Posts tagged ‘exchange traded funds’

ETF Slam Dunk: Mixing Jordan & Rodman

Players in the same game may use different strategies in the hunt for success. Take five-time NBA champ Dennis “The Worm” Rodman vs. Hall of Famer and fourteen-time All-Star Michael Jordan. Rodman’s bad-boy antics, tattoos, and loud hair colors more closely resemble the characteristics of a brash trader or quick-trigger hedge fund manager, which explains why Rodman played for five different NBA teams.  Jordan on the other-hand was less impulsive, and like a long-term investor, held a longer term horizon with respect to team loyalty – he spent 13 seasons with one team (Chicago Bulls), excluding a brief, half-hearted return to the Washington Wizards.  Despite their differences, they shared one common goal…the ambition to win.

In the investment world, traders and long-term investors in many cases could be even more different than Rodman and Jordan…just think Jim Cramer and Warren Buffett. But when it comes to the exploding trend of Exchange Traded Funds (ETFs) expansion, traders and investors of all types share the common appreciation for lower costs (management fees and trading commissions). Beyond the lower costs, ETFs also offer a wide and growing range of liquid exposures, regardless of whether a trader wants to hold the ETF for five hours or an investor wants to own it for five years. The benefits of low cost and liquidity, relative to traditional actively managed mutual funds, are two key reasons why this market has blossomed to $822 billion in size and is still strengthening at a healthy clip.

Source: SPDR

The flight to bonds and out of equities has been well documented (see chart below), but underneath the surface is a migrating investor trend out of active managers, and into lower cost vehicles for equity exposure (ETFs and Index Funds). The poster child beneficiary of this movement is the Vanguard Group (based in Valley Forge, Pennsylvania), which manages $1.4 trillion in fund assets, including $112 billion in ETFs (Bloomberg). Equity heavy fund management companies like Janus Capital Group Inc. (JNS) and T. Rowe Price Group Inc. (TROW) have felt the brunt of the pain from the disinterested investing public.

Source: Iacono Research

The migration away from expensive actively managed funds has created a cut-throat dog-fight for ETF market share. Competition has gotten so bad that discount brokerage firms like Fidelity Investments ($1.25 trillion in mutual fund assets) and Charles Schwab Corp. (SCHW) have begun offering free ETF trading. Just two days ago Schwab also purchased Windward Investment Management, Inc. (~$3.9 billion in assets under management), for $150 million in stock and cash.

At the end of the day, money goes where it is treated best. Irrespective of differences between long-term investors and short-term traders, the lower costs and improved liquidity associated with ETFs have shifted money away from more costly, actively traded mutual funds. At my firm, Sidoxia Capital Management, I choose to use a diversified hybrid approach via my Fusion investment products (Conservative, Moderate, and Aggressive). Fusion integrates low-cost, tax-efficient investment vehicles and strategies, including fixed income securities (including funds & ETFs), individual stocks, and equity ETFs. Regardless of the differing preferences of hair colors and tattoos, my bet is that Dennis Rodman and Michael Jordan could agree on the importance of two things…winning games and using ETFs.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com 

*DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in JNS, TROW, SCHW or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

September 1, 2010 at 2:02 am 1 comment

Leveraged ETFs…Too Much Adrenaline?

Do we really need extra levered ETF risk?

Do we really need extra levered ETF risk?

Isn’t the market volatile enough without leverage? I believe the vast majority of individuals have plenty of adrenaline in their daily investment lives without the necessity of exotic inverse ETFs (Exchange Traded Funds) or other leveraged investment vehicles. FINRA (Financial Industry Regulatory Authority), the largest regulating body overseeing U.S. securities firms feels much the same way. Many of these ETFs seek to earn a daily return double or triple a designated index – the inverse instruments strive to mirror the return in the opposite direction.

Read WSJ Article (FINRA Urges Caution on Leveraged Funds)

No doubt, many exchange traded funds have some key advantages over actively managed mutual funds such as lower costs, tax efficiency, and improved liquidity; however most investors have no business in trading these crazy leveraged gimmicks. For example, I wouldn’t recommend average investors speculating in the Direxion 3X Inverse Financial Bull (FAS) ETF, which was down more than 95% in its first four months of existence. Do yourself a favor and heed the advice of stuntmen that advise, “Please, do not try this at home.”

FINRA conveyed this sentiment in a recent notice:

“While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective.”

 

The Wall Street Journal article goes on to show a return example of how three different funds performed (vanilla index fund, double long fund, double inverse fund) under alternating positive and negative +/-10% day scenarios.  After 60 days of alternating up +10% and down -10% on an initial investment of $100, the index fund ended at a value of $40.47 while the double inverse funds finished worth a meager $2.54 each. The example proves that the correlation between the leveraged ETF and the underlying target index can vary dramatically when invested for longer periods than a day.

These levered products make for excellent brokerage and trading software commercials, but rather than getting sucked in to talking baby traders and fast moving graphics, the average day trader or casual investor would be better served by bungee jumping or sky diving to get their adrenaline fix.

Wade W. Slome, CFA, CFP®  

Plan. Invest. Prosper.  

www.Sidoxia.com 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in FAS, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

July 15, 2009 at 4:00 am Leave a comment


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