ETF Investing Strategies
Traditional ETFs track indexes, come in an array of varieties and tout many features: low cost, low turnover, broad diversification and lower expense ratios. The ETF world is dominated by passive investing, but there are other ETF investment strategies, Jim Mcwinney for International Business Times explains:
- Passive Investing
ETFs give a low-cost and simple way to implement indexing, which is also known passive management.
- Active Trading The liquidity of ETFs make it possible to trade them as you would single stocks. Market timing, sector rotation, short selling and buying on margin are possible strategies. Active trading is for investors looking for above-average returns.
- Actively Managed ETFs Although ETFs are structured to track an index, they could be created to track a manager's top picks, which is an example of an actively-managed ETF. So far, Germany is the only country that has a truly actively-managed ETF.
- Transparency and Arbitrage Arbitrage keeps the price of the ETF close to the value of the underlying shares. With actively-managed ETFs, a money manager gets paid for stock selection. In theory, those selections will help investors outperform their ETF's benchmark index. However, if the ETF disclosed its holdings often enough, there would be no reason to buy the ETF. Investors could buy the group of stocks on their own and not pay a management fee. Because of these technical challenges, actively-managed ETFs are not yet available in the U.S.
Gold ETFs continued to climb yesterday despite the dollar's attempt to rise against its all-time lows against the euro. Gold for December increased 40 cents to close at $739.30 an ounce although it reached an intraday high of $741.60, reports Myra P. Saefong and Polya Lesova for MarketWatch. Analysts at Goldman Sachs (NYSE:GS) say they expect to see gold prices reach $775 an ounce over the next three months and $800 in six months, according to Chris Flood for The Financial Times. The performance of gold ETFs year-to-date is:
While we know ETFs are popular and expedient investment tools, some come with a twist to make investing more exciting. These renegade ETFs are known as leveraged funds. The leveraged ETF will increase the exposure and impact from the underlying index, such as attempting to double the return of an index on a daily basis, reports Matthew McCall for Forbes Investopedia.
ProShares introduced the first family of leveraged ETFs in June 2006. The Ultra ProShares ETFs are designed to double the daily performance of the index in which they track. ProShares uses a bevy of strategies to generate magnified returns. Some advantages of leveraged ETFs include:
- Provide an easy and inexpensive way to leverage without options or margin
- Available in retirement accounts
- Because the goal is to double "daily" return, it can be a good tool for short-term traders
Some of the drawbacks to these ETFs include:
- Negative compounding can impact long-term performance - the key word is "daily" return, not "long-term" return
- Low trading volume leads to low liquidity
- High risk is associated with these funds and can be dangerous to an uneducated investors
New "Intangible" ETFs
IndexIQ Advisors is waiting on the filing status of three ETFs based on "intangible" qualities, such as innovation, power and productivity. The ETFs are:
- ETFIQ Commodity Rotation
- ETFIQ Country Rotation All World Ex-U.S.
- ETFIQ Country Rotation Developed Markets Ex-U.S.
Trang Ho for Investor's Business Daily spoke with Gus Fleites about the upcoming ETFs. Fleites is a veteran of ProShares and State Street Global Advisors who is now president of IndexIQ Advisors. Fleites says the price momentum strategy will be used to select the commodity ETFs because they follow a trend line for extended periods of time. As of August 2007, the Commodity Rotation holds base metals, silver, agriculture, gold, precious metals, oil and energy.
Factors involved in the country rotation portfolios include momentum, valuation and macroeconomics elements. The Country Rotation All World Ex-U.S. consists of larger weights in Austria, Germany, Netherlands, South Korea, Italy, Brazil and Mexico with smaller position in France and Malaysia, as of August 2007.
Client interest is the primary reason behind the creation of two different country rotation ETFs, Fleites says.