Dear Exactduke,

Thanks for your short and erm, stern reply!

OK, thanks for the pointer. So you start with "exposure to a certain segment of the market", which presumably (sorry but I AM a beginner) is served by many ETFs - where do you go now?

Thanks for your reply.

mazza,  I think duke's answer was right on. ETFs are, in the end, index funds. The question you should ask yourself before buying any ETF is "would I want to own THAT PARTICULAR basket of stocks".  (presumably, the ETF allows you to buy in, in a diversified way, to that particular group of stocks).

Consider by way of example, the divd ETFs:  DVY, SDY, PEY.     About one year ago, they all had high divd yields (relavative to other ETFs),  lower PEs.  So a value investor might have concluded "what's not to like".    The answer became clear:  financial stocks.  All 3 included heavy allocations of banks and other financial stocks (such stocks typically pay higher than average divds).    So it is EXACTLY what stocks comprised those ETFs which determined the fortunes (or lack thereof) of those ETFs.

I think ETFs, because they are index funds, suffer the same problem as traditional OEF index funds:  because there is no active manager, they are late to exit busted stocks.

So the question you should ask yourself:  Would you really want to own the stocks in the ETF you are considering purchasing.

Ciao

pining4Lenore:

I think ETFs, because they are index funds, suffer the same problem as traditional OEF index funds:  because there is no active manager, they are late to exit busted stocks.

 

 

No, that's completly wrong. Because ETFsy are index funds, they DON'T just exclude a stock because it is "busted". A stock remain a component on an index until it either it fails to meet the criiteria of the index or in the case of the DJIA, it doesn't fit into Dow  Jones perception of what 30 stocks should reflect the broader market. That's now  a "problem" fo indexing, thats a feature, because index funds and ETFs simply don't trade stocks.On the other hand, If an active fund manager "exits" a certain sector or sells certain stocks after they are "busted" (as you like to call it). then its already too "late". And this is a problem with actively-manged funds.

But to the original question past performance of a coventional ETF generally is not a point for scrutiny, as it is the performance, composition and methodology of its respective index that is an issue. The exception would be ETFs that employ enhancements that except its performance from any given index. An example would be the difference between Powershares QQQQ, an index of the NASDAQ 100, and their XTF "Intellidex" series of ETFs, which are based on a quantitive model. You might want to be very scrutinous of the latter.Its only their past performance that can indicate how good of a quantitative model they are employing.

Also note there can be more than one ETF that tracks the same index you'd naturally want to look at expense ratios of all the ETFs with the same bogey and choose the cheaper version. Also note that two different indexes that track a certain market sector can offer identical or distinctly different performance. Because one of the chief advantages of ETFs is supposed to be nominal expenses - and most are cheap - I would cast a jaundiced eye on any ETF with an above-average ER. In those cases, you are paying a premium for what might merely be a marketing gimmick based on a contrived index or a dubious investment strategy.  

-The Snark

Mazza69:

 

OK, thanks for the pointer. So you start with "exposure to a certain segment of the market",

No, you don't have to "start with "exposure to a certain segment of the market". That is what Exactduke specifically uses ETFs for, but that is not what all ETFs are specifically designed for. With the variety of well-diverisified ETFs,  one could meet all his/her invesmtent requirments in a single ETFs. As an example, NYC, the ETF that tracks the NYSE Composite Index covers all markets sectors and capitalizations, from mega-cap to microcap, and it's comprised of around 38% in ADRs, so yo have a substatial degree of foreign stocks in it. And because it is based solely on the NYSE components, there is only moderate expousre to tech (tech is mostly listed on the NASDAQ), which is one reason the NYSE has been trumping the S&P 500 since 2000.  There are asset allocation ETFs that offer a mixture of stock and bond indexes, with various bond-to-stock weightings, which can replace your conventional open-ended blaanced funds. In short, you could make your ETF portfolio as simple as one postion, or as complex and strategic as you could imagine. Thats up to you.

I really am very grateful to all of you for the helpful pointers.

I should perhaps have explained that I live in Malta, a VERY small country in the Mediterranean, now part of the European Union.  Consequently, I am unable to invest in any US mutual funds being a non-US resident.  The remaining US/Euro/UK mutual funds I AM able to invest in are a waste of time.

This leaves only ETFs for me to contend with.  Hence, I could start off with a total market philosophy (similar to what MarketWatch do) of investing broadly, in say IWR, VBK, VTV, giving me the ONLY opportunity I have of investing in magnificent Vanguard.

But if I need to switch at some stage, then what?  It was THIS information I was after, of the step-by-step methods you would employ before switching out of your ETF into another.

Your technical replies clearly show what an expert I have yet to become!

Thanks again.

Perhaps my use of an incorrect verb tense is the problem, WRT "busted stocks"

What I meant to say, is that ETFs cannot avoid stocks ABOUT TO BECOME busted. (a la the financial stocks in 2007, or the tech bubble in 2000-2002).     In the case of the divvy-paying ETFs,   they won't eliminate a stock until a stock cuts or elminates its divvy.  By that time, the damage has been done.  The index fund will be (just about) the last seller.)  

They buy relatively MORE of expensive stocks (as expensive stocks become ever bigger percents of an index) and buy relatively fewer cheap stocks as cheap stocks become a smaller percent of any index).

Index funds (and ETFs ) buy high and sell low.  But hey, they have low management fees.  Whoo-hoo!

"Index funds (and ETFs ) buy high and sell low.  But hey, they have low management fees.  Whoo-hoo!"

Now I'm really concerned - and incredibly worried!

Is someone over there telling me that I've just wasted around 4 - 6 months of my retirement life boning up on ETFs?

I concur that Morningstar ETF Investor's own Hands Free and Hands On portfolios are lagging a little currently, but then in the current state of the markets, what isn't?

I'm surprised by the above comment.  My knowledge being rather shallow, I'm easily put off by such posts.  Now I can't invest in US mutuals, or ETFs, so what's left?  Hm, China H Shares perhaps - now I know a little about those, having worked there for a few years!

Incidentally pining4Lenore, The Motley Fool are always pushing Index Funds - are they wrong too?

Just asking the question, that's all...

I think over the VERY LONG term, index funds (including ETFs) will perform about the same as the market, with about the same volatility.  Keep in mind, someone who bought the 800 lb gorilla of ETFs, SPY is about break-even over 10 years, in terms of price -- and has endured one whole, he11uva lotta volatility.  So when I say "long term" I mean LONG term. 

And for most folks, especially those not inclined to do much research, its adequate.   [Actually, I am somewhat interested in the (prospective) Vanguard Global index fund for a portion of my holdings. 

For the relative few U.S. investors, who are so inclined, I think better results (whether that means higher alpha, or lower beta, or lower risk of drawdowns, depending on individual circumstances, goals, etc.) can be obtained.

As for Motley Fool,   weren't they among the "cheerleaders" for tech during the 98-99 tech bubble?  I can't say I put much credence in their opinions, though they obviously have a following.    I wonder if they were recommending the divvy ETFs (SDY, DVY, PEY) BEFORE the collapse in the financial sector...? 

Hi!  Having spent some pleasant weeks over eacho f several years in Valletta and other  areas of Malta and Gozo (eg Rabat), I'd like to offer a thought.  All the above comments are good, but perhaps the main reason for using ETF is to get diversification in areas of interest at least cost and most tax efficiency.  If there are no special areas or asset classes of interest and one does not wish to spend time on stock-picking, regional trends or macroeconomics, there are broader national and global ETF.

If one is a long term investor, busted companies are discarded along the way. the few that do go bad are offset by ones that outperform and might not have been chosen by a stockpicker.

I believe ETF selection should depend on a top down approach in which asset allocation is of foremost importance.  Having picked the asset classes of interest and regional diversification desired, index funds can be  found to fit each need.  Otherwise one can simply allocate to global equity and fixed income ETF as the  two relevant asset classes.

ETF are not a single solution  yo portfolio formulation, but combined with CEF (which many ignore) and individual stocks of interest, a risk managed portfolio is relatively straightforward.  Best wishes
 

I really cannot express my gratitude eloquently enough to thank you all for your comments, particularly pining4Lenore, who posts for no personal gain whatever – thank you.

I’m afraid I lost my faith in Motley Fool when they incessantly recommended Index Funds to the exclusion of everything else and, on a lesser note, their holier-than-thou attitude I found disingenuous.

Yes pining4Lenore, even I have heard about SPY and am stunned by your information – so much for the experts I should NOT be listening to.  Thanks for this.

I must particularly thank chamois for his very informative and helpful reply (not just because he (she?) has visited my country!  The pointers s/he gave me were excellent.  I shall employ the top down approach suggested, for starters.  Picking asset classes for preference is difficult as I have none, but only wish to involve myself in areas which are not likely to lose my retirement sum overnight!  (So, what’s new?)  Regional diversification is easier as for example, even I am aware that China, India etc, are overheated or overpriced, although with prices being down currently, there must be a few bargains around surely?  Global equity is good, hence my suggestion earlier of VBK, VTV – please, any comments?

Chamois, one further question please?  What is a CEF?