ETF Talk with Russell

Make Wheat, Not War

2012-02-13T20:22:00.000-08:00

In the stock market Olympics of the past century(1900–2000), the overall winner in terms of real stock market return (returnafter inflation — the kind of return that really counts) was . . . drum roll .. .. the socialist, Volvo-producing, snow-covered nation of Sweden. Sweden’soverall rate of return for the century was 7.6 percent. In second place wasAustralia with 7.5 percent. In third place was South Africa with 6.8 percent.The United States came in fourth with 6.7 percent, and Canada was fifth with6.4 percent. At the bottom of the world barrel, the Belgian equity marketreturned only 2.5 percent, with Italy, Germany, Spain, and France draggingclosely behind with respective 100-year annualized post-inflation returns of2.7, 3.6, 3.6, and 3.8 percent.

Here’s the conclusion of the authors who pulled these numberstogether, a group of distinguished professors from the London Business School:“Generally speaking, the worst performing equity markets were associated withcountries which either lost major wars, or were most ravaged by internationalor civil wars.” The best performers, point out professors Elroy Dimson, Paul Marsh,and Mike Staunton, were “resource rich countries.”

An updated listing of the long-term stock-market winnersappears in the Credit Suisse Global Investment Returns Sourcebook 2011, usingreturn data from 1900 through 2010. Australia has now taken the lead with 7.4percent, South Africa is in second place with 7.3 percent, and Sweden now holdsthird place (tied with the United States) with a 6.3 percent real stock marketreturn over the past 110 years.

Excerpted, with permission, from Bond Investing for Dummies, Second Edition, Copyright (c) 2011, Wiley Publishing, Inc. All rights reserved.

Available wherever books are sold, including Amazon

2012-01-29T20:19:00.000-08:00

Boom Economy = Robust Stock Market? Not Necessarily

You would think that a fast-growing economy would be the bestof places to invest. And yet there is more to stock returns than the growth ofa national economy. (Just ask those investors who poured money into Chinaseveral years ago.) In fact, the mind-blowing conclusion of a handful of recentstudies is that the reverse is true: If you look at the stock returns ofvarious national markets over the past 100 years, you actually find an inverse relationship. Slow-growing economies (such as India’s,whose stock market has lately left China’s in the dust) generally make forbetter stock investments!

There are several possible explanations for this anomaly. Somesay that rapid economic growth is attributable more to small, entrepreneurialbusinesses rather than to larger, publicly held corporations. Others havesuggested that the fruits of economic growth often don’t go to shareholders.Instead, those fruits may go to labor, or consumers, or (with the United Statesbeing a prime example) top executives and option-holders. Another possibleexplanation is that the prices of stocks in fast-growing economies (just likedomestic growth stocks) often start off overpriced due tohigher-than-reasonable expectations. Stocks of slow-growing economies (justlike value stocks) may tend to be underpriced.

The moral of the story is to spread your investment dollarsaround the world. Don’t think you can pick countries that will outperform byusing projected growth rates as your crystal ball.

Excerpted, with permission, from Bond Investing for Dummies, Second Edition, Copyright (c) 2011, Wiley Publishing, Inc. All rights reserved.

Available wherever books are sold, including Amazon

2012-01-22T17:31:00.000-08:00

DO YOU NEED MID-CAPS IN YOUR PORTFOLIO?

In a word, my take on mid cap ETFs is . . . why? Yes, for the past several years midcap stocks — investments in companies with roughly $5 to $20 billion inoutstanding stock — have performed especially well. They’ve done better thanlarge caps and have even given small cap stocks a run for their money. But suchoutperformance of mid cap stocks is a fluke. So, too, is any underperformance.

If you look at the risk/return profile of mid caps over manyyears, you find that it generally falls right where you would expect it tofall: smack dab in between large and small cap. Owning both a large cap andsmall cap ETF, therefore, will give you an average return very similar to midcaps but with considerably less volatility because large and small cap stockstend to move up and down at different times.

Other investment pros may disagree, but I reallydon’t see the point of shopping for mid cap ETFs, even though there are manymid cap offerings. Keep in mind, too, that most large cap and small cap fundsare rather fluid: You will get some mid cap exposure from both. Many sectorfunds — including real estate, materials, and utilities — are also chock fullof mid cap.

* * *

Excerpted, with permission, from Bond Investing for Dummies, Second Edition, Copyright (c) 2011, Wiley Publishing, Inc. All rights reserved.

This book can be purchased wherever books are sold. Here is but one option... http://www.amazon.com/Exchange-Traded-Dummies-Business-Personal-Finance/dp/1118104242/ref=sr_1_1?ie=UTF8&qid=1327282117&sr=8-1

2012-01-18T15:45:00.001-08:00

ETFs make for good bedtime stories...

http://www.youtube.com/watch?v=uaZFm5uAd2M&feature=youtube_gdata

Market Predictions for the New Year!

2012-01-15T07:42:00.000-08:00

This being the start of a new year, thefinancial press is hitting us, yet once again, with all kinds of predictionsfrom all kinds of characters telling us what stocks and commodities and bondsand the housing market and such will do over the coming year.

Please realize, as Yogi Berra said, thatit is tough to make predictions, especially about the future.

Before you jump to act on any of the predictionsthat you read this month, youmight want to Google some of the forecasts from a year ago.

Here is one, from CNBC, quoting“investment banking powerhouse” Goldman Sachs….

http://www.cnbc.com/id/40530212/Goldman_Sachs_2011_Forecast_Stocks_Gold_Oil_Higher

Words in brackets are mine….

“Goldman Sachs is bullishon the U.S. economy for 2011, and forecasts U.S. stocks will see their thirdstraight year of gains.

The investment banking powerhouse sees the S&P 500 [.SPX 1289.09 -6.41 (-0.49%) ]gaining nearly 25 percent to a level of 1450 in the next 12 months, fueled bystrong corporate profits, easy monetary policies and an improving U.S. economy.[The S&P 500 ended almost exactly where it started]… 0 return….although if you bought and held, and if you paid minimal expenses to a fundmanager, you might have earned about2 percent in dividends.]

….Goldman is recommending its clients increasetheir investments in cyclical sectors. It continues to overweight technology,[tech stocks gained 2.67 percentover the course of the year] and has raised its outlook on energy [energystocks up 2.98 percent] and financials [oops, saw a return of -17.16 percent in2011] to overweight from neutral.

Goldman also recommends investorsunderweight defensive sectors like health care [up 12.42 percent], consumerstaples [up 14.00 percent] and utilities [up 19.51 percent]. “

So much for the investment banking powerhouse’spredictions… You would not have profited by acting on their predictions…. But what about all of the othercrystal ball readers?...

Hereis an article from a year ago, in CNNMoney…

http://money.cnn.com/2011/01/04/markets/investment_outlook_survey_stocks/index.htm

"Stocks have had a great run since bottoming out nearly two years ago, andWall Street experts anticipate 2011 to be no different.
Investment strategists and money managers expect the S&P 500 to rise11%, on average, according to an exclusive CNNMoney survey. In fact,not one of the 32 experts surveyed by CNNMoney think the S&P 500 willdecline this year.
‘Everything seems tobe in place for the stock market to rise,’ said Weeden & Co. market strategist Steven Goldman [norelation to Goldman Sachs].”
The analysts didn’t do very well with their stock predictions. Theywere off by even more on bonds. Nearly everyone last January, including bondguru of bond gurus,Bill Gross of PIMCO, was predicting that U.S. Treasuries would take a dive in2011. In fact, 20-year Treasuries soared by 28 percent. Oops again.
Yes, you can ask me to make predictions. And I gladly will.Predictions are fun! But I, nor any other investment manager, have any idea whatsoever what the futurewill bring. Sure, we can guess… But our guesses aren’t much better than yours,if they're better at all.What a good investment professional can do, rather than pretend that the futureis knowable, is to build a well-diversified, low-cost portfolio that can dowell inthe face ofa future that is unknown.

Can you tell the difference between "value" and "growth"?

2012-01-08T20:59:00.000-08:00

Six Ways to Recognize Value

Warren Buffett knows a value stock when he sees one. Do you?Different investment pros and different indexes (upon which ETFs are fashioned)may define “value” differently, but here are some of the most common criteria:

* P/Eratio: As early as 1934, Benjamin Graham and David Dodd (in their book withthe blockbuster title Security Analysis)suggested that investors should pay heavy consideration to the ratio of astock’s market price (P) to its earnings per share (E). Sometimes called the multiple, this venerable ratio shedslight on how much the market is willing to cough up for a company’s earningpower. The lower the ratio, the more “valuey” the stock. (The P/E ratio as itrelates to growth stocks is addressed in the previous chapter.)

* P/Bratio: Graham and Dodd also advised that the ratio of market price to bookvalue (B) should be given at least “a fleeting glance.” Many of today’sinvestment gurus have awarded the P/B ratio the chief role in defining valueversus growth. A ratio well below sea level is what floats a value investor’sboat. Book value refers to theguesstimated value of a corporation’s total assets, both tangible (factories,inventory, and so on) and intangible (goodwill, patents, and so on), minus anyliabilities.

* Dividenddistributions: You like dividends? Value stocks are the ones that pay them.

* Thecover of Forbes: Magazine coversare rarely adorned with photos of the CEOs of value companies. While growthcompanies receive broad exposure, value companies tend to wallow in obscurity.

* Earningsgrowth: Growth companies’ earnings tend to impress, while you can expectvalue companies to have less than awe-inspiring earnings growth.

* The industry sector: Growth stocks aretypically found in high-flying industries, such as computers, wireless, andbiotechnology. Value stocks are more often found in older-than-the-hillssectors, such as energy, banking, transportation, and toiletries.

What creates returns, and what kind of returns will the future bring?

2012-01-02T08:42:00.000-08:00

What creates returns, and what kind of returns will the future bring?
In the world of stock markets, with their by-and-large juicy long-term returns, the juice comes from three sources:

* Dividends
* Earnings growth
* Price/earnings multiples (the measure of market expectations), otherwise known as P/E

Dividends, it may surprise you to learn, account for the lion’s share of stock market returns over the past two centuries. The stock market has given us roughly a 7 percent post-inflation rise during that period. Perhaps three-quarters of that 7 percent is attributable to dividends. That’s history, of course. Today’s dividend yield on the S&P 500, although it has grown in the past several years, is only about 1.7 percent and is very unlikely to exceed 5 percent ever again. Instead of paying dividends, companies today funnel much of their profits into internal growth, repurchasing shares of their own stock, and dishing out astronomical compensation for top executives.

In the future, we may be looking at a 2 percent dividend yield, tops, plus whatever good fortune brings us in the way of earnings growth. The price/earnings multiple — the factor by which investors are willing to invest in stocks in hopes of future earnings — soared wildly in the bull market of the 1990s but has since shrunk to a level that’s pretty close to its historical norm. (The true historical average is about 15, but when interest rates are very low, as they are while I’m writing these words, the average tends to rise to about 20, which is right about where we are now.). It may grow again, or it may shrink. Who knows? And whether earnings growth can pick up where dividend yield left off and provide investors with 7 percent returns after inflation is a big unknown.

When I look into my crystal ball (I really try not to do that very often), I can’t see what returns will be, but I do know for sure that the stock market will continue to be volatile, perhaps even more so than it has been in the past. Many investors may end up jumping overboard long before they get to any port where they’ll find the Holy Grail. Fortunately, with a well-balanced portfolio of ETFs, you will be in a position to complete the voyage.

But don’t presume that you can avoid all risk or that the future will mirror the past, and don’t put everything you have into stocks.

{From Exchange-Traded Funds For Dummies, Second Edition, (c) 2011, Wiley Publishing, Inc. All rights reserved.}

ETFs for Dummies Second Edition now available!

2011-12-31T09:18:00.001-08:00

...When I first published Exchange-Traded Funds For Dummies, in 2007, there were but 300 ETFs on the market. There are now roughly 1,300. Needless to say, there is much new in this new edition. Starting next week, I will begin to take excerpts from the new book and posting them on this blog. If you would like to order the book, go here... http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118104242.html

Volatile Times

2011-11-04T15:12:00.000-07:00

People in my industry, jargon-lovers that we are, refer to a day such as yesterday as a day of “high upside volatility.” In other words, the market soared. Of course, as you know well, the market of late has also seen a good number of “high downside volatility” days, as well. In other words, the market on those days sank. Why all this volatility?

There are a number of reasons for this, including the advent of ETFs and computerized trading. There is also a divergence of opinion among experts, arguably a wider divergence than we’ve ever seen.

Without question, investors are nervous. And just as violence breeds violence, volatility breeds volatility.

In the short-run, I urge you to ignore it. (Easier said than done, I know.) In the long-run, I have to caution you that these kinds of huge daily swings are not a good thing. Such intense volatility makes financial planning very difficult. Those near retirement may see their “number,” the amount they reckon they need to retire comfortably, move in and out of range at a frightening clip. Volatility also, slowly but surely, eats returns. If you don’t believe me, pull out your calculator, punch in “$100,” then add 10 percent, and then subtract 10 percent, and see where you are. Clue: It isn’t $100 anymore. If this crazy volatility continues, the stock market may still be a good place to invest – my belief is that stock market returns will almost certainly beat the returns on bonds and cash and most other investments over the next decade – but the kind of returns we’ve seen in the past (almost 10 percent average annual nominal return, 7 percent “real” or post-inflation return, over the past 80 years) may be close to impossible to achieve in the future. Whatever happens, I know one thing will remain constant: Diversification is the key to good investing…and good sleep.

The state of the market

2011-10-02T09:47:00.000-07:00

Yes, the stock market has been awfully turbulent lately. And that may well continue… We’re seeing a powerful downward drag by unemployment and stagnant wages, severe government debt problems, and a banking crisis in Europe similar to what the United States experienced in 2008. But on the other side of the coin, the market is being given jab-like boosts by a surprising resiliency in corporate profits, a price-to-earnings ratio lower than it has been in years, and a dividend yield exceeding the interest rate paid on long-term Treasuries. (Historically, these last two measures of valuation and comparative return have been strong predictors of good times to come). No one ever knows where the stock market is going (although many pretend to know). The uncertainly now is especially palpable given the record ups and downs that has so many investors losing sleep. Now, more than ever, it is crucial to keep a long-term perspective. We don’t know where the market will go in the next year or two – and that is why you should never invest any money in the stock market that you may need in the short-run. But over the longer term…Still, no guarantees, but stocks are more than likely (history shows, and my gut tells me) to show positive returns, and to beat other investments, such as cash, bonds, gold, and real estate.

If I may editorialize for just a moment… This unprecedented volatility in stocks combined with unprecedented low real (after-inflation) interest rates on bonds make this a very difficult time for many Americans to plan for retirement, never mind to actually retire. As our government reshuffles its priorities to combat the debt problem, I hope that the strength of Social Security remains a top priority. But enough editorializing…

Russell

2011-05-28T08:31:00.000-07:00

A new exchange-traded fund (ticker SOIL) now allows you to sink your money into potash..."a critical sector," according to the fund provider... And here I thought that the ETF options were already getting wacky. What next? A fund to invest in boron? Matryoshka dolls? Lucky Charm futures? Jabba-the-Hutt-salt-and-pepper-shakers? Where will it end? Yes, diversification is good. And the more ETFs representing more asset classes, the better... Up to a point. I'm afraid that ETFs with such narrow focus as this only encourage speculation...and speculation usually ends on a bad note.

Inflation and the federal debt

2011-05-03T09:58:00.000-07:00

The federal debt, at about 90% of GDP, is too high. But it was about 120% immediately following WWII. In the years that followed, we did not see hyperinflation. (In fact, we had tame inflation in the 50s and 60s.) Government services grew. Family income grew. I grew, and most of you, readers of this blog, grew, and we had Captain Crunch and other things to eat. Yes the debt is too high, but it isn't the end of the world.

Universal Questions

2011-04-13T07:05:00.000-07:00

The woman cutting my hair yesterday asked what I did for a living, so I told her that I'm an investment advisor and financial journalist. "You want to know a good stock?" she asked me.
-- "Um," I said.
-- "Silver. Silver is really good," she volunteered. "Silver just keeps going up and up." But, she added, "The U.S. dollar really sucks, so you gotta watch out for your silver."
-- ..."Um," I said.
Then she asked if I wanted my hair cut with scissors or a razor -- that's a question I can never answer.
Another question I can never answer is this: Why it is that all the people who REALLY know how to make millions in the markets, end crime, and reduce the federal deficit are either cutting hair or driving a cab?

Worried about inflation?

2011-03-22T07:45:00.000-07:00

Despite scary headlines (the media just love 'em!), inflation is not likely zooming into double digits anytime soon. Nonetheless, if you are worried about inflation, know that stocks offer good protection. According to a missive I just got from T. Rowe Price, stock returns have outpaced inflation in ALL 20-year rolling periods between January 1926 and December 2010. Also consider Treasury Inflation Protection Securities (TIPS), specifically designed to protect from rising prices.

Scary Headlines

2010-05-20T14:46:00.001-07:00

Yes, the U.S. market was down today (about 3.5 percent). And the financial media, doing what it does best, is wasting no time trying to terrify the heck out of you.

To lend just a little bit of perspective, I’m giving you the one headline that I guarantee you won’t see in tomorrow morning’s paper....

EVEN AFTER A TERRIBLE DAY ON WALL STREET, THE U.S. STOCK MARKET IS STILL UP OVER 20% IN THE PAST YEAR!

2010-05-10T13:19:00.001-07:00

World stock markets swooned last week. Blame it on Greece. Blame it on offshore oil. Blame it on some kind of technological glitch on Wall Street that still has the exchanges and regulators scratching their collective chins. Or blame it on nothing.... Stock markets occasionally swoon. And then they perk right up. (Witness today’s frenetic upward climb.) Through it all, the talking heads on television, without the slightest bit of shame over their many past predictions gone awry, claim to know what’s going to happen next. Yet no one does. Markets are volatile. Markets are unpredictable. I’m just sending this quick reminder to ask you to please keep your eye on the long-run, and not get caught up in the hourly ups and downs of the Dow. History shows us that in the long run, stock values tend to appreciate nicely. And with a diversified portfolio of stocks and bonds (preferably held in low-cost index and index-like funds, whether ETFs or mutual funds) you should do just fine. All you need to do is rebalance your portfolio regularly, and turn your head away from the television when the talking heads are telling you to sell....and buy...and sell...and buy....

If the past few days have you frazzled, take a moment to chuckle at this short video I found from the Saturday Night Live archives, poking fun at big brokerage-house commercials: http://www.hulu.com/watch/36665/saturday-night-live-reliable-investments

Stay away from leveraged inverse funds

2009-04-26T20:20:00.000-07:00

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!

2009-02-11T09:10:00.001-08:00

Please check out my latest book....

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

Russell

For the latest ETF news...

2008-12-22T15:26:00.000-08:00

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!

2006-12-13T09:00:00.000-08:00

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?

2006-11-06T11:33:00.000-08:00

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

2006-11-05T08:28:00.000-08:00

"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?

2006-11-03T09:32:00.000-08:00

"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

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

2006-10-31T05:52:00.000-08:00

[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!

2006-10-24T13:05:00.000-07:00

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

2006-10-16T10:05:00.000-07:00

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

2006-10-15T12:19:00.000-07:00

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!

2006-10-11T22:08:00.000-07:00

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

2006-10-10T13:09:00.000-07:00

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

2006-10-07T10:54:00.000-07:00

"Listed" vs. "Traded"

2006-10-07T10:26:00.000-07:00

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

2006-10-06T17:42:00.000-07:00

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

2006-10-05T07:35:00.000-07:00

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

2006-10-04T15:55:00.000-07:00

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