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How You Can Benefit From Investing in ETF
Investing in an ETF (Exchange Traded Fund)
Welcome to the world of Investing. If you’re new to ETFs, maybe it’s time to consider this as part of your investment portfolio. So, what is an ETF?
An ETF is a Mutual 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). An ETF can therefore be described as a mutual fund.
Although there are some very important differences between them, it is easier to understand ETFs if you think of them as mutual funds.
But unlike mutual funds, which try to beat indexes like the S&P 500 annually, ETFs try to track them.
For example, if the S&P 500 trades 10 percent higher, the next ETF will trade 10 percent higher. If the S&P 500 index trades 12 percent lower, the next ETF will go down 12 percent.
If you don’t know what a Mutual Fund is, let me explain it to you. A Mutual Fund (also known as a Unit Trust in Asia) is an investment vehicle that pools money from multiple investors. A professional fund manager then invests and manages these funds in a variety 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 restrictive in how you can buy or sell them. With the explosion of ETFs over the past few years, I personally have decided not to bother investing in Mutual Funds (Unit Trusts), except for the investment related policies I currently have in place partly for protection.
Why do I recommend looking at ETFs as part of your investment portfolio in today’s context? As ETFs are relatively new compared to Mutual Funds, it means that there are currently few investors with the necessary skills and knowledge to invest in them, thus providing a great opportunity for first time investors at this stage of investing.
Imagine if you were one of the first investors who invested and benefited from the rise of China or the boom of Mutual funds in their early stage? You can get great returns on your investment portfolio now…
This will help put things in perspective: back in the early 1970s, there were about 270 mutual funds, with total assets of about $48 billion.
In 2006, the total number of mutual funds was approaching 7,000 … with over 9.2 TRILLION in investment assets!
Imagine knowing all the ins and outs of mutual fund trading in the 1970s, and being able to ride that path for the past 30+ years.
Do you see that in ETFs? I hope you do…
Well, if I have your interest, let’s talk about ETFs now…
Who issues ETFs?
Do you want to find a wide range of ETF’s currently on the market?
The full list is from Yahoo! Financial. If you go there, you will find a section on ETFs under the “Investing” tab. Scroll down using the left menu until you get to “View ETFs.” It’s not 100% current, but again, it’s the best tool on the internet right now.
For more detailed information on ETFs you will want to go to the websites of the issuers of those ETFs. There you will find a lot of information that will help you identify ETFs that you are comfortable buying.
Some of the main ones include:
Barclays – iShares
State Street Investors Global – SPDRs (Spiders) and streetTRACKS
Merrill Lynch – HOLDRSs
Rydex Funds – 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 and Poor’s Depository Receipts, Series 1 (SPDR): (Ticker Symbol: SPY) A Word About Ticker Symbols- Every stock ETF or Index Mutual Fund 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 must type the ticker symbol.
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 shares of any other company.
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 can be easily bought or sold like shares of any other company.
Returning to Singapore my country, if you want to grow your money with the same value of the Straits Times Index, which measures the Stock market of Singapore, then you can buy the STI ETF. You can buy a minimum of 100 shares through any local broker. STI ETFs are worth about 1/1000 of the STI Index. So if the STI is at 2100, the STI ETF will be worth $2.10/share. The most amazing thing about ETFS is that it also pays dividends of 3%-4% per year on top of the ETF’s share price appreciation.
Some Personal Tips:
If you have excess cash after setting aside 3-6 months of emergency funds and have an investment horizon of 3-5 years, you may like to invest some of your spare in an STI ETF. I have been recommending buying the STI ETF since it broke through the 1600 level. Despite the fact that there may be a pullback of the STI Index to the 2000 level, you may want to accumulate the STI ETF on any weakness or pullback in the STI ETF. With the upcoming 02 United Resorts set to open for business at 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 may want to look at is the Oil Services Sector (SYM: OIH ). From my previous blog about how the US economy is growing and inflation is likely to increase in the near future, it can easily be found an index of future oil prices and hence this particular ETF. Do your sum and take advantage of this opportunity.
Next, you may want to look at the Metals & Mining ETF (SYM: XME). The price is now around $35 and this was the price in 2006! Investment Guru Jim Rogers has put a lot of emphasis on commodities and I believe there must be a reason why he does so. Sometimes, it just pays to follow a Guru after you’ve done your homework.
In summary, ETF is a great investment tool that should not be missed at this time when the market has crashed after the investment and is on the way to recover in the next few years. The beauty of ETFs is that they allow you to allocate money the way an institution does, that is, sector by sector. This used to be a Big Boy Game, but with ETFs, a small investor like us can now join the game. As I always say, this problem happens once in your life if you make a big profit in your investment portfolio, don’t miss the boat this time, remember to collect from any weakness and keep investing for the next few years.
In my next blog, I will share how you can use OPTIONS to multiply the returns on your ETF investments, and how you can buy at the lowest market price! Stay tuned and talk to you soon.
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