ETF Investing - Part 3 (Addendum to your existing portfolio)

This is Part3 in a multipart series exploring ETF investing. Click to read Part1 and Part2.

If you have already established a core portfolio and are looking for something that would let you get a quick exposure to say, another country, or another asset class, without taking on a significant risk, you can use ETFs. Certain scenarios include:

• International Exposure:

If you own only domestic US stocks, and are looking to diversify into international markets, an ETF like Vanguard All World Except US (VEU) can be a good bet. For that matter, using only 2 ETFs like Vanguard Total Stock Market ETF (VTI) and Vanguard All World Except US ETF(VEU), you can gain a diversified exposure to the entire world's capital markets.

If you are looking for a specific region exposure like Europe or Asia, you can take a look at the Vanguard European ETF (VGK) and SPDR S&P Emerging Asia Pacific(GMF) respectively. If you are bullish on Pacific countries like Australia, New Zealand etc, you can invest in Pacific-ex Japan ETF like iShares MSCI Pacific ex-Japan (EPP).

If you are looking for country-specific exposure like India or China, you have the iPath India ETN (INP) (currently there is no ETF for India, but for all practical purposes, you can consider this ETN as a viable alternative) and iShares FTSE/Xinhua China 25 Index (FXI) respectively. However, if you think that India and China are bubbles, and would like to invest in Malaysia, South Korea or Middle East, you have the iShares MSCI Malaysia Index (EWM), iShares MSCI South Korea Index (EWY) and SPDR S&P Emerging Middle East & Africa (GAF)respectively.

• Market Cap Exposure:

Market caps can be divided into three categories - Large-cap, Mid-cap and Small-cap. Lets say that you have been a cautious and conservative investor so far and have a lot of large-caps like GE, Exxon Mobil (XOM), Verizon (VZ) etc., and now you decide to move into a slightly more aggressive field like mid-caps. However, you might want to be aggressive with minimum risk exposure by diversifying into a broad range of mid-cap companies - and guess what, Vanguard mid-cap growth ETF(VOT) comes to your help. Or you might want to have 50-50 exposure to mid caps and small caps, in which case you can invest in Vanguard mid-cap ETF (VOT) as well as Vanguard small-cap ETF (VBK).

• Sector Exposure:

If you are bullish on a specific sector, but dont want to risk your investment in just couple of stocks within that sector, you can choose to diversify using ETFs. If you are like me, you are probably bullish on oil and energy, and you can gain a good exposure to this sector using Energy Select Sector SPDR (XLE). If you are bullish on world technology, you can take a look at Technology Select Sector SPDR (XLK). If you are bullish on steel considering the rising demand from emerging economies, especially China, you can invest in the Market Vectors Steel ETF (SLX). If you like the prospects of healthcare companies in general, you can research more about Vanguard Health Care ETF (VHT).

• Shorting Exposure:

If you are bearish on the US Economy, just like Asif Suria is, you can still make money by shorting the entire S&P using UltraShort S&P500 ProShares (SDS). This ETF works inversely proportional to the S&P 500 index on a daily basis. If you think that small-caps have had their run and its once again time for the large-caps to run, you can invest in the UltraShort Russell2000 Growth ProShares (SKK). Instead of investing in short ETFs, you can instead also short any regular ETF - however, there are restrictions on doing this within retirement accounts, and thats where the short ETFs come in handy.

Part1
Part2
Part3

WisdomTree launches small-cap Emerging Markets dividend-paying ETF

WisdomTree announced the launch of a new small-cap emerging markets dividend-paying ETF yesterday, which started trading on NYSE Arca today with ticker DGS (NYSEArca: DGS). This ETF is based on WisdomTree's Emerging Markets SmallCap Dividend Index, which, according to their calculation has beaten the MSCI Emerging Markets Index by by about 9%, when backdated for the last 10 years.

Key index facts:

• Top 10 countries based on weightage include (guess what, no BRICs in the top 10):
• Taiwan
• South Africa
• Korea
• Thailand
• Malaysia
• Israel
• Turkey
• Mexico
• Indonesia
• Chile
• The maximum weight assigned to the topmost holding is just 2.68% - which means that the fund is highly diversified, which is good, since this is a risky play.
• Dividend yield: 4.39%
• Companies included in the Index fall within the bottom 10% of total market capitalization of the WisdomTree Emerging Markets Dividend Index as of the annual index measurement date
• IBD reports that the index includes some 369 odd dividend paying stocks across 17 different countries
  

Key fund facts:

• The fund, being an ETF, obviously tries to track the above-mentioned index
• NAV as of 10/30/07: $51.50
• Price: $51.40
  
• Expense Ratio: 0.63%

This fund is probably what some high-risk investors were looking for anyway. Since the index includes only dividend-paying companies, it offers a cushion against the volatility of the emerging markets small-caps. Also the fact that an ETF by very nature is highly diversified, the risk is further reduced.

To know more about ETFs, click here and here.

Voluntary Disclosure: I currently own WisdomTree shares.

ETF Investing - Part 2 (Sample ETF Portfolio)

This is Part 2 in the series of posts about ETF Investing. Click here to read part 1 about ETFs and their advantages/disadvantages. This post is dedicated to building a sample ETF portfolio.

Some things to keep in mind:
-First things first, you got to decide if you want to dedicate a part of your portfolio to ETFs or your entire portfolio.
-Think about your risk appetite
-Think about your rewards expectation

Higher risk = Higher volatility = Higher profits OR Higher losses

Sample Portfolio 1 -Aggressive (Stock ETFs constitute your entire portfolio):
If you are like me, you would want to dedicate about 30-40% of your portfolio to US, and the rest 60-70% international. Out of the 60-70% international, I would set aside maybe 20% for developed economies like Western Europe and the rest 40-50% for emerging economies, and maybe 10-20% for sector-specific ETFs. Here are the specific ETFs I would allocate money to:
1. Domestic US ETFs:

• SPDR S&P 500 (AMEX: SPY) [10%]: Invests in US S&P 500 companies, usually large caps. I would put this at low risk, low rewards. Seeks to correspond to the growth and yield of the US S&P 500 index. Expense ratio 0.08%.

• Vanguard Mid-cap growth (AMEX: VTI) [20%]: Invests in US mid-cap companies, I would put this as medium risk, medium reward. Seeks to track the MSCI US Mid Cap Growth Index. Expense ratio 0.13%.

• Vanguard Small-cap growth (AMEX: VOT) [10%]: Invests in US small-cap companies, I would put this as high risk, high reward. Seeks to follow the MSCI US Small Cap Growth index. Expense ratio 0.12%.

2. International ETFs:

• Vanguard Emerging Markets Stocks (AMEX: VWO) [30%]: Invests in stocks of emerging market economies. I would put as very high risk, very high reward. Seeks to track the MSCI Emerging Markets index. Expense ratio 0.3%.
  

• iShares Pacific ex Japan (AMEX: EPP) [15%]: Invests in stocks of Pacific markets except Japan. Seeks to track the MSCI Pacific ex-Japan index which constitutes economies like Australia, Hong Kong, New Zealand, and Singapore markets. Expense ratio 0.5%.
  

3. Sector specific ETFs:

• Oil and Energy - Energy Select SPDR (AMEX: XLE) [5%]: Like most investors, I am bullish on oil and energy, since these are limited natural resources with increasing demand. I would devote 5% of my portfolio to this ETF, which invests in oil, gas, energy equipment & services companies. Expense ratio 0.24%.
  

• Technology Select SPDR (AMEX: XLK) [5%]: Technology has become or is becoming a part of every field, and considering that tech demand will continue to increase, I would also devote 5% of my portfolio to this ETF, which invests in technology economic sector - which includes hardware, software and telecom companies. Expense ratio 0.24%.
  

• Market Vectors Steel ETF (AMEX: SLX) [5%]: Considering a bullish demand for steel especially from emerging economies, I will also devote 5% to this steel ETF. Expense ratio 0.54%.
  

More sample portfolios to follow.

Part1
Part2
Part3

WisdomTree: ETFs in 401K?

Yesterday WisdomTree (Pink Sheets: WSDT) announced the launch of their innovative 401k platform featuring ETFs. Although ETFs have been around since the early 1990s, this is the first time they will be offered as part of any 401K plan. Under this offering, they will also make ETFs of other companies like Vanguard and iShares available along with their own. It will also feature some low-cost, no-load, no 12b-1 fees actively managed mutual funds. WisdomTree will offer two options for the 401k plan:

• The "model plan" features six professionally built ETF portfolios depending on the participant's risk tolerance appetite and target retirement date. It includes ETFs from WisdomTree, Vanguard and iShares as well as some actively traded mutual funds.
  
• The "Custom plan" lets an investor make his own choice with available ETFs/funds and create his own customized portfolio.

About WisdomTree: WisdomTree offers ETFs that are fundamentally weighted as opposed to others that are market-cap weighted. The investing principle behind the former being that ETFs should constitute weights of companies in an index depending on their core fundamentals like earnings and dividends vs. the investing principle in the latter which constitutes stocks based on their market cap.

It seems to me like WisdomTree has the first mover advantage in bringing ETFs to 401K, when the popularity of ETFs has soared in recent years. Also smart is the move to offer Vanguard and iShares ETFs as well as some actively traded funds along with its own ETFs to appeal to a broader audience. What remains to be seen is how and when corporates start offering this plan to their employees.

For the entire press release, click here.

Voluntary Disclosure: I currently own WisdomTree (Pink sheets: WSDT) shares.

ETF Investing (Part 1)

This is the first in a series of posts that explores investing in ETFs. I am sure most of you have heard about ETFs (Exchange Traded Funds) - which are the hottest and fastest growing financial instruments of recent times. Almost every few days I hear about the launch of a new ETF, the most recent one that caught my eye was the Nuclear Energy ETF by Market Vectors. Some of the early (and most popular) ETFs include the PowerShares QQQQ (based on Nasdaq 100 index), AMEX SPY (based on the S&P 500 index) and the AMEX DIA (based on the DJIA). Yahoo Finance today reveals a total of 565 ETFs trading in US markets.

What are ETFs?
ETFs are like mutual funds, or more specifically index funds, that trade like stocks, on the open markets. However, unlike mutual funds, the price of an ETF fluctuates throughout the day based on supply and demand. ETFs combine the diversification of mutual funds with flexibility of stocks. Interested in owning the entire US stock market? - you have the Vanguard Total Stock Market ETF (AMEX: VTI) at your disposal. Bullish on technology? - you have sector specific ETFs like the Morgan Stanley Technology ETF (AMEX: MTK). Want to allocate a bigger slice of your portfolio to emerging markets ? - go for the iShares MSCI Emerging Markets ETF (AMEX: EEM).

How do ETFs work?
In order to understand the tax-advantage of ETFs, it is very important to understand how they are created. The big mutual fund companies own a lot of individual shares of different companies as underlying part of mutual funds. So, if they decide to establish say, one unit of the S&P500 ETF, they go an authorized entity with a basket comprising of individual shares of the S&P 500 index and the authority redeems these shares for one unit of the ETF. Of course, these baskets are typically quite huge, and get redeemed typically for 50,000 or more units of the ETF. These ETF units are then floated on the open market for others to buy and sell.
Redemption is exactly the reverse - an S&P 500 ETF can be redeemed by the ETF company for an equal number/proportion of stocks.

Advantages of ETFs

• Cost: Probably the biggest advantage of ETFs is the cost factor. Since ETFs are passively managed, their expense ratios are very low compared to traditional mutual funds. Of course, you do have to take the trading commissions into account since you buy ETFs through a brokerage account. However, trading commissions can be zero these days if you have a Zecco brokerage account.
  
• Tax advantage: Mutual funds typically are actively managed, and result in large turnovers of the underlying stocks, which result in unnecessary capital gains taxes for all individuals, irrespective of whether the individual chooses to sell his own fund. Due to the very nature of ETFs (read above for how they are created and redeemed), the capital gains taxes need to be paid only at the final sale of the fund.
• Diversification: ETFs are a handy way to create a diversified portfolio consisting of different indices and hence mitigate the risk of owning an individual stock.
  

Where can I buy ETFs?
Since ETFs trade like stocks on the open market, all you need is a brokerage account. You can discount brokerage accounts with very low or zero trading commissions at brokerages like ScottTrade, Izone, ShareBuilder, FirstTrade and Zecco (free).

ETF Resources:

• ETF Center at Yahoo Finance
• ETFConnect.com
• Morningstar ETF section
  

Stay tuned for more posts on ETFs about portfolio allocation, comparison of the different fund families and more.

Part1
Part2
Part3