07/26/2006
Two weeks ago, we talked about an article written by that Mad Money man over at CNBC. He criticized the growing popularity and expansion of exchange-traded funds (ETFs). He seemed to delight in poking fun at the variety of new investment choices that have opened up to investors with the explosion of ETFs.
Well, it didn't take long before I read another similar criticism of the many new ETF options available. This time it was a CBS MarketWatch piece titled, "For ETFs, too much of a good thing?"
The opening paragraph reads, "A rising chorus of observers says the proliferation of specialized exchange-traded funds across myriad market sectors and niches is confusing investors and pushing these popular financial products farther from their roots as low-cost, tax-efficient investments."
Really? Well, I guess if you are a broker or fund manager or someone who is otherwise threatened by investors having access to low-cost sector funds, then you might be part of that "rising chorus of observers" hostile to investor freedom.
Call me naïve, but I've always thought the individual investor is smart enough to see when he or she is being handed a load of bull. Now to be fair, the MarketWatch article wasn't as one sided against ETFs as the Mad Money man's piece. In fact, the MarketWatch article was careful to present an opposing view that the expansion of sector and inverse ETFs are actually a good thing. But the gist of the story was that ETFs have somehow become a victim of their own success, and because of their popularity, people now are buying things that they don't really understand. "Spare me the condescension," I say.
Sure, you shouldn't buy something unless you are totally familiar with it. However, that advice holds true for mutual funds, individual stocks, bonds, commodities and just about everything else we purchase in life. Hey, I'll be the first one to tell you when not to buy something, even an ETF, but that doesn't mean that having the choice available to you is a bad thing.
The point here is that the people out there criticizing all of these new ETF options still don't get it. Investors are demanding more investment choices, particularly now that the major indexes have basically been flat for so many years. And where there is a demand, there will be an entrepreneur out there to make sure that demand is being met. This is nothing to fear. It's just called capitalism in action.
In part one of our five-part series on ETF strategies for an uncertain market, we discussed the new ETFs out there designed to take advantage of a decline in the overall equity markets. This week we will turn our attention to another area of the ETF universe that can help you profit when everything else is sliding -- sector ETFs.
I love sector ETFs because they allow you to "pick your spots" as an investor. If there's a general decline in place in the major market averages, you can move your money into areas that aren't affected by the overall trend. And the beauty of using sector ETFs is that they don't just work in a down market, they also work equally well in sideways and bull markets.
The basic theory behind sector ETFs is that they allow investors to get exposure to specific areas of the market. As you've already learned, there has been an explosion of ETF offerings designed for investors who are partial to nearly every market segment. At last count -- and this changes nearly every week as new ETFs are brought to market -- there were 273 ETFs listed on U.S. stock exchanges.
In times of uncertainty, when there is no clear or discernable trend in the broad equities market, it is very difficult to make money without using sector funds and picking your spots.
In my Successful Investing service, we've used a combination of sector ETFs to help us produce an 8% gain throughout the first six months of the year. Compare that to a general market performance, -1%, measured by the S&P 500 Index, and you can see what a powerful tool investing in sectors can be.
In my ETF Trader service, we used sector ETFs to capture an 18% gain through the first half of 2006.
The key to using sector ETFs is first to familiarize yourself with the many different offerings available. I like to use Yahoo! Finance to do a lot of my initial research, but there are many other good, free sources of information out there on ETFs. Subscribers to Successful Investing get a report every Friday that contains all of the performance details of every ETF out there.
|
TICKER |
Category |
Name |
|
|
|
Sectors |
|
XLF |
Finance |
Financial Select Sector SPDR |
|
IYF |
Finance |
iShares DJ US Financial Sector |
|
BBH |
Health |
Biotech HOLDRs |
|
XLV |
Health |
Health Care Select Sect SPDR |
|
IYM |
Basic Mater |
iShares Dow Jones US Basic Materials |
|
XLE |
Energy |
Energy Select Sector SPDR |
|
OIH |
Energy |
Oil Services HOLDRs |
|
XLY |
Consumer |
Consumer Discretionary SPDR |
|
XLP |
Consumer |
Consumer Staples Select Sector SPDR |
|
IYR |
Real Estate |
iShares Dow Jones US Real Estate |
|
XLK |
Technology |
Technology Select Sector SPDR |
|
PUI |
Utilities |
PowerShares Dynamic Utilities |
The table above is just a very small sample of the various sector ETFs out there you all have to choose from. The ETF sectors include finance, healthcare, basic materials, energy, consumer staples, real estate, technology, utilities and even commodities. This short list doesn't even begin to scratch the surface.
If you are looking for ways to pump up your portfolio by using sector ETFs, we can help. I invite you to click on the links below for more information on how it's done.
Click here to learn more about Successful Investing
Click here to learn more about ETF Trader
"Locked inside each of us is the person we want to be. Others might not recognize it yet, but I'm telling you, it's in there. The passion shouldn't die before we do. Even against ridiculous odds, what propels you forward and separates you from the rest? P.R.I.D.E., which stands for Perseverance, Responsibility, Integrity, Determination, and Excitement. If you have these five elements in your life, you can accomplish almost anything."
– Sylvester Stallone, Sly Moves
Hey, I'm not a huge fan of his films, but I don't think anyone can deny that Sylvester Stallone is the embodiment of success—both professionally and financially (I wonder what his portfolio looks like?). You've got to give it up for a guy who basically just willed himself into Hollywood's elite. And while we may not want to become the next big action star, all of us have an idea of the person we'd like to be. If you've found yourself wondering how to get there, you might want to try looking at life the way Sly does.