Introduction To Exchange-Traded Funds

Exchange-traded funds (ETFs) are a type of financial instrument whose unique advantages over mutual funds/ unit trusts have caught the eye of many an investor. If you find the tasks of analyzing and picking stocks a little daunting, ETFs may be right for you. In this entry I will attempt to define ETFs, highlight their advantages, and list some of the most popular ETFs available to investors.

What Is an ETF?
Think of an exchange-traded fund as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reflect an index such as the S&P 500. An ETF, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an ETF's price changes throughout the day, fluctuating with supply and demand. It is important to remember that while ETFs attempt to replicate the return on indexes, there is no guarantee that they will do so exactly. It is not uncommon to see a 1% or more difference between the actual index's year-end return and that of an ETF.

By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock. Because ETFs trade like stocks, you can short sell them, buy them on margin and purchase as little as one share. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade.

Varieties of ETFs
The first exchange-traded fund was the S&P 500 index fund (nicknamed spiders because of their SPDR ticker symbol), which began trading on the American Stock Exchange (AMEX) in 1993. Today - tracking a wide variety of sector-specific, country-specific and broad-market indexes - there are hundreds of ETFs trading on the open market. You can pretty much find an ETF for just about any kind of sector of the market.

For example, if you were interested in the healthcare sector, perhaps Vanguard’s Health Care Viper (ticker VHT) would be worth looking into. Does the Austrian market peak your interest? Then take a look at the ishares MSCI Austrian Index fund (ticker EWO). Or if you’d like exposure to the internet infrastructure sector, then maybe Merrill Lynch’s HOLDRs (ticker IIH0) might be for you.

Some of the more popular ETFs have nicknames like cubes (QQQQ), vipers (VIPERs) and diamonds (DIAs). All ETFs are passively managed, meaning investors save big on management fees. Below you will find a closer look at some of the more popular ETFs:

Nasdaq-100 Index Tracking Stock (QQQQ)
This ETF represents the Nasdaq-100 Index, which consists of the 100 largest and most actively traded non-financial stocks on the Nasdaq, QQQQ offers broad exposure to the tech sector. Because it curbs the risk that comes with investing in individual stocks, the QQQQ is a great way to invest in the long-term prospects of the technology industry. The diversification it offers can be a huge advantage when there’s volatility in the markets. If a tech company falls short of projected earnings, it will likely be hit hard. Between 2000 and 2004, QQQQ was by far the most heavily traded index fund.

SPDRs
Usually referred to as spiders, these investment instruments bundle the benchmark S&P 500 and give you ownership in the index. Imagine the trouble and expenses involved in trying to buy all 500 stocks in the S&P 500! SPDRs allow individual investors to own the index's stocks in a cost-effective manner. Another nice feature of SPDRs is that they divide various sectors of the S&P 500 stocks and sell them as separate ETFs, there are literally dozens of these types of ETFs. The "technology select sector index", for example, contains over 85 stocks covering products developed by companies such as defense manufacturers, telecommunications equipment, microcomputer components, and integrated computer circuits. This ETF trades under the symbol XLK on the AMEX.

iShares
iShares is Barclay's (Barclay’s Global Investors “BGI”) brand of ETFs. In 2004 there were approximately 120 iShares trading on more than 10 different stock exchanges. Barclay has put out a number of technology-oriented iShares that follow Goldman Sachs's technology indexes. All of these particular ETFs trade on the AMEX.

Vipers
Just like iShares are Barclay’s brand of ETFs, VIPERs are Vanguard’s brand of the financial instrument. Vipers, or Vanguard Index Participation Receipts, are structured as share classes of open-end funds. Vanguard also offers dozens upon dozens of ETFs for many different areas of the market including the financial, healthcare and utilities sectors.

DIAMONDs
These ETF shares, Diamonds Trust Series I, track the Dow Jones Industrial Average. The fund is structured as a unit investment trust. The ticker symbol of the Dow Diamonds is DIA, and it trades on the AMEX.

Conclusion
A great reason to consider ETFs is that they simplify index and sector investing in a way that is easy to understand. If you feel a turnaround is around the corner, go long. If, however, you think ominous clouds will be over the market for some time, you have the option of going short. The combination of the instant diversification, low cost and the flexibility that ETFs offer, makes these instruments one of the most useful innovations and attractive pieces of financial engineering to date.

Anger and Overcoming it

"Anger ruins joy, steals the goodness of my mind, forces my mouth to say terrible things. Overcoming anger brings piece of mind, leads to a mind without regrets. If I overcome anger, I will be delightful and loved by everyone."

-Charlie Crews from "Life"

Life is too Short...

"Life is too short and whining is totally unattractive"

-Psylocke

Stock Taking 2

If there is one thing I need to stop buying, this is it: Cuff Links!
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The last time I counted, I have 30 pairs of them - yeah right, one for each day! And the cost for them: Around $2000 in all. (The most expensive pieces here cost around $150).
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Okay, I must admit that my little collection is no match against some of my lady friends' accessories, whose LV bag alone can cost up to $2000 a piece already!
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For the unfamiliar ones, a cufflink is a decorative fastener for the two sides of the cuff on a shirt.
Cufflinks are designed only for use with link cuffs shirts (also known as French Cuffs), which have buttonholes on both sides but no buttons. These may be either single or double-length ("French") cuffs, and may be worn either "kissing," with the ends pinched together, or "barrel-style," with one end overlapping the other.
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And yes, I have 2 (actually 3) pairs of silk knot, which is an alternative fastener to a cufflink. They are also known as monkey's fists (although, technically speaking, the knot is a Turk's head, not a monkey's fist) . Despite having a lower cost than cufflinks, they are just as well regarded and just as formal.
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The problem with cuff links shirts is that sometimes you leave home without the links! That's kind of embarrassing and you will look quite wierd without them! So, for people like me who drive, I kept an extra pair in my car (just in case) :)

Stock Taking 1

As a child, I always look forward to the coming Chinese New Year. Reasons: Lots of food, ang bao, and new clothings. Sadly, for most part of my recent years, the food isn't cheap (all food bills footed by me), the ang bao received are decreasing compared to the ones I received, and ... new clothings aren't cheap.

Why?

Well, for a start, I have to pay for the mandarin oranges as well as the "bak kua", not to mention other types of goodies. Next, I prepared in the region of $800 for ang baos (some for my parents, some for parent-in-laws, and the rest for other 'outlaws') but I always received less than $800. Man...it is a money-losing business!!!

Now, as for new clothings, most of my shirts are tailor-made. On average, I arrange for 5 sets of link-cuffs shirt made every 6 months, plus a pair of black pants. On the record, I still have around 4 pairs of brand new pants in my closet!!!

Perhaps the only people that are happy during this Chinese New Year are the kids, and ... my tailor!

Fed's Cut As Expected

Once again, our dear Federal Reserve stepped in and made a half-point rate cut, a move that Wall Street (and me) apparently liked :)

I know you know that many also know that the rate cut didn't come as a complete surprise, as the stock market had been banking on it. They just weren't sure if it would be the half-point cut, or a more cautious quarter-point. The move today puts the federal funds rate target at 3%, the lowest since June 2005!

Once the cut was announced just now, the stock markets went positive: within minutes of the decision, the Dow Jones industrial average jumped more than 100 points at one point. The S&P 500 and Nasdaq also rose following the report.

Well, it's positive news (at least for a while), but between this latest cut and last week's unexpected three-quarter point cut, will it be enough to rejuvenate the economy? Let's wait and see. To me, it has been more waiting and less seeing.

Interestingly, the Dow turned right around, gave back every penny of its gains, and ended the day DOWN 37 points at the closing bell! Why? Because most investors in the street aren't dumb. They know what's going on in their own neighborhoods. They see the handwriting on the wall in the headlines. And they realize Bernanke's caught between a rock and a hard place.

On one hand (the rock), the US economy is sinking very slowing, but surely. Home construction plunged 24% in the fourth quarter, the worst since 1981! The economy sputtered to a virtual standstill in the fourth quarter, crawling at the anemic pace of just 0.6% per year! And for the entire year, GDP growth was the worst since 2002, then when the economy was suffering from the aftermath of 9-11, a tech wreck, and a wave of scandal-ridden corporate bankruptcies — all at the same time!

On the other hand (a hard place), resurging inflation that only gets worse as the Fed cuts rates and pumps more money into the market. My favourite inflation hedger, Mr Gold, is my best indicator. Gold is on fire, surging another $7 just today! The U.S. Dollar Index got killed today — down 75 basis points on today's Fed rate cut alone. And then in November, we saw the most dramatic surge in wholesale prices in 22 years! Finally, import prices surged by a staggering 10.9%, signaling much, much higher inflation ahead!

This is serious!
This is scary!!
This is shocking!!!

It means that long before the Fed's rate cuts begin to have the desired impact on the economy, they're already beginning to backfire with more inflation. Do you see it now? Are you selling too? I am, and I suggest you do the same, at least for short term. Leave emotion out of the equation. Just clear your stock holdings and keep at least 70% cash, 20% Bonds, & 10% equities if you must.

Good luck, or else, good bye!!!

Until the Day's Out

"Measure not the work until the day's out and the labor done."

Elizabeth Barrett Browning
(1806-1861)
English poet