Go and vote -- but not with your investment dollars!

[This is a revise of an earlier entry. I thought, with the elections coming, that it would be appropriate to re-run.... Russell]

Bonita, a buddy of mine, calls me on the phone and tells me that thanks to President Bush and his “inane economic policies,” the dollar is due to get walloped. She asks me how to invest in foreign currencies. I caution against it, explaining that financial markets are unpredictable, but she insists. The dollar rises, and her “investment” (I’d call it a gamble) tanks.

Ken, another friend, certain that the GOP is driving this country to ruin, has kept his money in a savings account for the past 6 years. What started off as $70,000, thanks to 6 years of low-but-steady inflation and taxes on his interest, is now worth something less. That same $70,000, invested in a well-diversified, modestly aggressive portfolio, might now be worth $100,000, or more.

I’m not going to get into my own politics. I’m only here to say, whether you are liberal or conservative, please don’t let your politics shoot you in the investment foot.

In our hyper-intense political environment, I’ve seen more and more of this knee-jerk reaction in which people want to move their investments to reflect their political leanings. The ease of transfer of assets has exacerbated this tendency, too, as I’ve noted in my new book, Exchange-Funds for Dummies, published this fall. ETFs are in many ways the perfect vehicle for these politico-investors. Hate what’s happening in Washington? Invest your money in South Africa, Malaysia, or South Korea. Hate especially the oil industry? You can plunk your money in an alternative-energy ETF. It’s easy now to target market sectors for your political support, or opposition.

Ken (the same guy mentioned above), for example, is certain that the exportation of jobs, the dissolution of organized labor, and the resulting squeeze on wages will slaughter the Middle Class. No one will be left to frequent the malls. Stores will be boarded up. The stock market will collapse. He is shocked that it hasn’t happened yet. “How can Wall Street be so blind?!” he asks me. Ken can easily short the market with the ProShares Short S&P 500 ETF. But I wouldn’t advise him to do so.

Wall Street, where very many smart and educated people hang out, is not so blind, Ken. They know that even if you are right, even if history proves President Bush to be the buffoon that you think he is, even if Republican politics is driving this country down, it doesn’t necessarily mean that stocks will suffer.

Knowledgeable investors understand that market movements in the short term, and possibly well beyond, are largely random. Studies that show the huge disconnect between market returns and practically anything and everything else going on in the economy. Consider these tidbits:

• Researchers at the London School of Business recently found that a comparison of stock market returns around the world shows a generally inverse relationship between total market returns and a nation’s economic growth rate.

• And speaking of things Londonish….England started off the past century as the undisputed #1 World Power. It ended up the century with a lost empire, sky-high unemployment, and crumbling inner cities. During that time, of course, the United States came to dominate the known universe. Return of British large stocks, past 50 years: 11.8. Return of U.S. large stocks, past 50 years: 10.7. Looking to small stocks, the Brits beat us by a mile.

• Consider the history of disaster. (Always fun to do!) 1918, the year of the flu pandemic, the worst disease outbreak in modern world history, was a good year for stocks….1942 (Japan attacked Pearl Harbor; Hitler marched across Europe) was a great year…. 1962 (Cuban Missile Crisis, near destruction of entire world) wasn’t so bad…In contrast, in 1929, when the market began its Mother of all Nosedives, nothing terrible was going on. Ditto for April 2000, the start of the 3-year bear market that shredded so many Americans’ 401(k)s.

• Compare China to India. China's gross domestic product grew by an average of 9.0 percent during the past decade; India’s grew by less than 6 percent during the same period. 10-year average return of The China Fund: 13.9. 10-year average annual return of The India Fund: 20.4.

I can’t explain all of these paradoxes. No one can, really. They are what they are. But they come with a moral. Here it is: Stock market returns in the United States have averaged about 10 percent a year over the past 75 years. That’s way higher than just about any other investment. Will it continue? I don’t know.
But the stock market has been a pretty darn resilient thing so far. As bad as the current economic climate may seem to you, as destructively idiotic as you may think the current administration’s policies to be, the stock market, in my book, has seen worse.

You want to allow your politics to dictate your investments? Avoid the stock market altogether if you are a Bush-hating liberal. Go whole hog if you are a pro-Bush conservative. You want to be more rational about it? Separate politics from portfolio.

I hope that each one of you votes your conscience on Nov. 7. But I also hope that each of you invests without your political biases coming into play.

Russell

Hey, anyone can sell an ETF!

State Street (purveyors of SPDRs and StreetTracks ETFs) ran a full-page ad in the Wall Street Journal last week. It featured a guy walking the city streets with a sandwich board. On the sandwich board, it read, "ETFs for Sale." The caption next to the photo said, "Everyone and their brother sells ETFs. But that doesn't mean you should trust them like family."

I love it.

Everyone and his brother IS selling ETFs.

Consider The United States Oil Fund (USO), which opened on the American Stock Exchange on April 10, 2006. The fund is technically not an ETF, but a very similar animal called a “commodity pool." For all practical purposes, we can call it an ETF. The United States Oil Fund, as awsome and official as that sounds, is run by a group called Victoria Bay Asset Management. And what exactly is Victoria Bay Asset Management?

According to the fund's prospectus, Victoria Bay Asset Management, LLC, is “a wholly-owned subsidiary of Wainwright Holdings, Inc. a Delaware Corporation…that also owns an insurance company organized under Bermuda law.”

Gee whiz.

And who runs this wholly-owned subsidiary?

Two of the top people running the fund also manage a mutual fund called Ameristock, and a third, Malcolm R. Fobes III (no relation to Malcolm Forbes) is the founder of the Berkshire Focus Fund …(no relation to the fabulously successful Berkshire Hathaway.) Both Ameristock and Berkshire Focus (both with Morningstar one-star ratings) have track records that would positively make you cringe.

But the part of the prospectus that really grabbed me was the part where it explains that “the managing and directing of day-to-day activities and affairs [of the fund] relies heavily on...Mr. John Love,” who, we later learn, is not only employed by Ameristock, but also “holds a BFA in cinema-television from the University of Southern California." Furthermore, the prospectus, continues, "Mr. Love does not have any experience running a commodity pool.” His experience: “from December 2000 to February 2001 [sic], Mr. Love was employed by Digital Boardwalk, Inc.”

Anyone and their brother, indeed.

Don’t mistake this fund for anything like the Vanguard Energy VIPERS (VDE) or the SPDR Energy (XLE) funds, both of which invest in oil companies, like ExxonMobil. Don’t mistake this fund for something like any of the precious metal commodity funds run by Barclays and State Street. Those funds maintain vaults filled with gold and silver. Victoria Bay deals in paper... futures contracts, to be exact.

In other words, they use your money to speculate on tomorrow’s price of oil.

I don't like speculation. I'd rather see you invest wisely. But if you are going to speculate on oil futures, don't you want someone as wise (and lucky) as Jed Clampett or as cunning as JR Ewing? Mr. Malcolm R. Fobes III and Mr. John Love, given their miserable track records, and unimpressive resumes, don't seem especially wise or lucky.

But are they cunning? Only if they get your money.

Oh, by the way, the United States Oil Fund, which will likely never pay a dividend (and therefore capital appreciation will be your only return), opened at around $70 back in April. It is now trading at around $50. Woooeeee.

Russell

Bull Horns and Bear Claws 50/50

Don't buy it when you hear some "expert" say that the market is going up/down in the next days or weeks. For every "expert" who says one thing, there are an equal number of experts who say the opposite. In fact, if I took a poll this very second of every player on Wall Street, half would be basically bullish, and half would be basically bearish....50/50. How do I know that? Think about it....If 51 percent of the players thought the market was moving up, and 49 percent thought it was going down, we would see more buyers than sellers, right? There would be more buy orders than sell orders (demand would exceed supply), and that would force the price of stocks up....up...up until such point as the number of sell orders and buy orders were the same, at which point, the price would stop moving. If 51 percent of the players were selling (thinking the market was headed south), then the price would drop...drop...drop until such point that equilibrium was reached.

Moral: Don't bother even reading prediction stories, much less acting on them. Put together an ETF portfolio, and hold it for the long run, tweaking now and then for the purpose of rebalancing or adjusting to meet life circumstance....Refrain from trying to time the markets based on what Joe Blow said in this morning's Wall Street Journal. His position, no matter how impressive his credentials, and no matter how powerful his arguments, is only telling half the story.

Russell

ETF Madness at Seligman Advisors

ETFs have a lot going for them, but perhaps their sweetest attibute: Low costs. Most of the Barclay's domestic ETFs, for example, will cost you around one-quarter percentage point a year in operating fees.

Enter Seligman Advisors, a mutual-fund company that packages ETFs (Barclay's, mostly) and sells them to small investors as a "multi-asset class fund" that "provides cost-effective diversification."

Is Seligman's TargETFund Core, A Shares, truly a "multi-asset class fund?" Yup, it is.

Does it provide "cost-effective diversification?"

Well, with it's load of 4.75 percent, and a gross expense ratio of 2.06 percent a year (per Morningstar Principia), I would say not. In fact, I would sooner recommend that you cover your head in aluminum foil and run naked through a lightening storm than purchase a Seligman ETF-based mutual fund. In the former case, you may or may not get burned; in the latter, there is no question that you WILL get burned.

I'm not even sure how Seligman gets away with this ridiculous claim of cost effectiveness. Some people at the SEC are obviously asleep at the wheel.

If you want to buy ETFs, buy them direct. Learn to diversify your own portfolio of ETFs by reading my book, Exchange-traded Funds for Dummies. You can do it. Really.

Russell
www.russellwild.com

It's almost here!

Exchange-traded Funds for Dummies is scheduled to arrive in bookstores within two to three weeks!

Pre-ordering is possible at Amazon.

(Why did the colors get all washed out when I blogged this image? I dunno. I'm an ETF expert not a graphics expert!)

Russell

Introducing Global Sector ETFs

Everyone agrees that diversification is a good thing. But, ah, how to diversify? As I wrote in my article, Style War, that appeared in Financial Planning magazine, many investors first divide their holdings into U.S. and foreign, and then often go from there into value and growth. Others prefer to start with industry sectors -- industrials, consumer staples, tech, healthcare, etc.

A new line-up of ETFs from Barclays make it easier to combine diversification styles. The iShares Global Sector ETFs introduced on September 12, 2006 each carry operating expenses of 0.48 percent....not too bad (although nothing to write home about, either). And each allows instant exposure to both U.S. and foreign, and industry sectors at the same time. Examples: RXI represents an S & P index of global consumer discretionary sector stocks, and EXI represents an S & P index of Material Sector stocks. There are 10 total and you can read all about them on the Barclays website, iShares.com.

If you go this route, all the power to you....you could do much worse. But keep in mind that you will be holding a portfolio of predominately large-cap stocks. Don't forget that you should also have some small-caps, and, of course, some bonds and cash, and perhaps (especially for larger investors) real estate and commodities to round out your nest egg.

Russell
www.globalportfolios.net

The ETF Expert, relaxing after a hard day of blogging

 

"Listed" vs. "Traded"

What does it mean to say that a certain ETF is "traded" on, say, the NASDAQ, as opposed to being "listed" on the NASDAQ? This is a source of confusion, even for some professional traders.

Here's the answer:

In ye olde days, a stock (there were no ETFes in ye olde days, of course) that was listed on, say, the New York Stock Exchange, was typically traded on the New York Stock Exchange. A stock that was listed on the American Stock Exchange was typically traded on the AMEX. Today, an ETF or stock that is listed on the AMEX can and usually does trade on any number of exchanges simultaneously. The SEC permits securities listed on any national securities exchange to be traded on all other such exchanges.

So in choosing an ETF (or ETFe), should you give a clam's ass which exchange it is listed on? The answer is NO. Pay attention instead to the two things that matter most....Asset class (is it a bond ETF or stock ETF? Is it a large-cap or small-cap, U.S. or foreign-stock ETF?).... And Fees (Vanguard ETFs are typically the lowest).

Much more, of course, on how to pick an ETF in Exchange-traded Funds for Dummies, coming out in November. (Pardon the sales pitch.)

Russell
www.russellwild.com

Buying ETFs should be easy, but not so at Fidelity

I had a client in my office today, and we placed some ETF trades through Fidelity. (Fellow advisors: I'm talking retail platform here, not advisor channel.) The client was looking over my shoulder as I explained the mechanics of making the trade. First, I explained, you go into your account. Then you go to the green section on the left part of the screen, under where it says "ACT" and then you click on the appropriate link. She looked perplexed. The trading choices at Fidelity, you see, are "Trade stocks"...."Trade mutual funds"... and "Trade fixed income." But....but...where is "Trade ETFs"? For the life of me, I don't know why Fidelity doesn't yet offer that option, but it doesn't. So. Just in case you are about to purchase your very first ETF, and you have an account at Fidelity, the correct link is.....drumroll...."Trade stocks"....that is where you will need to go to buy your ETF. Once you click on that link, it will take you to a window where you will be asked to put in the ticker of the ETF you wish to buy....SPY...QQQQ.... VNQ, etc. Happy shopping!

Note to Fidelity management: Fix this, will ya?

Russell

Gimmicky New Offerings Galore

Exchange-traded Funds for Dummies hasn't even hit the bookstores yet, but my prediction that a flood of gimmicky ETFs would soon hit the market has already come true.

First comes WisdomTree, riding the current popularity of high-dividend stocks, introducing 20 different high-dividend ETFs, with ridiculous variations among them. Next comes Claymore with five new ETFs, including the Claymore/Zacks High Yield Hog ETF (catchy, eh?) that invests in an "index" of limited partnerships and closed-end funds, and the Claymore/Sabrient Stealth ETF, investing in (allegedly) stocks that show certain positive insider trading patterns.

I'm not buying, and neither should you.

My next prediction: Good ETFs will continue to be turned into bad financial products. It’s already happening with some of the ETF offerings in 401(k) plans. In that case, perfectly good ETFs are packaged in such a way that the investor (trapped like a fly in a bowl of milk in his company’s plan) is paying as much as three percent in management fees. I’m sure that good ETFs will similarly be popping up in crappy annuity plans, 529 college plans, and other investments where someone somewhere stands to make a big buck off the small investor.

My advice to all those not trapped like flies:

Keep it simple. Invest in low-cost ETFs from Vanguard, Barclays and State Street. Pick ETFs that represent traditional asset classes, such as large growth, small value, and TIPS. Don't get suckered into buying newfangled ETFs with high expense ratios and gimmicky formulas. They never worked too well in the world of mutual funds, and they aren't going to work much better in the world of ETFs.

Russell

Hello, ETF investors

Welcome to ETF Talk with Russell!

Russell....that would be me, Russell Wild, principal of Global Portfolios, and author of Exchange-Traded Funds for Dummies. For more bio, see www.russellwild.com.

The world of ETFs is forever changing. So, too, is the world around us.

Whenever I feel that investors may benefit with the most up-to-date information on ETFs, I'll post that information right here.

Russell