How you can benefit from investing in ETFs

Investing in ETFs

Welcome to the world of investing. If you’re new to ETFs, it’s probably time to consider 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 during the day (you can buy and sell it at any time of the day, just like stocks). Thus, an ETF can be called a mutual fund that trades like a stock.

Although there are some very important differences between them, ETFs are easy to understand if you think of them as mutual funds.

But unlike mutual funds, which try to beat indexes like the S&P 500 every year, ETFs try to keep up.

For example, if the S&P 500 is trading 10 percent higher, the ETF that follows it will also trade 10 percent higher. If the S&P 500 is trading 12 percent lower, the ETF that tracks it will also be down 12 percent.

If you don’t know what a mutual fund is, let me give you that definition as well. A mutual fund (also known as a mutual fund in Asia) is an investment vehicle that pools the money of many individual investors. A professional fund manager then invests and manages these funds in a broad diversification of stocks, bonds and other securities.

The main problem with mutual funds or mutual funds is that they tend to have high management fees and are very limited in how you can buy and sell them. With the explosive growth of ETFs over the past few years, I have personally decided not to bother investing in mutual funds (mutual funds) anymore, except for some investment related policies that I now have partly for protection.

Why did I suggest you consider ETFs as part of your investment portfolio in today’s context? Since ETFs are relatively new compared to mutual funds, this also means that there are currently few investors with the necessary skills and knowledge to invest in them, which provides ample opportunity for first-time investors in this investment arena.

Imagine being one of those early investors who invested and profited from China’s rise or the early-stage mutual fund boom? You could be making great returns on your investment portfolio right now…

To put things into perspective, back in the early 1970s there were about 270 mutual funds with about $48 billion in total assets.

By 2006, the total number of mutual funds was approaching 7,000 … with over $9.2 TRILLION in total invested assets!

Imagine knowing all the ins and outs of mutual fund trading back in 1970 and being able to follow the trend for the past 30+ years.

Do you see this in ETFs? I hope you will…

Ok, now that I’ve piqued your interest, let’s talk about ETFs…

Who issues ETFs?

Want to find a complete list of ETFs currently on the market?

A fairly comprehensive list is actually at Yahoo! Finances. When you go there, you’ll find the ETF section under the Investments tab. Scroll down using the menu on the left until you reach “View ETFs”. It’s not necessarily 100% up to date, but again, it’s the best resource on the web right now.

For the most detailed information about ETFs, you’ll want to go to the websites of the issuers of those ETFs. There, you’ll find a lot more information to help you decide which ETFs you’re comfortable buying.

Some of the major issuers include:

Barclays – iShares

State Street Global Investors – SPDR (spiders) and streetTRACKS

Merrill Lynch – HOLDRSs

Rydex Financial – Rydex ETF

Vanguard Group – Vanguard ETFs (formerly known as VIPERs)

ProFunds – Inverse ProShares ETFs with debt funds

Bank of New York – BLDRS (ADR based)

Some of the common ETFs are:

Standard & Poors Depository Receipts, Series 1 (SPDR): (Ticket symbol: SPY) A few words about ticker symbols. Each ETF or Index mutual fund is assigned a ticker symbol. For example, the symbol for “Citigroup” is C and the symbol for “S&P Depository Receipts (SPDR)” is SPY. Every time you want to trade a security, you must enter the ticker symbol.

SPDR (also known as SPIDER) is an ETF that tracks the performance of the S&P 500. They are listed on the American Stock Exchange (AMX) and you can buy and sell them 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 just like shares in any other company.

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, you can buy the STI ETF. You can buy a minimum of 100 shares through any local broker. The cost of the STI ETF is approximately 1/1000 of the STI index. So if the STI is 2100, the STI ETF would be worth $2.10 per share. The great thing about ETFS is that it also pays you cash dividends of 3%-4% per annum on top of the appreciation of the ETF shares.

Some personal recommendations:

If you have excess liquidity in the form of cash after setting aside emergency cash for 3-6 months and an investment horizon of 3-5 years, you can invest some of your spare funds in the STI ETF. I have been recommending buying the STI ETF since it fell to the 1600 level. While there may be some retracement of the STI index to the 2000 level, you can accumulate the STI ETF with any weakness or pullback in that particular STI ETF. With the upcoming 02 resort complex set to open for business later this year and next year, Singapore, with its strong government and political stability, is poised for a strong economic recovery in the next 3-5 years.

Another ETF you might want to look at is the oil services sector (SYM: OIH ). From my previous blog on how the US economy is doing with inflation likely to increase in the near future, it is easy to infer the direction oil prices will go in the future and thus this particular ETF. Do your sum and take advantage of this trend.

Next, you might also want to look into the Metals & Mining ETF (SYM: XME ). The price is currently around $35 and that was the price in 2006! Investment guru Jim Rogers has been heavily focused on commodities, and I believe he must have a reason for that. Sometimes it pays to just follow the Guru after you’ve done your homework.

Summary

In summary, ETF is a great investment tool that you should not miss at this point in time, when the market has been affected by the credit crisis and has a tendency to recover in the next few years. The beauty of ETFs is that they allow you to allocate money the way an institution does, i.e. across sectors. It used to be a Big Boy’s Game, but with ETFs, small investors like us can afford to join the game now. As I have always said, this crisis happens once in a lifetime so that you can significantly add to your investment portfolio. Don’t miss the boat this time, remember to stock up on any weak points and keep investing for the next few years.

In my next blog, I’ll talk about how you can use OPTIONS to multiply the returns on your ETF investments, and how you can buy below the market price! Stay with us and talk soon.

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