Finance Articles

Ishares and ETFs: Indexed Investment Illusions

How many of you remember the immortal words of P. T. Barnum? Of Yogi Berra? On Wall Street, the incubation period for new product scams may be measured in years instead of minutes, but the end result is always a lopsided, greed-driven, gold rush toward financial disaster. The dot.com melt down spawned the index mutual funds, and their dismal failure gave life to "enhanced" index funds, a wide variety of speculative hedge funds, and finally, a rapidly growing number of Index ETFs. Deja Vu all over again, with the popular ishare variety of ETF leading the lemmings to the cliffs. How far will we allow Wall Street to move us away from the basic building blocks of investing? What ever happened to stocks and bonds? The Investment Gods are not happy.

A market or sector index is a statistical measuring device that tracks the movement of price changes in a portfolio of securities that are selected to represent a portion of the overall market. Index ETF creators: a) select a sampling of the market that they expect to be representative of the whole, b) purchase the securities, and then c) issue the ishares, SPDRS, CUBEs, etc. that you can trade on the normal exchanges just like ordinary stocks. Unlike ordinary index funds, ETF shares are not handled directly by the fund, and as a result, they can move either up or down from the value of the securities in the fund, which, in turn, may or may not mirror the movements of the index they were selected to track. Confused? There's more? these things are designed for manipulation!

Unlike managed Closed-End Funds (CEFs), ETF shares can be created or redeemed by market specialists, and Institutional Investors can redeem 50,000 share lots (in kind) if there is a gap between the net-asset-value and the market price of the fund. These activities create demand in order to minimize the gap between the fund net-asset-value and the fund price. Clearly, these arbitrage activities provide profit-making opportunities to the fund sponsors that are not available to the shareholders. Perhaps that is why the fund expenses are so low? and why there are now hundreds of the things to choose from.

Two other ishare/ETF idiosyncrasies need to be appreciated: a) performance return statistics for index funds typically do not include fund expenses? it should be fairly obvious that an index fund will always under-perform its market, and b) some index funds, ishares in particular, publish P/E numbers that only include the profitable companies in the portfolio. How do you feel about that?

So, in addition to the normal risks associated with investing in general, we add: speculating in narrowly focused sectors, guessing on the prospects of unproven small cap companies, experimenting with securities in single countries, rolling the dice on commodities, and hoping for the eventual success of new technologies. We then call this hodge-podge of speculations a diversified, passively managed, inexpensive approach to 21st Century Asset Management! How this differs from how the dot.com mess started is a mystery to me. Once upon a time, there were high yield junk bond funds that the financial community insisted were appropriate investments because of their excellent diversification. Does diversified junk become un-junk? Isn't "Passive Management" as much of an oxymoron as "Variable Annuity"? What ever happened to the KISS Principle?

But let's not dwell upon the three or more levels of speculation that are the very foundation of all index funds. Let's move on to the two basic ideas that led to the development of plain vanilla Mutual Funds in the first place: diversification and professional management. Mutual Funds were a monumental breakthrough that changed the Investment World. Hands on investing (without the self-centered assistance of the banks and insurance companies) became possible for absolutely everyone. Self directed retirement programs and cheap to administer employee benefit programs became doable. The investment markets, once the domain of an elite group of wealthy entrepreneurs, became the savings accounts of choice for the employed masses. But only because the Funds were relatively safe with their guarantees of diversification and professional management! ETFs are just not the answer to the problems we've experienced lately with traditional Mutual Funds. (Those problems are a function of Fund Manager Compensation, conflicts of interest within Fund Sponsor Organizations, the delivery and pricing system for the funds, and believe it or don't, the self directed retirement programs themselves.)

Here's a thumbnail sketch of how well the major Passively Managed Indices have done since the turn of the century: For those six years, the DJIA growth rate averaged Zero % per year, the S & P 500 averaged Minus 2% per year, and the NASDAQ Composite averaged Minus 8% per year! How many positive sectors, technologies, commodities, or capitalization categories could there have been? Go ahead, add in 1999 just to make yourself feel better and you'll come up with +2% per year for the DJIA, Zero % annually for the S & P, and a stellar ?1.5% per year for the NASDAQ. Now subtract the fees? hmmmm. Again, how would those ishares have fared? Hey, when you buy cheap and easy, it's usually worth it. Now if you want performance, I suggest you try management. Any management is better than no management, so long as you are receptive to the strategies or disciplines employed by the manager. If you can't understand or accept the strategy, don't hire the manager. During the past six years, there have been more advancing issues than declining ones on the NYSE, more stocks achieving new highs than new lows. Why did you lose money?

Sure, you might find some smiles in an ishare or two, particularly if you have the courage to take your profits, and there may be times when it makes good business sense to use these products as a hedge against a specific risk. But please, stop kidding yourself every time Wall Street comes up with a new short cut to investment success. Don't underestimate the value of experienced management, even if you have to pay a little extra for it. Actually, there is no reason why you (and I mean every one of you) can't learn either to run your own investment portfolio, or to instruct someone how you want it done. Every guess, every estimate, every hedge, and every shortcut increases risk, because none of the crystal balls used by those creative product hucksters works very well over the long haul. Products and gimmicks are never the answer. ETFs, a combination of the two, don't even address the question properly. What's in your portfolio?

Steve Selengut http://www.sancoservices.com http://www.valuestockbuylistprogram.com Professional Portfolio Management since 1979 Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Other Article Sites

findabook.com  moneycd.info  a-mortgage.info   about-lemon-laws.info  aboutstudentloans.info
all-about-publishing.info  auctions-articles.info  bestcollege-university.com  bestispconnection.com
biblefolder.com  blogger-website.com  books-used.info  brokers-guide.info  buywindows.info  cable-dsl.info
career-miner.com  carpel-tunnel.info  cashinaflash.info  cashloanreviews.info  casinobell.com  chat-house.info
clearmycredit.info  collegeloantips.info  crones.info  depression-articles.info   dirnic.net  dishguides.info
divers-below.com  expodog.info   financewizz.com  fire-insurance.info  getgood.info  handleit.net   it-idea.info
health-supplies.info  hosting-right.com  insidealert.com  insurance-facts.info  jobs-employment.info
justgood.info  lookgold.net   lowcost-travel.info  money-source.info  myhostzone.info  numisblog.com
peoplesearchfinder.info  pr-articles.info  realeas.com   refinancing-guides.info  spyware-remove.info
telelot.info  the-law.info   toppaid.info  travel-deals.info  travelcorrect.com  wedding-guide-site.com
your-blog.info  your-credit.info

Canaan Partners Leads Investment in India-Based techTribe
Canaan Partners with The Entrepreneur's Funds and Miven Venture Partners to drive growth of global career networking company.

Buy Gold - Wise Investment Options
As one of the world's leading precious metals refineries and fabricators, PAMP is particularly well regarded for its pioneering spirit, as evidenced in 1977 by the introduction of a wide variety of decorative designs on the reverse side of its ingots, also known as 'small bars.'*

Warning Signs Of Investment Frauds
If you want to know how you can protect your invested money, then you must learn to identify the signs of fraud. A potential investment fraud has certain signs and characteristics. If you can check them out, you will definitely save your hard earned money. There are thousands of frauds who use your email or call you on the phone countless times to convince you of the various schemes they have.

Mortgage Savvy Realtor Rescues Homeowners Facing Foreclosure Using Short Sales
While inside the White House the Leaders of this country try to solve the real estate debacle, an aggressive, well hearted, realtor is actually helping homeowner get out from under the collapse of the real estate market. He is taking the fight to the streets. www.help33.Biz is an information packed website designed to educate homeowner.

Cheap Payday Advance Loan: borrow money through cheap payday advance loan
Resources are limited for lending money and requirements of money are plenty because the people meet day to day worthless expenses. Diminishing these problems cheap payday advance loan gives you a potential offer. Cheap Payday Advance Loan is the short-term loan availed between two consecutive paydays. Cheap Payday Advance Loan can be availed by all the people who are working and earning enough to repay the Cheap Payday Advance Loan. Credit history does not matter to borrow Cheap Payday Advance Loan for the lenders who provide Cheap Payday Advance Loan, whether you have good credit history or bad credit history you are eligible to avail Cheap Payday Advance Loan.

What Is The Best Deal For A Mortgage?
Few of us invest the time and effort into researching and securing the best deal for a mortgage to purchase our home.For most of us, our house is the single most important and expensive purchase we ever make!We invest a lot of time and effort into finding the perfect property in the best location and with as many of the features from our wish list as possible, yet, when it comes to finding the best deal for a mortgage, we take what is offered rather than researching and securing the best mortgage for our situation.

Demand Unlimited Auto-Responders with Your Hosting Accounting
AutoResponders are nifty scripts that run in your web server 24/7 serving immediate email responses to questions, support and sales. Think about this, your customer comes to your website and spends a round 200$ to get your product.

Best Practices: Multi-Factor Authentication for Telephone Banking Web Conference March 28, 2007
If you think your customers' online transactions are secure, now that you've met FFIEC Guidelines with stronger authentication for your online channels, you need to rethink your cross-channel strategy. The fact is, fraudsters are now migrating to channels that aren't as well protected - such as telephone banking. Introducing the web conference: Best Practices: Multi-Factor Authentication for Telephone Banking.

Smith Group -- Dallas-Based Investment Management Firm Launches New Portfolio Strategy
Smith Group, an investment management firm based in Dallas, Texas, has expanded its product offerings with a new 130/30 strategy. This strategy incorporates both long equity holdings and a limited amount of short selling with the objective of increasing investment returns without increasing risk.

7 Steps To Choosing The Best Real Estate Loan For You
A home loan will be your financial responsibility for years to come, so it can be one of the most important decisions you make. Even tiny changes in an interest rate ? changes as small as half a percent ? can cost or save you thousands of dollars over the term of your loan. To enjoy an affordable home, follow these seven simple steps:

Warning For Bad Credit Mortgage Lending
Bad credit mortgage applications are subject to strict rules that are enforced by the mortgage industry regulator ? the Financial Services Authority The regulator regularly investigates whether the bad credit mortgage rules are being adhered to by mortgage brokers by way of test samples and mystery customers

Propertyshowrooms.com Unveils Unique Investment Opportunity in Italy
International property experts Propertyshowrooms.com have announced their latest select investment development in Italy.

Long-Term Investment In Todays Market?
The stock market is very unstable at this time going up and down while interest rates are so low you want to be a borrower and not a lender. Would you like some suggestions on how can you get the most out of low interest rates while being assured your principal will not disappear while you are trying to make some money? Of course, there is always the danger of borrowing the money and then spending it just because it is there.

Barclays Introduces 'PINsentry' - Pioneering New Security for Online Banking
Barclays introduces 'PINsentry' to replace the need for passcodes and memorable words.