Top 10 Highest Weighted Stocks In The Nasdaq 100 Index ETF Investments: Understanding "The Dark Side" of Exchange Traded Funds

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ETF Investments: Understanding "The Dark Side" of Exchange Traded Funds

Until now, I’ve been a large fan of ETF investments (Exchange Traded Funds). After all, they provide selection, flexibility, low prices and tax potency, amongst different advantages. And they are rising like wildfire…

Though small in comparison to the 8,000 mutual price range valued at $9 trillion, there at the moment are 253 ETFs with property exceeding $315 billion, up 41% from a yr in the past. Clearly, they have got fulfilled crucial want.

Everybody on Wall Street is stepping into at the act, too. The New York Stock Exchange, the Nasdaq, the AMEX and the COMEX; brokerage homes like Merrill Lynch, Goldman Sachs, and Lehman; the indexer Dow Jones; and the score services and products Standard & Poor’s and Morningstar. Even large mutual fund corporations Vanguard and Fidelity see the benefits of ETFs and are providing new ones.

Many of those exchanges and establishments are providing ETFs via iShares, EnergyShares, streetTRACKS and Rydex.

But there’s a problem. As I see it, two risks threaten your ETF portfolio…

ETF Investments Danger Sign # 1: The Liquidity Factor… You Can Buy, But Can You Sell?

With such a lot of new ETFs approaching marketplace, there is actual fear that you would be able to now not have the ability to promote.

Institutions are providing such a lot of new ETFs that it makes your head swim. At closing depend, Morningstar indexed 253 ETFs buying and selling on exchanges, in comparison to 152 the yr ahead of. New specialised ETFs are being created each and every week.

There’s no liquidity downside with many of the older, larger ETFs, such because the DIAMONDS Trust (AMEX: DIA), which trades, on moderate, 8.4 million stocks an afternoon, the S&P Depository Receipts (AMEX: SPY), with a day-to-day quantity achieving 87 million; or the Nasdaq 100 Trust (Nasdaq: QQQQ), which trades 128 million stocks on moderate.

But what in regards to the 1st Trust Dow Jones Internet Index (AMEX: FDN), iShares Dow Jones U.S. Regional Banks (NYSE: IAT), the Rydex Small-Cap 600 Pure Growth (AMEX: RZG), or streetTRACKS DJ Wilshire Large Cap (AMEX: ELR)? All 4 had “zero” (0) trades the day I wrote this newsletter!

Lots of alternative ETFs have severe liquidity issues, too, buying and selling fewer than 10,000 stocks an afternoon. Most of those are new, akin to:

iShares Dow Jones U.S. Home Construction (NYSE: ITB)

EnergyShares Dyn Building & Construction (AMEX: PKB) or

Rydex S&P Midcap 400 Pure Growth (AMEX: RFG)

Some new ETFs, then again, are very popular. For instance…

The new iShares Silver Trust (AMEX: SLV) trades 625,000 stocks an afternoon, priced at $116 a proportion.

The iShares COMEX Gold Trust (AMEX: IAU) trades 250,000 stocks an afternoon.

iShares Dow Jones U.S. Real Estate (AMEX: IYR) stocks business 2.3 million occasions on a daily basis.

Liquidity additionally depends upon recognition, and it is relatively imaginable that some sizzling ETFs will likely be tricky to dump years later.

Foreign markets are sizzling at the moment, and so are the ETFs focusing on them. You should not have any downside promoting your iShares MSCI Emerging Markets Index (AMEX: EEM), which trades 7 million stocks an afternoon, or the iShares Japan Index (AMEX: EWJ), which trades 25 million stocks an afternoon. But quantity on iShares MSCI South Africa (AMEX: EZA) and that iShares MSCI France (AMEX: EWQ) reaches simply 150,000 stocks day-to-day.

My recommendation: Check the typical day-to-day quantity of every of the Exchange Traded Funds. Don’t put money into those ETFs except you to find that there’s excellent liquidity in each bull and undergo markets.

ETF Investments Danger Sign #2: Poor Diversification

The different risk in your wealth is an incomplete ETF index. That’s now not an issue with the S&P Depository Receipts, which mimic the S&P 500 Index; or the DIAMONDS Trust, which imitates the Dow 30. But Merrill Lynch’s Internet HOLDRs (AMEX: HHH), which used to be created in September 1999 – just about the highest of the Internet bubble – is closely weighted in best 3 shares: Yahoo!, eBay and Amazon.

In reality, it does now not even come with Google (Nasdaq: GOOG), which went public in 2004. If it were incorporated, HHH would were a best performer. Instead, open-ended tech price range, such because the Jacob Internet Fund (JAMFX), have outperformed HHH up to now two years… via a large margin.

Lesson: When making an investment in ETFs, take a look at the holdings ahead of you make investments.

In brief, do not promote your mutual price range anytime quickly. Ultimately, they will have some benefits over ETF investments, particularly when it comes time to promote or diversify.

Good making an investment, AEIOU,

Mark

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