Archive for the ‘Exchange Traded Funds (ETFs)’ Category:
Physically-Backed Gold ETFs Provide Convenience
by Ron Rowland
Thursday, October 6, 2011 at 7:30am
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The global economic crisis isn’t getting any better. Yes, we see rallies in various markets, but they’re getting weaker and shorter. The smart money is taking the opportunity to sell on strength.
I don’t know how it will all end. As I said in last week’s column, picking the bottom is tough even in the best of circumstances. I can’t really blame anyone who is looking for a safe haven right now. Many people think gold is a good place to hide.
Today I’m going to review some ways you can get gold exposure through exchange-traded funds. First, though, let’s look at the big picture for this most precious metal.
Remember $500 Gold?
It Wasn’t So Long Ago
To say that gold was strong the last few years is an understatement.
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| Gold has moved a long way in just a few years. |
Of course, the only reason you buy gold (or anything else) is because you think it will outperform whatever asset you would otherwise own — U.S. dollars, in this case.
So it appears that a substantial number of people would rather hold gold than greenbacks. You could say the same for most other paper currencies.
People can change their minds, of course. If those who presently own gold decide they would rather have dollars, yen, stocks, Treasury bonds, sea shells, or whatever, gold prices could collapse.
Likewise, the gold price in dollar terms could go up quite a bit further if more people decide to buy.
I can’t predict what the crowd will do, but I think gold still has a lot of upside potential. If you agree, ETFs make it easy to get aboard. Let’s start with the two biggest gold-based ETFs:
- SPDR Gold Trust (GLD)
- iShares Gold Trust (IAU)
GLD is by far the most popular exchange-traded gold proxy. In fact, with assets of around $65 billion as of early October, it is one of the most popular ETFs of any type.
GLD is bigger, but IAU is no small fry — it currently holds about $9 billion in gold bars.
IAU and GLD have very similar structures. In both cases, the ETF shares are backed by physical gold stored in a secure vault. The shares fluctuate but typically move in line with the cash price for gold bullion.
Here’s a key distinction, though, and why it could make a difference which ETF you choose:
- Each GLD share represents 1/10 of an ounce of gold, while …
- Each IAU share is valued at 1/100 of an ounce of gold.
So if the world gold price is $1,600 per ounce, you’ll see GLD trading for around $160 and IAU around $16 per share.
The smaller increments in IAU make it easier to fine-tune your portfolio. Here’s an example. Say you want to put $1,000 to work in a gold ETF. This represents 10 percent of your $10,000 nest egg. (For simplicity, we’ll ignore transaction costs.)
If you use your $1,000 to buy GLD at $160 a share, you can buy six shares for $960. Or you can buy seven shares for $1,120. That means you allocated either 9.6 percent of your money, or 11.2 percent to GLD. There’s no way to get any more precise.
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| Cut the pie into smaller pieces and you can have exactly the right amount. |
If your $1,000 goes to IAU, you could buy 62 shares for a total of $992, or 63 shares for $1,008. This is still not exactly where you want to be — but it’s quite a bit closer.
The small increments are less important if you’re trading larger amounts, of course. If, like me, you want to keep your gold investment within specific parameters, IAU’s low share price can be a big help. IAU also has a lower expense at 0.25 percent versus the 0.40 percent for GLD.
Is the Gold Really There?
Any investment in gold involves some degree of trust that the gold is really there. That’s the case even with gold coins and bars. They can be counterfeited or the metal diluted with impurities. Unless you are a properly equipped chemist, you may never know the difference.
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| Your gold is stored in huge vaults, but you can’t get in to see it. Only the auditors and a few others are allowed inside. |
The same is true of gold ETFs. Sure, they say they have so many ounces of gold in a vault someplace. Do they really? Some conspiracy theorists would have you believe they don’t. However, I think it’s a pretty safe bet.
A bigger issue — even if you presume the ETF has stored away the correct amount of real gold — is that no vault is secure from government seizure. Bureaucrats do crazy things sometimes. So it helps to pay attention to who has jurisdiction in the place your ETF keeps its gold.
GLD and IAU mostly use vaults in New York, London, and Toronto. A couple of newer ETFs offer a way to diversify your gold holdings geographically:
- ETFS Physical Swiss Gold Shares (SGOL) stores its gold in Switzerland.
- ETFS Physical Asian Gold Shares (AGOL) stores its gold in Singapore.
I personally don’t see much need for SGOL and AGOL, but they’re available if this feature is important to you.
Finally, I want to mention Sprott Physical Gold Trust (PHYS). I’m not calling it an ETF because it is actually something else. PHYS lacks the mechanism that keeps the other gold-based ETFs trading in line with the world gold price. Instead, PHYS is a closed-end fund that can trade at a significant premium or discount to actual value. That may be good or bad, of course. Just be aware of the possibility.
With ETFs, investing in gold has never been easier or more convenient. Consider them carefully if you want part of your money in precious metals.
Best wishes,
Ron
Source: http://www.moneyandmarkets.com
Three Often-Overlooked Risks of Inverse ETFs
by Ron Rowland
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The ETF revolution allows everyday investors to achieve the impossible. Just a few short years ago, short-selling, leverage, spreads, and commodities were practical only for the Wall Street insiders. Now, with ETFs, anyone can play.
Yet availability doesn’t guarantee success. You have new opportunities, yes, but they all have risks. You need to know what can go wrong and be ready for it — before you place an ETF order.
Lately I’ve received many questions about inverse ETFs, which are designed to go up when the indexes they track go down. With markets volatile, the economy sputtering, and a global debt crisis all over the headlines, now may be a great time to consider trading on the short side.
But inverse ETFs carry some unique risks. And today I’ll talk about three you may not have considered.
Inverse ETF Risk #1:
Bad Timing
This one may go without saying, but I’ll say it anyway. You don’t want to buy an inverse ETF (or make any kind of short sale) unless you are very confident your target market is heading down soon. Timing your entry and exit is critical.
The same is true for bulls, of course, but it’s doubly important on the short side. Markets tend to fall faster than they rise. The downturn can easily be over by the time you notice it and decide to jump aboard with an inverse ETF.
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| Inverse ETFs can change directions quickly, so be ready to jump off! |
Even for professionals, differentiating between a temporary drop and the beginning of a bearish trend is tough. And as we’ll see in the next section, time is not always on your side.
Inverse ETF Risk #2:
Holding Too Long
Many inverse ETFs include a built-in leverage factor. The intent is to amplify your gains by 2X or 3X. Sounds great, right? Go 3X short and a 5 percent drop for the market turns into a 15 percent gain for you, right?
Not exactly. In most cases, the leverage factor is reset every day. This means that, over time, the value of your shares can drift down even if the market moves in your favor!
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| Leverage can be helpful or dangerous. |
I explained this just last month in What Silver’s Recent Plunge Teaches Us about Leveraged ETFs. And for more details and examples, see my 2009 column Understanding Leveraged ETFs.
The bottom line: Leveraged and inverse ETFs are intended for quick strikes. Get in and get back out as soon as possible. If you make a mistake, admit it. Don’t just sit there and hope for a recovery.
[Editor's note: For clear, concise alerts on when to get into a position — and when to get out — you should check out Ron's International ETF Trader service.]
Inverse ETF Risk #3:
Derivative Exposure
Inverse ETFs employ various techniques to get the correct market exposure. In many cases they include derivatives like futures, options, and swaps.
The main concern in derivatives is “counterparty risk.” These instruments are nothing more than legal agreements in which two parties agree to do specific things in specific circumstances. One party is you — or really the ETF manager, acting on your behalf.
In the case of an inverse ETF, the counterparty agrees to pay your ETF if the selected benchmark goes down. Likewise, the ETF will pay the counterparty if the selected benchmark goes up. Counterparty risk is the possibility the other side won’t make good on their bet.
Most inverse ETFs achieve their desired exposure by holding swaps. And it is important to note here, that swaps typically involve only the gains and losses in an index, not the base value of the index itself.
For example, if an index has a starting value of 100 and moves 2 percent, the swap only covers the 2 percent move (4 percent if it happens to be a 2x fund).
If the counterparty were to default, the ETF might not be able to collect on the 2 percent or 4 percent gain, but it would still have the initial cash representing the original index value of 100. This example is oversimplified of course, but I think you get the idea.
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| Counterparty risk is everywhere. |
Counterparty risk isn’t unique to derivatives contracts. When you buy a plane ticket, for instance, you agree to give the airline a certain amount of money. They agree to have a seat available for you on a plane going to your destination at a defined date and time.
If you don’t pay for your ticket, or the plane takes you to the wrong city, then it is a form of “counterparty default.”
Defaults on equity swaps are very rare, but there is always the possibility that it could happen. This is one factor to consider when deciding whether an inverse ETF is what you need.
Every ETF has a prospectus with detailed information on its characteristics, fees, and risks. Always read it before you invest a dime. You can find it on the sponsor’s website. If you don’t understand something, get clarification from a reliable source.
Best wishes,
Ron
The Rundown on Japan ETFs
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We’re less than three full months into 2011, and the year is already chock-full of stunning world events. Yet if you depend on the media to tell you what is happening, you may miss some of the most important news.
Case in point: U.S. and European intervention in Libya pushed the Japanese disaster right out of the headlines! The nuclear plant explosions were dramatic, of course, but long-term damage from the earthquake and tsunami is potentially much more significant. Today I’ll tell you what it all means for Japan-related ETFs.
Japan Matters …
First, let’s get past the idea that Japan doesn’t really matter to the rest of the world. Yes, China recently moved ahead to become the world’s second-largest economy. Japan, however, is still third — and with a much smaller population and very few natural resources.
But in stock market terms, Japan is way ahead of China and second only to the U.S.
As a matter of fact, Japanese stocks currently comprise 8.8% percent of the MSCI All-Country World Index ETF (ACWI), and a whopping 21.9 percent of the international benchmark iShares MSCI EAFE Index ETF (EFA).
Of course I like China as well. My point is that Japan can’t simply be dismissed as irrelevant.
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Certainly the damage in Japan is significant and the loss of life heart-breaking. The nation also has plenty of other long-term problems. Yet we may look back and see that the sell-off in Japanese stocks was overdone.
Am I recommending you jump into Japan right now? No, I’m not. The effects are still being assessed. I think it’s better to wait and see how much infrastructure was destroyed.
That’s why this is an excellent time to review the many ways you can invest in Japan with ETFs. U.S. investors can pick from more than a dozen Japan equity ETFs and yen currency ETFs.
Here is the rundown:
The 7 “Long” Japan Equity ETFs
- iShares MSCI Japan (EWJ)
- SPDR Russell/Nomura PRIME Japan (JPP)
- iShares S&P/TOPIX 150 (ITF)
- WisdomTree Japan Small Cap Dividend (DFJ)
- SPDR Russell/Nomura Small Cap Japan (JSC)
- iShares MSCI Japan Small Cap (SCJ)
- WisdomTree Japan Hedged Equity (DXJ)
EWJ is by far the biggest and most actively-traded name on the list. EWJ, along with JPP and ITF, offer similar portfolios of the biggest Japan-based public companies.
The remaining four Japan ETFs are more specialized:
- As the name suggests, DFJ holds small cap stocks that pay dividends.
- JSC and SCJ focus on small caps as well, but use different weighting strategies.
- DXJ offers broad-based Japan exposure but with a twist: The impact of the U.S. dollar/Japanese yen exchange rate is hedged. This means DXJ reflects the movement in Japanese stock prices alone. Of course this can be good or bad, depending how the yen performs.
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Inverse and Leveraged
Access to Japan
ProShares provides investors a way to leverage their Japanese stock bets on both the upside and the downside:
- ProShares Ultra MSCI Japan (EZJ)
- ProShares UltraShort MSCI Japan (EWV)
EZJ is essentially a version of EWJ on steroids. On any given day, EZJ is designed to give you twice the performance of EWJ. And if you think the Japanese market will continue to fall, then EWV could give you twice the inverse of EWJ.
These ETFs should be used with caution, as I’ve pointed out in a past Money and Markets column.
Trading the Yen with ETFs
My colleague, currency expert Bryan Rich, just wrote last week that ETFs offer a great way for individual investors to participate in the foreign exchange markets. And here are the yen-based products you might want to consider:
- CurrencyShares Japanese Yen (FXY)
- WisdomTree Dreyfus Japan Yen (JYF)
- iPath JPY/USD Exchange Rate ETN (JYN)
- ProShares Ultra Yen (YCL)
- ProShares UltraShort Yen (YCS)
The ProShares ETFs offer long (YCL) and short (YCS) yen exposure. And both are leveraged with the goal of providing twice the movement of the daily exchange rate changes.
Whatever their stock and currency markets do, I wish our Japanese friends well in their recovery and rebuilding efforts. I know they will bounce back.
Best wishes,
Ron
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Argentina – A New ETF Lets You Get There from Here
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A few weeks ago I told you about opportunities in a huge Asian country overshadowed by an even bigger neighbor. I was talking about India. The bigger neighbor, of course, is China.
There’s a similar situation in South America … a dominant giant (Brazil) that can make us overlook smaller but still very significant players nearby.
And last week brought a major new development: A freshly-minted exchange traded fund (ETF) that opens up a whole new frontier.
Ag = Argentina
We’ve written a lot about Brazil in Money and Markets. And with good reason — Brazil is the powerhouse of Latin America.
Just to the south of Brazil lies Argentina. In terms of land area, Argentina is the eighth-largest country in the world with 2,400 miles separating its northern and southern tips. At 40 million people, it is also one of the most populous Spanish-speaking nations. Some 13 million of those are in and around the capital city of Buenos Aires.
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Where did this word “Argentina” come from? The answer is silver. Think back to high school chemistry … the periodic table symbol for silver is Ag.
Look deeper and you’ll see that Ag came from the Latin word for silver: Argentum. Now you know why Spanish explorers were interested in this distant place. Mining was — and still is — one of the main industries in Argentina. More recently, the discovery of energy reserves in Tierra del Fuego gave Argentina a new potential growth sector.
However, the really big business in Argentina is food. The country is the world’s second largest corn exporter and the third largest soy exporter. This is indeed a very nice position to be in as food prices are rising around the globe.
Until recently there was no easy way for U.S. investors to get exposure to Argentina as a whole. Assembling a diversified portfolio of individual stocks was difficult and expensive.
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But now we have …
The First Argentina ETF
Last week brought the debut of Global X FTSE Argentina 20 ETF (ARGT). This ETF is the first opportunity for average investors to get a slice of Argentina.
ARGT will track an index of the 20 largest public companies that are either headquartered in Argentina or have substantial revenue or assets there.
As you might expect, given its history and name, Argentina’s new ETF is heavy on natural resources. Yet a look at the sector weightings in the chart below suggests ARGT may be more diversified than many other single-country funds.
ARGT presently has no allocation to health care, industrial, or consumer discretionary stocks — probably because no such Argentinean companies have made it into the top 20 yet. The top holding is Tenaris (TS), a global leader in the manufacturing of energy pipelines.
And it has something never seen before in a Latin America ETF — a 10 percent allocation to the technology sector. Most Latin America ETFs have between 0 percent and 2 percent allocated to technology.
What Are the Risks?
If you asked this question, I’m proud of you. Too many people rush headlong into newly-available niches without thinking about risk.
Argentina does not currently qualify for “emerging market” status in the MSCI market classification system. Instead, it still carries the riskier “frontier market” designation.
The idea of investing in Argentina was lunacy just a few years ago. That’s because the country was almost synonymous with “inflation” in the mind of many global leaders …
Less than ten years ago, in late 2001, Argentina’s government formally defaulted on $132 billion in foreign debt. The country was in deep recession for years as leaders grappled with the implications of their folly.
Just as it looked like Argentina’s nightmare was ending, the 2008 financial crisis provided another setback. But the fruits of that crisis — massive money creation in the developed world — may prove to be Argentina’s salvation.
The resulting inflation in the U.S. and Europe is making Argentina’s food, energy and metal resources much more valuable. Foreign companies are now practically forced to invest in Argentina! They can’t find enough of what they need anywhere else.
Could Argentina go down the drain once again? It’s always possible. But with a new ETF alternative, you have a good chance to ride any bull market that develops. So take a look at ARGT, and be sure to use a limit order if you decide it’s right for your portfolio.
Best wishes,
Ron
4 Ways to Fight Inflation with ETFs
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Inflation is creeping up everywhere. Prices for gold, silver, oil, gasoline, food, even soft drinks are all creeping higher. You see it every day.
The one area where we aren’t seeing inflation is wages. With the U.S. unemployment rate at 9 percent (and much higher in some areas), few workers are seeing much growth in their paychecks.
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This is a dangerous blend. When the cost of living goes up and income doesn’t follow, people get squeezed. And unhappy people soon become restless and demand change. Just ask former Egyptian president Hosni Mubarak.
I’m not predicting riots or revolution here in the U.S. I am concerned, however, that our leaders in Washington don’t realize the danger they are creating with their free-spending, money-creating policies. They are walking a tightrope without a net.
So if inflation gets out of hand, how can you make the best of it?
ETFs are my top choice! You can quickly and easily build a well-balanced portfolio that protects you from the ravages of inflation — and could even let you profit.
Here are four groups of inflation-fighting ETFs you might consider …
ETF Inflation Fighter #1:
TIPS
Government bonds are usually one of the worst things you can own in an inflationary economy. But what if you could buy bonds whose principal automatically adjusts to keep up with inflation? Now you can — and you can do it through ETFs.
Treasury Inflation-Protected Securities, often called TIPS, are issued by the U.S. Treasury as well as some other national governments. The concept is simple: If an inflation benchmark like the Consumer Price Index goes up too fast, the bond’s value is given an extra boost. This keeps bond holders from losing their purchasing power.
Buying individual TIPS bonds is possible but impractical for small investors. ETFs are the better way for most people. Here are a few you may want to look at, based on your particular needs:
- SPDR Barclays TIPS ETF (IPE)
- iShares Barclays TIPS Fund (TIP)
- PIMCO Broad U.S. TIPS Index Fund (TIPZ)
- Schwab U.S. TIPS (SCHP)
- iShares Barclays 0-5 Year TIPS Bond Fund (STIP)
- PIMCO 1-5 Year TIPS Index Fund (STPZ)
- PIMCO 15+ Year U.S. TIPS Index Fund (LTPZ)
- SPDR DB International Government Inflation Protected Bond (WIP)
Incidentally, if you have a brokerage account at Fidelity you can buy and sell TIP without a transaction fee. Schwab customers can do the same for SCHP.
ETF Inflation Fighter #2:
Real Return Funds
A “real return” ETF is designed to give you just that: A “real” return when inflation rears its ugly head, and hopefully without making you take too wild a ride along the way. In investment-speak “real” means “inflation-adjusted.”
IQ Real Return ETF (CPI) tries to do this by allocating assets between various investment categories, which can include stocks, Treasury instruments, foreign currencies, and gold. Its goal is to outperform the U.S. inflation rate, as measured by the Consumer Price Index.
CPI is a fairly new ETF, and it’s not clear yet whether it will be able to achieve its objective. Nonetheless, I’m glad it is available and hope sponsors will offer more such funds.
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ETF Inflation Fighter #3:
Food and Agriculture
Been to the grocery store lately? Then you know food prices are high and getting higher. This is bad news for consumers, but good news for farmers, fertilizer makers, farm land owners, and quite a few other people.
ETFs give you a way to get aboard this trend and make back some of what you’re losing at the supermarket. See my column Profit from Rising Food Prices to learn more.
ETF Inflation Fighter #4:
Gold
I’ve talked about gold ETFs often in my Money and Markets columns. Rather than repeat myself again, I suggest you revisit Go for the Gold with Mining ETFs and Gold Isn’t All That Glitters in ETF Land.
Some Inflation
Fighters to Avoid
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Two other ETF groups may also benefit from inflation. But I’m concerned about some additional factors that could affect them. Real estate, for example, has historically been a great inflation hedge — and the more leveraged the better. However, since it was a housing bubble that got us into the current mess, I’m not sure we can count on real estate ETFs for help this time.
The second group is foreign currency ETFs of countries with lower inflation than the U.S. These ETFs should theoretically benefit if inflation makes the dollar decline. But as my colleague Bryan Rich just pointed out last week, the dollar may still be the “least ugly” world currency for some time to come.
As you can see there are plenty of ways to protect your assets from inflation. Look into them and be ready to act!
Best wishes,
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Go for Profits with International ETFs
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Let me ask you a question. Suppose you have the ability to invest in any stock market in the world. One of the largest markets has lagged badly for many years now. And there are few reasons to think the situation will improve.
Would it make sense to put the bulk of your assets in that relatively weak market?
“No, of course not,” you will probably say. Good for you!
Unfortunately, most U.S. investors are making the wrong choice … and many so-called “experts” are cheering them on. How can this be?
Simple: The weak lagging market I mentioned above is the U.S.! And sadly, thousands of professional financial advisors tell their clients to stick with the “safety” of U.S. stocks.
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I wish I knew why so many of my peers refuse to face reality. Maybe it’s just a force of habit.
However, those investors do have the ability to invest around the world — with hundreds of international exchange traded funds (ETFs).
So today I’m going to give you three challenging questions you should ask any investment advisor, stock broker or newsletter editor who tells you to keep most of your money in U.S. stocks, mutual funds or ETFs.
Challenging Question #1:
Is it hard for me to invest in
non-U.S. stock markets?
There was, in fact, a time when practical considerations made it very difficult for American investors to get overseas exposure. Many brokers couldn’t process foreign trades, the tax paperwork was complicated, and it was hard to get news from off-the-beaten-path places.
These barriers are no longer relevant — and anyone who tells you otherwise is sadly uninformed. Let’s look at them in order …
- With a few mouse clicks or a quick phone call, you can buy or sell an ETF like iShares MSCI Singapore (EWS) just as easily as an S&P 500 index fund. Both trade on the same exchanges. No need to get up in the middle of the night and call a broker on the other side of the world.
- Tax paperwork? You’ll have to speak with your Congressman if you want to get rid of it completely. A good interim step is the simple tax reporting that you can get even from discount brokers today. You don’t have to frustrate yourself trying to calculate your cost basis … unless you just enjoy that sort of thing.
- International news is easy to find on the web now. Sometimes the sources are questionable. But there is no shortage of basic news and analysis, even on the most obscure exchanges. You can read the local newspapers online at the same time as Wall Street’s analysts.
Therefore, the argument that investing overseas is somehow hard for the average investor just doesn’t hold water.
Challenging Question #2:
Which ETFs have the best short-term
and long-term performance?
The table below shows you the top ten best-performing unleveraged equity ETFs for the one-year and five-year periods ended 11/12/2010. All are readily accessible to U.S. investors.
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You’ll notice that most of the top-ranked ETFs for one year, and ALL of the top-ranked for the last five years, specialize in international markets, particularly emerging markets. Yet relatively few investors have money in them!
This brings us to our third and most important question:
Challenging Question #3:
Why should I invest my money anywhere else?
To me, the answer to this question is quite obvious. Global economic power is shifting away from North America and Western Europe. The new leaders are in Asia and Latin America.
I’ve written about that mega-trend many times. Of course, I’m not saying there are never any opportunities to profit in the U.S. Obviously there are. My point is the potential is even greater elsewhere.
And to me, the logical answer is to follow the momentum wherever it leads.
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Are international and emerging markets ETFs volatile? Yes, of course. They’re subject to political unrest … currency turmoil … natural disasters … and assorted other risks.
These are pretty much the same risks you take in U.S. stocks!
Like it or not, risk is everywhere. You can’t escape it — but you can use it wisely. I think international ETFs are one of the wisest risks an investor can take. That’s why I use them extensively. You should do likewise if you want to survive and profit in the coming decades.
You can get specific buy and sell recommendations for many global ETFs in my International ETF Trader service. Martin Weiss and I made a free video presentation to tell you more. Click here to check it out.
Best wishes,
Ron
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
4 ETFs Beating the Dow by a Mile
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Martin here with a quick update on four of our favorite exchange traded funds (ETFs).
>From the first trading day in May through this past Friday, November 5, the Dow is up 4 percent.
That’s actually somewhat better than we expected for U.S. stocks — given the still-somber state of the American economy.
But we don’t feel we missed much by avoiding Dow stocks.
Quite the contrary, we’re very glad we did … because in the same time frame …
• Our gold ETF (GLD) is up 18.2 percent, or more than four times better than the Dow.
• Our favorite ETF that tracks agricultural commodities (DBA) is up 21.8 percent, more than five times better than the Dow.
• The performance of our favorite emerging market ETF — IDX which owns Indonesia’s blue chips — is very similar. It’s up 22.5 percent, or nearly six times better than the Dow.
• And the Chile ETF (ECH) has trumped them all — up 38.6 percent or over NINE times better than the Dow.
All since the beginning of May!
If Wall Street fund managers could perform, say, 1.2 or 1.3 times better than the Dow, they’d be leaping for joy!
But these ETFs are doing far better — beating the Dow by 4.55, 5.45, 5.62, and 9.65 times, respectively.
In other words, for each $10,000 in gains earned by investors in the average Dow stock, these four ETFs have delivered $45,500, $54,500, $56,250, and $96,500, respectively.
This Is No Petty Change.
Nor Is It a One-Time Fluke.
With one exception, these same ETFs have continually delivered similar outperformance going back much further in time.
Take the period since the beginning of 2009, for example …
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Let me start with the exception — the agricultural commodity ETF (DBA). From the first trading day of January 2009 through this past Friday, it’s up just 16 percent, underperforming the Dow by 10.7 percentage points.
But most of these commodities didn’t really start taking off until around the middle of this year. And now, especially in the wake of the Fed $600 billion quantitative easing announcement last week, their rise has accelerated dramatically.
Meanwhile, the other three ETFs leaped ahead of the Dow from the starting gate of 2009 — and never ONCE looked back:
- The gold ETF (GLD) is up 58.2 percent. That’s more than DOUBLE the Dow’s performance.
Thank you, Larry Edelson and Claus Vogt, for reminding our readers so relentlessly — in article after article and video after video — about the vital importance of holding gold!
- The Chile ETF (ECH) has soared 157.8 percent, or almost SIX times better than the Dow.
Thank you, Sean Brodrick, for traveling all the way to Chile last year and making it the focus of your presentation to Money and Markets readers in “Our 11 Startling Forecasts for 2010.”
- The Indonesia ETF (IDX) has greatly trumped all four: It’s up 263.9 percent, or nearly TEN times better than the Dow.
Thank you, Ron Rowland, for introducing this ETF to our readers in your Money and Markets of September 24, 2009 … and AGAIN in your issue of January 7, 2010 (not to mention all the times before and since).
And thank you, Tony Sagami for trekking to Jakarta last year and telling all our readers attending our video gala event (transcript in Money and Markets) that Indonesia would be “one of the three best performing stock markets in 2010.”
Heck! Even including the one underperformer among the four, investors would still have wound up with an average gain of 124 percent since 2009 — 4.64 times better than the Dow during the same period.
Is It Too Risky or Too Late to Get This
Kind of Stupendous Outperformance?
If you had to count exclusively on Mr. Bernanke’s money printing program, perhaps.
Yes, he promises he will pursue it to the bitter end, and he certainly has been going to great lengths in the last few days to justify his actions — editorials, speeches, and more.
And yes, if he stays on this current path, he will probably blow past the $600 billion mark he’s committed to so far.
Still, we don’t think it’s prudent to depend on the madness of any one central banker, no matter how powerful — and bull-headed — he may be.
That’s why our editors like to recommend strictly investments that not only benefit from Fed policy … but are ALSO propelled by sustainable growth in demand — from investors, from strong economies, and from powerful fundamental forces that transcend money printing.
That’s the case for our four favorite ETFs I’ve covered here today.
That’s why our editors cited above have been recommending them and continue to do so.
That’s also why Monty Agarwal has used these same ETFs (among others) for my $1 million portfolio. For more details on this aspect, see the new video presentation he just uploaded late Friday, available for your immediate viewing by clicking here.
Good luck and God bless!
Martin
Profit from Rising Food Prices with ETFs
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Here’s a question for you … and I’m pretty sure your answer is “Yes.” The question is: Do you eat?
Food is a basic necessity of life. We all need to eat. Some of us eat more than others do, of course. Sadly, some people live in places where there simply isn’t enough food to go around.
The good news is that this is starting to change. The world is going through an agricultural revolution. For ETF investors, it is a potentially huge opening. Today I will tell you how to munch your way to profits.
Three Trends in Food
Three big trends are converging to bring about a dramatic shift in what and how people eat around the world.
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First, modern technology is opening up new frontiers in food production. Genetically-engineered seed, sophisticated fertilizers, and massive water projects allow farmers to harvest more from every acre … and let them produce from land that was once unusable.
Second, people in the “Emerging Market” nations of China, Brazil, India and many others are changing their diets along with their economies. Millions are finding they can afford things that used to be occasional luxuries: Meat, milk, and even sugar.
Third, Americans are changing their diets, too. Obesity is a national problem — and is hitting the pocketbook in the form of higher health care costs. We aren’t all going on the South Beach Diet. Nevertheless, our eating habits are changing, slowly but surely.
All these developments are causing massive change in the global food production industry. Smart investors know that change brings opportunity as well as risk. And now you can exploit the new trends with ETFs.
If you’ve seen my ETF Field Guide, you know that commodity-related ETFs are a growing niche. I don’t have space to tell you about all these funds, so I’m going to highlight just two of them.
MOO: An ETF You Can Taste
Modern-day agriculture is about big corporations as well as small family farms. Most of the dominant companies are publicly traded … which means you can buy into their success.
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Agriculture crosses many sectors. Because it is food related, it usually ends up as part of the “Consumer Staples” sector. However, agriculture is so broad that some of the stocks can be found in “Materials,” “Industrials,” and even “Natural Resource” funds. Unfortunately, since these funds are usually capitalization-weighted, the agriculture allocation can be dwarfed by the big multinational energy, mining, chemical, and manufacturing companies.
If your goal is to gain exposure to the food business, you are much better off with an ETF such as Market Vectors Agribusiness (MOO). Some of the top holdings in MOO are familiar names:
- Tractor manufacturer John Deere (DE)
- Fertilizer maker Mosaic (MOS)
- Agribusiness conglomerate Archer Daniels Midland (ADM)
Because MOO includes more than just U.S. stocks, it is also a great way to get a piece of some key foreign companies from this sector. You may not know much about Wilmar International or Yara, but they are big players in this sector.
Right now MOO is tearing higher. From July 1, 2010 through October 20, the shares have climbed more than 37 percent. Some of the gain is related to a falling U.S. Dollar, but the underlying trend in agriculture is also giving MOO a big boost.
One thing you need to understand about MOO: It is a stock ETF. Even though it holds only companies involved in agribusiness, it doesn’t necessarily go up and down along with food commodity prices. If that kind of investment is what you want, you should consider …
DBA: Going Straight to the Source
PowerShares DB Agriculture Fund (DBA) is based on a commodity price index that covers all the major crops: Wheat, corn, sugar, and soybeans as well as some smaller markets like live cattle, lean hogs, coffee and cocoa.
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I like DBA because it gives you one-stop shopping. Individually, all these markets are subject to wild swings based on weather, export policies and all kinds of other factors. Bundling them together in this way gives you better exposure to the long-term trends.
DBA is also far more convenient (not to mention less risky) than assembling your own portfolio using the futures markets. You don’t have to worry about margin calls, delivery dates, and other minutiae. All that happens behind the scenes in DBA.
What if you put MOO and DBA together? Then you have the agricultural sector covered from both directions. You will participate in the movement of commodity prices as well as changes in the stock price of companies producing those commodities.
DBA has jumped almost 26 percent since its last low in early June, and still has plenty of room for growth on the upside.
MOO and DBA are both good-sized funds with plenty of liquidity on most days. Even so, you will want to use a limit order. Be prepared for plenty of volatility if you choose to buy either of these ETFs. The ride can be rough — but the rewards can be super-sized.
Best wishes,
EWI’s Newest Service Picks ETFs: Interview with the Editor
EWI’s Wayne Stough adds another Flash opportunity service to the line-up: ETFs
By Elliott Wave International
Every trader or active investor at times wishes they could pick the brain of a pro that has “pulled the trigger” on real-money trades before.
EWI Director of Analysis Wayne Stough is one of these pros. For several years, several times per month, he’s been alerting his Flash service subscribers to opportunities in futures markets.
And now, there is a new addition to the Flash service line-up: ETF Opportunity Flash. We caught up with Wayne in his office and asked him a few questions:
Q: What method do you use when looking for high-probability trade set-ups?
Wayne Stough: My main approach is The Elliott Wave Principle. I look for clean, precise wave counts — usually ones that other analysts can confirm, so there is a general consensus on market direction. Once the market meets my other criteria for a high-confidence trade, I send out a Flash recommendation to my subscribers.
Q: How do you define a “high-confidence” trade?
WS: That’s a good question, because no market forecast is ever guaranteed, whether you use Elliott or some other forecasting method. Having said that, there are definitely moments when probabilities (or odds, if you will) strongly suggest a particular move. For example — and this is just basic Elliott — the Wave Principle says that markets move in a series of five waves in the direction of the larger trend (labeled on a chart 1, 2, 3, 4, 5) and three waves against the trend (labeled A, B, C). Also, there are certain proportions between these waves that markets often adhere to. So whether I’m counting a 1, 2, 3, 4, 5 pattern in a rally or a decline (i.e., in a bull or bear market), I focus on where the fifth wave should end, according to Elliott wave guidelines.
Once I’ve identified that price termination point, it becomes a matter of waiting for the market to get there. Fifth waves come at the end of the pattern and are usually weaker than third waves. So once I see certain technical indicators diverging (e.g. the RSI), my confidence grows: We are near the end of the pattern, and prices are about to reverse. That’s just one example of a high-confidence situation. But I do suggest a protective stop with every new Flash alert, in case the forecast doesn’t come true.
Q: Are you aiming for a particular percentage gain?
WS: Absolutely. When I send a Flash alert, I’m typically looking for a 3-to-1 ratio, at a minimum.
Q: Does that always work out?
WS: No. I monitor the recommendation for warning signals that let me know when a different scenario is unfolding in the charts. In those cases, I send out another Flash alert suggesting to lower or raise the stop-loss level, or exit the recommendation entirely.
Q: They say you love the S&P Mini as a trading vehicle. Why?
WS: I’d put it differently. I have traded the S&P for a long time, I understand that market’s nuances, and I like the leverage and volatility. But while the S&P comes naturally to me, I’ve also made many Flash recommendations on other markets, like gold and currencies. So, a better way would be to say that I love any market that gives me the desired risk-reward ratio. Now I’m also “looking for love” among various ETFs.
Special Introductory Offer: Get ETF Opportunity Flash now and have 2nd month FREE. Details.
Q: If traders expect a bear market, should they still consider Flash Services?
WS: Absolutely. I think we’re at the cusp of something very big in the stock market. And this is the time to act. Just keep in mind that speculating in severe bear markets (or during extreme volatility) carries additional risks. So be sure you do your research and know how your financial instruments behave under these conditions. And anyone who chooses to trade in this environment must only risk the money they absolutely can afford to lose.
Q: Who do you think should consider subscribing to EWI’s Flash Services — including the newest addition, the ETF Flash?
WS: Anyone who has some risk capital but not enough time or experience to find their own opportunities. Anyone who understands and accepts the fact that when you bet your money, there will be winners and losers. (Sometimes more of one than the other.) Anyone who knows better than to risk all their capital on a single recommendation; the old “all eggs in one basket” situation. I think in terms of quarters: I want all my subscribers smiling at the end of a quarter.
EWI ETF Opportunity Flash service now brings you potential high-probability opportunities in exchange-traded funds (ETFs). Don’t miss this special offer.
This article was syndicated by Elliott Wave International and was originally published under the headline EWI’s Newest Service Picks ETFs: Interview with the Editor. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Can Green Energy ETFs Put Green In Your Wallet?
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Remember a few years ago when “alternative energy” was all the rage? With crude oil trading at $150 and gasoline prices above $4 a gallon in many places, breaking free from our dependence on fossil fuels seemed like a good business opportunity.
As someone who greatly enjoys driving, air conditioning and electricity, I totally agree that it would be nice to diversify our energy sources. The question is: How to do it cost-effectively?
I believe the answer is to let free enterprise do its thing. Remove the artificial barriers, and the laws of supply and demand will lead us toward a good solution. Entrepreneurs will sort out the details.
Unfortunately, not every alternative-energy pioneer can succeed. There will be winners and losers. And investing in single stocks from this sector is a high-risk game. The good news is that you can get involved while staying diversified through exchange traded funds, or ETFs. Today I’ll tell you about some of them.
First let’s take a quick look at the different sources of energy …
Conventional Energy Sources
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Fossil fuels: Good old-fashioned oil, coal, and natural gas provide the bulk of the industrialized world’s energy. We have the infrastructure already in place to find, produce and distribute this kind of fuel.
There are two problems, though. First, the easily-tapped reserves are running low. Second, the whole process is messy and unhealthy for people as well as the planet.
Nuclear energy: The secrets of the atom can also produce energy, and in many places atomic power plants go a long way toward meeting the demand for electricity. However, nuclear is not so great in transportation. You can’t run your car on uranium — at least not yet.
Hydro power: As long as water keeps running downhill, hydroelectric dams will be a good source of electricity, with relatively low environmental and safety risks. Like nuclear, though, hydro power is of limited usefulness when portability is required. What’s more, the best running-water sources have already been dammed.
That’s where we stand right now. Everything else is an “alternative.” So let’s take a look at …
The New Energy Sectors
Electric cars: The big problem is that batteries with enough juice to power a car are heavy. So heavy, in fact, that carrying them around often costs more energy than it saves!
The holy grail of the electric car industry, then, is the lightweight battery — one of the highest-potential but most elusive goals of the sector. Such things are being developed but are still very expensive. Most use a metal called lithium.
The Global X Lithium ETF (LIT) is probably the best and easiest way to tap into advanced battery technologies. Although this ETF has “lithium” in its name, the majority of its investments are in battery companies. Think of it as a “lithium food chain” ETF.
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Solar energy: The sun is always there and doesn’t run out — or at least it won’t for a few billion years. Meanwhile we might as well tap into it.
Using sunlight to heat water is fairly simple; turning it into electricity is more complicated. New technologies are making the process a lot simpler, though. As this challenge is met, solar power could grow to provide much more than the fraction of our energy needs that it meets right now.
Currently two ETFs focus on solar energy: Claymore/MAC Global Solar Energy (TAN) and Market Vectors Solar Energy ETF (KWT). Both were launched in April 2008 and both are down about 70 percent from then. Solar energy may sound like a great idea, but it’s not yet a profitable idea for investors.
Wind energy: Remember when every farm had a windmill? They were handy for running the water pumps before electric lines made it out to the boonies. Now they’re just antiques.
What a change — now wind is the reason some farms exist. Oklahoma billionaire Boone Pickens has poured a ton of money into vast “wind farms” in the desert Southwest where huge windmills generate electricity.
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Wind energy has its limitations, of course. But it could still turn into a big business. Boone Pickens is no dummy about these things …
According to his Web site, his Mesa Power Group continues to pursue smaller projects throughout the United States and Canada through the American Wind Alliance, a cooperative formed with General Electric.
First Trust Global Wind Energy (FAN) and PowerShares Global Wind Energy (PWND) both target this alternative energy source, and like their solar cousins have not had much financial success. Wind energy is actually one of the worst performing industries of 2010. FAN and PWND are both down more than 30 percent so far this year.
Keep in mind that even if these ETFs are “green” for the environment, they may not necessarily put “green” in your wallet. Just like an old-fashioned gold rush, the alternative-energy rush is prone to hype and overconfidence.
This year most of the ETFs covering this sector have been hit hard, and it’s easy to start thinking that they look cheap. Are they a bargain at current prices, or are they only beginning to crash? I wish I knew the answer to that one. The “value investors” haven’t started buying them up just yet.
A somewhat less aggressive way to get into the alternative-energy group is with broader ETFs that don’t specialize in one niche like wind or solar. Alternative energy means different things to different people and as a result there is not just one index. Green, alternative, renewable, and progressive are among the monikers used to describe these funds.
Here are a few ETFs you may want to consider. But before you buy I suggest you dig a little deeper to see if they target the industries you want to own:
- PowerShares Wilderhill Clean Energy (PBW)
- PowerShares Global Clean Energy (PBD)
- Market Vectors Global Alternative Energy (GEX)
- PowerShares Wilderhill Progressive Energy (PUW)
- iShares Global Clean Energy (ICLN)
- First Trust Nasdaq Clean Edge U.S. Liquid (QCLN)
Nearly all the ETFs I’ve mentioned today are thinly-traded, so be sure to use limit orders when you buy or sell. Be cautious and know what you’re getting into.
Best wishes,
