To ETF or Not To ETF?
Exchange traded funds (ETFs) are all the rage. They come large and small, long and short, ultra and supersized, and track just about any sector, geography, investing style or commodity you can think of. The great thing is they trade like stocks yet share some of the characteristics of mutual funds (without the massive overhead some mutual funds carry).
ETFs are baskets of like stocks in a particular industry or region or index, and so, if you think for example high tech is going to take off, rather than study and research for which particular stocks to buy, jump on a high tech ETF and enjoy the benefits of spreading out your bet. You might not get as high a return as you could have with that one perfect stock pick, but then again, you have to be a really good stock picker while also bearing the risks of a less-diverse portfolio.
Some say ETFs have lower overhead than mutual funds and perform just as well, because of the reduced fees. Some even say during down markets ETFs fair better than mutual funds. So where's the 'alpha' in mutual funds, if you can put your money in ETFs, and have better downside protection for no increase in costs and no increase in volatility or risk? And why pay highly skilled, highly paid money managers who run mutual funds all that money, if they can't outperform an index during a down market, and often, during up markets?
I think it comes down to personal preference. What I like about ETFs is that I can quickly and easily create a well-rounded, diversified, lower risk portfolio that is very liquid, because of the stock-like trading feature of ETFs. These days markets can turn on you in an hour, so getting out immediately or using stop-loss orders can save you 3%, 5, 10% in a day, whereas mutual funds only trade after the market close, so by the time you make a decision to sell a mutual fund, you put your order in if you're lucky before 4:00 pm EDT that day, otherwise it's the next day, and you might lose even more money.
What one might do is create a portfolio tracking the major dozen or so industry sectors, a few of the global markets (Europe, Asia-Pacific, South America) and / or BRIC (Brazil, Russia, India, China), and then take part in some real-estate, some commodities like Oil and Gold, and then get some of the safe T-bills, Bonds and cash. Now the trick is how to allocate your money in such a way that you benefit from say the top three sectors and regions. We'll explore more on that in a later post, such as sector rotation strategies.
For oil we'll just mention DIG and DUG. DIG tracks oil and DUG tracks opposite of oil. So when oil hits bottom you buy some DIG and when it hits the top you sell DIG, take some profit, and buy some DUG and ride oil back to a bottom. Sell DUG, take some profit, and buy DIG again. This isn't exact because you will need to know when oil will find a peak and a trough.
I look forward to writing more about ETFs very soon.
ETFs are baskets of like stocks in a particular industry or region or index, and so, if you think for example high tech is going to take off, rather than study and research for which particular stocks to buy, jump on a high tech ETF and enjoy the benefits of spreading out your bet. You might not get as high a return as you could have with that one perfect stock pick, but then again, you have to be a really good stock picker while also bearing the risks of a less-diverse portfolio.
Some say ETFs have lower overhead than mutual funds and perform just as well, because of the reduced fees. Some even say during down markets ETFs fair better than mutual funds. So where's the 'alpha' in mutual funds, if you can put your money in ETFs, and have better downside protection for no increase in costs and no increase in volatility or risk? And why pay highly skilled, highly paid money managers who run mutual funds all that money, if they can't outperform an index during a down market, and often, during up markets?
I think it comes down to personal preference. What I like about ETFs is that I can quickly and easily create a well-rounded, diversified, lower risk portfolio that is very liquid, because of the stock-like trading feature of ETFs. These days markets can turn on you in an hour, so getting out immediately or using stop-loss orders can save you 3%, 5, 10% in a day, whereas mutual funds only trade after the market close, so by the time you make a decision to sell a mutual fund, you put your order in if you're lucky before 4:00 pm EDT that day, otherwise it's the next day, and you might lose even more money.
What one might do is create a portfolio tracking the major dozen or so industry sectors, a few of the global markets (Europe, Asia-Pacific, South America) and / or BRIC (Brazil, Russia, India, China), and then take part in some real-estate, some commodities like Oil and Gold, and then get some of the safe T-bills, Bonds and cash. Now the trick is how to allocate your money in such a way that you benefit from say the top three sectors and regions. We'll explore more on that in a later post, such as sector rotation strategies.
For oil we'll just mention DIG and DUG. DIG tracks oil and DUG tracks opposite of oil. So when oil hits bottom you buy some DIG and when it hits the top you sell DIG, take some profit, and buy some DUG and ride oil back to a bottom. Sell DUG, take some profit, and buy DIG again. This isn't exact because you will need to know when oil will find a peak and a trough.
I look forward to writing more about ETFs very soon.
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