Which ETF and what approach?

G

Guest116

Guest
I have about 15k in savings that I would like to invest into an ETF or a few ETFs.

Which ones should I go for and what is the best approach with this? Should I buy 5k per ETF or drip feed in 1000 per month etc?
 
it totally depends on what you attitide to risk is, you need to decide if you want to put the money into? do you want to put it into gold, oil, technology, BRIC, heathcare, defensive stocks...there are ETF's for everything.

If you want basic diversification, you should look at a good mixture. Log on to ishares or dbx trackers to learn about the products. google and yahoo have a lot of info on the performance of etf's...also look at the leveraging of the product that you buy into. I am looking at ETF's in the following areas
gold, DJ euro stoxx, S&P, BRIC to name a few. I want to cover different regions and cover differenct indices so I have some level of diversification.

If you buy 3*5k ETF's then you are limited so you need to consider if this is the level of exposure you want.
 
I was just thinking of using the ETFs that track the market index, e.g. one that tracks the ISEQ index. I dont know enough to choose more focused ETFs.
 
Due to brokers’ fee structures (i.e. fixed amount + %), it’s usually better to make lump sum investments in an ETF rather than drip feeding. With 15 grand, to get some diversification, depending on your risk profile and investment horizon, you should consider splitting your investments between various asset classes, for example: euro developed market equities, foreign developed market equities and something else, e.g. emerging markets. Also it would be prudent to ensure the ETFs are held in your own name in a CREST a/c and not in a nominee a/c. [Disclaimer: The above is comment / observation and is not a recommendation to follow any particular investment strategy or to buy / not buy any particular fund.]
 
There are ETF's for everything. Absolutely everything

Most markets are overcooked at the moment IMO. I would be careful what ETF's you choose.

There are two that are taking my fancy at the moment, principally because they are based on a limited commodity that will only have upside in the medium to long term.

The first is UNG, a natural gas futures front month contract fund that is a little difficult to get your head around as to how it works. If you are a long term invester then this may prove interesting. Another one, if you have a higher risk capacity is the leveraged or double bull NG ETF. It only trades on the toronto exchange mind you. HNU.TO is the ticker

Reason I mention the above (and purely as suggestions that require a great deal of research) is becuase a large number of other ETF's are quite overdone with the run up since March and hence may have limited short term upside (Edit: and a high probability of downside, which can, if you are not used to nasty negative price swings or are a weak hand force you to sell your lot)

If you want to buy and forget then a leveraged, double bull, type ETF such as DDM (tracks DOW) or MVV (Tracks S&P, both on NYSE exchange) may be just the ticket. As these are leveraged, there are more susceptible to market swings. Ultimately though your gains should be greater, that is a should be in italics.

Do a lot of research though, and check the costs. US funds tend to be cheaper than European based funds. Also, think about setting up a US brokerage account. Much cheaper to hop in and out if you want to.
 
If you want to buy and forget then a leveraged, double bull, type ETF such as DDM (tracks DOW) or MVV (Tracks S&P, both on NYSE exchange) may be just the ticket. As these are leveraged, there are more susceptible to market swings. Ultimately though your gains should be greater, that is a should be in italics.

Leveraged ETFs like DDM are actually not suited to 'buy & forget' type strategies.DDM, for example, aims to reproduce x 2 the Dow's daily return, ie, if the Dow rises by 1%, DDM will rise by 2%. "[FONT=Verdana,Arial,Helvetica]Investors should be aware that performance of these ETFs over a period longer than one day can differ significantly from their stated daily performance objectives" (recent SEC warning), see [/FONT]

[broken link removed]

Read of a case recently where a leveraged inverse ETF was down 88% when the underlying index was only down by 2%. Lots of US brokers have either banned or restricted use of such leveraged etfs. Bottom line - they're suitable only for day traders or those with a very short-term horizon.
 
Performance of them over the length of a bull market has been shown to outperform a standard index tracker ETF. I do not have the data to hand (if you have Jason Kelly's Neatest Little Guide this details the advantages - and disadvantages for that matter with the supporting figures (only source I am aware off)).

Agreed you can be wiped out in the event of a severe correction like that recently but I am of the opinion that potential upside exceeds that of the downside. I've tracked indexes and some of the better known leveraged double bulls and have not seen discrepancies such as those you have described above (2% & 88%).
 
The 2%/88% example is detailed at
http://bespokeinvest.typepad.com/bespoke/2009/07/leveraged-etf-ban-spreading-like-the-flu.html

An extreme case, no doubt, but it illustrates the point. Even the leveraged ETF providers admit that they are not suitable for buy and holders.

Yes, I must agree with Charttrader here. There are numerous examples of leveraged ETFs not providing leveraged returns. They are not for Buying & Holding, simple as that. The reason is that these products are designed for short term trading and do not, can not deliver over longer time periods. In a smoothly rising market a leveraged ETF might do what you expect but in volatile conditions the whip-sawing does the damage.
 
Of course there are a number of examples where returns dont even match the index, of course there are. Same way there are returns of stocks that dont even match the index even though they are in the strongest industry sectors over that period.

Buy and hold I would not apply to short or ultra short ETF's but standard double bull (Ultra) index leveraged ETF's I am and will continue to be an owner of.

Simply it boils down to doing your DD and then selecting your fund. Unfortunately I do not have the data to send on for these ETFs over the last decade (its in a book) but the numbers speak for themselves. In fact, if you want to go into the fine detail, Ultra mid cap ETF's are where you should be headed, moreso than the S&P and moreso than the DOW, in that order.

Let me give you a couple of figures to explain why this negative attitude doesn't have a leg to stand on when we look at indexes versus well run ultra ETF's (emphasis on well run).

I am a big fan of Proshares funds, track record and their candor in prospectuses etc.

Right, the numbers

DIA; Dow Diamonds Standard Index ETF
Mar 9 Close: 65.44
Today Close: 95.13
Increase (%): 45%

DDM; Proshares Ultra DOW ETF (Leveraged ETF based on DOW)
Mar 9 Close: 17.60
Today Close: 36.46
Increase (%): 107%

SPY; S&P 500 Standard Index ETF
Mar 9 Close: 68.11
Today Close: 102.96
Increase (%): 51%

SSO; Proshares Ultra S&P 500 ETF (Leveraged ETF based on S&P500)
Mar 9 Close: 14.54
Today Close: 32.48
Increase (%): 123%

I think the numbers speak for themselves. In fact, while I am at it I will add the numbers for the mid cap sector that I mentioned:

MVV; Proshares Ultra Mid Cap 400 ETF (Leveraged ETF based on S&P400)
Mar 9 Close: 13.78
Today Close: 34.51
Increase (%): 150%

All ETF's are Proshares (I have no connection with them whatsoever) as they are the most reputable. They have wiped the floor with the indexes as you can see.

So, what is the catch? Well, in a correction, they drop double fast.

So why am I recommending them, well back to the original post I stated "buy and forget"; what I meant by that was you can buy it now and forget about it until you hear the stock markets are getting toppy and there is nasty economic news about (Sub Prime, Lehman Brothers Failing, increased foreclosures, whatever the next crisis is going to be - or read a book on technical analysis and learn to recognise toppy markets), then you flog it, as you should if you own a standard index ETF.

Also, the only long term view for the markets is up. So if the general trend is up, then a leveraged ETF will only magnify your gains, same way as an ultra short will magnify gains in a correction.

Each to their own, but if there are gains to be made and a financial instrument will offer me more, then I'll do for it. Also, these ETF's have low charges, making them all the better.

If we are painting a picture then lets not scaremonger by posting extreme examples as mentioned above (2%, 88%). The above are three examples of how this type of instrument has, does and will continue to give you better gains.

Also, for those that may argue about the state of the market since March, yes, the general trend has been up, but rocky, far from smooth and a good example as to how effective these instruments are. As soon as economic indicators indicate the the recession is truly over and earnings gain more stability then a smoother upward curve should result.

Also, whip-sawed? Whip sawing is only applicable if you have long and short positions. The above ETF's dont hold short positions, you merely lose more on the downside becuase of your leveraged position.
 
this negative attitude doesn't have a leg to stand on when we look at indexes versus well run ultra ETF's

Not true. Most investors wrongly assume that if an index rises, say, 20% in a period of time, a leveraged ETF will rise by 40%. Of course, this is not the case, as your stats confirm (yes, you may benefit by more than double).

well back to the original post I stated "buy and forget"; what I meant by that was you can buy it now and forget about it until you hear the stock markets are getting toppy and there is nasty economic news about (Sub Prime, Lehman Brothers Failing, increased foreclosures, whatever the next crisis is going to be - or read a book on technical analysis and learn to recognise toppy markets), then you flog it, as you should if you own a standard index ETF.

That's not buy and forget. That's trading/active investing or whatever one would like to call it, but it's not buy and forget.

the only long term view for the markets is up. So if the general trend is up, then a leveraged ETF will only magnify your gains

Depends on what you mean by long, in that markets have suffered many 10-20 year periods of stagnation/decline. Without getting into that debate, however, the fact is that leveraged ETFs were designed with traders, not buy and holders, in mind.

Each to their own, but if there are gains to be made and a financial instrument will offer me more, then I'll do for it.

Sure, they're fine for trading (I trade them myself), but that's all.

If we are painting a picture then lets not scaremonger by posting extreme examples as mentioned above (2%, 88%).

I wasn't scaremongering, I mentioned that it was an "extreme case".

for those that may argue about the state of the market since March, yes, the general trend has been up, but rocky, far from smooth and a good example as to how effective these instruments are.

I wouldn't say it was rocky, US indices have not even suffered a 10% correction during that time (no mean feat, given a run-up of 50%+).

Also, whip-sawed? Whip sawing is only applicable if you have long and short positions. The above ETF's dont hold short positions, you merely lose more on the downside becuase of your leveraged position.

Whipsawing, to quote Investopedia, is where "a security's price heads in one direction, but then is followed quickly by a movement in the opposite direction". Consider this example;

Take an ordinary etf that drops 10% on a particular day. A triple leveraged etf would drop 30%. That puts the 1x ETF at $90 and the 3x at $70. Then on the next day the 1x ETF increases $10 back to its original value of $100, which is an 11.11% gain (10/90 is 11.11%). The 3x ETF will gain 33.33% of its $70 which is an increase of roughly $23. This puts the 3x ETF at a value of $93, for a loss of $7 (taken from ).

The SEC, as I said earlier, has warned against people using them for long-term positions. Brokerages are now restricting their use. Most importantly, the providers themselves caution against what you are recommending (“Particularly in periods of heightened volatility, the ETFs should be used by investors as short-term trading vehicles. As a consequence, we do not believe that investors should buy and hold the funds.” - Direxion, leveraged etfs provider, see
http://247wallst.com/2009/07/07/qua...ance-vs-target-index-fas-faz-bgu-bgz-erx-ery/

Bottom line, I'm not sure how someone can champion leveraged etfs for l/t positions when even the ETF providers advise against it.
 
this negative attitude doesn't have a leg to stand on when we look at indexes versus well run ultra ETF's

Not true. Most investors wrongly assume that if an index rises, say, 20% in a period of time, a leveraged ETF will rise by 40%. Of course, this is not the case, as your stats confirm (yes, you may benefit by more than double).

Yes, and they may benefit less than double, or more in line with the index or below the index. Proper research should help you avoid the mistake of choosing a bad fund.

well back to the original post I stated "buy and forget"; what I meant by that was you can buy it now and forget about it until you hear the stock markets are getting toppy and there is nasty economic news about (Sub Prime, Lehman Brothers Failing, increased foreclosures, whatever the next crisis is going to be - or read a book on technical analysis and learn to recognise toppy markets), then you flog it, as you should if you own a standard index ETF.

That's not buy and forget. That's trading/active investing or whatever one would like to call it, but it's not buy and forget.

Active investing/trading? Do you think? Well by your definition then, I recommend everyone that is in the stock market become active investors/traders. Really what you are telling me, if I try to get my head around this, is that if I buy into any ETF at the start of what I perceive as a bull market and then sell out when I get nervous/when markets look topped out/whatever the reason, which generally speaking is between 2 and 10 years after I bought in then this makes me an active investor/trader? All these folk out there that make 2 or 3 trades a year are now traders?

Maybe I just picked you up wrong on this one!

the only long term view for the markets is up. So if the general trend is up, then a leveraged ETF will only magnify your gains

Depends on what you mean by long, in that markets have suffered many 10-20 year periods of stagnation/decline. Without getting into that debate, however, the fact is that leveraged ETFs were designed with traders, not buy and holders, in mind.

OK, to be specific, when I say long, the term 2 to 5 years. Lets remove the term "long" and use "over the next business cycle" instead which should elliminate any ambiguity. The fact that this decade has been one of, if not the worst decade for investing in the market does not add any weight to your argument. The end result is still the same whether you used a standard ETF or a leveraged one (obviously you can pick two points a and b that would favour each one, but generally speaking you are looking in or around the same).

If somebody asks me, "I have about 15k in savings that I would like to invest into an ETF or a few ETFs", then without going into an hour long discussion as to how risk averse or not that person is, I will suggest what I have seen works well over business cycles and given we are close to the bottom of one (bar a overdue market correction of the small variety) and the numbers above support what I am saying (though there is far more supportive evidence out there once you choose the right fund) then I will recommend it. Its obviously worked for you or you would not be involved in them either. I really dont see why these things should only be for "traders" (your definition of which confuses me a little).

Straight up, anyone out there with money in stocks should have an idea what is happening in the market. The recent action in the last two years has told us this, nothing is safe, not even the mega blue chips and that applies to all markets. So for those that want to invest in the market and essentially treat it like a savings account, then stick with your saving account, you will do better. But if you are willing to keep yourself reasonably up to date with what is going on (I aint talking about hours a day) as to general market conditions and you use your intelligence as to buying at the start of a business cycle and selling when you feel is right then you will do well. You will also have a pile of fun doing it.

Each to their own, but if there are gains to be made and a financial instrument will offer me more, then I'll do for it.

Sure, they're fine for trading (I trade them myself), but that's all.

Dont agree, neither do my figures.

If we are painting a picture then lets not scaremonger by posting extreme examples as mentioned above (2%, 88%).

I wasn't scaremongering, I mentioned that it was an "extreme case".

Extreme being the operative word. My examples above are not the mind blowing winners, ie the other side of the spectrum, they are merely good reputable funds that people use.

for those that may argue about the state of the market since March, yes, the general trend has been up, but rocky, far from smooth and a good example as to how effective these instruments are.

I wouldn't say it was rocky, US indices have not even suffered a 10% correction during that time (no mean feat, given a run-up of 50%+).

Quite true, but there have been plenty of so called whipsaw moments which would have caused havoc with ultra ETF's, certainly the big down days anyway.

Also, whip-sawed? Whip sawing is only applicable if you have long and short positions. The above ETF's dont hold short positions, you merely lose more on the downside becuase of your leveraged position.

Whipsawing, to quote Investopedia, is where "a security's price heads in one direction, but then is followed quickly by a movement in the opposite direction". Consider this example;

Take an ordinary etf that drops 10% on a particular day. A triple leveraged etf would drop 30%. That puts the 1x ETF at $90 and the 3x at $70. Then on the next day the 1x ETF increases $10 back to its original value of $100, which is an 11.11% gain (10/90 is 11.11%). The 3x ETF will gain 33.33% of its $70 which is an increase of roughly $23. This puts the 3x ETF at a value of $93, for a loss of $7 (taken from ).

The SEC, as I said earlier, has warned against people using them for long-term positions. Brokerages are now restricting their use. Most importantly, the providers themselves caution against what you are recommending (“Particularly in periods of heightened volatility, the ETFs should be used by investors as short-term trading vehicles. As a consequence, we do not believe that investors should buy and hold the funds.” - Direxion, leveraged etfs provider, see
http://247wallst.com/2009/07/07/qua...ance-vs-target-index-fas-faz-bgu-bgz-erx-ery/

Bottom line, I'm not sure how someone can champion leveraged etfs for l/t positions when even the ETF providers advise against it.

Whipsawing will not affect a long term holder, only short term traders are affected by this, ie those with hedged positions (long and short) where they can lose on both.

I champion the funds becuase they work, that is, they work for me. As I mentioned, if you have money in the market be prepared to at the very least keep yourself up to date as to what is going on. Otherwise the market aint for you. I think the majority of posters on this board are savvy enough to know this.
 
Both myself and Charttrader are attempting to make a relatively simple point regarding leveraged ETFs - that in the case of leveraged ETFs which are designed to provide returns double the index, they guarantee to do this but only on a daily basis. High levels of volatility in markets (or sectors) mean that numerous leveraged ETFs have not provided leveraged returns over longer periods (say three months). Others have. Indeed, the are many examples of leveraged ETFs providing losses when the market has gone up. It is a tricky area and not for the inexperienced - I think that's out point.
 
Senorito, don't want to get bogged down in trading/investing debate. Your references to keeping a close eye on economic matters/technical analysis, etc, did not strike me as 'buy and forget' investing. Obviously, I accept that someone who buys and sells an index 2-10 years later is not a trader/active investor. Anyway, don't want to distort this thread so enough of that.

Where we really disagree is when you say that "proper research should help you avoid the mistake of choosing a bad fund" and that you "really dont see why these things should only be for 'traders'". Whether you have benefitted from l/t leveraged positions isn't the point. As I keep saying, even the ETF providers themselves warn that they are not designed for l/t positions. The issue of "research" and avoiding a "bad" fund is besides the point. The fact is that such etfs can wildly diverge over long periods even while they are doing exactly what they promised, ie, producing double the daily returns.

Further examples (including proshares);

1 - "between December 1, 2008, and April 30, 2009, a leveraged ETF seeking to deliver three times the daily return of the Russell 1000 Financial Services Index fell 53 percent, while the underlying index actually gained approximately 8 percent. A leveraged inverse ETF seeking to deliver three times the inverse of the Russell 1000 Financial Services Index’s daily return declined by 90 percent over the same period."

[broken link removed]

2 - "ProShares Ultra Oil & Gas lost 72% in 2008, according to ProShares. The bearish leveraged version, ProShares UltraShort Oil & Gas also lost money last year, shedding nearly 11%. Yet on a daily basis, the ETFs delivered their targeted leverage like clockwork, so they behaved exactly as they should have...

ProShares fund designed to return twice the opposite of the Dow Jones U.S. Real Estate Index was down 50% for 2008, while the index was also down, by 43%."

http://online.wsj.com/article/SB123111094917552317.html

3 - "Since June 21, 2006 SSO (2x S&P 500) is down 66% while SDS (-2x S&P 500) up on 12%.
* Since February 1, 2007 DIG (2x S&P 500 Energy) is down 63% while DUG (-2x S&P 500 Energy) is down 56%.
* Since November 6, 2008 FAS (3x Russell 1000 Financials) is down 84% while FAZ (-3x Russell 1000 Financials) is down 87%!! The inverse ETF has underperformed the long in a period where the underlying index is down 18%! ...the real travesty is that the total return for any number of these funds since inception is either negative or grossly different from the index

http://tickersense.typepad.com/tick...ed-etfs-beware-the-performance-conundrum.html

4 - "ProShares UltraShort Real Estate fund (trading symbol: SRS) seeks daily results, before fees and expenses, that correspond to twice the opposite of the daily performance of the Dow Jones U.S. Real Estate Index, the company says on its Web site.
Yet, according to the lawsuit, when the index fell about 39% from Jan. 2, 2008, to Dec. 17, 2008, the SRS fund fell about 48% -- "the antithesis of a directional play."

http://www.timesfirst.com/trade-news/203411/ProShare-Draws-Suit-Over-a-Leveraged-ETF.html

5 - "Dow Jones U.S. Oil & Gas Index, for instance, gained +1.6% from Dec. 1 to April 30. The conventional wisdom is that the leveraged ETF that tracks the index, the ProShares Ultra Oil & Gas (NYSE: DIG), should have doubled that performance and returned +3.2%. It didn't; it fell -5.6% instead"
[broken link removed]

6 - "Direxion Financial Bear 3x Shares (FAZ). This is an inverse leveraged ETF that is based on the Russell 1000 Financial Services Index.
On November 6, 2008, the index value closed at 720.446. Five months later, on April 6, 2009, the index ended the day at 520.629, for a drop of 27.7 percent.
So how do you think FAZ performed during this time? As an inverse fund, it should go up as the index goes down — and because FAZ is leveraged by a factor of three, your gain should be amplified three times over, right?
You might calculate that FAZ would have gone up 83.1 percent for this period (27.7 x 3 = 83.1).
Wrong …
In fact, FAZ actually fell 76.9 percent"




7 - Financial sector etfs - "1X Underlying Index ETF -(-6% Return)
3X Long ETF -(-64% Return)
3X Short ETF – (-84% Return)"

http://www.darwinsfinance.com/riskiest-etfs-earth-3x-returns/

8 - "plots the year-to-date performance of three ETFs: Direxion Daily Large-Cap Bull 3x, which is designed to triple the Russell 1000 Index’s return; Direxion Daily Large-Cap Bear 3x, which triples the Russell 1000’s inverse return; and the iShares Russell 1000 ETF, which (quaintly and simply) tracks the Russell Index.
Russell 1000 ETF is essentially flat year-to-date, a fact that would lead most logical investors to expect the leveraged ETFs to be roughly three-times over and below that mark. Far from it. Instead, both are off more than 25 percent for the year."

http://moneywatch.bnet.com/investin...s-are-dangerous-to-your-financial-health/249/

9 - "Only days after two lawsuits were filed against ProShares’ UltraShort Real Estate Fund (SRS: Quote, Profile, Advanced Chart, News), a third legal entity will begin investigating the leveraged ETF sector as a whole. Stanley, Mandel & Iola, L.L.P. and Wolf Haldenstein Adler Freeman & Herz LLP have announced their intent to find wrongdoing committed by virtually every leveraged ETF issuer on the market.
A press release issued by the two firms names virtually every major ETF issuer in the US markets: ProShares, Claymore, Rydex, Market Vectors, PowerShares, along with foreign ETF issuers Horizons and ETF Securities, as well as a handful of smaller ETF firms. The firms specifically spotlight a particular Russell 1000 Financial Services ETF, which declined more than 90% as the underlying index gained 8%.

While no further lawsuits have been filed, a broad investigation is indicative of future legal action against leveraged ETFs."

http://etf.com/category/ultra-short/

10 - "The new ProShares prospectus includes many graphic examples of the impact of “daily” leverage over longer periods of time. The chart below, taken from the prospectus, shows how both the +3x and -3x funds can lose money during a period when the underlying index has a 0% return.(3x fund returned -17%,3x inverse fund -31%)"

http://investwithanedge.com/index.php?s=leveraged


To sum up - "key point is that these ETFs provide leverage on a daily basis. Simply, investors are mistaken if they think they can buy a twice-leveraged ETF, hold it for a year, and end up with double the market's return..."We cannot stress enough that these aggressively leveraged products are not suitable as long-term investments," said John Gabriel, ETF analyst at Morningstar.
http://www.filife.com/stories/leveraged-and-inverse-etfs-are-shortterm-plays-only
 
Everything you mention above is detailed and I am sure accurate, I am also sure those interested in this subject will appreciate the time and effort gone into your post (I for one).

I completely agree, there are a large number of funds out there that do the opposite of what they should do. I dont like 3 x leveraged ETF's, there is just too great a margin for error in the event of serious market fluctuations due to the extreme leverage, I've not ever see one of those return 3 x the index (let me know if you have will you and what the ticker is!) so what you state above is true.

Specialised, ie specific sector funds are also dangerous, unless of course it is a dead set (Proshares Ultrashort Financials provided some fun for me over the last year). Energy is a play on energy prices. Better off gambling in my opinion, unless of course there is a high probability of you being right (in the case of long term holders of a Nat Gas fund at this moment- due diligence of course)

Anyway, no point in flogging a dead horse, the past two years were not the time to be in any ETF for any significant amount of time, I completely agree with that. BUT! There are certain instances where they are useful like the "business cycle" approach I mentioned in my previous post. Once on board, its only up to the owner to decide how long they want to stay on the train.

Thanks for the debate Charttrader. I appreciate your differing point of view.

For those interested in ETF's or their Ultra counterparts, plenty to think about!
 
very informative thread, here is some info I got from moneyandmarkets.com - i have edited it to suit this thread

[FONT=&quot]These six ETFs are large and actively traded; in fact, even with more than 800 other ETFs available it's not unusual for this small group to account for almost half the value of all ETF trading in the U.S.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Now I'm NOT saying you should buy any of my bread and butter ETFs right now. My point is that if you want to be a successful investor, it's a big help to know what's available. If you do, you'll be able to react more quickly when the time is right.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Ready to get started? Here we go.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Bread and Butter ETF #1: SPY[/FONT][FONT=&quot][/FONT]
[FONT=&quot]SPDR Trust is the granddaddy of all ETFs. Introduced in 1993, the SPY (that's the ticker symbol) was the very first U.S.-listed ETF and tracks the S&P 500. This index of 500 large-capitalization stocks is a standard benchmark for the U.S. equity market.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]When you buy shares of SPY, you get an instant portfolio of 500 domestic stocks covering every industry sector. Financials, technology, health care, energy ... they're all in there![/FONT][FONT=&quot][/FONT]

[FONT=&quot]Bread and Butter ETF #2: QQQQ[/FONT][FONT=&quot][/FONT]
[FONT=&quot]PowerShares QQQ used to be called the "Nasdaq 100 Tracking Stock" until the Nasdaq honchos decided to spin off their ETF business to PowerShares.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]This can be confusing, so read closely: The name of the ETF is PowerShares QQQ, with three Q's. The ticker symbol is QQQQ. That's four Q's. Clear enough? Obviously someone wants to keep us all on our toes.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]In any case, the QQQQ is based on the Nasdaq 100 Index. Note that this is not the same as the Nasdaq Composite Index that you typically see quoted in the news media. The Nasdaq 100 is a sub-set of the Composite, consisting of the 100 largest non-financial stocks in the index.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Back in the 1990s, the Nasdaq was home to many small technology companies — a few of which grew much bigger. That legacy survives in the Nasdaq 100, which is heavily tilted toward technology stocks. In fact, many traders look at it as nothing more than a large-cap tech benchmark.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]QQQQ is heavy on technology stocks.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]If you want exposure to banks, real estate or insurance stocks, don't bother with the QQQQ. You won't find them there. Nor will you find the blue-chip companies that call the New York Stock Exchange their home. But if you're after a highly liquid, volatile trading vehicle, the QQQQ is hard to beat.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Bread and Butter ETF #3: DIA[/FONT][FONT=&quot][/FONT]
[FONT=&quot]The DIAMONDS Trust follows the Dow Jones Industrial Average, which is probably the best-known stock market proxy in the world.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Unfortunately, the Dow is also mostly useless as a benchmark, at least in my opinion, and so are products like the DIA that attempt to follow the Dow.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]I've used the DIA from time to time since it came out in 1999, but it has three big problems ... [/FONT][FONT=&quot][/FONT]
[FONT=&quot]First,[/FONT][FONT=&quot] like the Dow, it's very narrow with only thirty stocks. That simply isn't enough to reliably represent the U.S. industrial economy, as the Dow purports to do.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Second,[/FONT][FONT=&quot] the DIA excludes some key sectors like transportation and utilities. Dow Jones publishes separate indexes for those groups.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Third,[/FONT][FONT=&quot] the Dow and the DIA are weighted by the share price of the component stocks rather than the market value. This was advantageous back in the days when you had to calculate things on the back of an envelope, but now it's just outmoded.[/FONT]


[FONT=&quot]Bread and Butter ETF #4: IWM[/FONT][FONT=&quot][/FONT]
[FONT=&quot]The IWM is the iShares Russell 2000 Index Fund. What's the Russell 2000? You already know the answer if you're a fan of small-cap stocks.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Each year, Frank Russell Associates ranks all the stocks in the U.S. by their market value. Chop off the top 1,000 biggest stocks and consider the next 2,000. That's the Russell 2000.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]IWM captures the small fry stocks.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]These are relatively small companies — but that's the whole point! When the U.S. economy is booming, small-cap stocks usually lead the way higher. And the IWM lets you buy hundreds of tiny stocks in one simple trade.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]The IWM should be a staple item for almost every investor. It's easy to jump in and out as the economy fluctuates, and you get plenty of diversification. There's no better way to play the domestic, small-cap stock market.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Bread and Butter ETF #5: EFA[/FONT][FONT=&quot][/FONT]
[FONT=&quot]The iShares MSCI EAFE Index Fund is international because it's based on the Europe, Australasia and Far East Index published by Morgan Stanley Capital International.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]I know that's quite a mouthful. Let me break it down for you: The EAFE Index is designed to represent the entire developed world, excluding the U.S. and Canada. It includes Western Europe, Australia, Japan — the countries with modern stock markets and banking systems (in contrast to the emerging markets, which we'll get to in a minute).[/FONT][FONT=&quot][/FONT]
[FONT=&quot]France is part of the EFA portfolio.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]The list of countries in the index can change. Recently MSCI promoted South Korea and Israel to developed-market status, and stocks from those countries were added to the index and to the EFA. [/FONT][FONT=&quot][/FONT]
[FONT=&quot]The EFA is useful as a way to round-out a portfolio that already includes enough U.S. stocks. Say you own the SPY and the IWM, but you want to have exposure to the rest of the world. Add the EFA to the mix and you're almost there.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]I say almost because there's one final piece ...[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Bread and Butter ETF #6: EEM[/FONT][FONT=&quot][/FONT]
[FONT=&quot]The EEM is the standard ETF if you want to trade emerging markets. These are places that only recently established economic ties with the rest of the world and are growing quickly. Markets like Brazil, Russia, India and China are good examples.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]MSCI produces an Emerging Markets Index as a benchmark for these markets, and the EEM lets you trade that index. This is a really handy fund because it's often difficult and expensive to buy individual stocks in emerging markets.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]The EEM is a quick and easy way to allocate some of your portfolio to emerging markets. Keep it on the tip of your tongue for the next time you're ready to make such a move.[/FONT][FONT=&quot][/FONT]
[FONT=&quot]Express Check-Out [/FONT][FONT=&quot]
[/FONT][FONT=&quot]For Active Investors[/FONT][FONT=&quot][/FONT]
[FONT=&quot]There you have them: SPY, QQQQ, DIA, IWM, EFA and EEM. These are the six ETFs every investor ought to know. Get familiar with them. Add them to your watch list, and be aware of how they could fit into your portfolio. [/FONT][FONT=&quot][/FONT]

[FONT=&quot][/FONT][FONT=&quot][/FONT]
 
Yes, I like that analogy 'Bread & Butter' ETFs. Thank you for that post.

Might use that analogy myself

Rory
 
Back
Top