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.