ETF's

[Spaf]

Exchange-Traded Funds
ETF's


What are ETF's (http://www.fool.com/etf/etf.htm)


ETF Center at MarketWatch (http://www.marketwatch.com/tools/etfs/html-top5.asp)

iShares (http://www.ishares.com/splash.jhtml?pt=false&_requestid=38217&_requestid=38217&_requestid=264951s)

[Spaf]

How do you invest with ETF's

First you would need to set up an account with an internet broker.
Remember you will be using tax-paid funds.
Using their online trading platform you can buy and sell shares within seconds.

"Ask" is what they are selling at. "Bid" is what they will buy back at. Note these prices fluctuate, so if you wait a while the deal may get better.

You have a cash account and you can purchase shares within that account. When you sell, there is generally a three day waiting period till the shares clear, it's called settled. Re-trading unsettled funds is a no-no.

For TSP the corresponding ETF's would be Cash= G-fund, AGG= F-fund, IVV= C-fund, IJR= S-fund, and EFA= I-fund. These are iShares, there are other matches but iShares are very consistant in their daily updating.

The Cash account pays interest for funds on hand, generally at the end of the month. Not quite as good as TSP, but within reason.

So using tax paid funds, one can construct a clone of the TSP funds, trade within seconds. And going to cash; withdraw the funds in case of an emergency. With TSP an inter-fund-transfer is free. Trades with ETF's have a trade cost plus the Ask/Bid difference. Using ETF's you can go with other indexes/sectors/etc., which there is a multitude. A good reference to the various ETF's can be found at the Barcharts web site: http://www.barchart.com/

[mlk_man]

Spaf, you can re-trade unsettled funds immediately but if you sell those shares before they settle in three days, it's considered a "free ride" by the government and you'll be hearing about it. Unless of course you set your account up as a "day trading account".

[Spaf]

M_M, anyone,
What happens if you "free ride"? What does the government do?....:confused:

[mlk_man]

The time I did it, this was when I first started my account, Scottrade just sent me a form that I had to sign as acknowledging that I had read and understood it. Mainly explaining what a free ride was. Never heard anything from the IRS about it. Of course I just got a letter from them a few months ago saying I owed them money from some stocks I sold in 2004 and never claimed. They were losses anyway so they ended up owing me money.........:D

[Spaf]

Thanks Mike!
I could just see 4 big black SUV's parked in my front yard.........:o

[FUTURESTRADER]

How do you invest with ETF's
So using tax paid funds, one can construct a clone of the TSP funds, trade within seconds. And going to cash; withdraw the funds in case of an emergency. With TSP an inter-fund-transfer is free. Trades with ETF's have a trade cost plus the Ask/Bid difference.

"Unless of course you set your account up as a "day trading account"

A mention of the 'wash rule' for active trading same stock. I don't know if it applies to ETFs, probably does. Primarily affects tax loss write-off. Within 30 days, you can't buy, then sell at loss, then buy back at lower price, and write off that loss. But you can go back and match up like trades, i.e., you made the round turn 4 or 5 times in oct and again in nov, you could offset any of the losses in the first month with gains from trades 30 days later

[Spaf]

FUTURESTRADER,

What you are saying is critical to having a reputable internet broker. At the end of the year you need to download your trading transactions, and have an accountant that can translate that into your tax return. If not the IRS will be after your rear end. Been there, done that!
This sounds funny for me since I worked in the same building with the IRS, on the floor below them......:embarrest:

[Locke]

Anyone interested in investing in the four fastest growing countries (Brazil, Russia, India, China), then check out Claymore's new BRIC ETF - Ticker symbol EEB

[clester]

I'm looking at transfering my TSP to an IRA to take advantage of the 72t rule.
Would ETF be a good choice? No taxes or paperwork involved inside IRA right? You could mirror TSP funds. Would the costs be too high?

[Spaf]

I'm looking at transfering my TSP to an IRA to take advantage of the 72t rule.
Would ETF be a good choice? No taxes or paperwork involved inside IRA right? You could mirror TSP funds. Would the costs be too high?

clester,
I use ETFs for trading with my internet broker, there are so many that you can mirror just about any index or sector. A lot of the internet brokers offer IRAs
There are some web sites that set up portfolios using ETFs!
However, to set up a long term IRA, I would look to see what some reputable mutual fund companies offered i.e., Vanguard, USAA, etc.
I would definitly do some research before making a final decision.
I think EWGuy has gone down this road. You may want to send him a PM and see what he has to say.
Spaf

[clester]

Thanks Spaf,
I was thinking of EFT's for the flexability. Most large companies like vanguard restrict you ability to move around. On the other hand expenses are low.
I assume EFT's with internet brokers have the $10 per trade fee, are there other fees if, for example, you trade large blocks like $50,000 like I do with TSP?

[Spaf]

Yea, brokers charge a fee for a trade, whether you buy 1 or thousands. Most trades are done in blocks of 100, but you don't have to. The fee is what the broker makes. Brokers that charge more generally have more frills to their systems.

The other cost is the "ask" and "bid" price. If the stock had a price of $20.00 they could ask 20.05 for it....or they would bid (buy it) for 19.95. That's where the company makes the money.

What broker one goes with is a matter of personal preference, but I would caution against the real cheap ones.

[clester]

So, do you think ETF's are a good option if I transfer my TSP to an IRA and make SEPP withdrawals? just looking for best guesses. anyone? thanks.

[Spaf]

So, do you think ETF's are a good option if I transfer my TSP to an IRA and make SEPP withdrawals? just looking for best guesses. anyone? thanks.

As with any investment, there are risks. I like ETFs because there are so many to chose from and they are mainly indexed to mirrow a certain sector. However, check out www.barcharts.com go to market overview and click on ETFs, there you can see the majority of the funds and their performance. Plus you can play with their performances via the tab buttons. Another good site is www.iShares.com

[James48843]

I recently bought FXI , which is capturing the China market. A bit of diversification into Asia while it's on the upswing. It's an iShares EFT.

[GGal]

I am interested in this one: H & Q Life Science Investors

http://www.fool.com/investing/mutual-funds/2006/11/16/the-best-etf-for-2007-hampq-life-sciences-investor.aspx?source=eptyholnk303100&logvisit=y&npu=y

If I wanted to buy x amount of it every month, should I use my regular broker, or should I set up some kind of online account (which I have never done!)

Please advise.

Thanks
GA

[Show-me]

Sharebuilder (http://www.sharebuilder.com/) is a Warren Buffet company I believe. It is more of a buy and hold broker.

Scottrade (http://www.scottrade.com/index.asp?supbid=68906) you can transfer money electronically or they can transfer money from a savings or checking account like a allotment.

[James48843]

I am interested in this one: H & Q Life Science Investors


Georgia gal:

HQL appears to have lost a significant amount of value over the last 12 months, going from about 18 bucks down to 13 bucks, and has a negative 25 percent growth rate.

What do you know that makes this one worth looking at? Yes, it's paying a dividend. But there doesn't appear to be many other things to make it an outstanding performer.

So what do you know about it?

thanks

[GGal]

Hey James,

I know debits and credits, and I know tax law, and I know how to cook, etc. etc.

I'm interested in HQL because I'm interested in investing in biotech companies for the long haul because of the aging baby boomer population. We baby boomers are squeaking like a gazillion little mice, wanting everything to be cured.

I like the idea of somebody with more expertise than me doing the picking. And, I like the idea that the price has dropped. That's a good thing.

I'm going to do more research before I set it up after the first of the year, but right now it looks like I'm going to go with a sharebuilder account, and it looks like HQL will be my primary target for now.

By the way, this year I made what turned out to be fabulous investments in ALNY and RNAI. And I could a made a bunch on ACOR but my broker talked me out of it. And so far my ANIK is doing well also.

I'm just real interested in Biotech. I am so sad that I did not buy Genentech. (sic?)

GA

[Spaf]

Biotech
My STA gives a reference to [BTX]. For a sector index seasonality it's a start buy around the end of July and runs through the beginning of March......:)

[GGal]

http://www.hqcm.com/Reports/HQL/hqla06.pdf

Link to HQL's latest annual report filed with SEC.

What I'm seeing is potential. Since this is a managed fund, I don't think the term "negative growth" should be used or viewed in the same context that we would use that term as related to a Home Depot or a Walmart, etc..

The volatility of the biotech market sector this year is what caused the decline in NAV. But, that can and will change.

It's not the same thing as saying Home Depot (or whatever) had a 25% negative growth rate because they closed x number of stores or lost x number of accounts..

GA

[James48843]

Thanks for the link to the annual report. That's an interesting read.

What I take from it is what I see as a pretty high fee ratio for the returns they are getting. They are charging 1.75% in asset management fees. Pretty steep, if you ask me. You mention the volitility in the sector- the annnual report icks out that as a factor, but I also see not just one year but all five years as a pretty questionable return. For those kind of consulting fees, one might expect to see some better performance.

But I understand your interest in the sector. Nice place to look around for the future. I'll keep my eye on it.

Thanks for the read. Good luck. Hope it works out for you.

J

[Bullitt]

According to the WSJ...

2/3 of people who are worth $500K-$1Million invest in ETFs and more than half invest in Mutual Funds.

On the other hand, 76% of the ultra rich (>$20mil) choose to invest in Hedge Funds and 35% choose startup companies. Allegedy only 1% of this category directly invests in ETF's/Mutual Funds.

I think this is deceiving though because alot of that money flowing into Hedge Funds gets invested into ETF's. It makes sense to give money to a hedge fund because I couldn't imagine trying to personally invest $20 million in the market. I don't understand what is wrong with a mutual fund though even if you have that kind of money though. I guess it all comes down to wanting to drive a Porsche or Ford.

My one gripe about ETFs is this that they all proclaim to have low fees. At the end of the day price is all that matters. If a Fund returns 18% YTD and has a 1.5% 12-b fee attached to it, who cares. You still made 18%!!! It's not like the Fund says 'ok you made $2000 this year but we're taking 1.5% from that.' It's already factored into the NAV. If you want to mimic an index, then buy an index mutual fund so you can DCA and not worry about getting blasted by commissions with your contributions. I don't think the big companies want the retail investor to know this because then they would lose money in commissions.

I think ETFs are good but not great. Like anything else there are winners and losers. They are best for riding a high flying sector or dropping a lump of cash down all at once. For example, the FXI would be a great wave rider but not a long term investmet. DVY would be a great ETF to drop a lump sum on and watch grow.

ETF's are a relatively new phenomenon and I wouldn't be surprised to see a few founder in the years ahead.

[James48843]

Interesting way to play here:

If you are into China, you know about the EFT called "FXI", which is the Shanghai index ETF. It peaked back in October.

In the flip side, you can make money on Shanghai going down- by using this EFT: FXP.

FXP is an inverse ETF- if the index goes down, the value of FXP goes up by twice as much.

[James48843]

Hey Spaf- you wanna take a crack at answering this question about ETF's?

I had someone ask it in another forum- I haven't had time to mull over a good response yet, but I'll through it out here, and let you, or anyone esle who wants to pitch in a thought- to try and answer the question below:

**************************************

Originally Posted by RPM http://www.tsptalk.com/mb/images/buttons/viewpost.gif (http://www.tsptalk.com/mb/showthread.php?p=159736#post159736)
James:

Do you know why there is such difference between $SPX and SPY on the P&F charts? TIA
You ask an interesting question.

I'll try and write something up in answer, and post it tonight in this thread:

http://www.tsptalk.com/mb/showthread.php?t=3493

The sum of your question comes down to "Why don't ETF's perform exactly in line with the indexes they are supposed to represent?"

And that answer will take more than I can do here.
*********************************************


Thanks in advance- gotta go.

[Bullitt]

Someone else may want to delve into this futher because I only know about a few spokes on this wheel but here goes. Two main reasons.

1. Fees, Fees, Fees, Fees, Fees. Even the most efficient ETF's have some kind of fee involved. SPY is probably one of the most efficient.
2. An ETF is a sample of the Index it attempts to represent. For example, the S&P 500 contains 500 companies but the SPY contains probably only about 100. The manager attempts to equally weight the ETF holdings to correlate with movements in the actual index. This is not always possible and may result in discrepancies with the actual index.

Don't get too excited about trying to capitalize on a discrepency in the actual NAV of an ETF vs it's current bid/ask. There are hundreds of Sharks in the Hedge Fund industry that make their money arbitraging ETF's in the same way that they arbitrage the Futures/Spot price/Index markets. In an ETF like SPY, the discrepancy between NAV and latest trading price might be ~.01% if you're lucky. When you're playing with millions of $$$ though, nickel dime trades over time do accumulate. If a shark sees that the SPY is trading below what they perceive to be it's NAV based on the current prices of it's holdings, they flood the system with buy orders. When it's trading above it's NAV, they flood it with sell orders. A constant tug-o-war amongst the big boys. Impossible for us Plebes to attempt as this is what's called Program Trading.

Example of how difficult is to arbitrage a highly liquid ETF: On 4/9/08 SPY had a NAV of 135.36 according to Yahoo. The closing price of the SPY that day was 135.83. The next day, 4/10/08, the SPY opened at 135.35 (very close to prior day's close NAV). SPY is a traders playground.

In the world we live in today where anyone has access to a trading account, opportunities for actual arbitrage are extremely rare. Burton Malkiel made big bucks loading up on Closed End Funds in 2002 as they traded at a discount of 10-20% below their NAV. (Hence the argument against the 'Efficient Market Theory'.) As more and more Hedge Funds rush into the game, this practice has become increasingly obsolete.

In summary, fees are the real killer. The S&P 500 is a mere mathematical equation that doesn't take into account the Bid/Ask Spread or Commissions when rebalancing it's portfolio.

[Bullitt]

ETF's are a relatively new phenomenon and I wouldn't be surprised to see a few founder in the years ahead.

http://s.wsj.net/public/resources/images/MI-AP891_WETF_20080411185229.gifChart courtesy wsj.com. "In the last two months, 21 ETF's were withdrawn from registration."

Looks like the alleged bear is causing investors to relinquish their lust for exotica.

[Show-me]

It's a hard sell when the bear is knocking, unless it is a inverse ETF.

[XL-entLady]

Inverse ETF's are an interesting option in today's market. I've been dabbling with some success. But I hesitate to put any substantial amounts into a company that isn't backed by "full faith and credit," such as FDIC insurance.

I'd love to get opinions on which "securities and investment" type companies the MB thinks are going to best weather this storm and be around in - - say - - five years. Which ones do you have the most confidence in that they're safer, well capitalized, well managed, etc.?

Anyone willing to offer an opinion? :o

Thanks,
Lady

[Bullitt]

In my opinion the Government isn't going to let anybody else fail that's TBTF after what happened globally with Lehman. Feel free to invest in ETF's at will.

I do caution investing in any low volume ETF's and ETN's, especially ETN's. ETN's don't invest in the underlying assets, but are backed by bonds and.... I really don't know how they work.

Look for good average volume before dabbling into any ETF. That's your best indicator of being 'safer' in regards to defaults.

This is no time to be messing around with 2x short funds if you're looking 5 years out. I'm still a believer in the global infrastructure story so a few good ETF's to consider with that respect would be
IGF: iShares Infrastructure (low volume though)
GII: Macquerie Global Infrastructure (very low volume)
SLX: Vectors Steel
MXI: iShares Global Materials
PHO: Powershares Water

[XL-entLady]

In my opinion the Government isn't going to let anybody else fail that's TBTF after what happened globally with Lehman. Feel free to invest in ETF's at will.

I do caution investing in any low volume ETF's and ETN's, especially ETN's. ETN's don't invest in the underlying assets, but are backed by bonds and.... I really don't know how they work.

Look for good average volume before dabbling into any ETF. That's your best indicator of being 'safer' in regards to defaults.

This is no time to be messing around with 2x short funds if you're looking 5 years out. I'm still a believer in the global infrastructure story so a few good ETF's to consider with that respect would be
IGF: iShares Infrastructure (low volume though)
GII: Macquerie Global Infrastructure (very low volume)
SLX: Vectors Steel
MXI: iShares Global Materials
PHO: Powershares Water
Thanks for taking the time to offer your thoughts! And I appreciate your confirmation of my opinion that the time for ultra-shorts has passed. I have been dealing lately with SH, SBB and EFZ and they have been treating me well. I'll take a good look at the ETF's you have suggested as well.

And who knows. The way the markets have been the last three days, the time for SPYders may not be far off! :D

My sincere appreciation! Thanks again!
Lady