The Trillion $$$ investment you never heard of
ETFs are widely popular among active investors but largely unknown to the general public. ETF stands for Exchange Traded Funds; they are baskets of stock that act like a mutual fund but have become popular due to their lower fees own, low entry cost and ease of purchase.
Bloomberg reports there are over 1400 ETFs in existence and each seeks a particular niche. There are ETFs that follow commodities such as grains (GRU) or Gold (GLD). Investors should note the purpose of an ETF is to get a similar rate of change in price, but it won’t be exact.
At the time of this writing Wheat futures have risen approximately 50% in the past 60 days. GRU has risen only 40%. There are several reasons. One is GRU includes other grains that haven’t experienced the same change in price, such as corn.
Another factor comes from a warning from the New York Stock Exchange – the underlying asset many times is a futures contract. As these contracts mature there is price fluctuation that doesn’t reflect the actual cost of the asset.
“ETFs began as a low-cost alternative to the mutual fund, a sort of improved index fund. Nathan Most, an executive at the American Stock Exchange, developed the first SPDR-Standard & Poor’s depositary receipt in 1993,” repots Bank Investment Consultant. SPY is the call symbol for the ETF that follows the S&P.
Creating more opportunity and more confusion is the addition of leverage. Some ETFs like FAZ and FAS follow financial stocks, but seek to move an average of 300% more. Both use options to create more gains or losses. Options have a built in “wasting aspect” to them. That is, time diminishes the value.
FAS moves with the financial stocks. If they are rising, so is FAS. FAZ is an inverse ETF, also called a “short”. If the price of financial stocks is falling then FAZ is rising. And because of its leverage, it moves faster.
In May 2012 the DOW fell about 1300 points and financial stocks fell along with it. FAZ moved up over 50% in the same time period. Used wisely ETFs are an important piece of any investment strategy, but they are not a “buy & hold” instrument. Investors must seek trends, ride them and get out. Timing the turns is critical.
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