How You Can Benefit From Investing in ETF6 min read
Investing In ETF (Exchange Traded Fund)
Welcome to the world of Investment. If you are new to ETF, it’s probably time you look into this 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 anytime of the day just like a stock). ETF can therefore describe as a Mutual Fund trading like a stock.
Although there are some very important differences between them, it’s easy to understand ETFs if you think of them like mutual funds.
But unlike mutual funds, which try to beat indexes like the S&P 500 each 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 decline by 12 percent.
In case you are not aware of what Mutual Fund is, let me define it for you as well. A Mutual Fund (also known as Unit Trust in Asia) is an investment vehicle that pools money from many individual investors. A professional fund manager then invests and manages these funds into a broad diversification of stocks, bonds and other securities.
The main problem with Mutual Fund or Unit Trust is that they tend to have high management fees and are very restricted in the way you can buy or sell them. With the explosion of ETF over the last few years, I have personally decided not to bother with investing in Mutual Funds (Unit Trusts) anymore, except for some investment linked policies that I currently have partly for protection purpose.
Why did I propose that you should look into ETF as part of your investment portfolio in today context? As ETF is relatively new as compared to Mutual Funds, that also means that there is currently few investors with the necessary skill and knowledge investing in it, thus providing a vast opportunity for early investors in this investment arena.
Imagine that you are one of those early investors who have invested and profited from the rise of China or the boom of Mutual funds in their early stage? You could be reaping a great return in your investment portfolio right now…
This will help put things in perspective: Back in the early 1970s, there were approximately 270 mutual funds in existence, with total assets of around $48 billion.
By 2006, the total number of mutual funds was approaching 7,000 … with total invested assets of more than $9.2 TRILLION!
Imagine you knew all the ins and outs of mutual fund trading back in 1970, and were able to ride that trend for the past 30+ years.
Do you see that in ETF? I hope you do…
Ok, if I have interest you, let us talk about ETF now…
Who Issues ETFs?
Do you want to find a comprehensive list of ETF’s currently in the market?
A fairly comprehensive list is actually at Yahoo! Finance. If you go there, you’ll find a section on ETFs under the “Investing” tab. Drill down using the left-hand menu until you get to “View ETFs.” It’s not necessarily 100% current, but again, it’s the best resource in the internet right now.
For the most detailed information on ETFs you’ll want to go to the websites of the issuers of those ETFs. There you’ll find a lot more information that will help you identify ETFs that you’re comfortable buying.
Some of the major issuers include:
Barclays – iShares
State Street Global Investors – SPDRs (Spiders) and streetTRACKS
Merril Lynch – HOLDRSs
Rydex Financial – Rydex ETFs
Vanguard Group – Vanguard ETFs (formerly known as VIPERs)
ProFunds – Inverse and leveraged ProShares ETFs
Bank of New York – BLDRS (based on ADRs)
Some of the common ETFs:
Standard & Poors Depository Receipts, Series 1 ( SPDR): ( Ticker Symbol: SPY) A word about Ticker Symbols- Every stock ETF or Mutual Fund of Index has a ticker symbol assigned to it. For example, the ticker symbol for “Citigroup” is C and the ticker symbol for “S&P Depository Receipts ( SPDR)” is SPY. Whenever you wish to trade a security, you have to type in the ticker 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 you can buy and sell them like the shares of any other company.
The DIAMONDS Trust, Series 1 aims to track the performance of the Dow Jones Industrial Index. They are listed on the American Stock Exchange (AMX) and it can be easily be bought or sold like the shares of any other company.
Back in Singapore my country, if you want to grow your money at the same rate of 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. The STI ETFs are priced approximately 1/1000th of the STI Index. So if STI is at 2100, the STI ETF will be priced at $2.10/share. The wonderful thing about ETFS is that it also pays you cash Dividends of 3%-4% a year on top of the appreciation of the ETF’s share value.
Some Personal Recommendations:
If you have excess liquidity in cash after setting aside 3-6 months emergency cash and have an investment horizon of 3-5 years, you may like to invest some of your spare in the STI ETF. I have been recommending buying of STI ETF since it fell to 1600 level. Despite the fact that there may be some pullback of STI Index back to the 2000 level, you may like to accumulate the STI ETF upon any weakness or pullback in this particular STI ETF. With the upcoming 02 Integrated Resorts that would be opened for business by end of this year and next year, Singapore with a strong government and political stability is poising for a strong economic recovery in the next 3-5 years.
Another ETF you may like to look into is the Oil Service Sector (SYM: OIH). From my previous blog on how US economy is evolving with inflation likely to creep in the near future, it can be deduced easily the direction of oil prices in the future and hence this particular ETF. Do your sum and take advantage of this trend.
Next, you may also like to look into the Metals & Mining ETF (SYM: XME). The price is currently around $35 and this was the price back in 2006! Investment Guru Jim Roger had placed a lot of emphasis in commodities and I believe there must be a reason for him to do that. Sometimes, it pays just to follow the Guru after you have done your homework.
In summary, ETF is a great investment tool that you should not be missing out at this point of time where market is bruised after the credit crunch and is in trend for a recovery in the next few years. The beauty of ETFs is that they let you allocate money the way an institution does, that is, on a sector by sector basis. This used to be the Big Boy’s Game, but with ETF, small investor like us can afford to join in the game now. As I always said, this crisis is once in a lifetime for you to make big tremendous gain in your investment portfolio, do not miss the boat this time, remember to accumulate on any weakness and stay invested in the next few years.
In my next blog, I will share on how you can utilise OPTIONS to multiply the returns on your ETF investment, and how you can buy at lower market price! Stay tuned and talk to you soon.