ETFs Can Be Volatile Too
Another one bites the dust.
Just when investors thought the exchange-traded fund was the absolutely perfect investment to diversify their portfolios, turns out it can carry risks just like other vehicles.
A number of ETFs, which are mutual funds traded on a stock exchange throughout the trading day, have been hammered on sudden market downturns. Rather than performing like diversified indexes, they tumbled like individual stocks.
This behavior doesn't mean ETFs have suddenly turned evil, but rather that some investors have chosen inappropriate ETFs for their goals.
ETFs are increasingly popular because they charge lower fees than traditional mutual funds and offer access to wide swaths of the market. They can be bought for the cost of a trading commission, with some major firms such as Vanguard and Fidelity even offering commission-free trades on some ETFs.
All of that is undeniably positive. Yet some ETFs are indexes of small and volatile universes such as single countries or commodities; their easy access may lead to reckless trading; and investors sometimes chase past returns rather than study up on what they're actually buying.
Here are warnings from experts about taking a good thing too far:
"Just because an ETF is a passive, low-cost investment doesn't mean there's little or no risk," said
"Some investors shoot and ask questions later," said
"Too often, individual investors are just looking for the hot tip--something exciting and sexy that will do well in the short term," said
Even an ETF's name can confuse an investor. An example from Justice is United States Oil ETF (USO), which has declined 13 percent in value the past 12 months. It doesn't actually own stock in oil companies, but rather crude oil futures contracts that can be extremely volatile. At best, it should be considered as a small "satellite" holding rather than a broad bet on the oil industry, he said.
"There has been a trend toward more concentrated ETFs that focus on sectors, commodities, countries or regions, and you just won't get the same diversification in a narrow sector ETF that you'd get in a broad-market fund," explained DeLegge. "Some single-country ETFs, especially in emerging markets, are the worst offenders because they can be concentrated in a handful of stocks."
As investors have learned the hard way, in turbulent markets the prices of some ETFs can turn unpredictable quite suddenly, no matter what the value of their underlying portfolios. ETFs can trade substantially above or below their net asset value.
To obtain broad-market exposure and inexpensively diversify your overall portfolio, you should first select broad-market ETFs, the experts agree.
A solid foundation for an individual's diversified portfolio would be
For a small-cap portfolio, there is
"One ETF that's been doing well all year is Industrial Select Sector SPDR (XLI), which has held up pretty well even though the
Once you've laid the foundation, ETFs also permit sophisticated investors to try out their personal strategies.
So, if you believe European stocks will head further downward, look at ProShares UltraShort MSCI Europe (EPV), which shorts the MSCI Europe index, DeLegge said. Or, if you think the Euro currency is going up and the worst is over, the
Avoid overlap in the ETFs in which you invest. For example, DeLegge has seen investors buy three large-cap ETFs with no real reason to own all three of them.
ETFs are generally better for stocks than for bonds, Salzinger believes, because an ETF index structure is harder to construct with bonds. There many different types of bonds, some liquid and frequently traded while others are less liquid. That means an actively-traded bond portfolio you'd find in a traditional mutual fund with good management and low expenses may be a better bet for bonds than an ETF, in his estimation.
The ETF trend is here to stay. Though still dwarfed by traditional mutual funds in total assets, ETFs have been gaining ground.
"There's still about
Available at Amazon.com:
- 5 Tips For the Average Investor
- Why Emerging Markets Belong in Your Portfolio
- What China's Currency Reform Means For Investors
- Financial Reform For the Retail Investor
- Target-Date Funds Are Not A 'Sure Bet'
- ETFs Can Be Volatile Too
- Chinese Growth Expected to Boost Asian Markets Long-Term
- 3 Mutual Funds to Steer Clear Of
- Mutual Fund Buzz: Alternatives On The Rise?
- Mutual Fund Buzz: The Tax Man Eyes The Fund Manager
- Mutual Fund Buzz: Bond Bubble?
- Ease Back Into Stocks With These Mutual Funds
- Value and Growth: Why Investors Need Both
- Investing Your Social Security Check? Consider These Factors
- New Efficiencies Should Help Alcoa as Recession Lifts
- Mutual Fund Fees: How Much is Too Much to Pay
- In Gold's Shadow: How Other Metals Fit Into Portfolios
- Should Investors Sit This One Out?
- There's No 'Perfect Time' to Dive Into Investing
- How to Keep Your Cool in a Turbulent Market
- How to Repair Your Damaged Portfolio
- Keep Bond Portfolio Broadly Diversified
- Why Not All Target-Date Funds Are Created Equal
- Five Tips to Avoid Confirmation Bias
- Financial Reform Legislation Gives Shareholders More Say
- Fiduciary Provision May Be Most Important Part of Financial Reform Bill
- What Gold Can and Cannot Do For You
- Why Your Portfolio Needs More Risk
- Read Mutual Fund Ads Critically
- Keep the Right Bonds in Your Portfolio
- European Debt Crisis Affects Investments
- 7 Valuable Lessons For Investors
- The Reality of Mutual Fund Returns
- Mutual Funds and a Changing Landscape
- Assembling a Sturdy Retirement Portfolio
- Funds for Recent College Grads
- Many 'Wide Moat' Companies Losing Competitive Advantage
- Who Got Hit Worst in the Market Crash
- Utility Stocks: Trade Flash for Dependable Payouts
- Formulate Strategy Before Diving Into Higher Risk Mutual Funds
- Contrarian Investors Target Promising Out-of-Favor Stocks
- Income Investors Face Challenges as Economy Shifts
- Can SEC Beat Goldman Sachs?
- Business Schools' Great Ethics Debate
- Investing for Retirement A Balancing Act
- Fees Can Take Big Bite Out of Retirement Fund Contributions
- Small-Cap Stocks Poised For Big Comeback
- John C. Bogle's Old-fashioned Investing Advice Still Applies
- 10 Great Mutual Funds You've Never Heard of
- Mutual Funds Fees & Expenses Only One Factor
- Why Investors Are Flocking to Index Funds
- Trend Setting Companies Target Hip Young Consumers
- Weakening European Stocks Offer Some Bargains for U.S. Investors
- Investing: What to Do About Inflation and What Not to Do
- Kick-Start a Portfolio With Just a Little Cash
- Exchange Traded Funds Offer Low-Cost Diversification
- Fresh Look at Socially Responsible Mutual Funds
- Technology Opens Doors for Investors
- Make the Most of Your Mutual Fund Money
- Fiduciary Standard for Giving Investment Advice
- 'Investment Rewards' Credit Cards Well Worth A Look
Investing - ETFs Can Be Volatile Too | Successful Investing
(c) 2010 Andrew Leckey