Throughout his career, Mark Nevdahl has been dedicated to assisting individuals using a unique “educate before recommending” approach. Mark believes that expert advice and discipline are the foundations of every investment decision. As a Certified Financial Planner...
Publish Date: February 26, 2007
I wrote this month’s commentary the evening of the 26th. Well, the morning of the 27th brings some interesting data. The Chinese markets get hammered down 9.2%. Keep in mind these markets were up 13% over the previous 6 sessions. Reading the headlines, hardly anyone is talking about the run up last week. The press loves blood in the streets. Freddie Mac toughens subprime standards long overdue and banks have been handing out money, trapping many first time homebuyers in financial jeopardy. Durable goods orders plunged 7.8% in January, the largest decline in 18 months. One day or month does not make a trend.
The Russell 2000 closed Feb. 27 at 792.66, down 0.00946% for the month. The iShare Russell Microcap Index ETF (IWC) closed at 58.42, down 0.00128% for the month. I still remain bullish on the small and micro-cap markets. I think the reactions in the markets today were over exaggerated. I see a case of the markets looking for an excuse to sell off. Look for the babies who got thrown out with the bath water. The markets had been getting a bit tired; a cat nap was in order, the retreat on the 27th will help.
At The World Money Show in Orlando, FL earlier this month I spoke on The Complex and Confusing World of ETFs. The more choices investors have the better. The question is do you know how to navigate over the landscape. We ended 2006 with 357 SEC registered ETFs, where 266 where domestic and evenly divided between broad-based indexes and sector/industry indexes. So far this year we have seen ProShare launch 22 ETFs designed to provide leveraged and inverse leveraged exposure. iShares have brought 8 ETFs tied to debt instruments and the list goes on.
John Bogle, Founder of Vanguard was critical of the “ETF Market” direction when he wrote a commentary on 2/9/2007 in The Wall Street Journal titled “’Value Strategies.” This excerpt I believe sums it up. “These nouveau index funds starkly contradict each of the principal concepts underlying the original index fund. If the broadest possible diversification was the original paradigm, surely holding small segments of the market offers less diversification and commensurately more risk. If the original paradigm was minimal cost, then holding market-sector index funds that may themselves be low-cost obviates neither the brokerage commissions entailed in trading them nor the tax burdens incurred if one has the good fortune to do so successfully.”
So your saying to yourself why would an advisor who offers alerts on actively trading ETFs, point out an article that is against active trading. Because I want to bring to your attention the importance of being educated in the areas you invest. Using ETFs to build a diversified portfolio is totally what I believe in. You need to implement a target asset allocation strategy using the major index ETF. They are perfect for this. The alerts are to add alpha to that diversified portfolio. Not to build a portfolio from them.
You can take advantage of sector moves with the added protection of the diversification offered by an ETF by reducing the effect of individual company risk. This is when these new narrow sector ETFs can be powerful tools.
As advisors and investors we tend to lump product into broad categories. ETFs started their lives as tracking funds of an index. They have grown into a complicated and riskier investment in some cases. For example, the leveraged ETFs of ProShares. Leverage works both ways to magnify the upside and the downside. You need to fill your portfolio with investments that fit a specific purpose, not your emotional need to have the latest and sometimes complicated tools. As my dad used to say using the old adage “keep it simple stupid.” So use the traditional ETFs for portfolio building and the more narrow selections for adding alpha.
The opinions and commentary provided by the advisors in the My Automated Advisor Newsletter are the opinion of those advisors and not of My Automated Advisor.
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