Many of us will be opening our 401k and IRA statements in the
next few weeks, and some will be scratching heads and thinking,
"I can do better than this 401k fund manager", especially looking
at the ratio of profits to management fees. Are ETFs the way to
do that?
I know I did close to a decade ago, and again before the 2008
crash when looking at my wife's statement.
Now I'm NOT suggesting stopping your 401k or IRA and going it
alone. I am saying most of us can do as well as -- or better --
with some work. I know many people started online accounts
alongside retirement accounts as an additional means of income,
and it's you I'm talking too.
Many are fearful of the market, especially with months like
May and June. But the right attitude is to respect, not fear, the
market. Understanding what is happening and how to profit from it
will always give you the advantage over those not taking the time
to understand their environment.
A long time ago a mentor in the business told me that when
markets move into a bear trend, be prepared with your shopping
list and look for companies on the sale rack. He'd walk around
saying America is on sale, people get ready! That holds true for
any market: it can easily be Russia is on sale!
Do you have your shopping list ready?
Now no one knows for sure when markets will return to bull
mode, and yes, they are screaming today on the back of the EU
summit headlines. But as I highlighted in
Friday's morning coffee brief
, we really do not have clarity or, I'd argue, an executable
plan; at least not one that has been conveyed to markets
yet. It's these two points that have many analysts
wondering if the rally will fade. In fact I've heard this phrase
on financial shows well over a dozen times already, early Friday
morning when this was written.
An Exchange Traded Fund or ETF can be a great vehicle for
beginners and even advanced investors looking for exposure with a
particular market focus. Beginners can use ETFs to put together a
portfolio without buying a series of stocks to be diversified.
With that in mind I want share some rules I use when trading
ETFs:
1) Know the construction of the ETF. In
other words understand what you are buying or selling, what
stocks or assets the ETF is made up of, and also what weight is
given to the individual names. For more information on ETF
construction see
Know your ETF risk
.
2) Just as in stocks, the trend is your
friend -- a phrase I'm sure you've heard from either me or
others. It may seem simple but so many beginners break this
rule. If the trend is lower, look for an ETF that takes advantage
of the lower trend. You can always sell when the trend
changes.
3) There are many companies out there with
similar ETF make-ups. Don't be afraid to compare the two side by
side. Look at fees, asset weights, and check out the ETF's
website. You'll be surprised how small differences can make a big
difference in performance. Don't forget market sentiment can give
an advantage to one in some cases.
4) As with any equity, option, ETF or
mutual fund, it is highly recommended you use limit orders --
especially in thinly traded ETFs that deal with emerging
markets.
5) Beware of when you trade. Trading in
the first 20 minutes and last 20 minutes typically has higher
volatility and wider spreads. Commodity ETFs need to catch up to
their counterparts in the futures markets and often overshoot or
undershoot the market. The time I like to buy is between 1:45
p.m. and 2:30 p.m. EST, when brokers are executing margin calls
and selling off assets to bring client accounts into
compliance.
6) Trade for free. Because of the
popularity of ETFs, many larger online brokers allow their
clients to buy and sell ETFs with no commission. This means great
savings when scaling into positions. Be sure to consult with your
broker surrounding the terms of commission-free ETFs, and
for a list they provide of commission-free ETFs.
7) Homework does not go away because you own an
ETF. Do yourself a favor and set up a watch list for each ETF,
and include at least the top five weighted assets in the ETF in
your watch list. These five assets will drive the ETF the most.
Do your homework on these companies. If your ETF has its top five
weighted names in the oil sector, like
USO
(
quote
) for example, and oil is dropping -- you could be in for world
of hurt.