Stay away from leveraged inverse funds

Feeling depressed that your market investments have gone nowhere the past 11 years? Here’s something to cheer you up: You could have done a lot worse by investing in leveraged or leveraged inverse funds....

The rest of this article I wrote will appear shortly in Kiplinger's. Do read it. In the meantime, do not invest in such ETFs as the leveraged inverse Treasury funds (being heavily advertised right now). Chances are good to excellent that you WILL LOSE money.

Russell

Index Investing for Dummies hits the bookstores!

Please check out my latest book....

http://www.amazon.com/Investing-Dummies-Business-Personal-Finance/dp/047029406X

Russell

For the latest ETF news...

Sorry....Been a good while since I've updated this blog. I've been busy writing several books.

Speaking of which....

ETFs for Dummies may be getting a wee bit dusty, but Index Investing for Dummies, scheduled for release on December 31, 2008, contains lots and lots of new information on ETFs. Please pick up a copy either online or at your local bookstore.

You might also want to read Bond Investing for Dummies.

And stay tuned for information about my next book....One Year to an Organized Financial Life (to be co-authored with organizing guru Regina Leeds).

Russell

Tax Harvesting Time!

Tax loss harvesting has never been easier, thanks to exchange-traded funds.

You had a bad year in a particular investment? Let Uncle Sam share your pain. You can sell the investment by December 31, and use the loss to offset any gain. Or, if you've had no capital gains, you can deduct the loss from your taxable ordinary income, up to $3,000. But there's a catch: Because of the IRS's "wash rule," you can't take the tax loss if you buy that same investment back within 30 days. You can leave the proceeds in cash. But January is usually a pretty good month for stocks. What to do? Buy an ETF. If you sell, say, $20,000 of Intel (down 13 percent YTD), you can buy $20,000 of the Technology Select Sector SPDR, a basket of Intel-like companies. Not the same thing, for sure, but either gives you exposure to the same company (and its competitors) for the 30 days that you must live without the stock. If you wish, after 30 days, you can sell your ETF and repurchase your beloved Intel...and voila, you've just earned yourself a sweet tax deduction.

Russell

What's in a name?

It’s a shame that exchange-traded funds have such a technical-sounding, unfriendly name, as opposed to mutual funds that sound so fuzzy and warm. In essence, ETFs are nothing more than low-cost index mutual funds that are bought and sold in a slightly different manner. Yet many people seem to believe that ETFs are only for sophisticated investors, day-traders, and big wheeler-dealers....in part because of that darned name. Hmmm. Maybe if I changed my name to Einstein, people would think I'm a genius.

Albert

Basic Stuff: How ETFs Differ from Mutual Funds

"How to they differ from mutual funds?" is often the first question I am asked about ETFs. Here is my answer, in a nutshell:

They are similar in that they both represent “baskets” of securities (usually stocks or bonds), but mutual funds and ETFs differ in a number of ways:

ETFs trade differently. They can be bought and sold, and their price changes, throughout the day. Mutual fund orders, in contrast, can be made during the day, but the actual trading (and any resulting price change) doesn’t occur until after the markets close.

ETFs are cheaper. They require you to pay small trading commissions, but ETFs usually wind up costing you much less than a mutual fund because the ongoing operating expenses tend to be much less. Most ETFs charge no more than one-half of one percent a year, some less than one-tenth of one percent.

ETFs tend to track indexes. Managers of ETFs tend to do very little trading of securities in the ETF. The vast majority of mutual fund managers spend a lot of their time trading.

ETFs result in less tax. Because of low portfolio turnover and also the way they are structured, ETFs’ investment gains usually are more gingerly taxed than the gains on mutual funds.

Russell

Put Your Money Where Your Mouth Is?

"Put Your Money Where Your Mouth Is?" That's the headline of an article in today's Wall Street Journal that questions whether ETF managers should invest in their own products. Apparently, according to SEC records, many do not. The article suggests terrible things about those managers....

I'd like to defend them.

In the case of an actively managed mutual fund attempting to beat the market, yes, a manager should indeed "put his money where his mouth is" -- absolutely. I would not want to invest in any actively managed fund that the manager did not have enough faith in to plunk some his own personal funds. But index mutual funds and (most) ETFs? That's a whole other story.

There are many perfectly good reasons why an ETF manager might not want to invest his or her own money in a particular index:

1. His risk profile may not match yours...and perhaps the QQQQ is a bit too risky for his own financial situation.

2. She may already have funds invested in the index, perhaps through an index mutual fund, and would have to pay huge capital gains to switch to the ETF.

3. He's making deposits or withdrawals on a regular basis, in which case, an index mutual fund may make better sense than an ETF.

4. She may have just bought herself a new Jag, and has no money to invest.

In short, don't be concerned about where the manager of an index fund keeps his own loot....concern yourself with how well he tracks the index, and how much he charges you to partcipate in his fund.

Russell