Exchange Traded Funds
08/31/2005
Last week I briefly mentioned Exchange Traded Funds. This week I want to focus on one in particular. I got a lot of emails about them, and I do consider myself something of an expert in them, having first written about them in my Financial Times column in 1999.
It's the most liquid security in the world, meaning its daily traded value is more than any other. Yet the chances are you've never heard of it, despite being able to profit as easily from it's rises as well as its falls.
It's better than a stock, because it's more diversified, and can outperform most fund managers trying to mimic it's risk-reward profile because of its lower charges.
No, it's not Microsoft or IBM. It's the QQQ and it represents the Nasdaq 100. Moreover, it's especially beneficial if you are not a US investor.
The QQQ is an exchange traded fund (ETF) which trades just like a single stock but tracks the whole index. Other ETFs track regions, sectors and other indices - but none are as popular as the QQQ.
Only ETFs combine diversification (the ETF represents a basket of stocks), can be bought and sold like a stock through most online brokers without entry or exit charges and avoids stamp duty.
Usually overlooked by net traders is the ability to mimic institutional money management techniques. The 'core and satellite' strategy is becoming the 'bedrock for institutional managed money' according to Dresdner Kleinwort Wasserstein.
Under this strategy pension funds, for instance, hold a passive index tracking core (maybe 55%) with an active satellite with perhaps the remaining 45% of the portfolio equally divided between value, growth and alternative investments such as hedge funds or specific sector ETFs.
The passive element provides low cost diversification and the knowledge that index tracking is particularly successful over long periods, whilst the active element allow the online trader to use his stock picking skills to outperform the index.
But surely, you ask, there is no place for trading the Nasdaq? What are the chances of a good return? After all the TMT boom is over.
How does a 50% return sound in 12 months? There is a 50% chance of a 50% return in a year on the QQQ according to Riskgrades.com based on its historic volatility and returns.
For more exotic returns try the iShares MSCI South Korea ETF. Of course if you are not convinced the QQQ is going to rise the advantage of the QQQ is you can short it (sell it in anticipation of a fall then buy it back cheaper to close the trade at a profit).
So why don't UK investors use it? No, there is no good reason why ETFs are not more popular; our ignorance of them is the barrier to superior trading strategies as well as the relatively better performance of index tracking and benefits diversification ETFs offers to our portfolios. The QQQ is the most liquid security in the world thanks to informed institutions not private investors for whom the cost of ignorance remains high.
Value-Growth
On my value growth criteria which are based on stocks meeting revenue and profit growth and good value based on criteria such as price earnings growth, the following names come up. Remember they are for a 6 month outlook: ROK, Rolls Royce, Telford Homes, Alexandra, Comino, Rensburg Sheppards, Michael Page.
Remember I am targeting about 20-20% with the value growth criteria. Last year it produced 33% return. On my momentum value indicator I have Lookers, Findel, Ideal Shopping Direct, Tarsus, Bisichi Mining.
Crazy Small Stock
These are high risk volatile stocks which could move sharply higher or move sharply lower in my view, but will almost certainly not stand still. Names on the radar include: Anglesey Mining, Character Group, QXL.
Also, if you would like a free multi-media CDROM on 'Investing Better', which covers spreadbetting, CFD trading and momentum indicators like the MACD, posted to you then drop me an email with your postal address to alpesh@tradermind.com.
Spreadbetters
Spreadbetters and futures traders often look at hard and soft commodities. Here's my quick take on the action for the week ahead:
- Oil: Up
- Copper: Sideways
- Gold: Sideways to lower
- £/$: Down
- Dow: Mixed to lower
- FTSE 100: Mixed to lower
- Soyabean Oil: Up
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