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Reduce market risk by diversification
An important aspect of any financial market
trading is risk. Diversifying one's portfolio helps to minimize
this. ETFs (exchange-traded funds) allow the investor get wider
exposure to a particular sector and are a unique diversification tool
that can help both the buy-and-hold investor and the active trader.
In the USA and some other countries, ETFs can be used to fund an IRA (Individual
Retirement Account) or its equivalent in other countries too.
The underlying question is why someone who is
prepared to buy two single stocks not buy shares in two ETFs instead? Owning a
share in an ETF (which is a 'basket' of related stocks traded through
an exchange), is wise because it can reduce the overall risk of a
portfolio as well as exposure to problems that may occur with individual
companies.
The old adage "the whole is greater than the
sum of its parts" could apply, but there's a contradictory one "a chain
is only as strong as its weakest link". Which one makes more sense in the
case of ETFs? We are told that the strong stocks tend to 'carry' those that may
have problems from time to time, so it would seem the first saying is more
appropriate.
For the US investor/trader there is the S&P 500,
and also the S&P 500 ETF (SPY) which has a broad base and relatively low
risk. For bonds, there are large baskets put together by iShares with the
Lehman Aggregate Fund (AGG) or the Vanguard Total Bond Market (BND). For a
broader and more global exposure, there's the Vanguard FTSE All-World ex-US ETF (VEU).
Keeping your mix of stocks more diversified lowers
risk and increases expected returns. Buying shares in ETFs is one of the
easiest ways of achieving portfolio diversification.
However, choosing the right ETF or ETFs can
be a daunting task. There are hundreds of them, covering a wide range of market
sectors.
As an example, the oil supply industry is a
hot sector right now, with oil prices at record highs of over $100 a barrel.
Prices are expected to continue to rise.
A popular ETF managed by Merrill Lynch is
Oil Service HOLDRS Trust (OIH) is an exchange-traded fund. Back in
2006 it was trading at $150 a share. Currently it's worth near $180. But does
that automatically mean you should invest in that ETF? There are other issues to
consider and skills to learn, which, even if you are already a seasoned stock
market investor, are best done with a specialist training course and
ETF trading methodology.
April 1st saw the release of the "ETF Profit
Driver System", a comprehensive home study course for ETF trading, of
definite benefit to stock or fund traders and especially those who intend
funding an IRA with ETFs.
Let's continue with our example...
With oil prices continuing to escalate, an oil
producing fund is surely the way to go. Basically when you invest in a stock
you're paying for the future dividends of the firm. Oil is such a necessary
commodity that you're almost guaranteed to at least get your principle
investment back. Therefore it's prudent to invest in the goods and services that
almost everyone uses regularly. Alternative sources of fuel and energy are being
developed and choosing the right one to put some money into could prove very
lucrative. But the major oil companies are also involved in these new
technologies. If oil demand eventually lessens, the industry giants will
probably continue to profit.
So it's all a bit of a mine- or in this case
oil-field and not for the novice investor to jump into without some decent
education in ETFs and how best to trade or invest in them for future
profits.
Most of us don't have the time, inclination or
money to attend formal courses or seminars. Online or CD and manual-based
study seems the easiest and most efficient way to go. You can work at your
own pace and in your own time.
Bill Poulos and son Greg Poulos, in
the wake of their extremely successful Forex Profit Accelerator and also
Quantum Swing Trader courses, saw the need for an ETF training program
for trading beginners and professionals alike.
The "ETF Profit Driver Course"
will 'blow
open' the world of Exchange-Traded Funds and how to trade them for short term
profit too. Details of the ETF ProfitDriver System
are now available.
Some common questions about exchange-traded funds
What are exchange traded funds?
Exchange traded funds (ETFs) are index funds or trusts that are listed and
traded intraday on
an exchange. ETFs allow investors to buy or sell shares in the collective
performance of an
entire stock or bond portfolio as a single security. Exchange traded funds add
the flexibility,
ease and liquidity of stock trading to the benefits of traditional index fund
investing.
How can I buy or sell exchange traded funds?
Investors can buy or sell exchange traded funds through a broker, the same as
stocks.
How easily can I buy or sell exchange traded funds?
As easily as buying or selling shares of stock. Exchange traded funds are listed
on an exchange
and can be traded intraday, making it easy for investors to buy or sell ETFs.
What is the minimum size purchase of an exchange traded fund?
Investors can purchase as little as one share.
Why invest in an index?
Indexing, often called "passive management," involves investing in a group of
securities that
represent the composition of a broad stock market, stock industry sector,
international stock,
or U.S. bond index. Index funds offer "market level" performance; they aim to
generally match
the performance of a specific index. Index funds generally have lower management
fees and
operating expenses than actively managed funds.
What are the benefits of exchange traded funds trading as stocks?
The unique "exchange traded" structure offers several advantages to ETF
investors:
-
buy and sell at any time during the trading
day
-
instantly get exposure to a portfolio of
stocks or bonds
-
buy on margin
-
sell short
-
no sales loads, although brokerage commissions
will apply
-
lower fees
-
tax efficiencies
How does the performance of an exchange traded fund compare with the performance
of its
underlying index?
Exchange traded funds are designed to provide investment results that generally
correspond to
their underlying benchmark index by holding a portfolio of securities designed
to give similar
price and yield performance. In the secondary market, one mechanism that helps
to keep an ETF
trading on the exchange at a price close to the value of its underlying
portfolio is arbitrage.
Because exchange traded funds are both created from the securities of an
underlying portfolio
and can be redeemed into the securities of an underlying portfolio on any day,
arbitrage
traders may move to profit from any price discrepancies between an exchange
traded fund and the
portfolio, which in turn helps to close the price gap between the two. (ETF
creations and
redemptions are restricted to large transactions, typically in multiples of
50,000 shares but
ranging from 25,000 to 600,000 shares, usually transacted by large investors and
institutions.)
Of
course, because of the forces of supply and demand and other market factors,
there may be
times when shares of an exchange traded fund trade at a premium or discount to
its underlying
portfolio value.
Can exchange traded funds be purchased on margin?
Exchange traded funds may be purchased on margin, subject to the same terms that
apply to
common stocks. Investors should contact their broker regarding initial and
maintenance margin
requirements.
Can exchange traded funds be sold short?
Yes. All exchange traded funds may be sold short, representing the sale of
"borrowed" shares in
anticipation of lower prices. Investors are required to make arrangements to
borrow securities
before selling short.
Is there a sales load on exchange traded funds?
While exchange traded funds are not subject to sales loads, usual brokerage
commissions for
securities purchases and sales will apply.
Do I get paid dividends on exchange traded funds?
ETF holders are eligible to receive their pro rata share of dividends, if any,
accumulated on
the stocks held in an ETF, and interest on the bonds held in an ETF, less fees
and expenses. Of
course, based on past performance, little, if any, dividend distributions can be
expected on
certain ETFs. There may also be the opportunity for dividend reinvestment.
Where do exchange traded funds initially come from?
Exchange traded funds are "created" by large investors and institutions in
block-sized units of
shares (or multiples thereof) known as "Creation Units" of a respective ETF. A
creation
requires a deposit with the trustee for a specified number of shares of a
portfolio of
securities closely approximating the composition of the specific index and a
specific amount of
cash in return for shares of a specific exchange traded fund. Similarly,
block-sized units of
exchange traded fund shares can be redeemed in return for a portfolio of
securities
approximating the index and a specified amount of cash.
Where can I find exchange traded funds listed in the newspaper?
Investors can find exchange traded funds listed in the financial section of many
newspapers
under the heading "American Stock Exchange Listed Stocks." They are also listed
under "Exchange
Traded Portfolios" in the financial section of The Wall Street Journal.
Is the value of an exchange traded fund equivalent to the value of the
underlying index?
Not necessarily. The share price of many exchange traded funds is initially set
at a percentage
of the index upon which they are based, but may differ over time due to costs
and other
factors.
Where can I get up-to-date price information on ETFs?
The pricing of exchange traded funds is continuous on the American Stock
Exchange during normal
trading hours. Investors can obtain this information from their brokers, stock
quotation
systems, or on a delayed basis by clicking here. The closing prices are also
published in major
newspapers on the following business day.
Where can I get a prospectus?
It is important that investors read a prospectus for all exchange traded funds
in which they
are interested. A prospectus, which contains more complete information,
including charges,
expenses and potential risks, can be obtained on a specific exchange traded fund
by clicking
here. Read the prospectus carefully before investing.
What are the risks of investing in ETFs?
Equity-based exchange traded funds are subject to risks similar to those of
stocks; fixed
income-based ETFs are subject to risks similar to those of bonds. Investment
returns will
fluctuate and are subject to market volatility, so that an investor's shares,
when redeemed or
sold, may be worth more or less than their original cost. Foreign investments
have unique and
greater risks than domestic investments. Past performance is no guarantee of
future results.
Fixed Income ETFs
What are fixed income ETFs?
Fixed income ETFs are bond index funds that are listed and traded intraday on an
exchange. They
let investors buy or sell shares in the collective performance of an entire bond
portfolio as a
single security. ETFs add the flexibility, ease and liquidity of stock trading
to the benefits
of traditional bond index fund investing.
Why buy fixed income investments?
Diversifying into fixed income investments may provide stability to an equity
portfolio because
the bond markets are often less volatile than the stock markets.
Do fixed income ETFs pay dividends?
Yes. Dividends, if any, will be distributed on a monthly basis, similar to bond
mutual funds.
How will fixed income ETFs be taxed?
Dividends paid out of an ETF's net investment income and net short-term capital
gains, if any,
are taxable as ordinary income. Distributions of net long-term capital gains, if
any, in excess
of any net short-term capital losses, are taxable as long-term capital gains.
Will fixed income ETFs be as tax efficient as equity ETFs?
Because fixed income ETFs typically have higher yields than equity ETFs, they
may not be as tax
efficient. In addition, the deletion of maturing bonds from bond indexes and the
addition of
newly issued bonds may result in higher turnover rates than equity funds.
I'm a trading beginner. How can I learn to ETF
trading from scratch?
We recommend signing up for Bill Poulos's new ETF Profit Driver System (home study
course)
released in April 2008. Learn successful ETF trading step by step at your own
pace at home.
ON LIMITED RELEASE FROM APRIL
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