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Diversify your portfolio with ETFs


Exchange Traded Funds are a relatively new form of investment. The good news is that they behave like a combination of two instruments that everybody knows - an index mutual fund, and a stock. So there is nothing really exotic about them. A typical ETF will track a number of stocks (like an index mutual fund), but the ETF can be bought and sold like a stock - you can buy it and sell it throughout the trading day, you can sell it short, and you can buy and sell options on some ETFs.

So what's so great about ETFs?
1) ETFs tend to be more tax efficient than a typical actively managed mutual fund.
2) ETFs have lower fees than a typical mutual fund.
3) They can be traded actively - something mutual funds discourage ( recently many mutual funds added "early redemption fees" - ranging from 0.5 to 2% of the the equity, if you trade a fund more often than once every 30, 60 or 90 days - depends on the fund. So if you buy a fund today, and next week a prolonged bear market begins - they will charge you as much as 2% of your equity in order to get out of the position - how arrogant - you have to pay them a fee to get your money). This is one of the reasons why billions of dollars are flowing to ETFs every month - ETFs have no early redemption fees - you can trade the same ETF 10 times in a single day if that's what your strategy calls for - one of the reasons that day traders love ETFs.
4) The variety of ETFs increases almost weekly - if you can't find an ETF that suits your needs - chances are within a month or two someone will create one.
5) ETFs allow traders and investors to fine tune their strategy by focusing on a currency, or sector, or country, or a region of the world.

Because of the sheer variety of ETFs, it is possible to implement almost limitless investment strategies:

If you think that US dollar will continue falling - you could purchase Euro etf (ticker symbol FXE), or Australian dollar etf (FXA), or Canadian dollar etf (FXC). Conversly, if you think that dollar will go up against major currencies, you could sell short FXE, FXA, FXC. Or maybe you simply want to avoid the entire sorry mess and bet that Swiss Franc will continue to hold value - you could buy FXF.

If you want to follow in the footsteps of Peter Lynch (see our Classics to Read section) - you could implement sector rotation strategy using ETFs - you could rotate through Internet sector (HHH), Biotech (BBH), Semiconductors (SMH), natural resources (XLF), telecom (TTH) or a slew of other sectors.

If you think China or India are the place to be, you could purchase Chinese etf (ticker symbol CHN) or the Indian etf (IFN). Or you could bet on the countries in the European Union - England (EWU), France (EWQ), Austria (EWO), Italy (EWI), Spain (EWP) - to name a few - and of course, you could bet on Switzerland - EWL.

If you want to actively trade major US indexes - you could do so using Dow Jones etf (ticker symbol DIA), S&P500 (SPY), and Nasdaq (QQQQ) - before embarking on active trading, we encourage you to read book by Van K Tharp "Trade Your Way to Financial Freedom"- it is the best book on active trading we have ever found. You can find it in our Classics to Read section.



If Latin and South America is your thing - you could bet on Brazil (EWZ) or Mexico (MXE), or a large cap Latin American index - ILF.

If your tastes run to the Far East - you could bet on Singapore (EWS), Japan (EWJ), Korea (EWY), Taiwan (EWT) or Hong Kong (EWH). Australia is nearby - you could trade EWA.

Some prefer to broaden their bets, and instead trade emerging markets (ADRE).
Gold bugs can choose between GLD and IAU etfs, and load up on the silver etf while they are at it - SLV.

As you can see, there is an ETF for every taste - we only mentioned the most popular few.

So how can you get your hands on some ETFs?
You can trade them through any broker that handles US stock market.
ETFs can also be traded in IRA accounts (Regular IRA, Roth, or Educational IRA).

Of course, no trading instrument is perfect. So a word of caution - some of the ETFs can be as volatile as individual stocks - take this into account when designing your strategy.
Click here to learn about other rarely mentioned risks associated with trading ETFs.

Link to Yahoo listing of all Exchange Traded Funds

 

 


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