Most investors have their favoured niche; a nice happy place where they feel comfortable in their level of knowledge and ability to avoid doing something silly.
My first stock trade was a buy at market prices that drove a lightly traded company stock up 20% and caused a run. My next trade was a long time after that..
Some investors like RRSP friendly stocks that will rise by low double digits over three years, others want doubles by lunch time, even if it means risking the vig on a total wipeout.
The Exchange Traded Fund (ETF) world is something you may have heard about recently. But chances are good you’ve also not paid much attention to the details behind them because, hey, you like gold explorers or biotech or dividend plays. While the ETF market has jumped over the last few years from huge to immense, there are still a lot of investors who just don’t know what they are, and don’t realise that they’re a potentially good way to play all those traditional markets.
This is understandable, in the wake of economic crises that stemmed largely from ‘new tools’ the financial world built and sold that managed to yank the rug out from most of the investment world. Though ETFs are still a mystery to many, they’ve actually been around since 1993. The sector really picked up in 2008, however, when the SEC allowed companies to sell actively managed ETFs.
ETFs are, in the simplest sense, like mutual funds that are traded in the same way as a stock. An ETF features low costs (many brokers will trade them commission-free), the ability to jump in and out at will, and a certain level of tax efficiency.
Also, unlike mutual bonds, the fund doesn’t need to redeem individual shares at net asset value. Rather, the ETF can be bought and sold all day long.
If you think gold is going to have a strong 2015, a gold ETF allows you to cover the sector without the risk of purchasing individual equities. If you think gold is due for a fall, a bear gold ETF might be a good option.
ETFs can be extremely broad or insanely focused. A HealthShares Dermatology and Wound Care ETF was closed down in 2008 when nobody wanted to buy. A Global X Central Asia and Mongolia Index ETF (
NYSE:AZIA,
Stock Forum) offers a basket of investments in Mongolia, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, for those inclined to believe that bloc will be the next global powerhouse. The PowerShares Lux Nanotech Portfolio ETF may have sounded like it covered a small market (come on, comedy gold), but it jumped over 25% in a month shortly before it was closed down.
You can invest in ETFs for
agribusiness,
precious metals,
currency,
bonds,
NASDAQ companies,
national and regional economies,
consumer staples,
utilities,
emerging markets,
interest rates, the
S&P 500, the
Venture Exchange,
dividend payers,
minimal volatility options,
real estate,
energy,
infrastructure,
water, the
oil sands,
growth… and that’s just a small sampling.
While the traditional thinking behind mutual funds is they’re nice for a strong, consistent return on your money (with any luck), a well-timed ETF purchase can far outrun a fund.
The iShares India Index ETF (
TSX:T.XID,
Stock Forum), as an example, was up 39.1% at the close of 2014. The S&P/TSX Capped Consumer Staples Index ETF (
TSX:T.XST,
Stock Forum) returned 47.2%. The Capped IT Index ETF (
TSX:T.XIT,
Stock Forum) was up 36.3%. The USA Minimal Volatility Index ETF (
TSX:T.XMU,
Stock Forum) was volatile enough to bring a 26.1% return.
Perhaps unsurprisingly, the Venture Index ETF managed to lose 30.0% in the last year while the Oil Sands Index ETF dropped 24.7%.
The iShares S&P CNX Nifty India Index Fund is a great example of the advantages inherent in trading an ETF over picking individual stocks. While lots of Indian companies have had great years, I’d challenge the average North American retail investor to name one.
Yet, with T.XID, you get into 50 Indian companies – the best of breed – that are large enough to weather small economic hiccups, international enough to not rely on the local economy doing all the right things, and rapidly expanding outwards into a region of billions. Though a mutual fund would do the same job, the management fees of same are heavier, and you’re not going to be able to get in and out on the same day as prices fluctuate.
In an effort to help expand the knowledge base of our readership of one million-plus monthly investors, we have created a new ETF section on our website, dedicated to an ongoing editorial coverage of the space, complete with informational pieces to help you navigate the ins and outs going forward. And hopefully uncovering the next Nifty Fifty India Fund before it goes on a double.
For more information, visit and bookmark
https://stockhouse.com/markets/etfs and come back often.
--Chris Parry
https://www.twitter.com/chrisparry