Tag: etfs contributor

3 Reasons ETFs Are Better Than Mutual Funds

Posted on by Matt Thalman

Matt Thalman - INO.com Contributor - ETFs


For good and bad, Wall Street is constantly finding new ways for investors to attempt to grow their money. But, with all these products available for investors to choose from and a massive amount of information being presented to the average investor, it is easy to understand why so many investors still ignore ETFs and stick with mutual funds.

In most cases the average investor does not have a choice between a mutual fund and ETFs when it comes to their 401(K) plans through their employer. But for those investors who decide they want to put more money to work than just their 401(K) contributions, plowing more money into mutual funds is a bad idea for three reasons: truly knowing what your buying, performance, and cost.

Knowing What You Actually Own

Walk into any retail store in the US and pick up a any product; find the tag if it's a piece of clothing, the label if it's a drug or grocery item, or even the new Christmas toy you purchased, and you can find out exactly what was used to make that product. Depending on what the product is, there are different laws that have been put in place to protect the consumer which require the manufacturer to inform the customer of exactly what they are getting at all times.

Flip to the world of finance, unfortunately knowing what you are buying at all times is not always the case. While mutual funds are required to disclose their holdings to the public, these disclosures don't typically happen more than on a quarterly or semiannual basis. So what that means is that although you think you have purchased a large-cap growth mutual fund and that the manager must have at least 90% of the fund's assets in large-cap growth stocks, you essentially have no way of finding out if that's really were your money is invested. All the mutual fund manager needs to do is sell whatever doesn't meet the large-cap growth requirement the day before the fund's disclosure statement is put together and to investors it looks like the manager is doing exactly what he is supposed to be doing.

So why would a mutual fund manager not keep the funds in exactly what the fund's prospectus says they will do? Continue reading "3 Reasons ETFs Are Better Than Mutual Funds" →

Befriend The December Volatility!

Posted on by Matt Thalman

Matt Thalman - INO.com Contributor - ETFs


As we roll through the second week of December, the markets seem to be going a little crazy as the year comes to an end. From January 1st until November 28th of this year, the Dow Jones Industrial Average had gained 7.02% while the S&P 500 was up 10.6%. But, over the first week and a half of December, the Dow has lost 1.68% while the broader S&P 500 has fallen 2.04%.

Furthermore, the bulk of those declines came earlier this week when the markets closed lower Monday, Tuesday and Wednesday. And not only did the major indexes end the sessions off the mark, but their intraday lows put the indexes down by more than 1.25% on two of the three trading sessions.

The downward pressure being felt earlier this week could easily be blamed on a number of things which I am sure they were by many of the pundits out there; oil prices falling, oil prices rising, issues in Europe and Draghi not doing enough, slowing growth in Asia, weak growth numbers here at home, a poor start to the holiday shopping season, the list could go on and on. But, I personally don't believe any of those reasons are why the market has recently been falling.

The December Dive

Continue reading "Befriend The December Volatility!" →

Leveraged 3X ETFs Are Much More Dangerous Than You May Think!

Posted on by Matt Thalman

Matt Thalman - INO.com Contributor - ETFs


Due to market demand, over the past few years we have begun to see another increase in investors' use of leverage. Just ten years ago all the rage was using leverage to buy more home than one could really afford. Before that, it was the increased use of credit cards and way back in the late 1920's it was trading stocks on margin. The use of leverage has time and again blown up in the faces of those who use it at an abusive level.

So today I would like to point out some of the dangers of Leveraged ETFs or better known as 3X ETFs. But first, let's talk about why it's hard to see the danger in these investments. I believe the most glaring reason is because we have been told that ETFs, or any group of investments bundled together in order to provide diversity, is safer than buying individual stocks or investments. And that is completely true, but what makes the leveraged ETFs dangerous is the leverage itself.

Deterioration Risk

The first item to consider is what it costs the ETF to gain 3X leverage. That price is often referred to as deterioration risk. The deterioration of invest-able capital is due to the price the ETF must pay other financial institutions to buy and sell investment instruments in order to gain the 3X price movement of the underlying ETF asset. If the ETF is invested in the oil industry for example, the industry itself will have a limited number of financial instruments to invest in, and often times those instruments will have very little liquidity. The lack of supply and lack of demand for the investment therefore pushes the price of the investment higher for the ETF to purchase. In turn, and over time, that increased cost will deteriorate part of the capital being used to invest.

Daily Trading Only

The next issue is the use of leverage and how it makes returns very unpredictable, especially over long periods of time. Direxion Investments is one company who offers leveraged ETFs. On their website, as well as in the profile summary of each of their leveraged ETFs, you can find a warning to investors which reads:

"These leveraged ETFs seek a return that is +300% or -300% of the return of their benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark’s cumulative return for periods greater than a day."

Continue reading "Leveraged 3X ETFs Are Much More Dangerous Than You May Think!" →