Last week, I sat down for an interview that will be aired on PBS. One of the questions I was asked was about the tools that are available for investors today compared with those that existed years ago.
In addition to all of the online retirement calculators, independent research and real-time quotes, a big development for individual investors has been the increased abundance of exchange-traded funds (ETFs).
A traditional mutual fund is priced at the end of the day according to its net asset value. An ETF is a fund, but it trades like a stock.
Most ETFs are passive, meaning there is not a fund manager and research team determining which stocks to buy based on where they think the stocks are going.
The beauty of ETFs is that they allow the investor to create a diverse portfolio, which can include a wide range of market caps, sectors, strategies and asset classes.
For example, it’s easy to put together a portfolio with large cap value stocks, small cap growth stocks, international stocks, dividend payers and gold…
- Large cap value – iShares S&P 500 Value ETF (NYSE: IVE)
- Small cap growth – iShares Morningstar Small-Cap Growth ETF (NYSE: JKK)
- International stocks – Vanguard Total International Stock ETF (Nasdaq: VXUS)
- Dividend payers – SPDR Portfolio S&P 500 High Dividend ETF (NYSE: SPYD)
- Gold – SPDR Gold Trust (NYSE: GLD)
Then there are ETFs for when you really want to bet heavily on the direction of the market or a sector.
Let’s say you were very bullish on the financial industry. You could buy the Direxion Daily Financial Bull 3X Shares ETF (NYSE: FAS), which should move roughly three times as much as the Russell 1000 Financial Services Index.
Want to bet against the market? The ProShares Short S&P 500 (NYSE: SH) will trade inversely to the S&P 500. So if the S&P 500 falls 5%, the ETF will rise 5%.
Feeling very bearish? You could buy the ProShares UltraPro Short S&P 500 (NYSE: SPXU), which will return three times the inverse performance of the S&P. So if the S&P falls 5%, the ETF should climb 15%.
There are ETFs for nearly any aspect of the market that an investor would want to place a bet on. Consider…
- The iPath Series B Bloomberg Livestock Subindex Total Return ETN (NYSE: COW), which invests in lean hogs and cattle futures
- The iShares MSCI Belgium Capped ETF (NYSE: EWK), which tracks a broad index of Belgian equities
- The Forensic Accounting Long-Short ETF (NYSE: FLAG), which provides exposure to the S&P 500 but excludes companies with financial red flags or aggressive revenue recognition.
Basically, if you can come up with an investment idea, there is probably a way to trade it through an ETF.
ETFs provide flexibility, liquidity and a wide range of ideas, whether you’re a long-term investor or a trader looking to participate in the move of a specific sector.
They’re a great way to invest if you don’t want to own individual stocks.
Now, if I can only remember the name of that ETF that invests in Belgian livestock companies with no accounting issues…
Good investing,
Marc