In last week's Money and Markets column, I told you about the advantages exchange-traded funds have over mutual funds. Today we'll go a little deeper and look at the many exciting ways you can execute your investment ideas with ETFs.
As you'll see, practically all the new financial innovation is happening in the ETF niche. Mutual fund sponsors have all but given up on doing anything new and different.
The first thing I want you to understand is that an ETF is nothing more than a tool. And most of the time, ETFs do what they're designed to do. The more important question is which ETF is a match for your goals and situation? The ETF that works for your neighbor might not be the same one that you need.
So what are your goals? If you have a well-designed investment strategy, you'll still need good tools to execute that strategy. And ETFs are a great way to fill up your toolbox.
Just look at some of the ways ETFs allow you to invest ...
Market Benchmarks: If you're a broad-minded investor who wants to play the whole market, you can easily do it with ETFs. The iShares MSCI ACWI Index Fund (ACWI) tracks the MSCI All-Country World Index ? which includes just about every stock market in the world: U.S., Europe, Asia, Emerging Markets, 46 countries in all. ACWI is one-stop shopping for equity investors.
Style Investing: Do you think small-caps will outperform? Consider iShares Russell 2000 Index Fund (IWM), which lets you buy all 2,000 stocks in this popular index with one, quick transaction. Or if you're looking to tilt your portfolio toward value stocks, or growth stocks, or dividend-paying stocks, you have plenty of ETFs to choose from.
Sector ETFs: These are some of my favorites. You know that different industries tend to rotate in and out of favor: Technology, health care, retailers, utilities, and more. ETFs let you own the hot sectors and also give you a way to zero in on the best sub-sectors. Within the technology sector, for instance, there are ETFs that cover semiconductors, computer hardware, software, information services, networking, telecommunications and more.
International: For years investors had to use mutual funds in order to invest outside the U.S. Fund sponsors covered broad regions, but to get any more precise you had to buy individual stocks. Not any longer. ETFs now cover not only the major regions of the world ? Europe, Asia/Pacific, Latin America and so on ? but also many individual countries. Whether you want to buy Singapore, Switzerland, or South Africa ... ETFs let you do it. Try that with a mutual fund!
Fixed Income: Are you a bond investor? ETFs don't leave you out. You'll find ETFs covering the U.S. Treasury market at all maturity levels, from short-term bills out to the long-term bonds, and even "laddered" maturities. You can also use ETFs to trade high-yield or "junk" bonds, investment-grade corporate bonds, international bonds, emerging market bonds, municipal bonds, and more.
Real Estate: This asset class hasn't been so attractive lately, but its day will come again. When it does, you can use ETFs to participate in commercial real estate ... housing ... industrial properties ... international real estate ... and more! Unlike buying your own properties, with real estate ETFs you won't have maintenance headaches and you won't have to chase after deadbeat tenants. You also won't have to pay a realty agent a six percent commission when it's time to sell.
Commodity ETFs: Have you ever wanted to speculate in grains, crude oil or other commodities but didn't like the idea of trading futures? Now there's another way: Commodity-based ETFs and exchange-traded notes (ETNs) give you access to many natural resource markets. And unlike futures, with ETFs and ETNs you can never lose more than you invest.
Foreign Currencies: If you're convinced that our soaring national debt is going to turn the U.S. dollar into dust, you don't have to sit still and take it. With ETFs you can easily diversify into other world currencies: Everything from the euro and Japanese yen to more obscure (but sometimes very strong) currencies like the Australian dollar, Danish krone and the Chinese yuan.
The Latest:
Inverse and Leveraged ETFs
Like I said, ETF developers are brimming over with exciting, new ideas. One of the latest is inverse ETFs. As you know, almost all ETFs track an index of some kind. If the index goes up, the ETF goes up, too. Likewise, if the index falls, the ETF that tracks it will lose value.
Inverse ETFs are like regular ETFs in reverse. An inverse ETF is designed to go up as its index goes down, and down when the index goes up. So now you can use ETFs to profit from a falling market! Sure, this has always been possible with options, futures, and short-selling, but inverse ETFs make the process so much easier.
Leveraged ETFs are amplified versions of regular ETFs. They come in different strengths ? 2X and 3X are now available. A 2X ETF is meant to deliver twice the daily return of its index. For instance, ProShares Ultra S&P 500 (SSO) tracks the S&P 500 Index. On a day when the S&P 500 goes up two percent, SSO should be up about four percent. Sweet!
Put these two ETFs together and what do you get? Leveraged Inverse ETFs. Now you can bet on a falling market and magnify your gains if you're right.
For instance, suppose you think the emerging markets are ready to fall. You could buy Direxion Daily Emerging Markets Bear 3X Shares (EDZ), which have 3X daily leverage. This means if the MSCI Emerging Markets Index falls five percent in a day ? which is not really so unusual for emerging markets ? EDZ should be up approximately 15 percent!
Of course, you have to be nimble to trade these ETFs. If you're wrong, leverage will boost your losses just as fast as it adds to your gains! The point is that these are tools you didn't have five years ago. Now you can join the same game hedge funds and large institutions have been playing for years.
Today, ETFs give you a world of new ways to make money. It's up to you to educate yourself and grab these opportunities, and I'll continue to help you on both counts right here every week.