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