has swelled to more than 850. With so many funds, finding the ETFs that are right for your individual circumstances can be a daunting task. Fortunately, there are a number of robust ETF screeners available that allow users to sort through all the product offerings by dozens of different criteria.
1.Bloomberg ETF Screener: Allows users to search for ETFs traded in dozens of countries around the globe. This ETF screener also allows users to sort by expense ratio and recent performance.
2.Index Universe ETF Data Query: Allows users to sort primarily by performance metrics, including one month, three month, year-to-date, and ten-year returns.
3.MarketWatch ETF Screener: This resource provides a number of screening criteria, including beta, average daily volume, and fund price.
4.Fidelity ETF Evaluator: This user-friendly screening resource features a style/capitalization box and a region selection map for choosing international ETFs.
5.ETF Guide’s ETF Database: ETF Guide’s Index Strategy Boxes allows investors to select from three security selection strategies (quantitative, screened, and passive) and security weighting (capitalization, fundamental, and fixed weight).
6.ETFScreen.com: This resource provides a comprehensive list of performance measures and technical analysis indicators.
7.ETFdb Screener: This free ETF screener allows users to filter the universe of ETFs by a variety of criteria, including asset class, industry, region, issuer, and expense ratio. Unlike many screeners, the ETFdb screener uses proprietary technology to prevent users from selecting options that will not return any results.
8.Morningstar ETF Screener: Allows users to graphically apply screening criteria to narrow the ETF universe by expense ratio, return metrics, index correlations, and exposure to particular stocks.
9.Schaeffer’s Investment Research ETF Center: This handy tool allows investors to find ETFs that are trading above or below their moving day average for a variety of different time periods, from 10 to 200 days.
10.ETF Connect Fund Sorter: Allows users to screen both closed-end funds and indexed ETFs by a number of criteria, including premiums to NAV and distribution rate.
11.Yahoo! Finance ETF Center: Filters all ETFs into a “best fit” category, such as Large Cap Blend, Emerging Markets, and Long-Term Government Bonds.
12.NASDAQ ETF Screener: Provides users with five categories for screening exchange-traded funds to find the one that is right for you. Options include size, style, returns, and share price.
13.ETFdb Category Pages: Offers a list of approximately 65 “best fit” categories that contain the universe of all available U.S.-listed ETFs. ETFdb Categories stretch across all asset classes, and even include leveraged, inverse, and multi-asset funds.
14.ETF Tips: Provides a number of ways to sort available ETFs, including by industry, investment style, and region. ETF Tips includes information on ETFs traded on global stock exchanges.
15.ETF Research Center: Offers a variety of screening fields, including fundamental criteria such as sales and earnings growth and valuation criteria such as price-to-sales and price-to-earnings ratios.
16.ETF Trends Analyzer: The ETF Analyzer at ETF Trends allows users to sort funds by ticker symbol by clicking on a letter. ETFs can also be sorted by a variety of different criteria.
17.ETF Experts Screener: Has capabilities to search for ETFs by investment philosophy, index composition, asset class, and region.
18.TheStreet.com ETF Screener: This screener includes a field that allows users to filter funds by recommendation and risk ratings.

Comparison Tools

Even within particular asset classes and investment styles, investors are often provided with multiple ETF options for acquiring the exposure they seek. When trying to decide between multiple ETFs, there are a number of tools that allow investors to compare ETFs by various criteria, including expense ratio, size and liquidity, market exposure, and others [for more ETF analysis, make sure to sign up for our free ETF newsletter].
1.NASDAQ ETF Comparison Tool: Allows investors to see the best and worst performing ETFs over a number of time periods, from one day to five years.
2.ETF Database Expense Ratio Comparisons: Displays a list of the 25 ETFs with the highest expense ratio and the 25 funds with the lowest expense ratio.
3.Vanguard ETF Comparison Tool: This resource from Vanguard allows potential investors to compare ETFs offered by different sponsors on a number of different points, such as expenses, total assets, and historical returns.
4.Largest ETFs By Volume and Market Cap: Liquidity is a key concern for any investor. These tables allow users to view the largest ETFs available by either average daily volume or total market capitalization.
5.ETF Table: Allows users to rank ETFs by various criteria, including historical returns and moving average crossovers.
6.Best and Worst YTD ETF Performers: This ETF Database tool allows investors to view the best and worst performing ETFs year-to-date.

Quantitative Analysis

For investors looking to do more in-depth research into potential ETF investments, expense calculations, asset correlations, investment outlooks, and fund ratings may be of particular interest. There are several free resources that allow investors to quantify the impact the addition of certain ETFs will have on their portfolio and objectively analyze investment opportunities.
1.AssetCorrelation.com: Enables construction of custom correlation tables to show the strength of the relationship between various ETFs and asset classes.
2.Macro Axis: Allows investors to construct 30-day moving average correlation tables and clouds with up to 15 ticker symbols.
3.XTF.com ETF Ratings: Provides ratings, on a scale of 1 to 10, for ETFs based on several criteria, including structural integrity, risk-adjusted performance, and yield.
4.Rydex Trading Expense Calculator: Helps investors compare the costs of investing in ETFs versus no-load mutual funds. Investors enter a few inputs and this resource computes which trading route will be the cheapest.
5.ETF Investment Outlook: This site features breadth charts and rankings for more than 100 ETFs to help investors find the next up or down movements.
6.Master Data: Ranks ETFs and indexes by specific key statistics such as price change and volume, as well as breadth statistics such as number of constituents above moving averages and constituent uptrends.
7.Morningstar ETF Snapshot: This screen presents style box details, valuation metrics, asset allocations, and sector weightings for hundreds of ETFs.
8.TradeRadar Stop Calculator: Calculates stop levels for leveraged ETFs, an essential tool for any investor using these investments in their trading portfolio.
9.ETF Total Return Calculator: This tool allows investors to quickly calculate the total return they earned on any ETF investments.
10.ETF Heat Map: Provides a visual representation of daily ETF price movements and volume.

X-Ray Tools

One of the most appealing factors of ETFs relative to traditional actively-managed mutual funds is the transparency they offer by disclosing their holdings on a daily basis. But when investors have a complete portfolio of ETFs, calculating exposure to certain investment styles and regions becomes more challenging. Fortunately, there are tools that can do the work for you, providing an “x-ray” of ETF holdings.
1.ETF Desk: Provides information on the underlying holdings of ETFs, access to fact sheets, related funds, and ways to play each ETF.
2.TD Ameritrade Instant X-Ray: Users enter ETF tickers and holding values and this tool reports the asset allocation, sector breakdown, style box diversification, expense summary, and regional allocations.

Portfolio Trackers

Many investors are curious to try out their skill at portfolio management with ETFs before jumping in with their hard-earned cash. For those interested in either tracking their actual ETF portfolio or managing a virtual portfolio of funds, here’s a few free tools to track ETF holdings.
1.Fidelity ETF Tool: Allows users to customize, analyze, and trade an ETF portfolio. This resource also includes “market lenses,” broad market indexes that can be broken down into mutually exclusive components.
2.Kaching: Allows investors to create and manage a virtual portfolio, track other users portfolios, and join social investment groups.
3.MarketWatch Virtual Stock Exchange: Test your ETF investment strategy with this virtual portfolio center that allows you to track returns, access news and research reports from various sources, and utilize other free research and analytical tools.

Social Media

Social media has become a valuable tool for investors looking to gauge market sentiment, pick up actionable investment ideas, and hear the latest news on the Street. While there are a number of sites offering discussion boards and forums to discuss investing news, these sites offer a little something extra to set themselves apart.
1.Tip’d Social Tickers: This resource tracks stock and ETF tickers across the social web, featuring the latest Tweets, blog posts, and stories for each company or fund.
2.StockTwits: Self-described as “Bloomberg for the little guy and gal,” StockTwits is an open, community-powered investment idea that allows traders and investors to swap tips and ideas.
3.Board Central: Brings together financial message boards and stock-related tweets to provide one of the largest online financial communities. Check out their BuZZ pages to see this most-discussed tickers.
4.Motley Fool Ticker Pages: Compiles the latest news on ETF tickers, as well as user-generated performance polls and bull and bear cases for each ETF.

ETF Charts

Any thorough quantitative analysis includes historical performance charting. Again, there are a number of sites offering charting capabilities, but these few provide investors with several options for time periods, presentation style, and metrics graphed (i.e., these can show more than just simple price movements).
1.ETF Database: Chart any one of 850 ETFs in a variety styles (including simple lines, candlesticks, and directional bars) over customized time periods.
2.Quote.com: Apply more than a dozen studies to ETF performance charts, including momentum, directional movement indexes, exponential moving averages, and historic volatility.
3.ETF Desk Charts: Includes an option to graph any ETF relative to major indexes, including the Dow Jones Industrial Average, S&P 500, and Nasdaq.

Research Tools

For investors looking to learn more about the ETF industry, particular issuers, or more general classes of ETFs, there are several research tools available that efficiently categorize and present this information [for more ETF analysis, make sure to sign up for our free ETF newsletter].
1.American Stock Exchange Option Chain Finder: Displays options chains available on exchange traded products, along with the ticker(s) for the options.
2.Monthly NSX Data: The National Stock Exchange provides monthly data on the ETF industry, including changes in asset size and fund flows. The NSX data provides data for individual funds, fund families, and investment styles.
3.Morningstar ETF Filings: Access prospectuses, annual reports, and other regulatory filings for hundreds of ETFs from Morningstar.
4.ETF Zone: Offers asset class reports with ETF analysis, ETF detail, and comparison of ETF performance including charts.

Labels: ETF

ETFs Mentioned: EEM • GLD • QQQQ • UNG • VWO • XLE • XLF

ETFs have experienced widespread adoption from investors around the world in part because of their simplicity. Near total transparency, intraday trading, and a (generally) more straightforward tax situation all make ETFs appealing to everyone from buy-and-holders to active individual and institutional investors. While ETFs offer numerous advantages over traditional actively-managed mutual funds and individual stocks, they aren’t foolproof, and there are plenty of opportunities to make mistakes while investing in ETFs. Below, we profile ten common but easily avoidable mistakes made by ETF investors [Download 101 ETF Lessons Every Financial Advisor Should Learn]:

Mistake #1: Blindly Using Market Orders

The liquidity of ETFs ultimately depends on the liquidity of the underlying securities. So an investor looking to establish a big position in a thinly-traded ETF that invests in blue chip stocks would be able to do so at or very near to NAV. But that doesn’t mean that limit orders are unnecessary when trading ETFs, regardless of the apparent liquidity of a fund. Putting in a market order on a thinly-traded ETF may result in the order being executed at a big premium or discount before the Authorized Participant (the primary arbitrage mechanism in place to keep market prices near the NAV) is able to step in and create additional shares.

Moreover, the readily available bid/ask numbers won’t always reflect the true depth of the market for an ETF, since some market participants are hesitant to show their entire hand. So using a limit order may allow investors to flush out additional buyers or sellers of a particular security. Regardless of the trading volume of an ETF, the use of market orders creates the potential to get burned and put yourself in an early hole [see 50+ All-ETF Model Portfolios ETFdb Pro Members Only].

Mistake #2: Ignoring Expense Ratios

ETFs have become so popular in part because of the competitive expense ratios charged relative to traditional actively-managed mutual funds. But the range of expense ratios charged by exchange-traded products is wide enough to drive a truck through, ranging from 7 basis points to well above 1.0% (see the cheapest and most expensive ETFs).

Generally speaking, the more complex or granular the exposure, the higher the expense ratio. So comparing the fees charged by an S&P 500 ETF to those of an emerging markets ETF isn’t exactly fair. ETF selections shouldn’t be made on the basis of expenses alone, but fees should definitely be part of the equation.

For more active traders with relatively short holding periods, the impact of a few basis points may be minimal. But for buy-and-holders, the “tyranny of compounded costs” can eat into bottom lines. While expense ratios for similar ETFs will generally be comparable, there are some surprisingly large gaps between nearly identical products.

For investors looking to minimize expenses, the switch from mutual funds to ETFs is a good start. But for those who want to really cut costs, comparing expense ratios is the next step, and can create some surprisingly large savings (an easy 20 basis points in this example).

Mistake #3: Liquidity Screens

When narrowing the universe of nearly 1,000 ETFs down to find a particular fund, one of the first screens run by a lot of advisors and individual investors filters by liquidity. There are a lot of different rules of thumb thrown around for determining “sufficient” liquidity; some require average daily trading volume of 25,000 shares or $2 million in notional volume. The potential to get burned by running out a market order representing a significant portion of (or even a multiple of) daily volume is very real. But eliminating from consideration any ETF that doesn’t pass a “liquidity screen” can cut out some quality products that may be well-suited for accomplishing a certain goal.

Again, investors must be careful about trading low-volume ETFs, but there are several cheap and easy ways to establish or liquidate a position without paying a huge spread. The use of limit orders goes a long way to narrow spreads for smaller trades. For larger orders, there a number of firms, such as Street One Financial and WallachBeth, that specialize in facilitating efficient trades in low-volume securities.

Liquidity screens seem like a good way to avoid the potential pitfalls of getting stuck in an illiquid asset, but these dangers are often overblown. Cutting down the universe of potential ETFs based on assets or trading volume is potentially a much bigger mistake [For more actionable ETF investment ideas, sign up for the free ETFdb newsletter].

Mistake #4: Judging A Book By Its Cover

Generally, the name of an ETF gives investors a pretty good idea of the exposure offered. The S&P 500 SPDR (SPY) tracks exactly what you’d expect. But making assumptions about a risk/return profile based on an ETF’s nametag can –surprise, surprise–have some disastrous consequences.

It’s frightening to imagine, but there is no shortage of horror stories of advisors who bought UNG for client portfolios thinking they were gaining exposure to spot natural gas prices. And there are those who think the underlying assets of USO are barrels of crude oil. It should go without saying that you can’t judge an ETF by its name, anecdotal evidence suggests that many investors and advisors do.

Understanding the underlying holdings of an ETF is particularly important in the commodity space (see What Every Investor Should Know About Commodity ETFs). Be sure to take a quick look at the underlying holdings before purchasing an ETF. The assets that make up an ETF–and will determine its returns–won’t always be what you expect.

Mistake #5: Cap-Weighted Blinders

Investors are creatures of habit, and they tend to stick with what they know. The majority of equity ETFs available to U.S. investors are based on market cap-weighted indexes that determine the weighting given to an individual stock based on its market value. Familiarity with indexes like the S&P 500, Russell 1000, and S&P SmallCap 600 makes it easy to gravitate towards ETFs tracking these benchmarks and avoid unknowns like the Rydex S&P Equal Weight ETF (RSP).

But there’s a lot of evidence suggesting that cap-weighting methodologies may suffer from certain flaws, not the least of which is their tendency to overweight overvalued components. Once a sector or size/style combination is selected, a lot of investors will default to a cap-weighted ETF option. But there are a number of interesting alternatives to cap-weighted exposure available through ETFs, including everything from equal weighting to allocation strategies based on top line revenue.

Know the nuances of the underlying index, and don’t be afraid to take the road less traveled by pursuing some of the alternatives to cap-weighted ETFs (see Beyond SPY: Nine Alternatives To S&P 500 ETFs).

Mistake #6: Misjudging “International” ETFs

ETFs have been praised for bringing access to every corner of the world within the reach of U.S. investors. In some sense, they get far too much credit in this regard. While it is true that there are now ETFs targeting nearly every major market–both developed and emerging–the majority of these funds consist primarily of mega cap equities that might not necessarily provide pure exposure to the local economy.

Because many of the world’s largest companies maintain a global customer base, they generally maintain only moderate exposure to the economy where they are traded. The iShares MSCI Spain Index Fund (EWP) is a good example of this phenomenon. Many of the major holdings–including the top two that make up 40% of assets–generate significant portions of their earnings from Brazil. So despite massive economic issues in Spain, EWP actually held up pretty well last year because of surging demand in Brazil (see What Every Investor Should Know About The Spain ETF).

Be aware of the inherent limitations of some international ETFs. Investors looking for pure play exposure to a particular market may be better served through a small cap ETF (use the ETF screener to identify small cap international ETFs).

Mistake #7: Using ETFs In Lieu Of Stocks

ETFs were first marketed as an improvement to traditional mutual funds, but investors have also embraced them as an alternative to stocks. Once upon a time, investors bullish on the financial sector may have purchased Citi stock. Now they’re more likely to buy XLF, recognizing that the wrong call in the right sector is still a bad pick.

But sometimes this preference for ETFs can get taken too far. If you’re bullish on the outlook for Apple after the launch of the iPad, the best way make that play isn’t through QQQQ or another tech ETF, but through Apple stock. ETFs will generally reduce risk by providing exposure to a diversified basket of securities, but risk is a two-way street. If you’re looking for a bigger up-side, individual stocks may be the way to go.

Stocks may seem strangely old-fashioned as investment vehicles. There’s nothing wrong with moving them to the bottom shelf of your investment toolkit, but don’t throw them out altogether.

Mistake #8: False Sense Of Diversification

ETFs have become so popular because, like mutual funds, they offer immediate exposure to a diversified basket of securities. Investors who understand security-specific risk also grasp why an ETF made up of 1,000 individual stocks may offer reduced risk relative to picking a handful of stocks.

But ETF investors, especially those with a preference for cap-weighted indexes, can easily get a false sense of diversification. Many ETFs have hundreds of holdings, but the use of a market cap weighting methodology results in heavy concentrations in a few big names. The Energy Select Sector SPDR (XLE) is a good example. This ETF offers exposure to the energy sector through 42 different stocks. But the largest, Exxon Mobil, makes up 17% of assets and the top ten account for more than 60% of holdings. It’s the same thing–albeit to a lesser extent–with broad-based ETFs like SPY.

When looking at a potential ETF investment, there are a few good indications of the level of diversification. Number of holdings is a good starting point, but it’s helpful to also consider the weighting methodology and percentage of assets in the top ten holdings. Equal-weighted ETFs will avoid big concentrations in a few names, a problem that plagues some cap-weighted products.

Mistake #9: Ignoring New Products

A lot of advisors have their “go to” list of ETFs that they use when constructing portfolios for clients. There’s nothing wrong with going through the due diligence process to identify a preferred list–that’s one of the signs of a good financial advisor in fact. But letting your list of “go to” funds get stale can mean you’re missing .

The ETF industry is still very young and is growing very quickly. Last year there were more than 100 new product launches, and we’re already above 60 so far in 2010 (see all the new ETF launches here). Not all of these new products are going to be useful for everyone; products have, in general, become more targeted and esoteric in recent years. But there are some interesting ideas coming out that offer a way to gain exposure to a previously inaccessible asset class (volatility ETNs from iPath) or a unique twist on popular products (small cap sector ETFs from PowerShares).

If you’re not aware of all the ETFs that have been brought to market in recent months, it might be worth taking a look.

Mistake #10: Skipping Out On ETF Homework

This last one sounds simple and obvious, but it’s worth repeating yet again. ETFs are very simple in many ways, but somewhat complex in others. From understanding the unique tax treatment of GLD to how contango affects UNG to the differences between EEM and VWO, there are a lot of nuances that can have a significant impact on total returns.

As we’ve seen by the total failure of some to understand how leveraged ETFs actually work, there are a lot of lazy investors out there who aren’t taking advantage of an abundance of educational resources on leveraged ETFs. There are a lot of great resources out there (see Top 50 Free ETF Tools And Resources). If you’re willing to do a little research and take a little time, you’ll be far less likely to make potentially costly investment mistakes (see our new ETF Library for a variety of educational reading).

Labels: ETF

ETFs Mentioned: AGG • BND • DJCI • DJP • EEM • IYY • MBB • SCHB • VMBS • VWO

ETFs have surged in popularity in recent years in part because of the numerous advantages they offer over traditional actively-managed mutual funds: lower costs, potential tax efficiencies, intraday trading, and enhanced transparency. But ETFs aren’t without potential drawbacks of their own. Although most funds appear relatively simple on the surface, there are some rather complex nuances as well. Below, we highlight five important questions for investors looking to avoid potential pitfalls and maximize efficiency of ETF portfolios (for more tips on ETF investing, sign up for our free ETF newsletter).

1. What Are The Underlying Assets?

This sounds like a relatively simple question to ask, but I’d be willing to bet that there are a fair number of ETF investors who don’t understand exactly what they’re buying when they invest in certain exchange-traded products. This is most likely to happen with two types of products in particular: exchange-traded notes (ETNs) and exchange-traded commodity funds, making it particularly important to take a look under the hood of these funds.

The iPath MSCI India Index ETN (INP), for example, sounds like a product that offers exposure to Indian equities. It does, but not in the way that many investors suspect. INP doesn’t invest directly in the stocks that comprise the relevant benchmark, but rather is a senior, unsubordinated, unsecured debt instrument issued by Barclays Bank whose cash payments to investors are based on the value of a reference index (in this case, the MSCI India Index). Like any other debt instrument, INP comes with credit risk. If the issuing bank defaults on the issue, investors may be left holding the bag, regardless of the performance of the underlying index.

Certain exchange-traded commodity products also present potential issues for confusion. Given the physical properties of most natural resources, the majority of ETPs don’t physically buy the underlying resources, but rather use futures contracts to establish exposure. Most investors no doubt understand why actually investing in crude oil or agriculture isn’t practical, but some don’t fully grasp the factors that influence the performance of a futures-based strategy (see this feature for a more in-depth look). Commodity products are generally correlated with spot prices, but returns gaps will often arise, and can occasionally become significant.

Investors shouldn’t necessarily steer clear of ETNs and futures-based commodity products, as each has its own benefits and potential uses. But ETF investors should know what they’re getting themselves into and have a firm grasp on the underlying price drivers and the relevant risk factors.

2. What Strategy Does The ETF Utilize?

The vast majority of ETFs are designed to replicate the performance of a specific benchmark. But there’s more than one way to track an index, and some can be more effective than others. ETFs will generally pursue one of two strategies: full replication or sampling. The former involves purchasing every holding in the index at the same weights in the index, while the latter involves selecting a basket of securities deemed to be reflective of the risk and return characteristics of the benchmark.

A comparison of emerging markets products from iShares and Vanguard highlights the differences between these strategies. Both EEM and VWO track the MSCI Emerging Markets Index, but EEM has 439 holdings compared to 816 for VWO. According to its prospectus, EEM uses “an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index.” VWO, on the other hand, employs a full replication strategy.

The impact of this decision can be significant: in 2009 VWO gained about 76% while EEM was up just 69%. That’s a fairly wide gap for two funds that theoretically seek to replicate the same index, the result of significant tracking error from the sampling strategy (see EEM vs. VWO: Where’s The Disconnect? for a closer look at these funds).

The information on the fund’s investment strategy is included in the prospectus, but finding the answer to this question doesn’t always require wading through regulatory documents. Most issuers will display the number of holdings for both the ETF and underlying index on their Web sites, and a quick comparison of the two usually provides a reliable indication of how the fund achieves its objectives.

3. How Liquid Is The ETF?

There has been a great deal written on the liquidity of ETFs lately, and with good reason. The most popular ETFs trade tens of millions of shares per day, and spreads are often extremely narrow. But smaller funds may exhibit wider bid-ask spreads, and careless investors can put themselves in a hole from the very beginning.

Some investors have rules of thumb, such as never purchasing or selling more than 2% of the average daily volume of any fund. Others will simply steer clear of ETFs that trade less than a certain number of shares in a day. But the importance of ETF liquidity is often overblown in the investment community, and daily volumes don’t tell the whole story. “The often-repeated ‘volume matters’ statement has become one of the most misused and abused notions in the ETF industry,” writes Paul Weisbruch. “The underlying securities of the ETF determine its liquidity. Many within the industry do not grasp this reality and are missing out on a lot of quality ETFs.”

So ETFs with a low average daily trading volume are by no means off limits, but may require some extra diligence before entering or exiting a position. Fortunately, there are some readily available, relatively inexpensive tools at the disposal of ETF investors. Limit orders are very powerful, and are often sufficient to avoid paying a huge spread. Large trades in such funds may require the use of an external liquidity provider, such as Street One Financial.

4. How Is The Underlying Index Constructed?


S&P 500 ETFs

ETF Weighting LTM Performance
SPY Market Cap 28.8%
RSP Equal 49.1%
RWL Revenue 36.3%

Most investors give almost no thought to the construction of the underlying index, but the weighting methodology utilized can have a major impact on returns. While most of the most popular ETFs are linked to market capitalization-weighted indexes, other weighting methodologies have become more popular in recent years, due in part to impressive performances relative to cap-weighted funds. The performance of SPY, RSP, and RWL, three ETFs that each invest in the holdings of the S&P 500 but apply different weightings to determine the individual allocations, highlights the importance of weighting methodologies (see a more in-depth look at performances of different weightings methodologies here).

The weighting methodology can also impact the degree of concentration in an ETF. Some investors simply look at the number of individual securities held by an ETF to gauge its level of diversification, but this number doesn’t always tell the entire story. The biotech ETFs offered by State Street and iShares serve as a good illustration. The S&P Biotech ETF (XBI) invests in 28 companies, while the Nasdaq Biotechnology Index Fund (IBB) has 126 individual holdings. But because XBI is based on an equal-weighted index, it spreads assets equally (at rebalancing) across all holdings. IBB is based on a cap-weighted benchmark, meaning that the biggest weightings are given to the largest companies. As such, despite having far fewer holdings XBI has much lower concentration in its top ten allocations (37%) than IBB (49%).

5. Is There A Cheaper Option?

The rise of the ETF industry is often attributed to the low costs offered by a passive investment strategy. But many investors assume that all ETFs are equal from an expense perspective, and don’t do the bargain hunting they should when selecting a specific fund. Fortunately for ETF investors, a series of low-profile price wars have popped up in some of the core asset classes, offering ways to slash expenses (and boost bottom-line returns) without altering a portfolio’s exposure.

There are five asset classes in particular that provide an opportunity for cost-conscious investors (as if there was any other kind) to save:
◾Total U.S. Stock Market: IYY and SCHB track two very similar broad-based benchmarks (the Dow Jones U.S. Index and Dow Jones U.S. Broad Stock Market Index, respectively). IYY’s expense ratio (0.20%) is twice that of SCHB’s.
◾Total Bond Market: AGG and BND both track the Barclays Capital U.S. Aggregate Bond Index. BND charges 0.14%, while AGG charges 0.24%.
◾Mortgage-Backed Securities: In another head-to-head of iShares and Vanguard funds, both MBB and VMBS track the Barclays Capital U.S. MBS Index. MBB charges 0.34%, well above the 15 basis points for VMBS.
◾Commodities: DJP and DJCI both track the Dow Jones-UBS Commodity Index Total Return, but DJCI (0.50%) does so for two-thirds the cost of DJP (0.75%).
◾Emerging Markets Equities: As mentioned above, EEM and VWO both track the MSCI Emerging Markets Index. VWO charges 0.27%, while EEM charges a whopping 0.72%.

Because even the more expensive ETF options are far cheaper than most mutual funds, many investors don’t feel the need to put in the extra effort to slash expenses. But the reward for doing so can be significant. Consider the two not-so-unrealistic portfolios below:



Portfolio #1

Portfolio #2

Weighting ETF Cost ETF Cost
50% IYY 0.20% SCHB 0.08%
20% EEM 0.72% VWO 0.27%
20% AGG 0.24% BND 0.14%
5% MBB 0.34% VMBS 0.15%
5% DJP 0.75% DJCI 0.50%
Wtd. Avg. 0.35% 0.15%

Despite nearly identical exposure, portfolio #1 has a weighted average expense ratio less than half that of portfolio #2. If you’re not interested in picking up 20 risk-free basis points, there’s an active manager out there somewhere who would love your money.

Labels: ETF

As ETFs have burst on to the scene in recent years and worked their way into the investing mainstream, the number of products available and complexity of exposure offered has increased significantly. Advisors and investors have taken steps to educate themselves on the ins and outs of ETFs, but many are still scrambling to play catch-up and unaware of the complexities these products can present.

What began as a handful of securities seeking to replicate widely-known stock and bond indexes has grown into a lineup of more than 1,000 funds, offering exposure to nearly every asset class, region, and investment strategy imaginable. While this impressive growth has enhanced the arsenal of securities available to ETF investors, it has also created the potential for misuse and made finding the right ticker symbol a bit more challenging. And while ETFs offer countless potential advantages relative to strategies that revolve around mutual funds and individual stocks, there are some potential pitfalls along path to enhanced cost and tax efficiency. Below, we offer up ten pieces of advice that will help to maximize the benefits of exchange-traded products for all types of investors, including tips on minimizing expenses, avoiding potential pitfalls, and picking the right fund for your portfolio.

10. Honor Thy Expense Ratio

The incredible rise of the ETF industry over the last several years has been attributable to a number of different factors. The enhanced tax efficiency of ETFs relative to mutual funds, intraday liquidity, and unparalleled transparency have all played a part in driving significant cash flows into exchange-traded products. But many investors have made the switch to ETFs based on the potential cost savings relative to actively-managed mutual funds, and the expense ratio delta is likely to be at the top of any list comparing mutual funds to ETFs [read ETFs vs. Mutual Funds: The Ultimate Guide].

After converting to ETFs, some investors pat themselves on the back for minimizing expense ratios, especially those buy-and-holders cognizant of the potential impact of compounding costs on a portfolio’s bottom line return. Not everyone realizes that even within the ETF industry, there are often gaps in expense ratios wide enough to drive a truck through. For those truly interested in minimizing expenses, finding the right ETF can make a significant difference. Consider the following portfolio, consisting of six ETFs and diversified across domestic and international equities, fixed income, and commodities:


ETF

Weighting

Expense Ratio

Russell 3000 Index Fund (IWV) 40% 0.21%
EAFE Index Fund (EFA) 10% 0.34%
Emerging Markets Index Fund (EEM) 10% 0.72%
Barclays Aggregate Bond Fund (AGG) 30% 0.24%
Dow Jones-UBS Commodity ETN (DJP) 5% 0.75%
Gold SPDR (GLD) 5% 0.40%
Total 100% 0.32%

The effective expense ratio of 32 basis points is impressive, especially considering that a similar portfolio comprised of actively managed mutual funds could incur upwards of 2.0% annually in management fees. Plenty of investors seeking to minimize expenses make it to this point and are satisfied, but the portfolio outlined above has only scratched the surface of the cost savings available through ETFs. Consider a second portfolio that offers similar asset class exposure (and nearly-identical index exposure):


ETF

Weighting

Expense Ratio

Broad U.S. Market ETF (SCHB) 40% 0.06%
EAFE ETF (VEA) 10% 0.16%
Emerging Markets ETF (VWO) 10% 0.27%
Barclays Aggregate Bond Fund (LAG) 30% 0.1345%
Dow Jones-UBS Commodity ETN (DJCI) 5% 0.50%
COMEX Gold Trust (IAU) 5% 0.25%
Total 100% 0.15%

Without materially altering the asset allocation, the identification of the most cost-efficient ETF options reduced the effective expense ratio by more than half, lowering it to just 15 basis points [see our list of the 25 Cheapest ETFs].

9. Consider The Total Cost Of ETF Investing

When praising the cost efficiency of ETFs or seeking out the cheapest options, many investors focus in only on the expense ratio. But in reality the expense ratio is only one element of the total cost of investing with ETFs; computing a more accurate and complete cost of ETF investing requires consideration of both additional explicit costs and fees that may be incurred during the trading process. Among the other factors that contribute to the total cost of ETF investing are commissions, bid-ask spreads, and perhaps even effective interest rates:

Commissions


Because trading fees are generally measured in absolute dollar terms, the effective percentage this cost component represents can vary significantly. For those investing significant amounts of money with very little turnover, the impact of commissions can be minimal. But for investors using a more active approach, the costs can add up in a hurry. Consider an investor with a $100,000 portfolio who pays $10 to execute every trade. If that investor makes a trade monthly–one buy and one sell order–the annual cost can exceed $200, effectively adding another 25 basis points to the total expense figure. That more than doubles the cost of the ultra-cheap portfolio outlined above.

Taking advantage of free commissions is an easy way to add to your bottom line. Fortunately for ETF investors, there are several options for avoiding trading commissions altogether. Schwab and Vanguard offer commission free ETF trading to their brokerage clients (on their respective lines of ETFs) and iShares has partnered with Fidelity to offer free ETF trading on 25 of the most popular iShares ETFs. Most recently, TD Ameritrade announced free trading on 100 ETFs [see Commission Free ETFs Coming To TD Ameritrade].

Bid-Ask Spreads

Another element of the total cost picture that must be considered isn’t as explicit as expense ratios and commission fees, but can add up rather quickly. Consider an investor who buys 100,000 shares of an ETF at $100.05 when the NAV is an even $100 and closes out the position at $109.95 after the NAV has climbed to $110. While the value of the ETF rose 10%, the bottom line return to the investor–before considering commissions–was about 10 basis points lower. Depending on the holding period on that investment, the bid-ask spread component of the expense equation could dwarf the expense ratio component [read Five Critical Questions To Ask When Investing In ETFs].

Interest Earned

For certain ETFs, there are other more advanced cost components that must be taken into account. Products that utilize derivatives to establish exposure–such as leveraged ETFs and futures-based commodity products–often maintain cash balances on which interest can be earned. The higher the yield earned by uninvested cash held by leveraged and commodity ETFs, the larger the offset to the expense ratio charged by the fund and the lower the actual overall cost. The issuers of leveraged ETFs pride themselves on their ability to offer competitive yields on uninvested cash, understanding that doing so can have a material impact on the bottom line return.

8. Thou Shall Not Use Market Orders Recklessly

While there are numerous advantages of ETFs compared to traditional actively-managed mutual funds, there are some potential drawbacks that must be avoided as well. When dealing with mutual funds, investors buy shares from the issuer at the underlying asset value and redeem them at NAV as well. Unlike mutual funds, ETFs are traded like stocks–between market participants at whatever price clears the market.

The advantage to this system is the enhanced liquidity available to ETF investors, as shares can be traded at anytime throughout the day, and not redeemed only once at the end of the day. But the stock-like trading characteristics of ETFs also create some potential pitfalls that investors must avoid. The assumption that a trade will be executed at NAV is not always a safe one; while there are arbitrage mechanisms in place to ensure that the price of an ETF doesn’t deviate substantially from the underlying net asset value, reckless use of limit orders can potentially put investors in an early hole or erode gains when exiting a position [read Ten Common Mistakes Every ETF Investor Should Avoid].

The combination of market and orders and ETFs can lead to disaster, especially when the fund in question features a relatively low average daily trading volume. Fortunately, limit orders are very simple and cheap to implement, and are very powerful tools for ETF investors.

Lessons From The “Flash Crash”

The events of May 6, 2010 were terrifying for many investors, as an unprecedented chain of events caused many securities–including many ETFs–to temporarily lose nearly all of their value. While many trades were ultimately canceled, a number of investors learned additional lessons about ETF investing the hard way. Many investors with straight stop orders on ETFs watched as values plummeted and stop orders kicked in well below the net asset value of the ETF.

Again, there is a relatively simple solution to prevent against a repeat of such a phenomenon: stop limit orders. “I think you need to replace all your stops with stop limits and be pretty generous with those limits, so as to actually get executed when the market might crater one way or the other,” said Paul Weisbruch, VP of ETF/Options Sales and Trading at Street One Financial, in a recent interview. “So if investors build into their expectations 10 to 25 cents away from their initial stop target and establish stop limits there, at least they will get protected and they won’t have any executions go far away from the actual NAV of the funds, which happened on May 6th.”


When trading ETFs, there is most certainly a potential to get burned by premiums and discounts. But that doesn’t mean that individual investors should be frightened off: there are very simple and powerful tools that can make trading ETFs a lot safer. Don’t be afraid to take advantage of them [see Ten Shocking ETF Charts From The "Flash Crash"].

7. Thou Shall Not Covet Your Neighbor’s Weighting Methodology

The impressive rise of the ETF industry over the last several years has transformed indexes from hypothetical performance benchmarks into investable assets. Not surprisingly, this transformation has brought increased scrutiny to the methodologies used to construct and maintain indexes. Some investors have come to the conclusion that market cap weighting–giving the largest allocation within an index to the company with the largest market capitalization–has some potential drawbacks, including the tendency to overweight overvalued stocks and underweight undervalued securities. A number of firms have attempted to come up with a better mousetrap, rolling ETFs linked to indexes utilizing lesser-known but potentially more appealing weighting strategies:
◾Equal Weighting: Several ETF issuers offer funds linked to equal-weighted indexes, including Rydex and State Street. As the name suggests, equal-weighted indexes afford an equivalent allocation to every component, generally resulting in lower concentration of assets compared to cap-weighted benchmarks. For example, the Rydex Equal Weighted ETF (RSP) gives Exxon Mobil and Apple the same weighting (0.20%) as it does to the other 498 components of the S&P 500.
◾Dividend Weighting: Not to be confused with indexes comprised of dividend-paying companies, this methodology uses cash dividends paid to determine the weighting afforded within an index. Dividend weighting breaks the link between stock price and weight, and can potentially avoid companies that have been “cooking the books” (it’s tough to manipulate dividend payments). This strategy can also result in a tilt towards value stocks, since those are more likely to pay a cash dividend.
◾Earnings Weighting: This strategy is similar to dividend weighting, but ranks each potential index component by earnings. Relative to a cap-weighted benchmark, the earnings-weighted methodology will tend to overweight companies with low price-to-earnings ratios while underweighting those with higher ratios. WisdomTree is the industry pioneer in both dividend-weighted and earnings-weighted ETFs.
◾Revenue Weighting: This methodology focuses not on a bottom line measure of profitability, but on top line sales. Revenue-weighted ETFs seek to capitalize on short-term imbalances when price/revenue ratios exceed a fair level, essentially overweighting stocks with low price-to-sales ratios [see Revenue Weighting: New Twist On An Old Drink].
◾RAFI Weighting: This concept has been made popular by Rob Arnott, founder of Research Affiliates. The idea behind RAFI weighting is to break the link between a security’s weight in an index and its price. Arnott devised a methodology that focuses on four fundamental factors believed to be more accurate measurements of a company’s true size: book value, income, dividends, and sales [see Does Your Portfolio Need A RAFI ETF?].

On the whole, the ETF boom has bolstered the popularity of and familiarity with market cap weighting, as many of the largest ETFs are linked to cap-weighted benchmarks. But the rise of ETFs has also brought increased attention to alternative methodologies.

For most investors, consideration of the most appropriate weighting methodology isn’t a part of the asset allocation process. Once the desired exposure has been identified (e.g., developed market equities or U.S. financial sector), the default choice is often a cap-weighted ETF that focuses on that sector. The weighting methodology isn’t a major consideration primarily because most investors don’t realize the impact this decision can have on bottom line returns. But in many cases, the manner in which weightings are determined can be just as important as the actual securities selected to make up the index. The following ETFs all offer exposure to large cap U.S. stocks, and the overlap between these funds is considerable. In some cases, the underlying names are identical (SPY and RWL both hold the stocks that make up the S&P 500 Index).


ETF

Weighting Methodology

1-Year Return*

PRF RAFI 8.5%
SPY Market Cap 9.8%
RWL Revenue 10.6%
EPS Earnings 10.7%
EQL Equal Sector 11.3%
DLN Dividend 11.5%
RSP Equal 14.5%
*As of September 30, 2010

Investors who held RSP and SPY over the last year maintained exposure to an identical basket of large cap domestic equities. But those with holdings in the Rydex equal-weighted fund generated excess returns of nearly 500 basis points. That relatively large gap drives this point home: the weighting methodology implemented by the related index can have a material impact on an ETF’s total return.

Cap weighting isn’t necessarily an inferior methodology; in certain environments, cap-weighted indexes will outperform similar strategies implementing various other methodologies. But it is only one of the many options available, and many investors may find the benefits of the alternatives to be quite appealing. Investigating the pros and cons of each weighting methodology is a worthwhile endeavor that may end up enhancing bottom line return [see The Guide to ETF Index Weightings].

6. Thou Shall Not Bear False Witness Against ETFs

As ETFs have burst on to the investing scene in recent years, the reception has been overwhelmingly positive. ETFs have been praised for reducing management fees, democratizing entire asset classes and investment strategies, and simplifying the asset allocation process. But there have been some criticisms of ETFs as well. While ETFs are generally simple securities, some investors have failed to grasp the nuances of some of the more complex products, leading them to cry foul when performance didn’t line up with their expectations. More recently, concerns popped up that the ETF structure was inherently unsafe, and that investing in certain products came with excessive risks.

While some of these criticisms seem initially compelling, they don’t have much–if any–basis in fact.

Flash Crash

The Myth: Because ETFs accounted for a big portion of the canceled trades on May 6, some investors became convinced that ETFs were behind the day’s chaos. Several massive ETFs saw prices decline to as low as a penny, and speculation immediately began to swirl around structural flaws in the ETF wrapper [see Ten Shocking ETF Charts From The Flash Crash].

The Truth: ETFs absolutely did account for the majority of canceled trades on May 6, but the erratic behavior of these products wasn’t necessarily indicative of any sort of vulnerability in the ETF structure. Rather, market makers became concerned that if trades on underlying ETF components were canceled, they would get burned. So they understandably pulled out of the market, and liquidity temporarily dried up. Further research has showed that a big trade in E-Mini Futures started a chain of events that caused billions of dollars in market capitalization to be temporarily erased.

ETF Collapse

The Myth: Last month a report surfaced expressing concern that big net short positions in certain ETFs were setting the state for a calamitous collapse that would potentially leave countless investors completely out of luck.

The Truth: There have always been mechanisms in place designed to prevent against an “ETF collapse,” including provisions that require share redemptions to occur with settled shares. There is simply no way for the doomsday scenario outlined to unfold, regardless of how massive the short interest in a fund becomes [see Why An ETF Can't Collapse].

Commodity ETFs

The Myth: Earlier this year BusinessWeek ran a cover story titled Amber Waves of Pain. The magazine’s cover issued a blanket warning against exchange-traded products designed to offer exposure to commodity prices, repeating “Do Not Invest In Commodity ETFs” three times. The feature went on to detail stories of investors who thought they were buying securities that would replicate the hypothetical returns of investing in spot prices, implying that flaws in commodity products led to disappointing returns [read Five Things BusinessWeek Didn't Tell You About Commodity ETFs].

The Truth: Returns of commodity products can and often do vary from the hypothetical change in spot prices. But that isn’t the result of nefarious design on the part of ETF issuers, rather a cold, hard fact of futures-based investing. What the article failed to mention was that the investors profiled apparently failed to perform even the most basic of due diligence, and totally failed to understand the basics of an investment product into which they poured money.

Leveraged ETFs

The Myth: A year before commodity ETFs came under attach, a firestorm raged around leveraged ETFs that seek to deliver daily results corresponding to a multiple of the day’s change in a particular benchmark. The unprecedented volatility of 2008 had caused many leveraged ETFs to lose money over extended periods of time, a result of the daily resetting of leverage. Leveraged ETFs were of being scams designed to dupe investors, and several lawsuits ensued (some of these have since been dismissed). Although much of the misinformation has been cleared up, confusion still remains; to this day some members of the media stubbornly stick to the claim that these securities exhibit massive “tracking error” that indicates their flaws [ETFdb Pro Members can see our Category Report on Leveraged ETFs here ETFdb Pro Members Only].

The Truth: Leveraged ETFs actually perform their stated objectives with impressive efficiency; the confusion surrounding the performance of these products was the result of investors failing to do their homework, and then crying foul when the results they were hoping for didn’t materialize. The daily resetting of exposure definitely creates the potential for “return erosion” when markets seesaw, but it also sets the stage for “return enhancement” in trending markets [see Two Sides To The Compounding Coin].

It’s hard to tell for sure why these attacks on ETFs have become more prevalent–or how they manage to spread so quickly despite the fact that there is no meat to the argument. There are certainly some potential drawbacks to ETFs, and these securities aren’t for everyone. But be careful about some of what you see written–it’s not always true.

5. Thou Shall Not Make Wrongful Use Of The Name “ETF”

When discussing the universe of exchange-traded products now available, many investors group a number of securities under the ETF umbrella, including exchange-traded notes, grantor trusts, holding company depository receipts, and others. While these securities are similar in many ways, there are some structural complexities that can potentially impact returns and shouldn’t be overlooked.

Perhaps the most important distinction to make is between exchange-traded funds and exchange-traded notes. Although these securities are often lumped together as ETFs, they offer exposure to the related asset class in very different ways. ETFs maintain a portfolio that corresponds to an underlying benchmark; for example, the Russell 1000 Index Fund (IWB) holds equity securities that correspond to the Russell 1000 Index. ETNs, on the other hand, are debt securities issued by a financial institution that pay a return linked to the performance of an underlying index. In other words, ETNs don’t actually hold the assets that comprise the underlying index, and are instead promissory notes that pay returns based on the change in a reference benchmark.

ETNs offer investors both advantages and disadvantages. On the positive side, these securities eliminate tracking error that can plague ETFs. Because ETNs are debt instruments linked to an index, there isn’t actually an underlying basket of securities that can deviate from the benchmark. Moreover, achieving commodity exposure through ETNs may offer enhanced tax efficiency relative to otherwise similar exposure achieved through funds that invest in futures contracts [read how Contango Impacts ETFs].

The drawbacks of ETNs are primarily related to the credit risk to which investors are exposed; because these products are debt securities, there exists the potential for investors to be left holding the bag if the financial institution behind the ETN goes under. While some investors write off the possibility that firms like Barclays or UBS–two banks that have issued billions of dollars worth of exchange-traded notes–will go bankrupt, it’s important to be aware of this risk. Lehman serves as a cautionary tale–the bank was an issuer of ETNs at the time of its collapse. In some cases, ETNs can be less efficient from a tax perspective, since distributions are taxed as interest income [see MLP ETFs: Fact And Fiction].

Holding company depository receipts, or HOLDRS, are also often grouped in with ETFs. But these products, offered by Merrill Lynch, are unique in more ways than one. HOLDRS have a unique structure when it comes to voting rights, and there can be unwanted tax ramifications when component companies are acquired. Moreover, HOLDRS are subject to significant concentration of assets among just a few stocks, which can make them vulnerable to company-specific developments [see Five Facts About HOLDRS Every Investor Should Know].

Structure Matters

Even among ETFs, there are some subtle structural differences that can impact the returns delivered by various products. For example, Rydex, WisdomTree, and iPath all offer exchange-traded products designed to reflect movements in the value of the euro relative to the U.S. dollar. But the three products aren’t identical: ERO is structured as an exchange-traded note, FXE is a grantor trust, and EU is an actively-managed ETF. Those distinctions may not mean much to most investors, but the different structures can lead to unique tax treatments, dispersion of counterparty risk, and, ultimately, bottom line returns [see Euro ETFs: Three Different Options].

A distinction can also be drawn between two popular ETFs offering exposure to the S&P 500. The ultra-popular S&P 500 SPDR (SPY) is a unit investment trust (UIT), which means it is forced to hold dividends in cash and exactly replicate the underlying index. The iShares S&P 500 Index Fund (IVV), on the other hand, can reinvest dividends from underlying securities until the distribution date, making it a potentially better play during bull markets.

The bottom line: once the desired exposure has been identified, it’s worth considering the most efficient vehicle for establishing such a position. While the differences between the various options may seem minor, they can (and often do) impact the effective return realized [read Five Ultra Popular ETNs].

4. Thou Shall Not Use “Liquidity Screens”

When searching for the right ETF, many financial advisors and individual investors first narrow down the field of the 1,000-plus products available to U.S. investors to a much smaller list consisting of funds that offer the exposure desired. From there, the first step for many is to implement a “liquidity screen” designed to filter out products that don’t meet a certain volume or asset threshold. The rationale behind including these screens is simple, but flawed. Investors worry that small ETFs will be illiquid, and that establishing or closing out a position will involve navigating wide bid-ask spreads and introduce the potential to get burned by a shallow market [see Best Execution In ETFs, Does Your Custodian Meet It?].

In an attempt to gauge the liquidity of an ETF, many investors rely on average daily trading volume, a readily available and easily understood metric that conveys the frequency with which shares of a particular security trade hands. But trading volumes are backward-looking statistics related to trading activity, and aren’t indicative of the true liquidity available to an investor considering a purchase of the security.

Just as the fair value of an ETF is derived from the value of the underlying securities, so too is a fund’s liquidity linked to the individual components. Because of the nature of the issuance mechanism in place behind ETFs, true liquidity is derived from the stocks (or bonds) that make up the creation basket. For example, the FaithShares Baptist Values Fund (FZB) trades fewer than 2,000 shares daily. But because the underlying holdings consist of large cap domestic equities, investors who know what they are doing could execute a huge trade without incurring significant costs. Under the hood of exchange-traded funds is a somewhat complex mechanism that allows Authorized Participants to create new shares of a fund if sufficient demand exists in the market, potentially resulting in “spontaneous liquidity” for tickers that may otherwise be thinly-traded.

“The liquidity of an ETF is one of the most misunderstood pieces of the entire structure,” writes David Abner in The ETF Handbook [Incidentally, Abner's book is the most thorough and best researched piece on the ETF space that we've seen]. “It is a hotly debated concept primarily because many people do not fully comprehend that ETF valuations are derived as a function of their underlying constituents and that there are alternative ways to create liquidity beyond the use of the ETF itself.” For investors who don’t cut off a huge chunk of the ETF universe due to liquidity deemed to be insufficient, the number of options obviously increases significantly.

Caution must be exercised when trading in low-volume ETFs, but excluding funds from consideration altogether because they don’t meet somewhat arbitrary thresholds can cause investors to overlook a huge chunk of the ETF lineup, potentially scratching off a fund suited to meet one’s investing needs in the process [also Myths About ETF Liquidity].

3. Not All ETFs Are Created Equal

As investors have embraced the many benefits of ETFs, the number of products available to U.S. investors has multiplied. Investors looking for an S&P 500 ETF have three options, not including those products implementing alternative weighting methodologies highlighted above. Those seeking diversified exposure to emerging markets have nearly two dozen different options, each of which offers a relatively similar risk/return profile [also read Emerging Market Bond ETFs Head-To-Head].

For almost any type of exposure identified, investors are likely to have several ETF options. Even within the targeted semiconductor space, there are four options from which to choose. Once investors have narrowed the universe of nearly 1,100 U.S.-listed ETFs down to those that meet their criteria, selecting the best fit can become a bit challenging.

While many ETFs appear similar on the surface, it’s important not to judge a book by its cover. Below, we highlight several factors worthy of consideration when comparing multiple ETFs head-to-head:
◾Expense Ratio: As demonstrated above, the difference in expense ratios between various ETFs can be quite significant, and choosing the fund with the lowest management fees obviously won’t hurt your bottom line returns [also see Five Critical Criteria For Rating ETFs].
◾Tracking Error: It’s a common misconception that replicating an index is a simple task, and that ETFs will always perform spot-on with the underlying benchmark. In reality, however, almost every ETF exhibits some degree of tracking error–a gap between the return on the fund’s price and the return of the related index. Most issuer web sites show the return over 1-year, 3-year, and 5-year periods for both the ETF and the benchmark to which it is linked, making calculation of tracking error relatively straightforward.
◾Distributions: Consideration of distributions can be important for any investor seeking current income, but this metric can also shed some light on the efficiency with which an ETF is managed. ETFs generally offer enhanced tax efficiency relative to mutual funds, as capital gains distributions are less frequent within the ETF structure. So reviewing the distribution history can be a worthwhile step in the comparison process, with ETFs that haven’t made capital gains distributions being more attractive. Again, this information is generally available from the issuer web sites: for example, the history for QQQQ shows that no capital gains distributions have been made recently–a good sign for investors.
◾Yield: When hunting for current return, navigating through the features of each ETF can be a tricky task. Most issuers present the 30-day SEC yield for each fund, a standardized metric that gives an apples-to-apples comparison of the yield that investors can expect [see this article for a good rundown of the various yield metrics associated with ETFs].
◾Structure: As discussed above, the structure utilized by an ETF can have an impact on the ultimate risk/return profile achieved, so it’s worth figuring out whether each potential investment is packaged as a UIT, ETN, grantor trust, or some other structure.
◾Weighting Methodology: Also highlighted above, the weighting methodology utilized by the underlying index can have an impact on the ultimate return realized in an ETF investment. And this isn’t just limited to the equity ETFs; recent innovation in the fixed income space has included the introduction of the first RAFI-weighted bond ETF.
◾Concentration: ETFs are praised for their ability to offer immediate diversification to investors, delivering access to a broad basket of securities through a single ticker. But just like expense ration, the diversification offered by various ETFs can be wildly different. Consider the Financial SPDR (XLF) and Vanguard Financials ETF (VFH), two funds within the Financials Equities ETFdb Category that offer generally similar exposure. An x-ray look at XLF’s holdings shows 81 individual holdings, with about 55% of assets in the top ten. VFH, on the other hand, consists of nearly 500 component stocks, with only about 40% of assets in the top ten. Lower concentration isn’t necessarily always more desirable, but the number of individual holdings and weightings afforded to each are worth looking into.
◾Exposure Type: When considering international equity ETFs in particular, take a look at the breakdown of holdings across both market capitalizations and sectors. While both the iShares MSCI Brazil Index Fund (EWZ) and Market Vectors Brazil Small Cap ETF (BRF) offer exposure to Brazilian equities, the differences between these funds are significant–both in terms of sector exposure and return characteristics. In general, small cap stocks tend to be more of a “pure play” on the local economy, while large caps focused on banks and oil companies can exhibit higher correlations with global equity markets. Again, one isn’t universally superior to the others, but different funds will make more sense for different investors.

2. Thou Shall Buy Commodity ETFs (But Only If You Truly Understand Them)

Commodity ETFs have become tremendously popular securities over the last several years, as the marriage of futures-based investment strategies and the ETF wrapper have democratized an asset class with potentially valuable diversification benefits for countless investors. But commodity ETFs have also attracted a fair amount of scrutiny, even prompting some publications to advise against buying them altogether. But warnings against the use of commodity ETFs seem to stand in sharp contrast to the billions of dollars in cash inflows into these products over the last 18 months. If commodity ETFs are so dangerous and inclined to erode value–as some have implied–why have investors been flocking towards these products in record numbers?

In reality, commodity ETFs offer efficient exposure to an asset class that would otherwise be difficult and costly to access for many investors. And they generally perform exactly as marketed and as presented in fund literature. Unfortunately, the diligence completed by many investors in these products included only reading the name of the fund and making assumptions about the exposure offered and the return that could be reasonably expected. Commodity ETFs can be incredibly powerful tools with a wide range of applications to all sorts of investors–if the nuances and return implications of a futures-based strategy are understood. Those investors who didn’t take the time to figure out how these products work may end up disappointed and looking for someone to blame, a scenario we’ve now seen play out several times.

The vast majority of exchange-traded products available to U.S. investors are relatively straightforward, including sector-specific and country-specific equity funds, as well as dozens of plain vanilla fixed income ETFs. But others are more complex, and thoroughly understanding the factors that will influence the return of each can be a bit challenging. For many investors, commodity ETFs fall into this category; the connection between the slope of the futures curve and the change in price of the United States Oil Fund (USO) may be a hazy one. Understanding the differences in expected returns to the Direxion Daily Financial Bull 3x Shares (FAS) in trending versus seesawing markets is beyond the grasp of some investors. And truly understanding the underpinnings of a product like the Barclays ETN+ Short D Leveraged Inverse S&P 500 Total Return ETN (BXDD) can be difficult even for the most sophisticated investors [also read the Definitive Guide to the United States Commodity Index Fund].

This advice certainly isn’t original, but it is perhaps more valuable now than ever before: if you don’t understand how an ETF or ETN works, don’t touch it with a ten-foot pole. It sounds obvious, but the allegations of fraud against ETFs that have performed exactly how they should–as summarized above–clearly demonstrates that a lot of investors are jumping into products that they don’t understand a bit. If you don’t understand the risks of an ETF after studying the fund literature for a few minutes, don’t hesitate to walk away and find a security with which you are more comfortable. At a certain point, the responsibility to protect investors falls to the investors themselves–and sometimes it seems as if proper discretion is in short supply. There is a tremendous amount of educational material out there in the ETF industry, including pieces from issuers and third parties. Make sure to take advantage of it [ETFdb Pro Members can read the Precious Metals Category Report here ETFdb Pro Members Only for more information].

1. Thou Shall Take Advantage Of Free ETF Resources

Navigating the world of ETFs can be a daunting task, particularly for those investors and advisors who have primarily utilized mutual funds historically. But there are a number of powerful, free resources out there that have the potential to make ETF investing a much easier process. Some of the free ETF tools offered by ETFdb include:
◾ETF Screener: Detailed descriptive information on all U.S.-listed products allows investors to slice-and-dice the ETF universe in countless ways, including by asset class, region, sector, bond and currency types, index tracked, and expense ratio.
◾Mutual Fund To ETF Converter: For investors looking to make the switch from mutual funds to ETFs, this tool can help to simplify the conversion process. Entering in a mutual fund ticker directs users to two lists of ETF alternative, including those that seek to replicate the mutual fund’s benchmark and others that fall into the same category [read more about the tool's methodology].
◾ETF Country Exposure Tool: For investors looking for international equity exposure, this resource can be quite valuable. Highlighting a country from our global map directs to a list of ETFs with exposure to that country, including both “pure plays” and funds that offer only partial exposure [you may be surprised at how many ETFs include exposure to Kazakhstan]
◾ETF Stock Exposure Tool: Figuring out which ETFs have considerable exposure to a particular stock is now incredibly easy–simply enter the ticker into this tool and find a list of all the equity ETFs with a big weighting [there are a ton of other great ETF tools out there as well; check out our list of 50 valuable online ETF resources].

Labels: ETF

I have been dollar cost averaging STI ETF (ES3) monthly since 18 May 2011 and put in $160k up to end 2013 with 53455 ES3 units being purchased. Current market value was $172659 with dividend being reinvested, up 7.91%. During the same period from 18 May 2011 to 30 Dec 2013, STI INDEX rose from 3141.21 to 3167.43, up merely 0.83%! ES3 rose from 3.21 to 3.21. ES3 average cost (DCA COST) is 3.09, which means that $6414 is saved due to DCA effect:(3.21-3.09)×53455=6414, while $6245 is net dividend received: (172659-160000)-6414=6245. Net dividend contributes nearly half in ES3's market valuation gain!!! Conclusion - Dollar cost averaging stock index ETF is a better choice for small timers like me, which took me one and half years to reach this conclusion before implementing my current 30-year long term investment plan starting from 18 May 2011.

Labels: Dollar Cost Averaging, ETF, Live Trading Records, STI ETF

Limit sell order of XLU filled at 37.74 with profit.

Interest rate kept on rising recently and will continue to do so after FED tapering, which reduces attractiveness of utilities and is thus bad for utilities. wanted to sell badly once hearing impending FED tapering not long ago. Selling at SMA200 shouldn't be a bad deal.

Labels: ETF, Live Trading Records

Sold EIDO at 26.18 with profit, SMA50 100 200 trending downwards and SMA50 less than SMA100 less than SAM200, price gapped up and almost touched intermediate resistance SMA50 in a steep short term rebound.

Labels: ETF, Live Trading Records

By Rob Berger

One of the best-kept secrets on Wall Street is one your broker hopes you never uncover— figuring out how to invest like a pro is really easy. In fact, any investor can build a well-diversified portfolio of stocks and bonds with little effort. It doesn’t require great expense, extensive knowledge of the market, or even a lot of time.

1. Keep it simple.

Investing does not have to be complicated. While some investors choose to buy individual stocks and bonds, for most of us, a couple of low-cost index funds will suffice. Even Warren Buffett recommends index funds as reflected in his 1996 letter to Berkshire Hathaway shareholders:

Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.Those following this path are sure to beat the net results (after fees and expense) delivered by the great majority of investment professionals. Seriously, costs matter. - Warren Buffett

Taken to its extreme, an investor can build a diversified investment portfolio from a single target-date mutual fund.

2. Go cheap.

As Warren Buffett noted in his letter quoted above, “costs matter.” Unfortunately, it’s easy to ignore costs when it comes to investing. Mutual funds do not send out a monthly bill for investors to pay. Instead, funds simply subtract the fees from the assets it holds. Yet even relatively small annual expenses, multiplied over a lifetime of investing, can make a serious dent in your nest egg.

Expenses that lower investment returns even one-half of a percent, for example, can result in substantially less money at retirement. The key is to invest in low cost stock index ETFs. Many index funds today cost less than 10 basis points (0.10 percent).

3. Invest with a plan.


A sound investment plan is simple to create. With the help of index funds, an investor can devise a simple asset allocation plan between stocks and bonds. Many suggest an investor should own her age in bonds, with the rest in stocks. For example, a 25-year-old would allocate 25 percent of her investments to bonds and 75 percent to stocks. Others suggest a more aggressive approach of owning a percentage of stocks equal to 120 minus your age. Regardless, choose a plan and stick with it.

Following an investment plan helps investors stay the course during difficult times. An investor in his 20s will undoubtedly experience significant bear markets over the next 50 years.Stocks will likely experience one-year losses of 20 to 30 percent several times over the next half-century. A sound investment plan will help an investor weather these storms.

4. Have no fear (or greed).

Fear and greed are two emotions that do not mix well with sound investing. When the stock market is moving up, many investors jump on the bandwagon in hopes of making a quick buck. When stocks eventually fall, those same investors run for the exit. The result is a repeating pattern of buying high and selling low.

Ideally, investors should do just the opposite. A bear market is an ideal time to buy stocks. A quick look back to 2008 and 2009 reveals many stocks that could have been purchased from the bargain racks. At a minimum, however, investors should avoid buying and selling based on the daily, monthly, or yearly fluctuations of the market. Following an investment plan as described above will help.

5. Track your results.

Tracking results is critical. As the price of investments fluctuates, investors will need to rebalance their investments periodically to keep them inline with their investment plan. As an investor nears his investment goal, such as retirement, changes may need to be made to the asset allocation plan. And the cost of investments should always be monitored.

Fortunately, there are many online tools that enable investors to track a portfolio for free. The one I use daily is called Personal Capital. It automatically imports investments from 401(k), IRA and other retirement accounts, as well as non-retirement accounts. It displays the asset allocation of a portfolio along with the total cost of the investments. Regardless of the tool used, however, the key is to monitor an investment portfolio regularly.

With these five tips, anybody can invest like a pro.

Rob Berger is the founder of the popular personal finance blog, the Dough Roller.

Labels: ETF, Stock Trading System, Warren Buffett