The ETF effect – How investors can upgrade portfolios and stay out of the rat race on markets?

by Amandeep Singh

in Personal Finance

Exchange Traded Funds, or ETFs, have been making big inroads into the mutual market. There’s currently estimated to be over a trillion dollars in fund management around the world, and managed funds are paying a lot of attention to their performance. ETFs are portfolios of funds, with unit prices valued on the basis of the net worth of the fund holding. The ETFs, which are commonly index based, are also traded in real time on the stock market, and have been becoming major trading commodities.

Also Read: 7 Reasons to be your own Financial Adviser?

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ETFs as investments

The major benefit of ETFs is that they provide real value while also providing investors and funds with some shielding against the effects of individual stock movements. ETFs usually have quite conservative weightings of holdings in their portfolios, and a single stock taking a hit won’t have wide “collateral damage” to the holdings on that basis.

Conversely, investing on an index basis can provide massive upsides. The commodities markets, tech, aerospace, and other indices are typically prone to big moves, and if an entire index jumps, so does the ETF holding value. You only need to remember the big moves in tech stocks, oil, metals and others to see the major benefits in this sort of holding structure.

The portfolio approach to ETFs

Most investors, even the best, get at least a bit singed on the stock market at some point. Many don’t like or need to be waiting on stock moves to see returns on their investment portfolios. That’s where the ETFs come in. The stock market rat race is fine for day traders and institutions, but for managed funds and private investors, it’s not necessarily the place for peace of mind.

More to the point, it’s also not the best place for making actual money. The 2008 crash vividly defined the limitations of the conventional investment market. It also defined the worries of investors. The ETFs took their own hits, but they also recovered pretty quickly, and in some cases they actually took over as preferred trading entities. Huge numbers of ETFs were traded in the early recovery in 2009, and they’ve maintained a steady rate of growth.

Also Read: Market Fall – How To Recover Losses?

A typical ETF portfolio is based on a “spread”. The portfolio is spread over a range of indices, for example:

  • Dow blue chips
  • Energy and oil
  • Tech stocks
  • Mining
  • Food
  • Gold and precious metals.

As you can see this is strategic investment rather than the conventional form of market investment. The investment in 5 indexes can be made through share trading on the market or by prospectus. Each ETF also pays dividends, and they also do stock splits. (Like normal shares, they have their “X date” for dividends and entitlements.)

If you’re looking for investment options, the ETFs may be exactly what you need. It’s a good idea to research the different funds and get a good level of orientation to how the ETFs operate in the market, and look at relative performance. Talk to your fund manager if you need specific professional guidance in this type of investment.

http://www.equitipz.com/2009/02/market-fall-how-to-recover-losses.html

{ 1 comment… read it below or add one }

Investment Research Tool February 25, 2011 at 11:48 am

Really informative article for investors.

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