Money Continues to Leave Equities for Bonds in 2016

– Money continues to leave domestic equity mutual funds and exchange-traded funds (ETFs) and move into bond funds and ETFs. This shows a potential continued lack of trust when it comes to equities.

– This year the difference between the two has been very pronounced. Year-to-date $89.1 billion has left domestic equity funds and ETFs, while $199.9 billion has moved into bond funds and ETFs.




Source: LPL Research, Investment Company Institute 10/05/16

Important Disclosures: Investing in mutual funds and ETF’s involve risk, including possible loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in the presentation may not develop as predicted.

“Vanilla Investors” Aren’t That Bad!

Copyright a.pasquier/Creative Commons
Copyright a.pasquier/Creative Commons

Vanilla is usually what people call a “boring” flavor for ice cream. And by boring, they mean unadventurous or dull. Basically, “boring” has a negative connotation in our society. When it comes to investing and the stock market, there is that saying, “The higher the risk you take, the higher the return.” But being a “vanilla”, or boring, investor is not always a bad thing. In fact, it can make you rich!

Surprised? You shouldn’t be! To be honest, most millionaires out there actually fall into this “vanilla investors” category. But what does it really mean to be a “vanilla investor”?

First of all, leaning towards plain and simple investments are always better than taking on the complicated and risky investments. Vanilla investor millionaires are very risk-averse and passive when it comes to managing their investments. Why is that? Compared to those aggressively managed blue-chip funds, the returns of these low-cost and stable ETFs or index funds usually grow faster since they have a higher rate of return and are low in cost. So in the long-run, the results of these “boring” stocks will prove to give you a higher gain with little to no maintenance!

However, it is so tempting to stop yourself from chasing after those trendy investments, especially with all of the tech start-ups popping up everywhere. But an important mindset to have is that when investing, you need to focus on risk, reputation, diversification of your assets, and tax rates. Being risk-averse and boring actually serves as a protection barrier from investing in the wrong company.

Don’t think that being cautious is a sign of fear. No! Being conscious of the risks is really a way for you to thoroughly understand the actual value of the investment. And when it comes to stocks, millionaires care the most about valuations! So next time, if a stock is priced at an unrealistic number, don’t feel obligated to buy it unless you feel that it is truly worth that value. Additionally, be aware of the tax rates because they are a significant factor that will cause you to lose your investment earnings.

And that, is how you think like a millionaire “vanilla investor” and strike it rich. You really don’t need to pick the risky roads in order to get to the same destination. So don’t be afraid to be a little “vanilla” sometimes!

Written by Lake Avenue Financial

Dow Closes Down Nearly 300 Points as Fed Shakes Markets

Provided by CNBC
Provided by CNBC

Stocks closed sharply lower Friday as investors weighed concerns over the implications of the Federal Reserve’s decision to keep short-term interest rates unchanged.

“The signaling by the Fed yesterday, (that it) doesn’t see confidence to pull the trigger to raise from zero to 25 basis points, I think is negative sentiment that’s hitting the market,” said Art Hogan, chief market strategist at Wunderlich Securities.

“I think they’ve done more harm than good,” he said.

Analysts also noted Friday trading would likely see more volatility due to quadruple witching, the expiration of three related classes of options and futures contracts, as well as individual stock futures options.

The Dow Jones industrial average and S&P 500 closed down more than 1.5 percent, mildly negative for the week. The Nasdaq composite was off about 1.4 percent on the day and eked out a 0.1 percent gain for the week.

The Dow closed in correction territory, or more than 10 percent off its 52-week high. The S&P 500 and Nasdaq composite are about 8 percent below their 52-week highs.

“You may start seeing some crazier-than-usual moves at the end of the day,” said JJ Kinahan, chief strategist at TD Ameritrade, adding that Friday’s move lower also shows an allocation shift from stocks to bonds.

Treasury yields extended Thursday’s decline, with 10-year note yields trading around 2.13 percent, while two-year yields traded around 0.68 percent.

“We opened down in concert with the rest of the world,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

The pan-European Stoxx 600 index closed down 1.8 percent lower as investors digested the Fed’s decision, while the German DAX shed 3 percent, putting it just shy of bear marker territory. About midway through the London trading session, a “fat finger” incident caused the FTSE 100 index to briefly fall 2 percent before closing down about 1 percent.

The Federal Reserve held its key federal funds rate unchanged after the conclusion of its two-day policy meeting Thursday. September was supposed to be the month the U.S. central bank finally came off its zero interest rate policy, but instead it opted to hold steady for at least one more month.

“There’s just a lot of uncertainty right now,” said Scott Brown, chief economist at Raymond James, adding that the timing of a Fed rate hike shouldn’t matter, “but it does for some reason.”

During a press conference after the announcement, Federal Reserve Chair Janet Yellen stressed the path of the Fed’s first rate hike in nearly a decade is more important than its timing.

“The only sliver of hope, post that announcement she left open the door that they could raise rates at a non-press conference meeting,” Hogan said.

Other analysts thought the Fed should not have raised rates, given the global economic environment. Fed funds futures had indicated only about 20 to 30 percent of a chance the Fed would hike in September.

“The people betting real money never expected the Fed to do anything yesterday,” said Nick Raich, CEO of The Earnings Scout. “Ultimately, the Fed did the right thing by holding.”

He noted there were some who thought “if the Fed did not hike, oh my goodness, what do they know, what’s so bad in the economy that we don’t know.”

Odds have also risen that the Fed will now not hike rates until 2016, and RBS says the markets are currently pricing the first full rate rise for March but odds for December were still above 60 percent.

The central bank added to recent Wall Street concerns about the impact of sluggish global growth. In its statement, the Fed said that “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.”

China’s surprise devaluation of the yuan in mid-August raised concerns about further slowdown in the world’s second-largest economy and was a factor behind the recent correction in U.S. stocks.

The Fed “said that the U.S. economy is doing OK but they are concerned the global economic turmoil, weakness in China, could have a negative impact on the U.S. economy,” said Stuart Hoffman, chief economist at PNC.

“Clearly they’ve given up on any acceleration in the U.S. economy in the second half of this year compared to the first half this year,” he said.

In Asia, the Shanghai Composite index closed up 0.42 percent, while Japan’s Nikkei finished 1.96 percent lower.

As of 2:57 p.m., the iShares MSCI Emerging Markets ETF (EEM) traded about 1.5 percent lower, after a 2 percent intraday spike and plunge Thursday.

“It’s certainly this fear factor which might intensify over the next several weeks (with the continued) Fed debate over interest rates,” said Peter Cardillo, chief market economist at Rockwell Global Capital.

Gold futures settled up $20.80 at $1,137.80 an ounce.

The U.S. dollar traded a touch higher against major world currencies, with the euro below $1.14 and the yen at 119.8 yen against the greenback. The dollar traded about 0.1 percent lower against the Mexican Peso.

Crude oil futures for October delivery settled down $2.22, or 4.73 percent, at $44.68 a barrel.

No significant earnings were due Friday. On the data front, leading indicators for August rose 0.1 percent, below the expected 0.2 percent gain.

The CBOE Volatility index (VIX) considered the best gauge of fear in the market, traded above 22, up about 5.8 percent.

About two stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 818 million and a composite volume of about 2.68 billion as of 2:30 p.m.

High-frequency trading accounted for 49 percent of this month’s trading volume of about 6.9 billion shares, according to TABB Group. During the peak levels of high-frequency trading in 2009, about 61 percent of 9.8 billion of average daily shares traded were executed by high-frequency traders.

Written by Evelyn Cheng of CNBC

(Source: CNBC)

Not all ETFs are Created Equal

© (Getty Images)
© (Getty Images)

When investors think about the risk in their 401(k) or other brokerage accounts, they often frame it in terms of volatility. Most often, they are concerned about sharp declines in the U.S. stock market. With memories of the 2008 market plunge fresh in people’s minds, it’s understandable that many view volatility and risk as one and the same.

But that’s not necessarily the best way to think about portfolio risk. In his most recent annual letter to Berkshire Hathaway shareholders, Warren Buffett addressed that topic, writing, “Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.”

Buffett was making the point that over the past 50 years, the return of stocks far outpaced the purchasing power of the dollar, which declined over that time. The “riskier” investment in stocks is actually the way to stay ahead of inflation and maintain purchasing power. That’s a key premise behind a carefully crafted retirement investment plan.

Exchange-traded funds provide a window into an understanding of portfolio risk. Historically, ETFs tracked basic market-capitalization-weighted indexes such as the Standard & Poor’s 500 index of large U.S. stocks. On the fixed-income side, a number of ETFs track the Barclays U.S. Aggregate Bond Index (formerly the Lehman Aggregate Bond Index) of investment-grade, dollar-denominated bonds.

A broadly diversified portfolio, constructed with ETFs representing several stock and bond asset classes, has its own distinct risk-and-return profile. For example, a portfolio containing 70 percent stocks has more risk than a portfolio with 40 percent stocks. Stocks are riskier than bonds, because in a bankruptcy, debt holders are repaid before equity holders. Investors demand to be paid more for taking that risk; hence, stocks have higher returns relative to bonds.

With the information at investors’ fingertips today, it’s not particularly difficult to design a portfolio with the right asset mix to achieve an expected return over time, while dampening the volatility of stocks.

But when investors veer into more esoteric ETF products, such as those concentrated in a single sector or that use complex strategies, the risk-and-return trade-off changes.

Ron DeLegge, U.S. News blogger, founder of and host of the Index Investing Show, a weekly podcast, says the more specialized, niche ETFs should be considered as noncore parts of a portfolio.

“The core portfolio is the foundation. That’s where the bulk of the assets will be allocated,” says DeLegge, who is based in San Diego. “The core is always broadly diversified and invested across the five major asset classes: stocks, bonds, commodities, real estate and cash.”

DeLegge says in this area of the portfolio, investors should use low-cost ETFs that track broad-market indexes.

“The noncore portion of a portfolio is complementary. This is where you have things that are narrowly focused, concentrated, higher risk, maybe leveraged,” he says.

Individual stocks, he adds, are outside the core because they represent concentrated positions in one very specific asset. Likewise, sector funds, regional funds, hedge funds and actively managed funds are noncore because none track a broad asset class.

Although risk and volatility are not the same, investors are familiar with the nail-biting experience of volatility, even when their portfolio is taking a level of risk appropriate for the desired outcome. Understanding what he or she owns, and why, can help smooth an investor’s ride.

Elisabeth Kashner, a chartered financial analyst and director of ETF research at FactSet in San Francisco, says investors should be realistic in their expectations of niche or esoteric ETFs. “By and large, you’ll find that these products are not magic. Usually, if a fund has greater returns than a comparable vanilla, market-cap-weighted benchmark, it’s because it has taken on more risk to get there. If the returns are lower, it’s generally because the fund has taken less risk,” she says.

“Most of the time, the index and fund construction process has not delivered more return for less risk,” she adds. “You have to be careful. I’m not saying these products are underperforming, I’m saying they are performing in line, that their performance is driven by risk.”

Alex Bryan, an analyst with Morningstar’s manager research team in Chicago, says the category of “strategic beta” – also known as “smart beta” – has been growing rapidly. Strategic beta funds use methods like tracking indexes not constructed using traditional market-capitalization weightings. Strategic beta funds, which do have strict methodologies, differ from most active funds, which rely heavily on stock picking and generally don’t have ironclad investment rules.

Bryan says part of the growth in the category is due to fund companies marketing the products heavily. “There’s been a push on the fund company side. They can charge higher fees for creating products that look different from other people’s, whereas if you are offering vanilla, broad-based exposure, you are competing on cost,” he says.

He cautions investors to understand what they are buying if they decide to put money into an ETF that doesn’t track a broad index. “There are some where the methodology is not transparent. We at Morningstar are more skeptical if you don’t know exactly what’s going on under the hood. You want to know what are the drivers of performance,” he says.

Kashner offers similar advice for retail investors. “There are reasons to go into a complex strategy, but there are usually more compelling reasons to keep it simple,” she says. “Or, if you are going to take something simple and make it more complex, you should understand exactly why you are doing that and what you hope to get out of it. If you don’t understand that, you are probably best off keeping it simple.”

Copyright 2015 U.S. News & World Report

Written by Kate Stalter of U.S. News & World Report

(Source: U.S. News & World Report)

The Best Ways to Invest $5,000

You’ve padded your emergency fund, paid off your debt and saved up a few thousand dollars – $5,000 to be exact – that you’re ready to invest. But is it best to put it in a mutual fund, certificate of deposit, index fund or exchange-traded fund?

“If you’re asking what’s the best way to invest $5,000, it’s kind of like asking what should I have for dinner tonight? Well, it depends,” says Greg McBride, chief financial analyst of Bankrate. “What do you like? What don’t you like? Do you have any allergies? What are you in the mood for? The same thing [applies] here.”

Before you get to specifics, such as how much risk you can stomach or what to choose off the menu of investments, start with the basics.

“The first question you need to ask yourself is, ‘When do I need to spend that money?’” says Manisha Thakor, founder and CEO of MoneyZen Wealth Management. “My rule of thumb is investing is something you do for the long run, which I would define as a minimum of five years and ideally 10-plus years. Once you are sure it’s long-term money, now you’re ready to really get into the nuts and bolts.”

To help you delve into those nuts and bolts, we asked financial experts for advice on the best way to invest your $5,000. They suggested options for both the short and long term, if you’re hoping to grow that money for retirement decades down the road.

1. Short term

A man working on his laptop.

© Mark David/Getty Images A man working on his laptop.

Online savings account. The best place for money you need in a moment’s notice is an online savings account, McBride says. Even though interest rates for online savings accounts are low – hovering around 1 percent – they “pay the best returns relative to the savings account offers among all the financial institutions,” he says. The returns currentlycompare to those of CDs, but without the early withdrawal penalties.

CDs and money market accounts. If your time horizon is less than five years, Thakor recommends putting the money in a CD with a maturity date that matches your goal. This option may be ideal if you have a low risk tolerance, since CDs are insured by the Federal Deposit Insurance Corp. up to $250,000 per depositor. The downside? You can’t touch those dollars for a predetermined time without paying a penalty.

Alternatively, money market accounts, which are also insured by the FDIC, earn slightly less interest than CDs, but you can withdraw the money at any point. Just keep in mind that interest rates are generally inversely correlated with access to your money. As Thakor puts it: “If you want unlimited access to your money, you’ll get slightly lower rates. If you don’t mind tying it up for a defined period of time, which is what you do with a CD, then you can get a slightly higher rate.”

Given their low yields, CDs and money market accounts are better for shorter-term investments, since they don’t always keep up with the cost of inflation. “Even though on paper it might look like you’re protecting your principal and [your] deposit is growing a little bit in value, you’re actually losing ground because the purchasing power is not holding,” says Paul Granucci, a financial solutions advisor with Merrill Edge.

2. Long term

A trader works on the floor of the New York Stock Exchange.

© Spencer Platt/Getty Images A trader works on the floor of the New York Stock Exchange.

Actively managed mutual funds. Investors with a longer time horizon can afford to take on more risk for a greater return by putting their money in the stock market. Mutual funds offer an easy way for investors to gain exposure to a broad range of stocks. If picking stocks makes you nervous, fear not. With actively managed funds, a fund manager makes all the decisions for you, including what sectors of the economy to invest in and which companies are undervalued or poised for growth. But beware: Mutual funds come with fees. The average actively managed stock fund charges an annual fee of 1.26 percent, according to fund tracker Morningstar, and Thakor advises against buying mutual funds with an expense ratio of more than 1 percent.

If you do go the actively managed route, Granucci recommends a globally balanced mutual fund, which is diversified in stocks, bonds and cash and contains domestic and international investments.

Index funds. “If the goal is to try to achieve a lot of diversification and build a portfolio that you can more or less kind of set and forget, it’s hard to beat index funds,” says Christine Benz, director of personal finance for Morningstar.

With index funds, you don’t have the opportunity to beat the market, but you can keep up with the market, “which is not a bad place to be given that most active fund managers do not outperform their benchmarks over long periods of time,” Benz adds.

Thakor points out that index funds are the healthiest option on the menu – without organic food prices. “Index funds are the financial equivalent of a superfood like chia seeds or kale,” she says. “Depending on what type you pick … you can get exposure to literally thousands of stock and bond issues at a very nominal fee.” The average expense ratio for stock index funds is 0.75 percent, according to Morningstar.

ETFs. Mutual funds and ETFs are very similar. “When you buy one share of an ETF or one share of a mutual fund, you’re buying a small piece of a lot of different investments that make up that fund,” Granucci explains. “The difference is how they are managed.”

There’s no active management with ETFs, so if you’re thinking about investing in a handful, be prepared to rebalance your portfolio at least once a year (mutual fund portfolios should be rebalanced, too). Advantages include costs that are a lot lower than those of mutual funds (Morningstar reports ETFs have an average annual fee of 0.57 percent) and no minimum investment requirements. While mutual funds may demand initial investments of $1,000 or $3,000, ETFs – which are traded on exchanges and fluctuate in price during the day – cost only their current trading price, like stocks.

ETFs offer exposure to asset classes ranging from bonds to domestic and international stocks, and even alternative investments like commodities. “Instead of trying to do one fund that’s going to do it all, you might need to find three or four ETFs that are going to fill all the different buckets that you want to hit,” Granucci says.

3. Before diving in

A man holds a credit card.

© Johnnie Davis/Getty Images A man holds a credit card.

You might be ready to put that $5,000 to work, but before you settle on one of the above investments, McBride points out three places where your money would be better spent:

1. Paying down high-interest debt.

2. Saving for retirement in a tax-advantaged account, such as a 401(k) or individual retirement account.

3. Starting an emergency savings fund that covers six months of living expenses.

“For the vast majority of Americans, tackling those three priorities is going to more than chew up that $5,000,” he says.

And there’s a reason why paying debt is at the top of the list: You’ll get a higher risk-free rate of return by paying down credit card debt than you will investing in financial securities. As McBride says, “Paying off a 15 percent credit card balance is like earning 15 percent risk-free.”

But let’s assume you’ve paid off your debt, contribute to a 401(k) or IRA and have enough savings for a rainy day. Now you’re ready to sit down at the table. The experts might have different tastes, but they all agree on one thing: You have to know what you’re ordering.

In other words, if you don’t understand what you’re investing in, you might make some mistakes.

“The power of investing comes from compounded returns and time, and if you don’t understand what you’re doing and you’re afraid to ask questions, when the inevitable hiccup comes in the market,” Thakor says, “you will be more likely to change your course.”

Copyright 2015 U.S. News & World Report

Written by Stephanie Sternberg of U.S. News & World Report

(Source: U.S. News & World Report)

Should You Have Gold in Your IRA?

© Mike Segar/Reuters
© Mike Segar/Reuters

It’s not unreasonable that some IRA owners may have bad feelings about the stock market.

However the safest fixed-income investments are currently paying microscopic interest rates even though the risk of future inflation remains worrisome. So the idea of investing some IRA money in gold or other precious metals might seem attractive. Here’s the story on what you can and cannot do with your IRA.

Physical IRA ownership of precious metal coins and bullion

Our beloved Internal Revenue Code allows IRAs to own certain gold, silver, and platinum coins and gold, silver, platinum, and palladium bullion that meets certain fineness standards. For example, an IRA can own American Gold Eagle coins, Canadian Gold Maple Leaf coins, American Silver Eagle coins, American Platinum Eagle coins, and gold and silver bars (bullion) that are 99.9% pure or better.

However, some well-known gold coins, including the South African Krugerrand, are off limits as are bullion bars that are not sufficiently pure. The coins or bullion must be held by the IRA trustee rather than the IRA owner. In other words, you can’t have your IRA buy coins or bullion and then stash the stuff in your safe deposit box or bury it in your backyard. Sorry about that. These tax rules apply equally to traditional IRAs, Roth IRAs, simplified employee pension (SEP) accounts, and SIMPLE-IRAs. No problems so far.

The big issue with IRA ownership of precious metal assets is finding a trustee that is willing to set up a self-directed IRA, handle the transfer of funds to the precious metals dealer, and facilitate the physical transfer and storage of the purchased coins or bullion. Only a relatively few outfits are in the game, and none of the major brokerage firms are willing to play. Conduct an Internet search to find a trustee. Most trustees will arrange for the physical storage of coins and bullion with the Delaware Depository Service Company in Wilmington, Del.

A precious metals IRA trustee will usually charge a one-time account set-up fee (maybe $50), an annual account administrative or maintenance fee for sending account statements and so forth (maybe $150 or an amount based on the account value), and an annual fee for storage and insurance (maybe $125-$250 or an amount based on the value of the stored assets). Additional fees may be charged for transactions including contributions, distributions, and precious metal purchases and sales.

Age-related considerations

Since precious metal prices are volatile, using an IRA to invest in precious metal assets becomes (arguably) more problematic as retirement age is approached and reached. Also, once you reach age 70½, annual required minimum distributions (RMDs) must be taken from traditional IRAs. Therefore, your traditional IRAs (including any SEP-IRAs and SIMPLE IRAs) must have sufficient liquidity to allow for RMDs. That said, RMDs need not be taken from each IRA. The only requirement is that the proper total annual amount (at least) be withdrawn from one or more accounts. For example, you could have one IRA that is invested in precious metal bullion and one IRA that is invested in liquid assets like publicly traded stocks and mutual funds. The entire annual RMD amount can be taken from the liquid account while leaving the precious metal account untouched.

Indirect precious metal investments via ETFs and mining stocks

Due to concerns about transfers and storage, physical ownership of precious metal assets by IRAs is not for everyone, although it has become more popular in recent years.

One option for folks who are uncomfortable with the idea of physical IRA ownership of coins or bullion is buying shares of an exchange traded fund (ETF) that tracks the value of particular precious metal. A few years ago, tax advisers worried that having your IRA buy such shares might be treated for tax purposes as buying collectibles (coins and metals are generally treated as collectibles under the tax law). Since IRAs are not allowed to own collectibles, that would have resulted in a deemed taxable distribution from the IRA with you then using the money to buy the prohibited EFT shares. Not good.

Thankfully, the IRS has ruled that IRAs can buy shares in precious metal ETFs that are organized as grantor trusts without any tax problems.

The two most-popular precious metal EFTs are the SPDR Gold Trust (trading symbol GLD) and the iShares Silver Trust (trading symbol SLV). The IRS has approved them both. If you have doubts about your IRA being allowed to own a particular precious metal ETF, read the tax section of the fund’s prospectus, which should be available online. (Be aware that there are still some folks out there who wrongly believe that IRAs are not allowed to own precious metal ETFs.)

Another indirect way of investing in precious metals is to have your IRA by stock in a mining company. For example, your IRA could buy shares in Barrick Gold Corp.  , the world’s largest pure gold mining company. There are no tax concerns with this option, because IRAs are allowed to invest in stocks of all kinds.

Written by Bill Bischoff of MarketWatch

(Source: MarketWatch)

How a 29-Year-Old Grew a $1 Billion Tech Fund in 7 Months

© Courtesy of ISE
© Courtesy of ISE

Carpe diem! And in some cases carpe ETF may be a wise mantra. That is part of the story behind one rising star in the increasingly popular tech-fund universe.

The startup company behind an outfit named PureFunds is currently a one-man operation, but that hasn’t stopped the exchange-traded PureFunds ISE Cyber Security ETF from racking up $1.04 billion in investor money after launching a mere seven months ago.

Personal and corporate data is under siege, as evidenced by a fusillade of recent, high-profile data breaches. Those include a huge hack attack on Sony Pictures and a separate data breach that affected four million government employees. Even the Houston Astros baseball team has allegedly been among recent hacking victims.

The PureFunds ETF, which holds publicly traded companies selling security software and hardware, has benefited from all the hacking.

And the guy running the show? A 29-year-old wunderkind, who has shaken off early stumbles to success:

“Now, looking back, it seems obvious,” PureFunds CEO Andrew Chanin told MarketWatch, in an interview. “Smaller shops were maybe considering [focusing on cybersecurity], but a lot of times the bigger guys are looking for those much broader types of industries.”

Indeed, Chanin’s trajectory may offer a case study in trial and error. Before the success of the cybersecurity fund, his earlier ETF products didn’t fare nearly as well.

How the cybersecurity ETF was created

Chanin said he co-founded PureFunds after industry colleagues said: “Why do you keep giving us ETF ideas? You should try launching them on your own.” Those comments came as he worked at the Kellogg Group, an ETF specialist, right after graduating from Tulane University.

But the PureFunds’ first ETFs struggled. The PureFunds ISE Diamond/Gemstone ETF and PureFund ISE Mining Service ETF both closed down in early 2014. The PureFunds ISE Junior Silver ETF , which launched in 2012, is still up and running, but it has a comparatively meager $5 million in assets.

Chanin said the International Securities Exchange suggested launching a cybersecurity ETF after the two companies developed a good relationship while putting out PureFunds’ prior ETFs. ISE developed the index that the cybersecurity ETF tracks, but as an index provider and exchange, it wasn’t looking to run an actual fund.

Chanin said he was able to make PureFunds profitable in large part thanks to support from ISE, other business partners and industry colleagues, as well as from his parents, girlfriend and other family and friends. “Their support is absolutely what kept me—and my dreams of turning PureFunds into a profitable company—alive,” he said.

“It’s extremely unique that you see those narrow funds get that kind of traction,” said David Nadig, director of ETFs at financial-data provider FactSet.

He said other ETFs that have attracted investor money quickly include the iShares Exponential Technology ETF  and the SPDR DoubleLine Total Return Tactical ETF , but the first benefited from being a bespoke fund for well-known financial adviser Ric Edelman, while the latter comes from one of the investing world’s “superstar managers,” Jeffrey Gundlach.

Given its $1 billion in assets and expense ratio of 0.75%, the cybersecurity ETF generates revenue of $7.5 million. Chanin said the “majority” of that revenue goes to pay a wide range of partners and service providers, including index provider ISE. Still, with the recent success, he has been able to move his office to Manhattan from New Jersey, where he was raised.

But other ETF providers are threatening to grab a piece of the action, with First Trust and Direxion recently filing for cybersecurity-related ETFs.

Although launching the first cybersecurity ETF looks smart at this point, other ETF providers had reasons to hold back.

Concerns about the cybersecurity ETF

The PureFunds ETF isn’t as targeted a play on cybersecurity as many investors may think, said FactSet’s Nadig. He notes the fund holds some big tech companies that aren’t 100% focused on cybersecurity, such as Cisco and Juniper . It holds 31 tech stocks overall, according to data.

The fund also sports a sky-high valuation, with a price-to-earnings ratio above 660, according to an calculation that takes into account the components that are losing money. In addition, niche ETFs are by nature on the risky side. “You’re talking about a portfolio of 30-odd stocks with a lot of microcap exposure,” Nadig told MarketWatch.

Chanin counters that the ETF offers a diversified way to invest in a volatile, growing industry, as it helps people avoid having to bet on a single company. He also notes that cybersecurity spending can be on a different cycle than outlays for other areas. Even in a less profitable year, a customer can’t necessarily cut back on cybersecurity investments, he noted.

Meanwhile, Nadig also cautions that it is possible that an investor with a large stake in the cybersecurity ETF could find it difficult to exit. “Right now it is the hotness and everybody’s piling in, but the volume on something like that could dry up tomorrow,” he said.

Written by Victor Reklaitis of MarketWatch

(Source: MarketWatch)

Time to Bet Against the Market? Here’s How

© Nick M. Do/Getty Images
© Nick M. Do/Getty Images

After six years of positive market returns, investors are getting a refresher course in what a market sell-off feels like. During a sizable market correction such as the one we’ve seen, it’s natural for investors to wonder if they should be doing more to play defense in a downturn.

Some may even be wondering if they should allocate a portion of their portfolio to an investment type that is designed to profit from market downturns: bear-market funds.

The short answer: For the vast majority of investors, bear-market funds just don’t make sense. “These types of tactical funds might be useful to a sophisticated few,” said analyst Josh Charney, who covers alternative strategies for Morningstar. “But selling a portion of your portfolio and allocating it to a bear-market fund is beyond hitting the panic button; it’s selling a piece of your portfolio and then betting against your portfolio.”

What Are Bear-Market Funds?

Bear-market funds are designed to profit during market sell-offs. They use a variety of different methods to do so.

Most of them are passive funds that use derivatives to get the inverse return of a certain market index (over certain short periods–often a single day), such as  ProShares Short S&P500 SH, and sometimes with added leverage, such as ProShares UltraShort S&P500 SDS. Others, such as  Federated Prudent Bear BEARX, are actively managed and take tactical short positions in order to hedge during market falls.

But these funds only outperform when the market is in the dumps.

If you had a crystal ball and could reliably predict when the market will sell off, a bear-market fund could work. But your timing has to be spot-on, because if you hold these while the market is gaining–as it has for most of the longer-term trailing periods–you will lose money.

“We’ve always taken the view that market-timing is extremely difficult,” said Charney. “Portfolio managers often get it wrong, so there’s a good chance individuals won’t get it right either.”

Bear-market funds just don’t make sense for long-term, buy-and-hold investors. For one, over the long term, the stock market goes up more than it goes down, so the risk/reward trade-off on bear-market funds just isn’t that great. To illustrate, take a look at the bear-market category relative to the same benchmarks over longer-term periods.

On top of that, the expenses on these types of funds are typically high (the median expense ratio among actively managed funds in the bear-market category is 1.78%). Although passive funds are typically cheaper than actively managed mutual funds that follow bear-market approaches, they are not the perfect solution either.

For one, many ETFs that employ inverse strategies are not designed to deliver the inverse return of the index for periods longer than one day due to the impact of compound interest. These discrepancies can be large and can be particularly magnified during volatile markets, and they were big in 2011, said analyst Michael Rawson. (In fact, the SEC and FINRA issued an alert cautioning investors about the risks of leveraged and inverse exchange-traded funds and clarifying their performance objectives.)

Rawson, who covers two such ETFs–ProShares Short S&P500 and ProShares UlraShort S&P500–notes that the funds carry significant risk and are by no means a long-term, buy-and-hold investment.

What Are Some Other Alternatives? 


If you want to reduce your portfolio’s exposure to equities, you may be better off assessing your asset allocations than holding a bear-market fund. For example, carving out a portion of your portfolio to be held in liquid assets (one year or more of living expenses, depending on your needs and risk tolerance) is the linchpin of Morningstar director of personal finance Christine Benz’s bucket portfolio approach. Though cash yields are close to zero, Benz notes that “the goal of this portfolio sleeve is to stabilize principal to meet income needs not covered by other income sources.”


Another option is to check your bond allocations. As Benz notes in her recent article “The Best Diversifier Has Been the Simplest”, despite the proliferation of instruments designed to provide diversification in recent years, high-quality bonds have proved to be the best foil to equities during the past decade. Looking at the long-term correlations among various asset classes, Benz noted that the open-end long-term government-bond category is the only category with a strong negative correlation to both the large-cap blend and foreign large-cap blend categories. And in fact, amid recent market turbulence, the long-term government category has been in the black, gaining 1.3% for the week and 3.3% for the month through Aug. 24, according to Morningstar Direct.

Market-Neutral Funds

If the appeal of a bear-market fund for you is the low correlation with the stock market (bear-market funds have a beta relative to the S&P 500 of around negative 1.3 to 1.5 over all long-term trailing periods), market-neutral funds could be a better alternative. Market-neutral funds aim to generate a positive absolute return by taking little or no market risk (very low beta). In order to achieve this, managers employ a variety of means, including going long and short simultaneously and in equal proportion, stock-picking, and quant strategies. Among the funds we like in this space are two with Morningstar Analyst Ratings of Silver,  Merger Fund MERFX and  TFS Market Neutral TFSMX, as well as five Bronze-rated funds:  AQR Diversified Arbitrage ADAIX,  Arbitrage Fund ARBFX,        BlackRock Global Long/Short Equity BDMIX,  Touchstone Merger Arbitrage TMGAX, and  Vanguard Market Neutral VMNIX.

Stay the Course

But if you can handle the market volatility and have a long time horizon, generally it is not necessary to tinker with your portfolio unless your targeted allocations drift far off-course. “Volatile markets can be a breeding ground for knee-jerk investment decisions motivated by emotions more than fundamentals; undertaking a major portfolio renovation in such trying times is usually not a good idea,” said Benz. Also, keep in mind that whether you are an investor looking for opportunities to scoop up high-quality stocks on sale or a long-term investor dollar-cost averaging into a fund, when many people in the market are sellers, it can be a great time to be a buyer. “[Stay] attuned to potential bargains that can crop up when market participants overshoot on the downside,” adds Benz. “(And they reliably do.)”

Written by Karen Wallace of Morningstar

(Source: MSN)

Special Report on the Recent Market Volatility

Market Crash

The last 5 trading days (August 18th – 25th) have been crazy ones in the market, with the Dow Jones Industrial Average down 9.39%. Here are five key points to help you understand how Lake Avenue Financial has been managing their client portfolios during this time.

1. This market correction, long overdue, is exactly what Lake Avenue Financial’s proactive portfolios are built for. We have been prepared for this correction and have been cautioning against one for the last 6 months.

2. Our hedge positions and conservative allocations are working exactly as intended. Our long-term investments in gold and managed futures have helped smooth out the ride and have actually appreciated in value during this last week.

3. Our investments in municipal bonds and short-term bonds bolstered our actively managed portfolios. The fixed income portion also has been a great place for clients to wait as we realized a financial “storm” was on the horizon. We will maintain these positions till we feel that the “storm” has passed.

4. We will be utilizing the dollar cost averaging strategy to get back into the equity markets. This strategy allows us to purchase shares of any stock, mutual fund or ETF over a 3 to 6 month time frame. This way, we are not trying to time the market. Instead, our clients are getting an average price per share. Thus reducing the impact of volatility in the markets.

5. Lake Avenue Financial has partnered with the cutting edge technology at Riskalyze to help pinpoint our client’s acceptable level of risk and reward with unparalleled accuracy. This helps us ensure that our client’s portfolio aligns with their investment goals and expectations.This technology allows us to make the right financial decisions, manage their assets more efficiently and minimize the volatility in our client’s accounts. We invite you to click on the button below for your free portfolio risk analysis.

With your FREE Portfolio Risk Analysis, you’ll finally be able to answer questions like…

What is my Risk Number?

Does my existing portfolio fit me?

How would I align my current portfolio with my Risk Number?

What would happen to your portfolio if the 2008 crash happened again? Or how would the bonds in your account react in a rising interest rate environment?


If you want the answer to these questions and more, just click on the button below!

What’s the Difference Between an Index Fund, an ETF, and a Mutual Fund?

© Getty Images: Mike Kemp
© Getty Images: Mike Kemp

Q: What is the difference between index funds, ETFs, and mutual funds? — Gary

A: An easy way to think about it is this: Exchange-traded funds, or ETFs, are a subset of index funds; and index funds are a subset of mutual funds.

“It’s like a funnel,” says Christine Benz, director of personal finance at fund tracker Morningstar.

Let’s start with the broadest of the three categories: mutual funds.

What is a mutual fund

A mutual fund is a basket of stocks, bonds, or other types of assets. This basket is professionally managed by an investment company on behalf of investors who don’t have the time, know-how, or resources to buy a diversified collection of individual securities on their own.

In exchange, the fund charges investors a fee, which may run around 1% of assets annually or more. That means $100 for every $10,000 you invest.

In the case of most stock funds, holdings are selected by a portfolio manager, whose job it is to pick the stocks that he or she thinks are poised to perform the best while avoiding the clunkers. This process is referred to as “active management.”

But “active management” isn’t the only way to run a mutual fund.

What is an index fund

An index fund adheres to an entirely different strategy.

Instead of picking and choosing just those stocks that the portfolio manager thinks will outperform, an index fund buys all the shares that make up a particular index, like the Standard & Poor’s 500 index of blue chip stocks or the Russell 2000 index of small-company shares. The aim is to replicate the performance of that entire market.

But because index funds buy and hold rather than trade frequently — and require no analysts to research companies — they are much cheaper to operate. The Schwab S&P 500 Index fund, for example, charges just 0.09%, or $9 for every $10,000 you invest.

By definition, when you own all the stocks that make up a market, you’ll earn just “average” returns of all the stocks in that market. This raises the question: Who would want to settle for just “average” performance?

As it turns out, plenty of investors around the world. While it’s counter-intuitive, academic research has shown that the higher expenses associated with active management and the inherent difficulty of picking winning stocks consistently over long periods of time means that most funds that aim to beat the market actually end up behind in the long run.

“In general, active funds have not delivered impressive performance,” Benz says. Indeed, S&P Dow Jones Indices has studied the performance of actively managed funds. Over the past 10 years, less than 20% of actively managed blue chip stock funds have outperformed the S&P 500 index of blue chip stocks while fewer than 15% of small-company stock funds have beaten the Russell 2000 index of small-cap shares.

What are ETFs

Okay, index funds sound like a good bet. But what type of index fund should you go with?

Broadly speaking, there are two types. On the one hand, there are traditional index mutual funds like the Vanguard 500 Index. Then there are so-called exchange-traded funds, such as the SPDR S&P 500 ETF (SPY).

Both will give you similar results, but they are structured somewhat differently.

For starters, with a mutual fund, you often buy and sell shares directly with the fund company. The fund company will let you trade those shares once a day, based on that day’s closing price.

ETFs, on the other hand, aren’t sold directly by fund companies. Instead, they are listed on an exchange, and you must have a brokerage account to buy and sell those shares. That convenience typically comes at a price: Just like with stocks, investors pay a brokerage commission whenever they buy and sell.

That means for small investors, traditional index mutual funds are often more cost effective. “If you are on the hook for trading costs, that can really eat into your returns,” says Benz.

On the other hand, because they are exchange traded, ETF shares can be traded throughout the day. Being able to trade in and out of funds during the day is a convenience that has proved popular for many investors. For the past decade exchange-traded funds have been one of the fastest growing corners of the fund business.

Written by Ian Salisbury of Money

(Source: Time)