Skip to comments.How ETFs will destroy Wall Street (not a bad option)
Posted on 11/28/2012 9:29:53 AM PST by Grampa Dave
For decades, ordinary investors with modest sums to invest had limited options. With even low discount-broker commissions making a big dent into regular investments from typical paychecks, individual stocks were largely out of reach, leaving actively managed mutual funds as the primary alternative. Through active funds, money managers got used to the idea of taking 1% off the top on an annual basis, regardless of whether the funds they managed produced gains or lost money for their shareholders.
Index mutual funds have been around for 35 years, but they largely coexisted peacefully with active funds throughout most of that time. Exchange-traded funds, on the other hand, appear to be driving the nail in the coffin of traditional mutual funds. With the writing on the wall, some of the largest money-management companies have thoroughly embraced ETFs, leaving less forward-looking firms in what could prove to be a dying industry.
Why ETFs reign supreme!:
The primary advantage that ETFs have is their low-cost structure. By adopting investment strategies that track passive indexes rather than requiring active management, ETFs don't have to pay as much for frequent trading expenses, and they generally don't pay managers as much to implement those strategies as they would to come up with their own independent investment ideas.
Index mutual funds share that low-cost advantage with ETFs, so it's only natural to ask what ETFs brought to the table that index funds lacked. Several things set ETFs apart from their index-fund brethren:
Intraday trading. You'll find experts on both sides of this issue, with some arguing that the ease of trading ETFs contributes to their overuse as short-term trading tools.
But some of the best buying opportunities for stocks have come in the middle of the day, with the Flash Crash two years ago perhaps the most extreme example. Having the ability to jump in midday can give you a big advantage over having to wait until end-of-day pricing kicks in for index funds.
Flexibility. Many index mutual funds require minimum investments and can therefore be challenging for beginning investors to set up. ETFs, on the other hand, are subject only to the minimums that your broker establishes, and many brokers let you open accounts with very little money and then offer their ETFs at no commission. That prevents you from having to make a big commitment to a single index fund early on before saving up enough money to diversify. Core strategies. ETFs make it easy to set up core portfolios using broad-based basic asset allocation strategies. For instance, BlackRock (NYSE: BLK ) recently came out with a set of 10 core iShares ETFs, including seven stock funds and three bond funds. Through various combinations of those ETFs, you can tailor your portfolio to the risk level and return potential you want. Tackling niches. At the same time, though, ETFs are useful for helping you make focused bets on certain parts of the market. For instance, State Street (NYSE: STT ) came out with its Sector SPDR line of ETFs years ago, allowing investors to drill down on particular industries while retaining the diversification of owning dozens of stocks within each industry. Transparency. ETFs also give investors the huge advantage of telling them exactly what stocks or other investments they own on a daily basis. By contrast, less frequent disclosures from mutual funds allow them to use window dressing to mask their investment decisions, making it much harder for you to judge their performance on a stock-picking level.
The threat Wall Street hasn't completely caved in to the new low-fee reality, though. To try to preserve profits, several companies have established or are lining up to come out with active ETFs. Bill Gross' PIMCO Total Return ETF (NYSEMKT: BOND ) has become a big hit, with more than $3 billion under management. State Street and Schwab (NYSE: SCHW ) are also in line to release active ETFs. Yet while active ETFs generally have higher costs than similar index-driven ETFs, companies are generally taking a pay cut compared to their mutual funds. For instance, PIMCO's ETF has annual charges more than a third lower than its Class A mutual fund shares and is available without a sales load.
ETFs are far from perfect, but they've had a real impact on the way that Wall Street profits from managing your money. By embracing low-cost ETFs, you can keep more of your money for yourself. In a low-return environment, that's more important than ever.
Simple ETFs can help you profit from improving macroeconomic conditions. To learn more about a few ETFs that have great promise for delivering profits to shareholders in a recovering global economy, check out
That was the best financial move I ever made.
I have posted on Free Republic for about a decade how the left wing controlled mutual funds buy left wing companies like the NY Slimes and keep their stock value from crashing with our mutual fund money.
We have kept two mutual funds due to their managers.
You can buy or sell ETF's like stock at anytime during the hours the market is open. Mutual funds can only be sold or bought at the end of the day. In the meantime the traders have scooped up any good deals and sold the losers.
Last but not least most mutual fund managers brag about lack of turnover and the holding on to stocks as they drop like rocks. Good for them and the left wing companies they own stock in as they often buy more of the losers instead finding something else to buy.
We use stop loss orders on our ETF's to prevent disasters like the May after Pelosi/Reid started raping and pillaging with their control of the house and $inate.
Stop loss orders saved our butts again in 2008 when the rats ran our economy aground.
Disclosure: We own a fair amount of the ETF BOND from the day it opened on the market.
Actively Managed ETFS:
Excerpt: “In order for the active ETF industry to take off, investor education is necessary to inform potential participants about the structure, risks and benefits. So far, the cost structure of an active ETF has proven beneficial, as the PIMCO Total Return ETF (BOND)* has amassed $4 billion in assets under management. The success of BOND has been influential for investors and providers, and has begun to pave the way for the industry. [PIMCO Total Return Ranks Third in ETF Sales Since March Launch]”
Full disclosure: We have owned BOND etfs since its launch.
Besides good dividends, it has down well in the market. It does often does real well when the market and GLD are taking hits.
I am not sure how reliable ETFs really are. When you buy an ETF, you are adding a layer of ownership that further obscures the underlying investments. You have to trust that the sponsor is really holding the underlying investments he says he is holding - if that is indeed what he claims. Some EFTs just track a class of asset without really owning them. These are little more than betting pools.
If you own a stock in street name, you still have to trust that your brokerage really is holding the stock on your behalf. If you own an ETF in street name, you not only have to trust your brokerage, you have to trust the sponsor.
I prefer the simplest investments possible, rather than a long chain of trust.
Of course, so far so good, but I would like to see what happens when a ETF sponsor goes bankrupt, and find out whether the assets really are preserved for the putative owners.
I day traded ETF’s back in 2008. I was hit with a massive income tax bill in 2009. I view ETF’s as inherently risky.
“I day traded ETFs back in 2008. I was hit with a massive income tax bill in 2009. I view ETFs as inherently risky.”
You apparently made some good money or you would not have been taxed.
Another problem with mutual funds not in an IRA/401k is they can have a great year, and you can get taxed on gains due to distributions, dividends and interest, that you haven’t realy used like home values in California before the current recession.
Also, our experience is with our IRA’s. We get taxed at the rate that is in effect the year when we make withdrawals from our IRAs.
Any investment is inherently risky, which is why we put in a stop/loss order when we buy any ETF and update the s/l orders, when we have made money or before the stop/loss order becomes lapses.
I was day trading FAS/FAZ, and got nailed with a bill north of 40%. I haven’t followed either for a few years now, but with their volatility, they were a day traders delight.
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