What Is A Short ETF?

A short exchange-traded fund (ETF) is designed to profit from a decline in the value of the underlying index. A short ETF gets its name from the fact that it is designed to benefit in the same manner as a short position in an underlying index. Thus, a short ETF will be profitable if the underlying index or asset declines in price, and will incur a loss if the underlying index or asset gains in price. Short ETFs can be used for speculation or hedging.

Short ETFs are widely known as “inverse ETFs”, and sometimes as “bear ETFs.” Short ETFs are not constructed through short positions in the constituents of an index, but rather, through the use of derivative instruments like options, futures and swaps.

Short ETFs have gained popularity because they are a viable alternative to short-selling, which has a number of drawbacks that make it onerous and risky to use for the average retail investor. Unlike a short sale, short ETFs do not require the use of a separate margin account. Short ETFs are also a cheaper way of obtaining bearish exposure than short-selling, which entails a number of expenses such as interest on the margin account, cost of borrowing the shorted security, as well as dividend payments made by the shorted security. Short ETFs may also be less exposed to other risks associated with short selling such as the risk of short squeezes and buy-ins, and regulatory risk.

Short ETFs are available on a wide range of indices and assets, and may also offer additional leverage. For example, the ProShares UltraShort S&P 500 S&P 500 Fund (SDS) seeks investment results that correspond to twice the inverse of the daily performance of the S&P 500. Thus, if the S&P 500 declines 2% on a given day, this UltraShort ETF should theoretically gain 4%. Conversely, if the S&P 500 advances 1.5% one day, the UltraShort ETF should theoretically decline 3%.

We say “theoretically” because short ETFs have very significant tracking differences compared to the underlying index. This tracking difference gets amplified over longer periods of time and with higher degrees of leverage. While this makes short ETFs suitable tools for hedging or speculating over short time periods such as days or weeks, they are much less efficient over longer time periods.

As an example of the effect of leverage on tracking difference, consider the following. The SPDR S&P 500 ETF (SPY) had a tracking difference of only 0.37% in relation to the underlying S&P 500 index as of July 2014; the ProShares Short S&P 500 ETF (SH) had a tracking difference of 18.2%, while the ProShares UltraShort S&P 500 S&P 500 Fund (SDS) had a tracking difference of 27.2%.

The Bottom Line

Short or inverse ETFs are a viable alternative to short-selling; while they can be a potent tool for speculation or hedging in the hands of experienced traders and investors, they should be used with caution by new investors.

Buying bonds at a premium? Note these 4 things

Would you buy an investment that was guaranteed to go down in price?

Oddly enough, millions of investors do that regularly when they buy bonds at a premium. A premium means paying a higher price than the maturity value of a bond.

Why would anybody do that? A bond is likely to trade at a premium if its interest coupon is higher than prevailing interest rates. For example, a bond with a coupon of 8 percent and a face value of $100 is likely to trade well above $100 if prevailing bond rates are around 4 percent. Effectively, the price will rise until the coupon represents a yield-to-maturity similar to prevailing market yields.

The outlook for buying at a premium today

Because interest rates have generally fallen over the past 30 years, many bonds outstanding today (especially those with older issue dates) have coupon rates higher than today's yields and thus are likely to be trading at a premium. When buying these bonds, you will get a higher coupon rate, but between now and the bond's maturity, you will see the price steadily drop toward face value.

Here are four things you should consider when buying bonds at a premium:

• You may be limiting your upside. Like savings accounts, yields on bonds move up and down as market interest rates change. Unlike savings accounts, bonds do this through changes in price, with rising interest rates driving prices down. While bonds also have the potential to see an interim gain in prices if interest rates fall, this potential is greater for bonds trading at a discount than those trading at a premium. So, investing in bonds at a premium may limit your potential to earn more than the yield-to-maturity when the investment was made.
• Lower volatility. On the other hand, because of their higher coupons, bonds trading at a premium have a lower effective duration than bonds trading at a discount, and thus are likely to have less price volatility.
• Cash-flow management. Investing in bonds at a premium may be helpful if you are trying to match interest income with periodic payments you have to make. Though you will pay more upfront, the higher coupon on a bond at a premium may better match your payment obligations.
• Tax complications. Because of their higher interest coupons, bonds at a premium will subject you to more of a year-to-year tax obligation than bonds at par or a discount. You can offset this tax disadvantage if you amortize the premium you paid over the life of the bond, but you need to be prepared for this added level of tax complication.

If you are simply searching for yield, keep in mind that the best CD rates might rival bond yields at some maturity lengths. The difference is, while the yields may be similar, bonds are subject to price fluctuations between now and maturity, while CDs will have stable values. It's up to you to decide whether those price fluctuations will work out in your favor.

Buyback ETFs: U.S. & International Strategies

According to a study by LPL Financial, the “smart money” may be exiting equities. Hedge funds, institutions, insiders and foreigners were net sellers of stock in June. The net buyers? Individuals and corporations. The brokerage firm’s chief market strategist, Jeffrey Kleintop, further explained that companies buying back shares of their own stock accounted for most of the purchasing activity.

Corporate buybacks are hardly a new phenomenon. Rather than hold too much cash on their books, companies often invest in their own shares if they believe that their stock is undervalued. That’s the positive spin. The more cynical narration is that corporations artificially support stock prices as well as massage the perception of how profitable they are. In essence, when a company reduces the total number of outstanding shares by purchasing them, profits per share move higher; market participant perception can be “goosed” even if total earnings have flatlined.

Considering the fact that pensions, insurers, hedge funds, large money managers, insiders were net sellers in June — every grouping other than individuals and the corporations — it stands to reason that individuals are the only market participants who believe the earnings story. In other words, most seem to conclude that companies are not repurchasing shares because they feel that respective stock prices are undervalued; rather, most players feel that current corporate buybacks are a mechanism of manipulation.

It may be hard to argue otherwise. According to Birinyi Associates, companies spent roughly $600 billion in buybacks in 2013. That marked the second highest calendar year of corporate allocation to stock in history. What’s more, the buyback craze has maintained a torrid pace here in 2014. Interestingly enough, the largest annual amount spent in history came in 2007, right before the onset of the recession and the subsequent collapse of the financial system.

What has been missing in the discussion of buybacks is where the corporate cash is not going. Specifically, if companies really felt good about the prospects of the globally interconnected economy, we might expect them to invest more heavily in new product development, human resources, marketing and a variety of aggressive efforts to expand.

Naturally, ETF enthusiasts may wish to know if there’s a way to capitalize on a market that is still trending higher, in spite of net selling by larger groupings. Possibly. PowerShares Buyback Achievers (PKW) handily outperformed the S&P 500 SPDR Trust (SPY) over the prior 3 years. It should be noted, though, that virtually all of the excess gains came during the 2013 year when corporate buybacks were particularly robust.

Keep in mind, however, the U.S. may be seeing net sellers from larger institutions due to valuation concerns. International investments may offer more compelling valuations alongside greater stimulus from the world’s central banks. And that means, if the buyback approach works well for ETF investors in the earlier stages, one might have reason to consider PowerShares International Buybacks (IPKW). With only 3-months of data to look at, IPKW is outhustling the iShares All-World excluding U.S. (ACWX).

Since we are discussing possible changes that investors might make to their portfolios at this time, I would be remiss if I did not address commentary by the Bank of International Settlements (BIS) this weekend. The BIS is an association of the world’s top central banks and the consortium did not mince words in its condemnation of “euphoric” financial markets. In brief, the group suggested that global economic outlook is shaky at best and geopolitical strife is increasingly stressful to the well-being of the world economy. The buoyancy of the markets, they reported, is out of sync with the uncertainty.

Granted, investments always manage to climb a wall of worry. On the other hand, the irony of the BIS commentary is that the world’s central banks are largely responsible for rational or irrational investor optimism. The U.S. Federal Reserve, the European Central Bank (ECB), the Bank of England (BOE) as well as the Bank of Japan (BOJ) have all engaged in policies that have kept interest rates unnaturally low. From my vantage point, the BIS may be looking for a way to blame market participants for excessive exuberance rather than shouldering any blame for the way that it has endeavored to boost global economic output.

No matter how you look it at the big picture, it is difficult to make the case that U.S assets are fairly priced. A conglomerate of top central banks has conjured up images of Greenspan’s infamous “irrational exuberance” comments. Meanwhile, individuals may be blindly following share prices that are being pushed higher by questionable corporate allocation of capital. Meanwhile, the big wheelers and dealers have been quietly paring back stock exposure.

Why You Should Invest In Green Energy Right Now

It's no secret that the global energy demand continues to rise. Driven by emerging economies and non-OECD nations, total worldwide energy usage is expected to grow by nearly 40% over the next 20 years. That'll require a staggering amount of coal, oil and gas.

But it’s not just fossil fuels that will get the nod. The demand for renewable energy sources is exploding, and according to new study, we haven’t seen anything yet in terms of spending on solar, wind and other green energy projects. For investors, that spending could lead to some serious portfolio green as well.

Rising Market Share

The future is certainly looking pretty “green” for renewable energy bulls. A new study shows that the sector will receive nearly $5.1 trillion worth of investment in new power plants by 2030. According to a new report by Bloomberg New Energy Finance, by 2030, renewable energy sources will account for over 60% of the 5,579 gigawatts of new generation capacity and 65% of the $7.7 trillion in power investment. Overall, fossil fuels, such as coal and natural gas, will see their total share of power generation fall to 46%. That’s a lot, but down from roughly from 64% today.

Large-scale hydropower facilities will command the lion’s share of new capacity among green energy sources. However, the expansion by solar and wind energy will be mighty swift as well.

The Bloomberg report shows that solar and wind will increase their combined share of global generation capacity to 16% from 3% by 2030. The key driver will be utility-scale solar power plants, as well as the vast adoption of rooftop solar arrays in emerging markets lacking modern grid infrastructure. In places like Latin America and India, the lack of infrastructure will actually make rooftop solar a cheaper option for electricity generation. Analysts estimate that Latin America will add nearly 102 GW worth of rooftop solar arrays during the study’s time period.

Bloomberg New Energy predicts that economics will have more to do with the additional generation capacity than subsidies. The same can be said for many Asian nations. Increased solar adoption will benefit from higher costs related to rising liquid natural gas (LNG) imports in the region starting in 2024. Likewise, on- and offshore wind power facilities will see rising capacity as well.

In the developed world, Bloomberg New Energy Finance predicts that CO2 and emission reductions will also help play a major role in adding additional renewable energy to the grid. While the U.S. will still focus much of its attention towards shale gas, developed Europe will spend roughly $67 billion on new green energy capacity by 2030.

Impressive Renewables Growth

While fossil fuels will still be a massive source of power, the growth in renewables will still be impressive. And that impressive growth could be worthy of portfolio position for investors. The easiest way to play it is through the PowerShares WilderHill Clean Energy ETF (PBW).

The $200 million ETF tracks 57 different “green” energy firms, including stalwarts like Canadian Solar Inc. (CSIQ) and International Rectifier (IRF). So far, PBW hasn’t lived up to its promise and the fund has managed to lose around 8% a year since its inception in 2005. That’s versus a 7% gain for the S&P 500. Yet, the fund is truly a long term play and could be a good buy at these levels given the estimated spending. Another option could be the iShares Global Clean Energy (ICLN), which only has about 35% of its portfolio in U.S. stocks.

For solar and wind bulls, both the Guggenheim Solar ETF (TAN) and First Trust ISE Global Wind Energy ETF (FAN) make adding their respective sectors a breeze. Cute tickers aside, both the TAN & FAN have been monster winners over the last few years as both solar and wind power makers have once again returned to profitability. With the sun shining and the wind at their backs, the new report could help push share prices higher over the next few decades.

Finally, as stated above, hydropower will be the dominant renewable energy source driving spending in the years ahead.  While General Electric Co. (GE) exited the hydropower turbine business a few years ago, it still makes software and other products for the industry. More importantly, its recent buy of France’s Alstom SA will put it right back in the driver's seat of the hydro-market. Alstom is one of the leading producers of hydropower turbines in the world. Not to be outdone, rival Siemens AG continues to focus on small-scale hydro-electric facilities. Both GE & Siemens make ideal selections to play that renewable sources expansion.

The Bottom Line

Bloomberg New Energy Finance’s recent report shows just how far renewables will go towards our generation needs. Given the anticipated spending spree in the sector, investors who choose to "go green" could see their holdings grow along with the demand for energy. 

Supply, Demand And Interest Rates: How They Relate

As we approach the mid-point of the year many casual investors are surprised to look in on the market and find that bond yields remain stubbornly low. In fact, they have actually fallen during the year with the 10 year US Treasury declining from 3.03% at the end of December to 2.63% as of June 9th. And it turns out that this overall decline in yields has occurred across global bond markets. There are a lot of drivers of lower yields, including the continued accommodative policies of central banks and the continued slow growth in GDP and inflation in most developed economies. All of this comes together in net bond demand, which is how much demand there is for bonds relative to supply. The Fed’s QE program has been a big part of this, as it has created additional demand and has helped to push interest rates down. Today I wanted to take a closer look at the broader supply/demand picture.

A recent JP Morgan report noted an interesting statistic: in 2013 the new global bond supply was $200b more than demand. The data came from the Federal Reserve’s quarterly Flow of Funds report. The report’s observation was that this excess supply coincided with higher global interest rates in 2013. The same relationship played out in reverse in 2011 and 2012, in both years demand was greater than supply and in both years global interest rates fell. This relationship is fairly intuitive. When demand exceeds supply in any market, prices are driven up. In fixed income this means that prices are pushed up and yields are pushed down. The same mechanic plays out in reverse when supply exceeds demand. Prices fall, and for bonds falling prices result in higher yields.

This insight helps explain the 2014 bond market. In Q1 2014 supply was insufficient to keep up with demand, and the report estimates that for all of 2014 demand will outstrip supply to the tune of $460 billion. There have been many drivers of the year-to-date buying including retail investors, banks, and foreign entities. We’ve seen this trend in fixed income ETF flows with $18b coming into funds globally as of last month. Obviously these trends may not continue in the way the projection describes, but this imbalance does go a long way towards explaining why interest rates have fallen so far in 2014.

So what does this mean for investors?

• The demand we have seen for fixed income this year is a significant contributor to lower interest rates. The demand is coming from retail investors through mutual funds and ETFs, as well as institutions and government bodies like the Fed.
• Changes in this supply/demand picture will go a long way towards determining where rates go, especially shifts by central banks. The Fed is now midway through their tapering down of Treasury and MBS purchases, and our expectation is that they will have ended the program by the end of the year. This is in contrast to Japan, which continues their asset purchase program, and the ECB, which stepped up last week to increase liquidity and may be moving towards a form of QE. Even when the Fed is out of the picture, continued strong bond demand from foreign central banks and investors could keep rates in a low range. We believe that the 10 year US Treasury will likely move towards 3% by year end, but it’s doubtful that it will rise significantly above that level. The supply/demand picture just doesn’t make this likely. Yes the Fed will continue to taper, but other investors are expected to step in and fill the gap. The Fed isn’t the only bond player in town.

7 Investments Beating The SPDR S&P 500 ETF (SPY)

Imagine for a moment that you are not familiar with ticker symbols. Now, let me name seven contenders for your investment dollars — assets that simultaneously diversify your portfolio as well as increase your risk-adjusted performance.

Ticker Symbols (Imagine That You Are Unfamiliar With Them)
 
  Approx   YTD %
 
EDV 19.0%
LTPZ 14.4%
CLY 11.9%
MLN 11.8%
BLV 11.7%
PCY 10.5%
BAB 9.8%
 
SPDR S&P 500 (SPY) 6.5%
 
Cut to the chase, right? What are these magical companies or stock funds that will enhance one’s risk-adjusted results?

On the other hand, understanding one’s missteps can help one avoid similar errors in the future. When there’s 100% agreement on a particular outcome, that’s typically a red flag. Investors should also consider just how little they hear about the monumental performance of longer-term bonds relative to stocks. Does CNBC do you a service or disservice with its endless chatter about Dow 17000 or the daily all-time records set by the S&P 500? As Alan Roth pointed out at ETF.com, “In the beginning of this year, economists uniformly forecasted rising rates due to Fed tapering. Rates have so far declined making it a good year for bonds and fooling investors.” Yet not all investors decided to follow the herd. In fact, interest rates had already risen dramatically in 2013 and that the tapering effect discussed by the economic punditry had already been priced in. It followed that contrarians believed that bond yields were more likely to fall than rise.

A great many naysayers believe that a correction is long overdue. After all, the S&P 500 has traded above its 200-day moving average for a record 398 sessions. Nevertheless, a record does not necessarily end the second it is achieved. Cal Ripken, Jr. did not just break Lou Gehrig’s record of 2,130 consecutive baseball games played — a record that had not been approached in 56 years — Mr. Ripken obliterated the achievement with 2,632 consecutive outings.

That said, the bond market’s resilience coupled with mixed economic data favor a “barbell approach.” I recommend rebalancing efforts that reduce assets in the middle of a risk spectrum — the handle of a barbell — as well as acquiring assets at the “least risky” and “most risky” ends of that spectrum.

Since the year began, I have been systematically reducing exposure to shorter-term investment grade in favor of Vanguard Long-Term Bond (BLV) or Vanguard Extended Duration (EDV). Do they have a whole lot of room to run? Maybe not. Yet the combination of yield and “risk-free” safety offer a compelling alternative to an aging rally for U.S. equities. And while the muni bond segment may be overvalued relative to treasuries, swapping out some of the intermediate-term high yielding junk bonds for ETFs like Market Vectors Long-Term Muni (MLN) is a worthy shift in taxable accounts.

What about the far right side of the barbell? If the U.S. stock market is in jeopardy of pulling back sharply, wouldn’t that imply trouble for foreign equities and emerging markets? Not necessarily. Emerging equities have been out of favor for so long, their price-to-earnings ratios offer compelling relative value. For instance, SPDR S&P Emerging Market Small Cap (EWX) trades near the same price that it traded at three years ago. With an earnings growth rate estimate of 17%, that alone may be compelling. This exchange-traded tracker also lists a Forward P/E of 13.4 that compares favorably with SPDR Russell 2000 Small Cap (TWOK) at a Forward P/E of 20. Moreover, EWX is well above its long-term 200-day moving average.

How Do You Use Stock Simulators?

Have you thought about buying stock in a certain company but just didn’t have the cash to make a trade? Or perhaps you heard news about a company and though to yourself that the stock price was poised to rise? Or maybe have you have always just wanted to know more about picking stocks? Thanks to virtual stock exchange technology, stock market simulators that let you pick securities, make trades and track the results—all without risking a penny—are as close as your keyboard or cell phone.

Sims, Sims Everywhere

There are a host of stock market simulators to choose from, with each offering a variety of features and benefits. Some are easy to use and offer only basic investment choices and trading strategies. Others are more complex, offering more advanced securities such as options and currency trading. Some are simply tutorials that help investors learn to trade, while others sponsor contests that provide an opportunity to test your skills against other users and even win real money. The simulator that’s right for you will depend on your skill level and reasons for trading. You may start out with a basic offering and more on to a more sophisticated platform once your skill level improves. When you are ready to give it try, the following simulators have all received high marks from various reviewers.

How the Market Works

How the Market Works is advertised as “the web’s most popular Free stock market game.” Like most of the simulators, to sign up, you enter your email address and age, opt in or out of third-party contact and are then ready to trade with virtual cash. On this site, investors can buy stocks, mutual funds and exchange-traded funds in the U.S. and Canadian markets. Currency trading and short-selling enable investors to practice more advanced investing strategies. The penny stock area even provides detailed insight into the potential dangers investors face when trading penny stocks.

Several trading modes are available, providing everything from real-time hours that match the stock market (including pre-market and after-market trading for those seeking to replicate the live-market experience) to fun mode that permits trading twenty four hours a day.

The site provides and extensive library of educational articles to help new investors get started and a variety of contests that let pit would-be traders against each other in a test of skills. To facilitate various trading strategies, it also provides data on the most actively traded stocks, the direction the financial markets are moving and the direction of currency markets. For investors who are ready to dig a little deeper and begin researching individual securities, the site’s research area provides the same level of detail available in real brokerage accounts, including company news and analyst recommendations.

While the site has a significant number of attractive features, more sophisticated investors may not appreciate the limited selection of order types. “Market orders” and “limit orders” are the only available selections, and option trading is not offered. The stock screener is also limited, with screening by price, volume, earnings and industries the only available selections.

Wall Street Survivor

Wall Street Survivor is another popular stock market simulator offering stocks (but not penny stocks), options and currency trading. After signing up, novice investors can upgrade their skills with a variety of educational courses, including six on Getting Started in the Stock Market. With offerings ranging from Understanding Stock Market Indexes to Reading a Stock Quote, this site covers the bases with insightful information. An array of tutorials, articles and videos rounds out a solid package.

The site is geared to entry-level investors, with a social-media style design and simple, basic informational displays. Information such as analysts ratings and stock research are presented in an easy to understand with few words or complex charts. Users can earn badges and compete for prizes while learning how to invest.

Investors that are familiar with standard brokerage accounts may find the information and data presented on Wall Street Survivor to be too basic. While the navigation is simple and user friendly, it is a less-than-perfect match for users seeking to replicate the look and feel of an actual brokerage account. While the interactive community chat room is an interesting feature that compliments the social-media theme and design, it is filled with the usual off-topic and unhelpful commentary found on so much of the web.

Investopedia

The Investopedia stock simulator is well integrated with the site’s familiar educational content. The simulator includes How to Guides on everything from The User Interface Tabs and Purchasing Stocks to Advance Trade Types, Covering Short Positions and Cancelling Orders. If you’ve never traded currency, the Forex Walkthrough is an outstanding guide.

The actual trading occurs in context of a game, which can involve joining a preset session or the creation of a custom session. The how-to guide within the "Investopedia Competition (no end)" game is the recommended starting place. Games include U.S. stocks, Canadian stock, those targeted to beginners, those designed for more advanced investors and self-designed sessions that let you test desired skills.

Options, margin trading, adjustable commission rates and other choices provide a variety of ways to customize the games. From there, an easy-to-navigate menu provides lets users update their profiles, review holdings, trade and check their rankings, research investments and review their awards (which can be earned for completing various activities).

The Bottom Line

Stock market simulators provide a safe, structured environment where would-be investors can teach themselves about investing without risking any money. With time and practice, on the simulators, the transition to actual trading in a real brokerage account will be seamless. Just remember, once you leave the virtual world and start trading in the real world, mistakes can be costly and a bad trade can result in the loss of real dollars. 

Are Mutual Funds Doomed?

The financial services landscape is an ever-changing environment. The mutual fund industry, in particular, has been in the spotlight in recent years, with questions around the cost and value of offerings. Regulatory pressure has also made headlines. The collective attention has led to changes, and has also raised questions about the future of such funds. 

Industry Changes

Massachusetts Investors Trust, the world’s first mutual fund, was unveiled by MFS Investment Management in 1924. That fund is still sold today. While mutual funds have a long legacy and lasting staying power, they have faced challenges over the years, undergone changes and will no doubt continue to do so.

Mutual share classes are a case in point. There are two main types of share classes: load funds and no-load funds. Load funds come in three primary share classes: A shares, B shares and C shares. Ongoing developments in the industry have put pressure on all of these, particularly B shares and C shares.

Goodbye to Bs

B shares were once considered a hot commodity for the financial services industry. Financial advisors liked them because they generally had higher management expense ratios (MER) compared to other funds within the same family, making them more profitable to sell. Investors liked them because, unlike A shares, they were not subject to an initial front end-load. However, in 2008 and the Financial Industry Regulatory Authority (FINRA) issued an investor alert titled "Class B Mutual Fund Shares: Do They Make the Grade?"

In its own words, FINRA issued the alert "because we are concerned that some investors may purchase Class B mutual fund shares when it would have been more cost effective for those investors to purchase a different class of shares." The alert was another manifestation of the ongoing concern that many investors would become enticed by the lack of up-front costs, only to realize charges once they tried to cash out. On the other side of the coin, B shares provide the advantage of using your entire investment to gain market exposure rather than paying towards upfront fees.

Sales of B shares have been in decline and many mutual fund firms are moving away from them, with big-name firms including Goldman Sachs, PIMCO, American Century and many other financial institutions dropping B shares from their product lineups. 

The Great Recession reduced investment returns, making the complex fee structure of B shares less attractive to fund companies. B shares became a significantly less valuable product from a seller's point of view. Pressure on the fund industry to reduce fees in light of poor performance, competition from low-cost ETFs and pressure from regulators add fuel to the fire.

Writing on the Wall for C Shares?

The future of C shares may also be questionable, as they usually have a higher management expense ratio than other mutual funds in the same fund family. A combination of regulatory pressure and concerns about fees may make it difficult to justify selling clients expensive C shares when less expensive shares of the same fund are available.

Give me an "A" 

A shares are the least expensive of the traditional load-fund fund share classes. They are also the least complicated. There are no back-end loads and no graduated pricing structures that reduce the cost to investors based on how long the investment is held. That noted, there are less expensive share classes available.

No-Loads

No-load funds offer a wide variety of investment strategies at lower prices than those typically charged by load funds. These less expensive shares are popular among do-it-yourself investors and are also used by some financial advisors. Of course, no-load funds face challenges too. Recently, regulatory attention has centered on money market funds and their traditional positioning as stable, cash-like investments that maintain a $1 per share net asset value. Proposals to let the share price float, moving up and down like the share prices of equity funds, could result in changes to how fund companies and investors view these funds. Cost pressure exists in the no-load area too, as investors seek to reduce expenses.

Exchange-traded Funds

ETFs offer a low-cost investment alternative that is fiercely competing with mutual funds. Still, despite all the attention they have attracted, there are only a little over 1,200 ETFs in the marketplace versus more than 8,700 mutual funds, according to the Investment Company Institute.(If you're an investor who likes to understand how and why your investment products work, An Inside Look At ETF Construction provides a close-up look at the popular, inexpensive portfolios, and Active Vs. Passive ETF Investing explains how you can use these securities for more than just indexing.)

The Bottom Line

The rise and fall of B shares and the development of ETFs highlight the dynamic nature of the financial services industry. New products are developed and old products are enhanced or eliminated based on a mix of market-moving forces, including supply and demand, the regulatory environment, and the performance of the products and the financial markets in general. Despite these changes, mutual funds remain quite popular. In the United States, where innovation in the investment industry is commonplace and the focus on cost containment intense, assets in “registered investment companies”(which includes mutual funds and ETFs) surpassed $13 trillion at the close of 2012 and set a new record with a year-end close of $14.7 trillion. Of that number, just $1.3 trillion was accounted for by ETFs.

Five Ways Early Adopters Can Use Bitcoin: Consumers

At this point, the benefits of accepting bitcoin are becoming obvious to many merchants.  A wide range of new payment services from companies like BitPay and Coinbase have made it cheap and easy for companies to convert customer bitcoins to dollars, allowing them to attract new customers, drastically reduce the fees they pay to process online payments, and eliminate chargebacks, fraudulent purchases and price volatility.  

Why would a consumer elect to spend a currency that may prove to be worth significantly more next week?  In early 2013, bitcoin investors might have been able to buy a single album on iTunes.  Yet if they had held onto that same bitcoin, they would be able to buy an iPad today.  Given the clear incentives most investors have to save their bitcoin, who is most likely to use the currency for actual transactions?  Let's talk about five use cases for today's consumers.  

Diversification: Early purchases will be made by investors who have hit the jackpot as early adopters and can afford to be conspicuous consumers. (How about a joyride to outer space?)  Rather than diversifying away from bitcoin by cashing out through an exchange, why not instead buy things from merchants that you already want, save the trading fees, and help demonstrate the utility of the currency to the broader market? Besides, that decision could in turn attract more speculators to pile into bitcoin and drive up the value of your remaining balance! 

International Travel: Anyone who has traveled internationally knows how high the fees can be to exchange money for a foreign currency - as much as 5-10%!  (Not to mention, that you'll pay twice if you have anything left at the end of your trip.)  With the emergence of bitcoin payment options and the massive international roll-out of Bitcoin ATMs, it is becoming easier and cheaper than ever to travel without incurring the exorbitant currency exchange fees you typically see at airports, and even banks, overseas.  The travelers' bitcoin experience is perhaps the best microcosm for bitcoin's future potential as a true international reserve currency.  

Remittance: Think international travel can be a pain?  The fees associated with foreign exchange for travel have nothing on the costs services like Western Union charge migrant workers who send money home to their native countries via the $500 billion remittance industry.  According to the World Bank, remittance prices average about 9% of the total value transferred, and often exceed 12% in sub-Saharan Africa.  Instead of paying $20 to send $200 to a family member abroad, bitcoin offers the opportunity to make the same transfer at a fraction of the cost.  While the infrastructure is still developing, there are already some services that facilitate this process, such as Kenya's BitPesa, which offer users the opportunity to transfer money for just 3%.  In addition, the rise of "mobile money" in many developing nations suggests that many of their citizens may bypass their banking systems altogether once they services become more widespread.    

Peer-to-Peer Payments: Whether you are settling up a dinner tab, buying concert tickets with friends, or even collecting money to pay for groceries or rent, bitcoin is easier, faster and cheaper than alternatives like PayPal, bank transfers or cash.  Bitcoin's public wallets and QR code technology also make real-time gifts and/or donations much simpler.  Want to send some spending money to a child who is away at college?  (Especially MIT, which is giving each incoming freshman $100 worth of bitcoin in fall 2014?)  With bitcoin, it's possible to send money that can be spent immediately, regardless of whether it's at the middle of the night or on a weekend.  How about send a tip to a friend working on a new blog?  Bitcoin's near-zero fees make micro-transactions such as gifts economically viable.   

Online Transactions: Some people prefer to keep their online spending habits private.  For better of for worse, there are large markets for "grey market" goods such as adult content, gambling, and pharmaceuticals with millions of customers.  The bitcoin community also includes a large base of self-identified libertarians and crypto-anarchists who balk at the prospect of authorities having any ability to track their personal economic activity without cause.  The pseudonymous nature of Bitcoin’s blockchain guarantees that consumers who put an emphasis on anonymity will be able to conduct their business privately.  

Even consumers making more mundane online purchases may benefit from the stronger identity security inherent in bitcoin.  In an era in which nearly 7% of online consumers face the prospect of identity theft, it simply doesn't make sense to share one's credit card information with dozens of different companies. Especially when even the largest and seemingly safest retailers have proven to be susceptible to data breaches.  Using bitcoin obviates the need to share any sensitive personal information with third-parties that are vulnerable to theft.

The Bottom Line

Make no mistake: the vast majority of demand for bitcoin in the near-future will continue to stem from its value as a speculative investment rather than a usable currency.  But with the rapid rise in the currency’s public profile, growth in services geared towards simplifying the bitcoin consumer’s experience, and the major pain points that bitcoin can solve for travelers, migrant workers, online shoppers and other users, rapid consumer adoption seems to be right around the corner.

The World's Largest ETFs

Is an exchange-traded fund with lots of assets necessarily a desirable one? On the one hand, obviously the largeness of an ETF is a selling point in and of itself, both literally and figuratively. Plenty of investors have already found such a fund worth owning a piece of, and that popularity becomes self-perpetuating – investors new to the market are going to be lured by an ETF with enough of a reputation to have amassed large holdings. 

On the other hand, the larger the fund, the less fluid and more inert it and its holdings are going to be. And the less difference there’ll be between the returns of one colossal fund and the next. If every ETF ends up holding comparably sized portions of this petrochemicals multinational and that internet search company, the less opportunity there is for the investor to enjoy returns that beat the market. (Assuming that that’s even what he’s looking for in the first place.) Still, a large exchange-traded fund means reduced risk, which is part of what most ETF investors are hoping for anyway.

The largest ETF in existence was built for the express purpose of tracking an index. The SPDR S&P 500 (SPY) from State Street Global Advisors was created in 1993 – making it also the oldest ETF in the United States – and, as its name indicates, contains proportionate holdings of each of the issues listed on the Standard & Poor’s 500 index. (SPDR is “Standard & Poor’s Depositary Receipts.”) The index itself summarizes the prices of the stocks of 500 U.S. companies that each have a market capitalization of at least $4.6 billion. Forthwith, here are the fund’s largest components:

Apple (AAPL) 

Exxon Mobil (XOM)

Microsoft (MSFT)

Johnson & Johnson (JNJ)

General Electric (GE)

Wells Fargo (WFC)

Chevron (CVX)

Berkshire Hathaway (BRK-B)

Procter & Gamble (PG)

JP Morgan Chase (JPM)

Verizon (VZ)

Pfizer (PFE)

Track the daily movements of the S&P 500, and you’ve essentially done the same for this particular ETF. It’s among the most conservative of securities that aren’t government bonds, created more to preserve wealth than enhance it.

The 2nd-largest ETF is a little more interesting. It’s Vanguard’s FTSE Emerging Markets fund (VWO), and again, an expository name helps to describe what the fund’s business is. FTSE stands for Financial Times/(London) Stock Exchange, the joint sponsors of a UK compiler of indices, sort of an Old World version of Standard & Poor’s. “Emerging Markets” is the universally accepted euphemism for second-tier countries whose economies show glints of brilliance outnumbered by wide stretches of poverty. The Vanguard FTSE Emerging Markets ETF consists of the stock of 955 largely Chinese and Taiwanese companies, many of them large but unfamiliar to North Americans. The stocks that make up the biggest proportion of the FTSE Emerging Markets fund are:

Are the emerging market stocks of this FTSE fund a better investment than the blue and comparably colored chips of the SPDR fund? The obligatory disclaimer about “past performance” aside, the SPDR ETF has doubled in value over the past 5 years, while the FTSE fund has failed to even keep pace with inflation.

Next up is the iShares Core S&P 500 ETF (IVV), which looks and sounds an awful lot like the SPDR S&P 500. Like its SPDR competitor, the iShares ETF tracks the S&P 500 perfectly, to the point where there’s no need to list the former’s largest components. So why would 2 investment firms sell an identical product?

They’re not completely identical. The iShares Core’s expense ratio is 2 basis points less than the SPDR’s, and you also can’t buy the latter without paying a commission. Which would seem to make the iShares Core ETF the better investment across the board, a position that’s reinforced when you examine other differences between the two ETFs. The SPDR ETF is set up as a unit investment trust and issues dividends at fixed quarterly dates, so when one of its underlying securities issues a dividend, the ETF has to hold onto the cash until the end of the quarter instead of reinvesting it. Which makes for a difference a few basis points in favor of the iShares Core ETF when markets are rising, SPDR when they’re falling. The difference is microscopic for the ordinary investor, less so for the institutional investor with millions on the line.

Homogeneity is inherent to large ETFs. Rounding out our quartet of the world’s largest is another iShares offering, MSCI EAFE (EFA), with net assets of $56 billion. That double initialism stands for another index, specifically Morgan Stanley Capital International/Europe, Australasia and Far East. A discussion of the ETF requires a brief explanation of the index itself, which is the oldest international stock index and contains issues from 21 developed countries excluding Canada and the United States. The fund offers an alternative for investors wary of putting their eggs in a basket dominated by just two countries – a pair consisting of a superpower with an increasingly intervening executive branch, and its neighbor whom, as the proverb goes, sneezes when the superpower catches a cold. Thus the MSCI EAFE ETF consists primarily of the following:

The MSCI EAFE ETF has gained 45% over the past half-decade, a more than suitable return for those concerned about wealth preservation.

The Bottom Line

Given that there are 1200 exchange-traded funds in existence, with the potential to create infinitely many more (all you need are at least two stocks, in varying proportions), this particular collective investment scheme is clearly here to stay. The largest examples of the genre will continue to be those that offer diversity, risk reduction, and liquidity.  

The Top Way To Invest In Commodities

As this guide has rather exhaustively demostrated, commodities are as complex as the people who trade in them. Because of this, the top ways to invest in commodities are as follow:

1. Pick a commodity or commodities that are interesting.
No successful commodity trader gets there purely because of his understanding of abstract mathematical formulas. Commodities are impacted by real life events. Even the steadiest commodities will experience fluctuations. The only way to have some notion of what is around the bend is to be a full participant in the process. By choosing a commodity that is interesting, a trader or investor will be able to stay motivated to keep track of developments that are affecting that particular commodity.

2. Register with a licensed and affiliated broker.
No matter how well informed any trader is, no one will be able to interact meaningfully unless that trader is registered with a licensed broker. Each exchange house requires that all traders are members, or are affiliated with members of the Commodity Futures Trading Commission.

3. Be prepared to lose initial investments.
For those who are attempting to trade and invest in commodities for the first time, being prepared to lose money while learning how quickly the market can change and shift will save potential heartbreak and help individual investors avoid a personal financial crisis. Using trailing stop losses can help lock in gains and protect investors from some of the downside risks. It is far more important to be profitable than it is to be right all the time.

4. After experience has been gained, invest in indexes.
After an individual investor or trader has learned the ropes of commodities trading, investing in larger financial institutions, such as indexes, can yield surprisingly profitable results. However, this should only be attempted after significant experience has been gained by the individual investor.

Important Market Indicators
Commodity bull and bear cycles usually occur over long periods of time. However, some key commodities can frequently provide clues as to what may lie ahead in terms of the direction of the market. The price of gold and silver is usually taken to be an indicator of the overall health of the commodities market. Additionally, oil prices have a heavy impact on how the commodities market is perceived.

If any of these main commodities suddenly experiences a price hike or price drop, investors and traders should take note that the market is probably going to experience a fairly significant change. Because these are tied into industry and general economic perceptions of fiscal reality, they are considered to be extremely important market indicators.



Additional Recommended Resources
Each year, innumerable books, blogs, and magazine articles are devoted to the intricacies of trading in the futures market. The internet has played a particularly vital role in the development of the commodities market, and continues to generate enormous amounts of constantly updated information on potential futures positions.

Individuals who wish to seek out additional information and resources about commodities trading are encouraged to explore the resources offered by the Commodity Futures Trading Commission, which regularly publishes texts detailing their studies of trends in energy stocks. Websites such as Bloomberg.com frequently have intelligent, highly informed web articles that can help investors seek out the information they need to make crucial decisions.

Several major exchanges maintain websites that provide up to the minute information on trades and other financial transactions. Keeping up on changing regulations in terms of how trades are managed is also vital to any investor or trader. These websites post their new rules as they change.

The best resources are frequently the people who have experienced the market first hand. By contacting brokerage firms either through the phone or via an online software platform, an interested individual can schedule an interview with a learned broker to truly understand how this incredibly complex and versatile system works. The key to any informational quest is to enjoy the experience of discovery and be unafraid to ask questions. Most people, when asked an intelligent and informed question, will be happy to give an interesting and fully rounded answer.

The 5 Invstment Myths

Equity trading may seem like an easy way to get rich quick but jumping on the bandwagon just because your neighbour made some serious cash can spell T-R-O-U-B-L-E.
Though it can potentially yield great returns you should only jump in armed with the right knowledge. Consider these before plunking your hard-earned cash onto some excitable shares just because your best friend’s cousin’s wife’s brother made some quick cash off of it.

1. If it worked once, it’ll work again.Lightning doesn’t strike in the same spot twice when it comes to investing in shares. There are too many factors, including current economic volatility, social upheaval and political instability that may have affected the performance of shares you made cash on previously.
If a developed country like the US can run afoul with mortgage issues as well as house some of the biggest investment frauds (Ponzi scheme anyone?) in its history, we should realise that we too are vulnerable to uncertain economic cycles that can derail our investments. Remember, history helps us form the groundwork for the future. It doesn’t repeat.

2. Accreditation means the stocks are good.
A company’s shares that earns a five-star rating is as good as a movie getting rave reviews from critics then later flops at the box office. A good rating does not mean the performance would endure and grow. “There is no evidence that superior performance persists. If you buy a top-performing fund, you have no better than a random chance that it will post above average performance,” said Marry Ellen McCarthy, registered investment adviser with Responsible Investing of Brookline (US).
It is acceptable to invest in an actively sought-after and praised company, but buying shares based on the money it made for other people last year may not yield similar results this year.

3. Gold and Bonds are safer bets compared to equities.
Gleeful appreciation of gold values has been the sales call of the jewelers to lure us into parting with our money in exchange for some gold. Similar to gold, bonds are also another “slow but steady” investment that have attracted many to invest in.
However, for some, these money makers are often seen as the “frumpier” parts of an investment portfolio.
There are high-yield bonds that are safe to take on, but they are also victim of contemporary socio-political repercussions like we often seen happen in the Middle East. As safe as they seem to be, they are not completely immune to external damaging factors.

4. You need a finance degree or specialist skills to invest in shares.
You don’t. The most common adage newbies get from investment gurus is, “do your homework before investing in anything”. As in most cases, experience and knowledge (not just luck) count in investment.
To fatten your knowledge bank, you need to constantly keep yourself updated with news that may affect the market.
Warren Buffett once said, “You don’t need to be a rocket scientist. Investing is not a game where the guy with 160 IQ beats the guy with 130 IQ.” And we agree with Buffett, you need to be informed but you don’t need to have specific qualifications for it.

5. Share investment requires a lot of cash.
You may have heard about folks who have pawned their valuables and immediately had access to a fistful of currency to invest in. But does investing in stocks really require enough bags of dough to be carried by ten mules?
Not necessarily, you can start your investment in shares with as low as USD 100.
In short, it may not be much, but it is enough to “test the water” to see if it’s really your cup of tea.
We call these myths busted. So go ahead and pull that investment trigger. You really just need to have enough knowledge and information to back you up, you’ll be equipped to make wise financial decisions that might make you (or at least save you) a lot of money.

When it comes to coffee-table wisdom, leave it on the table; as when you make the potential bank-account altering call, you are, indeed, alone.

5 Investment Basics We Should Remind Ourselves On

Investing can be as simple as making an omelet, or hard-boiled egg. What was soft, soggy and uncertain can be turned into something solid and nutritious (in this case, financially). But to get from gooey egg to delicious breakfast, investors should avoid certain pitfalls – at all cost!
Most investment experts would advise you to always exercise caution. Being skeptical is not only about being cautious but also about having good knowledge and experience before plunging into your next investment decision.

Just like what the foremost novelist, satirist and social critic Mark Twain once said, “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
However, risks aside, smart investment is not synonymous to rocket science. Here’s how everyone can get a taste of investing by getting back to the basics.

1. Digest valid information first
Information is king. Before you put your money in, you need to know as much as possible about a potential stock including the daily input of its performance and how the company does in the market. On top of that, always be aware of how that particular industry is fairing.
Ultimately, the information you refer to should be a lot more credible than Madam Zorras’ vision after peering into a crystal ball. There are plenty of these “seers” under the guise of investment experts. Be careful and strive to stay ahead of them.

2. Don’t make sudden decisions with your smartphone
Your smartphones may be good for not just selfies, but also keeping you abreast of market happenings and helping you make prompt decision. However, this can come at a cost if the prompt decision is not made with full consideration.
Warren Buffet once said, “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”
If the foundation is right when it comes to choosing the right investment, you will not be swayed by sudden market movements, and thus, you won’t panic every time you get news on your smartphone.

3. Your age and goals matter
Always go back to the drawing board when it comes to making an investment decision. The drawing board in this case would be your age and your financial goals.
It’s true that the younger you are, the more reckless you can be. However, it is only because you have the room to make mistakes. The age horizon plays a huge role in a person’s investment portfolio.
Though you may be investing for years, it is always wise to go back to the drawing board once in a while and review your investment portfolio to fit your age horizon and your shifting goals.

4. Put all your eggs in the basket you know everything about
Some would swear that differently coloured M&M chocolate candies taste different, when actually the only thing that differs is the appearance (unless you are colour blind like this author). It is a ridiculous assumption, but the same applies to your preference for your variety of investments.
Diversification is important, but it is not compulsory at all times. During financially turbulent times for the stocks you are holding, you can minimise the risk by spreading your investment to a few asset classes. However, if times are good, you can reduce your diversification (given you’re well informed about it) and as a result, increase your returns.
With mixed choices, you may have one portfolio hitting the dirt and even biting the dust, while another soar like a kite. This helps reduce your risk but at the same time minimises your gains.

5. Occasionally, kick back
It pays to be calm, calculative and well informed. This patience will pay off when it’s the right time to strike! Just like the fable about the rabbit and the tortoise, the slow and steady wins the race.
Being rash means you will likely slip up. With intrusions, challenges, and changes in the sociopolitical environment that you didn’t consider, you could turn your thousands of Ringgit into nothing more than a memory.
Learning from history and sticking to the investment basics may just save your investments. Many people have made big losses simply because they started over thinking their investment strategies and over complicating their decisions. Sometimes it pays to take a step back and just look at the basics.

Forget Gold, Invest In These Precious Metals

Over the last year or so, investors have left precious metals with abandon. Prices for safe-haven metals like gold have reflected a new atmosphere. The kind of hyper inflationary scenarios predicted by wave after wave of global easing programs simply hasn’t come true. Meanwhile, a strengthening global economy has been met with rising equity and bond prices at the expense of precious metals.

So why invest in precious metals? Here's why:

The white metals of silver, palladium and platinum are just as much about rising industrial production and global growth as they are about hedging against inflation or providing a safe-have investment. For investors, the white metals allow can capture much of the upside in the global economy as well provide some downside protection in case the fudge really hits the fan. Investors should act quickly, though. 

Rising Demand

Overall, industrial uses account for roughly 45% of silver demand. It's used in automotive, electronic, solar and photographic applications. Both platinum and palladium are found in auto and truck catalytic converters to control emissions, as well as a variety of tech products, such as LCD monitors, hard disk drives, batteries and electrodes.

And with such a diverse range of manufacturing uses outside of the world of jewelry and bullion, demand for white metals is surging as industrial production grows. 

According to investment bank Commerzbank, China’s imports of silver earmarked for industrial use have now totaled roughly 1,154 tons since the start of the year. That’s nearly 16% more than it imported during the same period last year and reflects its recent improvements to its PMI reading, a key gauge of industrial production. At the same time, higher PMI readings in the United States, the Eurozone and Japan have helped buoy silver prices. Japan’s solar explosion has especially contributed to its rising demand for silver.

The story is the same for platinum and palladium, which have seen global automobile manufacturing rise by roughly 5% this year. Also benefiting the duo is growing shale oil and gas exploration in the U.S. The metals are required by converters used in petrochemical facilities to process shale gas. The growth in ethane/ethylene production in the U.S. is a new market for the two metals, as are natural gas powered automobiles.

Simply put, global manufacturing growth will boost demand for the white metals and should provide solid returns to investors. As for the doomsayers, they'll always have a geopolitical event to persuade them to buy in, such as recent tensions in Iraq and Russia.

 Making a Play for the White Metals

A simple way to invest in silver, platinum and palladium is through an ETF, such as the Physical White Metals Basket Shares (WITE).

Just like the uber-popular iShares Gold Trust (IAU), WITE holds physical bullion in a vault on behalf of investors. The fund is currently weighted so that each share represents a 50% interest in silver, 34% interest in platinum and 16% in palladium. Overall, WITE makes a good broad play on the white metals theme, and at 0.60% in expenses, it’s relatively cheap. The only issue is that volume for the ETF is low; about 1,000 shares trade hands per day. That means investors may want to go the individual route to gain exposure to the industrial/precious metal trio.

In terms of silver, the only real game in town is the iShares Silver Trust (SLV). As with the IAU, it’s physically backed, features robust trading volume and has managed to tack on nearly 10% in gains since the end of May. As for platinum and palladium, the ETFS Physical Palladium Shares (PALL) and the ETFS Physical Platinum Shares (PPLT) are good vehicles.

Another interesting route for investors could be the miners. Rising prices for the white metals will only boost profits for the companies that extract them. The Global X Silver Miners ETF (SIL) tracks 26 different miners, including industry stalwarts like Hecla Mining Co. (HL) and Silver Wheaton Corp. (SLW). The First Trust ISE Global Platinum Index (PLTM), on the other hand, holds 19 global producers. Both funds have been hammered over the last few years, but should rebound as industrial demand grows.

The Bottom Line

As the global economy improves, precious metals prices have suffered as fewer investors see the need for a safe haven. That’s huge news for investors looking to get into the white metals group. The trio of silver, platinum and palladium are driven as much by their industrial demand than their safe-haven status. Continued rising manufacturing will only strengthen their appeal.