Newcomb Briefing

ETFs, Exchange Traded Funds

What are they? How do you use them?
First, what are ETFs? Exchange Traded Funds, invented about 11 years ago, are akin to Mutual Funds. Like their brethren, they are invested in a group, basket, sector or index of stocks, bonds or commodities or all of the above. Like Mutual Funds you can buy them through fund companies, but mostly through brokers.

That may be where the family likeness ends. Mutual Funds are priced at the end of each trading day, at 4:00 PM to be exact, so trading Mutual Funds takes place at the close price. ETF prices change throughout the day, so ETFs can be traded throughout the day. ETFs can be shorted or have options on them, where Mutual Funds do not. ETFs can use stop and limit orders and be bought on margin. ETFs can do all that because they are bought and sold on the stock market.

Another important point is that ETFs get rid of stock picking by fund managers and portfolio turnover because it stays in a solid sector or index. This reduces fund cost on capital gains and transaction cost to say nothing of stock picking error. The expenses are lower by a wide margin, ¼ of a percent versus 1.5% for the average Mutual Fund if you hold it. You will have to pay your own transaction cost when you buy, sell, trade and pay your own capital gains when you sell. Even after that, ETFs are less expensive than Mutual Funds with the average 0.6% round trip expense of buying/selling a $10,000 stake. That is, it’s less for the buy and hold type of investor. See James Glassmans article at http://www.nationalreview.com/nrof_glassman/glassman200404140841.asp

How do you use them? What’s available?
Check out http://quote.bloomberg.com/apps/data?pid=mutualfunds and put in the following fund symbols. Try QQQQ, it is the Nasdaq-100 Index Tracking Stock. This fund is an exchange-traded fund which represents undivided ownership interests in The Nasdaq-100 Trust. The objective of the Trust is to provide investment results that generally correspond to the price and yield performance of the component securities of the Nasdaq-100 Index. For more information see http://www.nasdaq.com/aspxcontent/qqqq/index.aspx . Try SPY, it is the SPDR Trust Series 1. This fund issues exchange-traded funds called Standard & Poor's Depositary Receipts or "SPDRs". The SPDR Trust holds all of the common stocks of the Standard & Poors 500 Composite Stock Price Index and intends to provide investment results that, before expenses, correspond to the price and yield of the S&P 500 Index. For more information see http://www.amex.com/ .

Mutual Fund companies are also in the ETF fray. Vanguard offers a 500 Index VFINX, Total Stock Market VTSMX, Small Cap Index NAESX, Growth Index VIGRX, and Value Index VIVAX to name a few. And Barclays is in the mix with Barclays Global Investors S&P 500 Stock Fund, WFSPX.

Are ETFs for you?
Want to join the ETF family? Be careful. The cost benefits of ETFs are not always what they seem. For one thing, trading costs add up to a weighty sum. If you're investing in a fund that tracks broad market indices such as the S&P 500 or the Wilshire and if you invest regular amounts in your funds, (read transaction cost), then your existing low-cost mutual-fund options may be difficult the beat. http://ednewcomb.blogspot.com/

posted by Ed Newcomb @ Saturday, April 23, 2005 0 comments

Bear Market, ain't no Sunhine ...

Bear Market
For those who can do sums without counting their fingers, or their toes for that matter, the current interest rates, energy prices, and employment numbers sing the same old song. It’s sung to the tune of the old Bill Withers; “Ain’t no Sunshine when she’s gone� and “she’s always gone too long anytime she goes away�. Of course, “isn’t any sunshine� would be proper English but we aren’t quibbling about sentence structure as much as the financial structure of the market.

The term to back and fill comes to us from sailing ships, where it signifies alternately backing and filling the sails, a method used when the wind is running up against a ship in a narrow channel. The sail is hauled back against the wind and braced so that the tide or current carries the ship forward against the wind. The same term applies now to the market. For a brief moment the market rallied at the end of March as major mutual funds and investment houses put in a last ditch effort to make the first quarter look good. Then the market was backing and filling against a wind of fundamentals that don’t look as promising as the rally.

The aforementioned fundamentals we are talking about, among other things, are the up-ticks of interest rates. The measured approach of the Fed is finally altering the market. The Federal Funds rate now sits at 2.75% up from 2.5%. The Prime rate followed suit and is now 5.75%, up from 5.5%. So are mortgage rates up? Yes, 5.12% and 5.52% for the 15 and 30 year respectively, up 4.25% and 3.18%. The 30 year T-Bonds were down 0.12% at 4.73% on April 4th. See http://www.bloomberg.com/markets/rates/ for current news.

Oil, Interest Rates and Jobs
Oil, too, has come a long way baby. Goldman Sachs’ bank recently envisions oil going up to $105 a barrel, (http://www.rte.ie/business/2005/0331/oil.html )! While this prediction may sound unbelievable there are murmurings out there about shortages and production short-comings. Oil was trading up to $58 a barrel on Monday. It was $51 a barrel back in February when I was predicting $60 a barrel and it appears I may have been too conservative. According to John S. Herold Inc., http://www.herold.com/research/disp_weekly.home , things don’t look rosy for reserve replacement coupled with an increased demand of two million barrels a day.

The Fed chairman has this to say about oil reserves; "Markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation," Greenspan reported to the National Petrochemical and Refiners Association Conference in San Antonio Texas. "Increased demand and lagging additions to productive capacity have combined to absorb a significant amount of the slack in energy markets that was essential in containing energy prices between 1985 and 2000." (See the Dan Ackman article in Forbes, http://www.forbes.com/home/energy/2005/04/06/cx_da_0406topnews.html ).

Only 110,000 jobs were added to the economy in March. (See http://www.washingtonpost.com/wp-dyn/articles/A20166-2005Apr1.html ). The seers were expecting 231,000 jobs. It appears the soothsayers aren’t any better than Nostradamus and may be a little more obscure at hitting their targets. Many pundits consider that over 200,000 new jobs are needed in order to grow the economy. The story is bad enough, but when you consider that the jobs created were largely bar, restaurant and health-care jobs you realize that wages in those sectors don’t add much to the consumption capacity in the economy. Consider also that while 110,000 jobs, of a kind, were added we also lost 8,000 much needed manufacturing jobs in March.

What to do until the sun comes out again
So for normal folk, and I suspect those not so normal, we can expect higher prices in interest rates, gas prices and in general prices on goods and services. For businesses trying to make ends meet, do they ever, it means that the cost of doing business will be higher making it more difficult to add personnel or consider expansion. What’s in store? Well, there are higher prices in the store. A little inflation may follow and I’m not even going to get into the deficit or the savings rate.

What should you do with your investments? There are many reactions out there. You can pick from complete withdrawal and take everything out of the market, put it in Certificates of Deposit to wait for the sun to shine once again on the market. In the other extreme, you can take the approach that this is the time to buy cheap stocks which will eventually, read hopefully, appreciate in value. (The latter choice may be a poor one making an allowance for the position that stocks are considered to be over-valued at the present time). Then, there is a vast middle-ground where you can look for value, buy gold or invest in energy stocks and funds.

Be careful if you go totally into the energy sector. It will do well into the coming months but, historically, it will drop off just as dramatically and possibly unexpectedly. Be careful out there and remember that it’s always darkest just before it goes totally pitch black, especially when it comes to oil. The sun will shine again one great day.

posted by Ed Newcomb @ Thursday, April 07, 2005 0 comments