Larry’s recouping from minor surgery today. He says it’s a pain in the butt, but nothing to worry about.
So I’ve invited Dan Ascani to sit down with me to talk about an investment vehicle that he specializes in and that’s on a lot of investors’ minds right now: Exchange Traded Funds (ETFs).
Dan is Vice President and Portfolio Manager for individually managed accounts at Weiss Capital Management, a separate affiliate. His views are not necessarily the same as those of Money and Markets. But we all agree that ETFs have emerged as a very important vehicle for nearly all investors.
Dan and his colleagues have written a special report on ETFs. So I felt now’s the perfect time to get his thoughts.
A New Investment Frontier
Interview with Dan Ascani,
Vice President and Portfolio Manager,
Weiss Capital Management, Inc.
Martin Weiss: We started covering ETFs from the very first day we began publishing Money and Markets, and we’re glad we did because the investor interest in ETFs has grown dramatically since then. And it continues to do so every day. What do you think is causing that?
Dan Ascani: It’s probably because of their obvious advantages over traditional mutual funds.
Martin: I think most of our readers know what they are. But just to make sure we’ve covered all the bases, can you name the ones you think are the most important?
Dan: Start with lower expense ratios. As of February of this year, Morningstar reported that the average gross expense ratio of over 20,000 traditional mutual funds was 1.67%. In contrast, for the 200-plus ETFs it was only 0.44%.
Martin: So in that sense, for every dollar it costs to run the average mutual fund, it costs only about 26 cents to run the equivalent ETF?
Dan: Yes.
Martin: Many — but not all — traditional mutual funds charge sales commissions or “loads.” That’s why Money and Markets has always recommended strictly funds that do not charge the loads. What about ETFs?
Dan: No sales loads on ETFs. Of course, you still have to pay a broker commission, just like a stock. But your commissions can be at discount rates, or even at the deep-discount rates available with many online brokers.
Plus there’s one more cost advantage: ETFs have been much more tax efficient. Morningstar actually has a measurement for this — its “tax-cost ratio” — and it’s typically better for ETFs than for traditional mutual funds.
Trading Advantages
Martin: What about trading?
Dan: I manage individual accounts. And I use strictly ETFs. Let me explain why.
Since ETFs are listed on exchanges, just like a common stock, you don’t run into a lot of the trading restrictions that traditional mutual funds often impose:
You can trade as often as you want — no minimum holding periods, no penalties for switching frequently, etc.
You can buy and sell any time during the trading day — not just at the settlement price at the end of the day like with most mutual funds.
You can use stop-loss orders to help protect your capital.
You can use limit orders, setting a target entry or exit price.
And you can choose from a huge diversity of ETFs. There are over THREE hundred ETFs now. A large portion of them are sector and industry ETFs.
But there are also ETFs designed to track fixed-income markets such as the iShares Lehman 20-year Treasury Plus Bond (TLT) and iShares Lehman Aggregate Bond Index (AGG).
There are ETFs that track commodities, like iShares Silver Trust (SLV), which tracks the price of silver bullion, allowing investors to invest directly in silver in the form of a security.
There are ETFs tied to foreign countries and regions.
And most recently, there are even new ETFs designed to go UP in value when key market indexes go DOWN.
Overall, I feel investors in ETFs are empowered with much more direct control over their money.
Martin: Are you saying that you’re recommending investors buy some of those right now?
Dan: No, I was just giving you examples.
Sell Short ETFs?
Yes or No?
Martin: Most of our readers are not speculators and do not use margin or short selling. But some have asked us about it. What’s the scoop there?
Dan: We don’t recommend it for most investors. But remember: An ETF is essentially a trust that owns a portfolio of assets tied to a market index, a sector index, a commodity, maybe even a basket of fixed instruments. When you buy an ETF, you’re just buying shares in that trust. So whatever you can do with stock — buying on margin, selling short, etc. — you can generally do with ETFs as well.
Martin: Do you think investors should avoid short-selling of ETFs entirely? Or are there special circumstances when you think it’s appropriate?
Dan: If you have a large portfolio of a particular category of stocks, and you’re worried about a decline, selling short ETFs that approximately match your portfolio can be a good protective hedge. But I would not do it without professional advice.
Disadvantages to ETFs
Martin: Any disadvantages to ETFs?
Dan: Yes. Many investors are looking for ways to outperform the market … or outperform a sector by hiring money managers that can pick the best stocks. You won’t get that in an individual ETF. Generally, the goal of the ETF is to match the performance of the index or commodity it’s tied to. Not to do better. Not to do worse.
Martin: So the point is to …
Dan: Utilize ETFs that are the most suitable to your investment needs. Or, if you’re a more active investor, to do your best to actively manage your portfolio of ETFs — to switch to the ETFs that are likely to provide the best performance. Remember: The ETFs don’t impose any penalties for trading, and you can do so for very low commissions … which leads to another possible disadvantage.
Martin: Which is?
Dan: That it’s sometimes so easy to move around, some investors wind up overdoing it. For investors doing it on their own, it’s probably not a good idea to jump around a lot. Usually nice, solid trends can last for several months.
Transparency
Martin: One thing that has always frustrated me about traditional, actively-managed mutual funds is that you never know exactly what they own right now. Sure, they publish their holdings. But only quarterly or semi-annually. Meanwhile, the managers are buying and selling every day. But with ETFs, you have better transparency. Please explain to our readers why that’s the case.
Dan: You know what index an ETF is tied to. You know which stocks are in that index. So you also have a very clear idea of what stocks the ETF owns. And that information is readily available. If it’s a commodity ETF, same thing: You know that it owns that commodity.
Martin: Bottom line?
Dan: Bottom line — ETFs open up a whole new universe for investors. They’re easy-to-trade investments. They can be used in a wide range of strategies. And often those are strategies that would be very difficult with traditional mutual funds.
Martin: You and your colleagues have written a report on ETFs. Care to tell our readers how to get a copy?
Dan: It’s free for the asking. Just go to our website and you can download it now. Or call 800-814-3045, and we’ll be glad to send it to you in hard copy or answer your questions.
Martin: Thanks! Next time, please tell us more about the ETF trading strategies you favor and give our readers some clues as to how they might try something similar on their own.
Dan: Will do. And thank YOU!
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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