Every now and again, I enjoy shaking things up. For instance, there's a downloadable application for the iPhone called "Urban Spoon." You shake the iPhone and... using GPS navigation... Urban Spoon suggests a restaurant nearby.
In the spirit of shaking up the blog format, then, I thought I'd do a bit of Q &A for exchange traded fund investing. For readers, e-mailers, radio show listeners, I've put together the following:
Question #1: Since the economy is really bad, doesn't that mean that stock ETFs will be really bad?
On June 18th, greenfaucet contributor Tom Lydon and co-author John Wasik released their first book, iMoney: Profitable Exchange-Traded Fund Strategies for Every Investor. In just one month, iMoney has received tremendous praise from the investment community, readers, and book critics. Exclusively for the greenfaucet community, we have provided summaries of the first two chapters:
A Brief History of the Mutual Fund Folly and After the Bubble Burst
Headline: Where the Mutual Fund Companies Went Wrong
Intro: To understand how ETFs came to be and why they're so popular with investors today, we feel that a little back story is in order.
Conclusion: While no one can claim that there will never be corruption again, or that there will never be another market crash, ETFs at least put investors in a better position of protecting themselves by enabling them to see what's cooking in the kitchen.
How ETFs Can Be Employed 
Headline: ETFs Have Made It Possible for Anyone to Play in the Markets
Intro: There are ETFs covering dozens of asset classes, sectors and global regions. How can you choose between them?
Conclusion: It's important for investors to remember that which ETFs they buy is a personal decision that depends on their goals, risk profile, asset allocation and any concerns that might be had about treatment at tax time. Having these questions answered beforehand will make for an easier decision-making process.
Equal vs. Fundamental Weighting
Headline: When It Comes to Index Weighting, Which Way Is Better?
Intro: How you like your indexes weighted is a matter of taste and preference, but knowing the differences can be key in how you choose which ETFs to buy.
Conclusion: Not all indexes are created alike. Understanding the differing methods of construction and how their components are weighted will help you at asset allocation time.
iMoney not only explains how ETFs work, but also offers simple strategies on how to make ETFs work for investors of all levels and at all stages of life.
Acclaim from Editorial Reviews:
"The authors cover the ETF waterfront. Whether you are a young investor just starting out or a seasoned stock veteran looking for new investment opportunities, this book is a valuable resource." Sam Stovall, Chief Investment Strategist, Standard & Poor's Equity Research
"Finally! Lydon and Wasik objectively analyze exchange traded funds for the average person. Me particularly liked iMoney's comparisons with more familiar mutual funds, the clear discussion about risks and the varying viewpoints from some of the industry's smartest minds." Alan Lavine and Gail Liberman, syndicated columnists for Marketwatch.com and authors of Quick Steps to Financial Stability
Praise from Readers:
"I have been in the market for a while, but mostly stuck to Mutual Funds. This book gave me a lot of great information on how to use ETFs in my portfolio in order to reduce costs and increase profit. I would recommend this book to anyone." - Amazon.com Reader
"I really enjoyed Mr. Lydon and Wasik's book. They take time to cover the basics and covers the evolution of the fund industry. I think this information is essential to fully understanding ETFs and why their advantages are so great and attractive to investors, particularly those who were burned in the early 2000s with active manager funds." - Amazon.com Reader
To learn more about or purchase a copy of iMoney: Profitable Exchange-Traded Fund Strategies for Every Investor visit Tom's site or Amazon.com.
The mutual fund industry has been throwing a tantrum lately, but it definitely doesn't want to take its ball and go home.
Fund purveyors have been dogged for years by the ever-growing popularity of low-cost exchange-traded products, but when Barclays Global Investors introduced exchange-traded notes (ETNs) last year, the $13 trillion industry called across the schoolyard for Congress and the Treasury Department to protect it from the big, bad bully.
The automakers and their unions are now in DC trying to extract loans from taxpayers to backstop their poor decisions. The line for taxpayer money is getting as long as waiting your turn at the unemployment office.
"Something was up" with financials were my thoughts during our Friday afternoon podcast since with the overall market weak, and with little supportive news, these stocks were all higher.
Back on March 31st of this year, I wrote my first post here at greenfaucet entitled "Classic Monday Fade?" In this piece, I attempted to explain what I saw as an unfavorable daily setup evolving that morning in the major indices. Typically in a bear market, any significantly positive action out of the gate on Monday will result in decreased buying interest throughout the day, which often leads to a "fade" into the close. Sounds simple right? Well, I took some hits around the office for writing that piece, so I figure now that that some time has passed, it may be a good time to revisit it. This isn't a victory dance by any means, I just think now is a good time to elaborate on the topic.
Why do Monday fades tend to occur in bear markets?
First off, in a bear market, traders tend to sell into any strength. Also, buying interest by definition generally isn't as robust as it is in bull markets. Traders tend to place their bets early in the morning (usually as a result of bullish weekend news) and buying interest along with volume tends to wane into the close, not to mention the fact that many swing and day-traders are less inclined to hold their positions overnight in a poor market. This Monday was a classic example as a Barron's artice over the weekend alluding to a bottom in the housing market, brought some folks in off the sidelines. However, the buying soon dried up and the sellers jumped back in and regained control of the market.
Going back to my March 31st piece, I explained that quarter-end days usually result in a slide down on the S&P 500 during the final hour of trading due to the posturing of funds and institutions (window dressing) liquidating positions in an effort to shape performance (or at least the perception of performance) before the the new quarter begins. This only exacerbates the likelihood of a slide into the bell. I interpret this as a very favorable short setup.
Now that the foundation has been set, I thought it would be interesting to see if this strategy has been effective over the last 16 weeks. I am using the DJIA and S&P 500 as comparable benchmarks. The results are displayed below:
Chart courtesy of Julie Radziewicz - Amherst College
Notice that if you had bought the DJIA open on March 31st and sold it on July 14th you would have been down a whopping 9.5% over the 16-week period. So what happens if you had "faded" (went short) the DJIA on the open and covered on the close every Monday from 3-31 forward? Well, as the chart above indicates, you would have been up .80% on the DJIA and 1.42% on the S&P. Sure, you didn't knock it out of the park, but you certainly desecrated the market during that timeframe, outperforming it by 10.3% and 8.1% respectively depending on the comparable benchmark index used. Also, note that recent results have been expectingly better since we have "officially" entered a bear market in July.
If you are really comfortable with this strategy, you could employ the ProShares UltraShort Dow 30 (AMEX: DXD) or the ProShares UltraShort S&P 500 as your trading vehicle. (AMEX: SDS) These ETFs are leveraged 2x's the inverse of the tracking index. If you do decide to go this route, I would strongly suggest having firm stops in place.
Conclusion: Be skeptical of strong Monday bear market gap-higher opens and watch for the volume and buying interest to level out during the day.
It seems that many contradictory forces are at work in the Canadian Market as the final quarter of 2007 gets underway. While we see currency traders bidding the Canadian dollar closer to parity with the greenback, we are left to mull over the latest Canadian Mutual Fund data, which should serve to temper enthusiasm for the Canadian market's perceived independence from the U.S. As a result, for the first time since 1994, August saw net redemptions to the tune of $1.5 billion in net sales.
