ETF's for Safety
Investment Research for Online Investors

by John Dalt

02/23/09

Wholesale prices rose 0.8% in January, which is 9.6% on an annual basis. December was only 0.2%. Seems like inflation might be starting. Bernanke said he would stop printing and begin withdrawing money from the economy when inflation began. Just not this soon.

We have some new members of the Long-Term Portfolio, and while talking to new investors I thought of some general information that may be helpful to our readers. You may be struggling with taking control of your investments rather than owning mutual funds. Probably the safest way to start investing on your own is with Exchange Traded Funds (ETF). Below is a list of popular ETF’s. These cover different sectors of the stock market, and economy. 

XLB= Materials                       XLE= Energy 

XLF= Financials                      XLI= Industrials 

XLK=Technology                     XLP=Consumer Staples 

XLU=Utilities                           XLV=Health Care 

XLY=Consumer Discretionary 

These can make good longer-term holdings.  I check each of these ETFs weekly looking for a short-term trade, by sector.  One of the things I tell new investors is to think about macro issues.  Do you think government actions will cause inflation?  The dollar to fall in value?  Interest rates to rise?  If you do, how can you profit from these things occurring.  Will consumer sales slow?  Will real estate or construction companies recover?  Once you think through your ideas on macro issues, and how these macro trends will cause some sectors to profit and others to fall behind, you can put your thesis into action through these ETF’s.  You can build your own mutual fund with ETF’s that mirror the SP500, or the Russell 2000.  A good resource is:

http://www.etfconnect.com/ 

You can also research ETF’s at: 

http://finance.yahoo.com/ 

If you are just getting started with ETF’s, look at the average daily volume, and how long it has been around.  Look for ETF’s that own a basket of stocks or commodities, these are great vehicles to isolate you from disasters with individual stocks.  Every investor has had a holding in his portfolio breakdown and fall in value due to an unexpected event like a strike, lawsuit, lowered earnings forecast, or analyst downgrade.  Owning an ETF minimizes the impact of these types of events.  One stock out of 20 or 200 will not even move the needle.  This lets you invest in a sector that you believe promises good gains, without the risk of individual stocks.  Here are some other ETF’s I use for short-term trades: 

Some Wide targeted ETF’s: 

VTI= U.S. Stocks 

VEU= Foreign Stocks 

IEF=   Bonds 

DBC= Commodities 

VNQ= Real Estate 

Popular ETF’s: 

GLD= Gold 

SLV= Silver 

SPY= S&P500 

USO=Crude Oil 

IWM=Russell 2000 

QQQQ=Nasdaq 100 Trust 

Do not use ETFs that trade options or futures for long-term trades. These are dangerous except for short-term trades. They exhibit “tracking error” over time. The price of the ETF does not correlate to the cash price of the stocks or commodity it is following, because the futures or options determine its price. I have written about this before. You can read my earlier comments here.  Before buying an ETF for a long term holding, check if they own the underlying asset or trade futures of options.  This can save you a lot of heartache.  I have posted a list of popular ETF's under 'Investor Resources'.

I read a fantastic blog post that you should read, it will open your eyes to the difficulty small investors have in picking stocks and timing the market. The statistics in this article are eye opening. For example, “39% of stocks had a negative lifetime total return” or how about this “64% of stocks underperformed the Russell 3000 during their lifetime.” So much for buy and hold! You can read it here.

I have posted a link to the stimulus bill that passed congress on the website. I thought you might want to have access to this as questions come up. It is under ‘Investor Resources’ on the right panel of the web site. 

A friend sent me a copy of a Milton Friedman clip from years ago on the Phil Donahue show. Friedman is asked about greed, and try as he can, Donahue cannot paint Friedman into a corner. This is a must see vintage video. It is on the site’s home page, just scroll down. I hope you enjoy it, invite your friends to see it here. 

You may have heard of the controversy this weekend about a cartoon the Washington Post ran last week. Some say it was racist. Probably bad taste.  You decide. 

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future. 

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