Skip to comments.What Are ETFs? (Exchange traded funds)
Posted on 01/11/2014 2:07:27 PM PST by RoosterRedux
What Are ETFs?
In the simplest terms, Exchange Traded Funds (ETFs) are funds that track indexes like the NASDAQ-100 Index, S&P 500, Dow Jones, etc. When you buy shares of an ETF, you are buying shares of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of index funds is that ETFs don't try to outperform their corresponding index, but simply replicate its performance. They don't try to beat the market, they try to be the market.
ETFs have been around since the early 1980s, but they've come into their own within the past 10 years.
ETFs combine the range of a diversified portfolio with the simplicity of trading a single stock. Investors can purchase ETF shares on margin, short sell shares, or hold for the long term.
Long-Term Growth of ETFs
It was in the late 1970s that investors and market watchers noticed a trend involving market indexes - the major indexes were consistently outperforming actively managed portfolio funds. In essence, according to these figures, market indexes make better investments than managed funds, and a buy-and-hold strategy is the best strategy to reap the advantages of investing in index growth.
(Excerpt) Read more at nasdaq.com ...
ETF's are cheaper than mutual funds (no load and low on-going fees), may be traded instantly, and permit the investor to target market indices, market segments, commodities, countries, etc with great ease.
Extra Terrestrial Faggots. They invented the anal probe and are masters at cattle mutilation.
Steer clear of them, they can do you no good.
Most if not all brokerage firms (I use Schwab) have online ETF screeners.
Whenever I find a stock I like, I first find out which ETF's contain it and how they are performing.
ETF's really give individual investors a leg up.
Nothing as helpful as the voice of personal experience.;-)
Agree, ETFs are another way to invest. I’ve got a bit in TBT on the assumption interest rates will be going up.
If I remember correct, they also trade "intra-day" meaning the price fluctuates via bid / ask vs. Mutual Funds closing @ a NAV @ the end of the day. Also If I remember correct you can put a "Stop Loss Order" on them as a way to prevent losses on the way down. So imagine in Sept 08' you were sitting on some gains and decided on a Stop Loss, you might have gotten out @ your sell price before the bottom fell out.
An EFT is highly artificial in many ways.
When you buy an EFT, you are basically relying on the EFT sponsor to do what he said he would do. For example, in a physical gold EFT, if shares are sold, then the sponsor is supposed to use that money to buy gold. Same thing with stocks and other underlying securities.
Now suppose there was another financial crisis, and the big financial houses that sponsor these things desperately need cash. Isn’t it possible that some of them might raid whatever money is available?
“Extra Terrestrial Faggots. They invented the anal probe and are masters at cattle mutilation.”
Dude, lay off the South Park.
But note that "stop loss orders" become market orders when triggered and that means, of course, not that they will be liquidated/executed at the trigger price, but they will be executed at market. In a falling market, a large group of market sell orders can drive a market in deep loss territory...and you don't want to sell there.
It has been said that this was the reason for the great depth of the crash of 2008. A lot of trading programs (computer algorithms) had "stop loss orders" which when triggered caused the entire market to race to the bottom in an effort to trade out.
Can an unscrupulous sponsor pull a Madoff? Well Madoff did and so did so did Jon Corzine.
But they are the great exception. Furthermore, there is nothing to stop a mutual fund manager from pulling the same stunt...or a corporate management team like that at Enron.
Actually, no. An EFT is not artificial.
You might be thinking of ETN's (Notes) wherein there is an institutional guarantor. Also, some leveraged ETF's might contain swaps and corporate guarantees...which is why I would avoid them.
This all said, I am not giving advice and none should be taken.
I'm not so sure about that. I believe computer trading is suspended after the market drops by a certain margin to avoid this very scenario.
I think the funds offer a good balancing mechanism for those who aren’t confident enough to own single stocks. Basically you’re paying the fun manager to do the homework and make the right choices and find the best mix.
What keeps me up at night are the doomsday scenarios, which a person can afford to neither ignore or bank on. The stop loss is probably the best protection, as long as the trigger is set to where you don’t incur losses on normal fluctuations but tight enough to guard against catastrophe. Of course finding that point is the tricky part...
“Exchange Traded Funds (ETFs)”
“ETFs? (Electronically traded funds)”
Any article that cannot use the same definition is suspect as junk.
That’s my fault...just finished a large Italian dinner and had a bad case of carbohydrate hangover. I will ask the mods to correct the title.
That scene with supposed stock traders moving around frantically on the trading floors is theatre.
That said, suspension still is triggered by a big percentage loss and the losses of 2008 and 2009 still occurred despite the use of trading suspensions, halts, and stops.
” Also If I remember correct you can put a “Stop Loss Order” on them as a way to prevent losses on the way down. So imagine in Sept 08’ you were sitting on some gains and decided on a Stop Loss, you might have gotten out @ your sell price before the bottom fell out. “
You can get killed on a stop-loss order. Suppose you had a stock trading at 50 with a SL at 45.
On a rumor it opens the next day at 20. Your SL sells it at 20.
Rumor is falsified and stock returns to 50. You are out 30 points.
Exactly. That's why I suspect the big losses occurred due to something other than electronic trading.
From what I understand, a big factor in the stock market crash of 2008 was that large institutional investors with a lot of real estate and/or mortgage-backed securities in their portfolios were forced to sell off their stock market holdings in order to make up for losses in their other assets.
I stared a Scottrade account and stick to ETFs mostly. I’m not confident enough yet to go all in on individual stocks. SPY,QQQ, DIA and IWM.
but that's because the fellow next in line who can barely afford to buy groceries is paying for it!
Oops, my bad. Not EBT . . . ETF (different animal).
I’ve been in the business since 1978 (now retired - investment banker) and I stick with ETF’s exclusively. I watched my brother lose a small fortune on Enron and vowed to stay away from individual stocks for the rest of my investing career.
That's why my local grocer now stocks lobsters and oysters in the shell. I am often in line behind folks with those items...and all I have is Oscar Mayer bologna and a fresh tomato.
But I am happy.
That’s quite plausible...
This is the phase where your computers are trading on your accounts at night while you’re asleep.
When they’ve amassed enough money, their complete takeover will be under way.......
I’ve been watching this one and would like to put some into it but I don’t know whether it is safe or not. I would feel better if it was Ishares or Spyder or somebody I had heard of. I think automation is goiung to see some major growth in the future.
Robo-Stox Glbl Robotics&Automation ETF (ROBO)
Then you know that ETFs are a rip-off because of:
- management fees:
- bid-ask spread on the ETF;
- bid-ask spread on the underlying;
- rolling over the underlying futures contracts and re-balancing; and
- the compounding effect of the above.
An ETF based on futures contracts (commodities, indexes and financials) gradually trends to zero value over the long term. At worst, only invest in an ETF very short term, at best, not at all. They're like Vegas. The house always wins, the house in this case being the ETF promoters, investors in the underlying futures contracts, brokers and exchanges for both the ETF and the underlying futures contracts and the market in general.
ETFs based solely on underlying stocks are the least harmful, ETFs based on futures contracts are worse and leveraged ETFs based on futures contracts are the worst.
Options have many of the same inefficiencies, notably the bid-ask spread of often highly illiquid contracts.
If you must speculate on the price direction of commodities, indexes or financials, trade futures on the Chicago Mercantile Exchange. Then you only have one middleman. You'll need to roll over contracts as they approach expiry if you want to maintain your 'position', street talk for your bet. Only buy a bit. Futures are leveraged roughly 6:1, whereas ETFs are 1:1, 2:1 or 3:1.
Caution: unless you are in the business, 95% of investors do more poorly than the market.
Some mornings there is catnip on my keyboard and, according to my browsing history, someone has been searching for pet care-based and herbal agriculture ETF's.
Whatever you are drinking...I think you should share!
I have thought about adding it as a very tiny sliver of my portfolio.
The only problem with ROBO holdings is that the real excitement is in 3-D printing (DDD and SSYS), and I just can't tell if 3-D printing is ready for prime time.
Yes, it is fascinating and seemingly miraculous...but is it ready to create real value among manufacturers and designers such that it can bring home some bacon.
Go watch videos on 3D Systems and Stratasys and ask yourself if you feel that their promotional videos are substantial or if they are all sizzle and no steak.
I got the feeling that they are still selling sham-wow.
I have no doubt that one day (perhaps soon) this industry will strike gold...but when...and what other industries and companies may arise to push them aside.
Nothing personal, Rooster. I know a guy who lost over $10 million using a leveraged ETF to bet that natural gas prices would rise, in early 2009. If he had just used futures contracts, he would 'only' have lost $7.0 million. The promoters actually dropped by his office and congratulated him on having such big balls. Their short leverage nat gas ETF traded at under 1% of its value three years before. Their long fund would not have come close to making up the difference. They keep doing negative splits to paper over the truth. As a result, I researched the topic. People have done peer-reviewed papers supporting what I told you. I would be happy to share.
Absolutely! It is wonderful not to live on the welfare plantation. You know, our dignity is not for sale.
This article is aimed at introducing mutual fund investors to good old basic index and sector ETF's which contain nothing more than the underlying stocks.
The Standard & Poors composite index (SPY) beats the living tar out of most mutual funds with very little costs.
To those considering ETF's, don't throw the baby out with Kennard's bath water.;-)
And Kennard, where's my share of your cocktail!
Take a gander at biotech ETF's in NASDAQ and S&P.
In my mind they are a little bit like Coca-Cola. Once they find a popular recipe, they can produce it like flavored water.
Robotics companies are basically machine tool companies which have a software component. Even Intuitive Surgical (maker of Da Vinci surgical robot) has suffered lately (from attacks by greedy lawyers).
BTW, if said lawyers claims are eventually deemed frivolous, Intuitive Surg. will recover nicely IMHO.
I stay with what I understand. Equities.
That is a good idea to see which ETF's have a stock you're interested in. Same with mutual funds.
Good, sound advice! Thx.
Jack Bogle and I agree.
Many years ago I put my parents in some great American Funds (Washington Moo, Cap Income Bldrs, Fundamental Investors). They had a great retirement.
But Spy (which wasn't around then) beats the tar out of all of them.
I use SPY as my foundation...and spread out from there.
I look at SPY as my little fishing pier. I stand on the end of it and cast for higher returns. When the skies turn ugly, I pull everything back into SPY.
I live simply...so that if the market takes a dive, I will wait until it recovers.
With ETF's, a man working a job he doesn't like can still have a little farm outside of town. That farm is his ETF portfolio.
He can put his heart into his little farm and that becomes his reason for living. ETF's can be understood by the regular guy...but farmers are not the regular guy..and neither are most Americans. Americans are smart and they can make a living in tough times.
Regular human beings can make a good living on ETF's if they take the time to understand things.
ETF's have moved that understanding out of the market center and back out onto the farm.
ETF's trade on the big picture...not on clever little market center tricks.
ETF's give regular guys and gals a way to invest in the REAL economy they always understood.
ETF's bring investing out to the rational world and away from the world dominated by insiders and institutions.
I traded financial ETF’s (FAS/FAZ)in 2007-2008. The money was good if you could guess where the next uptick was coming from, and it was a guessing game. I got out when I noticed the amount of reverse splits happening to keep the financial ETF’s above the penny-stock category, and when I was hit with a huge IRS tax bill for day trading.
Spiders/SPDR (NYSE:SPY) is the largest ETF, with net assets of $173 billion. With an expense ratio of only 0.095%, SPYs are a natural core equity holding for all investors. It has none of the negative characteristics of the other ETF types that I mentioned above.
ETF's bring the market within their understanding...would you tell them to get involved or...
Many Americans will understand SPY and will prepare for their family's future.
And knowing how smart farmers and frontiersmen are...ETF's are nothing to them.
They will grasp them automatically...if they only become aware of them.
I spent many years among the 1% and they frankly aren't so smart. I find farmers and small town merchants and regular families at least as smart as the Starbucks Latte crowd.
But it doesn't hurt that the little men and women have a little bit of help...from you and me.
We can make a real difference!
In the middle of last year, I noticed my 401k was losing money on money market funds. WTF? They are money market funds. I realize interest rates are in the crapper and they don't make much, but got on the horn to the corporate manager and found out that these SLEEZEBALLS TAKE COMMISSIONS ON MONEY MARKET FUNDS!
How in the hell can they justify taking a fee or commission on a money market fund? So I rolled every dollar eligible into a Scottrade IRA.
I bought one EFT (SQQQ) which specializes in shorting the market. Needless to say, it did very well last week. I don't advise anyone putting all their money in such a fund, but it doesn't hurt to have some there.
I believe Rick Edelman was talking about this favorably today on his radio show.
IMO- ETF's are a day trading vehicle. You can easily play both sides, but they have a built in diminishing returns on investment. I've seen FAS go from the $60 range down to $7.00 before a reverse split was done to bring the price back up. If you look at todays charts going back to that time, they don't even reflect the accurate prices because of numerous splits.
I've since gone to buy-and-hold for stocks with a decent dividend. One of my favorite buy-and-hold stocks is a little known tobacco and real estate holding company; VGR. I've held it since 2007. It's been relatively steady with a nice dividend for the price per share.
All-in-all, it has a lot to do with your tolerance for risk. Can you afford to buy and hold? Can you afford to gamble on a sudden upturn/downturn in the markets?
One positive I will give the ETF's is that you can easily play both sides without a separate options upgrade to your account for calls/puts.
My 401K made about 31% last year. I thought that was great. In 2012 it was 15.05% , 2011 it was 1.57%, 2010 it was 13.4%
I try to be an aggressive investor. So depending on your age you should be into some great funds in your 401k.