Money Management - Exchange Traded Funds - Essay Example

?Executive Summary Most businesses rely on capital and investments to initiate and grow their businesses. These businesses rely on different sources of capital income in undertaking their business needs. Some of the common forms of investment include bonds, stocks, certificates and Exchange Traded Funds. During the 1990’s several stock exchanges faced financial problems causing major losses to investors. The bubble bust as the bear run that affected the stock markets such as the NYSE (New York State Exchange) and other major stock exchanges. As a result, many investors shied away from the market and opted for low risk investments with good returns. Most of these investors turned to government bonds, certificates and private or corporate bonds from reputable firms (Madura, 2008, p.13). This trend led to the emergence of special funds which allowed small investors to pool funds and investment in a number of securities or stocks. These funds are managed by fund managers which became popular with huge companies like insurance firms and banks. However the costs of managing these funds were high and some investors looked for other options to invest. This led to the emergence of Exchange Traded Funds (ETFs), which allowed investors to put their money on investment funds to be traded on stock exchanges (Abner, 2010). ETF investment funds incorporate an array of assets such as stocks, commodities or bonds and trades at a price close to the net value of these combined investments. For the many years it has been in existence, EFT’s have been successful with current stock markets due to its flexibility and low risk. Table of Contents Executive Summary 1 Table of Contents 2 Introduction 3 Individual Analysis 3 EFT Analysis 5 Swiss Based ETFs 5 Other Managed Funds (ETFs) 6 Personal Asset Allocation 8 The art of investing requires careful planning in asset allocation since the way you allocate your assets reflects the return on your investment. For instance, if you have $ 100, 000, you should invest in a number of investment options. Time factor is one of the most crucial factors to watch out while investing. Looking at the Swiss market, we witness that the some mutual funds have been performing very well compared to some ETFs. Therefore, it not easy to conclude that mutual funds are better than ETFs or vice-versa, the most important factor is tracking these investments over a suggested period of time (Ferri, 2011). A look at ComStage Stoxx Europe 600 ETF Household goods based product we notice that this ETF tracks household goods stocks in the Swiss market. This ETF has performed well over the past two years returning 40.2% compared to the ComStage Stoxx Europe 600 Food & beverages ETF which returned only 24.1% as witnessed by table 4 in the appendix. In comparison to the United States of America where there is a mid cap fund that has returned over 41.87%. This performance is better than the ETF based investment option in Switzerland (Wagner, 2008). This mutual fund is known as the JB holdings fund and it has invested in different segments based on a selected benchmark. A list of investments in the JB holdings fund is shown by table 5 in the appendix. Based on the analysis of the different ETFs and funds listed above, it is difficult to choose the best investment option by solely choosing and ETF or fund based investment (Madura, 2008). The best investment decision to undertake when investing in an ETF or fund is to analyze the industry or benchmark used in implementing the fund or ETF product. Time factor is also very important since most ETFs or funds take a minimum of three years for the investment to make marginal gains. 8 Current Investing Trends 8 References 12 Appendix 14 Introduction The art of investing is very difficult and challenging and many a times, people find it difficult to invest. Several investment options are available to potential investors interested in making profits. Investing is a risky venture and many people prefer to invest in low risk investments. As a result, many investment banks and firms have opted to create investment options for different investors in the market. Investment decisions are based on the type of investment, time horizon and risk tolerance. These factors are widely considered by novice and experts in the process of making investment decisions. During the early 1990’s several investment options were availed to investors who were interested in low risk investments. Professional financial analysts and advisers devised ways of accommodating these low risk investors. As a result, funds were created to allow small investors interested to pool their resources into investment options that were flexible and less risky to invest. Hedge funds, unit trusts and EFT’s were introduced alongside traditional stock trading markets and other investment options. This essay is going to analyze the different types of investments funds available to a potential investor. Individual Analysis The task of investing involves the tasks of analysing the individual portfolio and risks associated with a specific person. In the analysis of the individual portfolio includes analysing the character, lifestyle, time horizon and the objectives of the investor. These factors depend on the type of investment in which an individual chooses. In this essay we are going to look into the option of ETFs, whereby a certain person can choose to invest in this class of investment. The process of investing in ETFs requires people to analyse their own personal objectives, finances and timing. Character: As a retail investor, I have the tendency to set aside a small portion of my finances to invest in different investment options. I weary of investing in the stock market due to the fluctuations that the stock market that could easily wipe out my investments. The small portion of savings affords me the opportunity to invest in long-term investment options such as ETFs. For instance, ETF based investment products would be suited for an investor like me due to it little capital outlay compared to bonds or treasury bills (Kristof, 2010). Lifestyle: As an employed person, I live a modest lifestyle within my means and this ensures that I spend most of my earnings with little savings to spare. In the future I want to reduce my expenses and live a better lifestyle and as a result, it would be prudent to invest in a long-term investment option like an EFT based product. As a result, an ETF would help me pay for the mortgage debt taken for a period of 15 years. Time Horizon: The art of investment is time bound and analysing the period one is going to invest is very prudent. Time horizon is very important because it reflects on the objectives of the investor. Successful investors like Warren Buffet and Jim Rogers recommend people to invest for the long term since it is safe and benefits can be accrued easily. Statistics from different fund managers and stockbrokers show that investments from different sectors require at least 3 years for the investments to reap benefits (Greenwood, 2006, p.32). In my case I would choose to invest in ETF based products which are geared towards accruing benefits in the long term. The emerging markets of Asia and Africa are good investment grounds for any astute or upcoming investor. Many ETF products are moving to these markets with the intention of reaping maximum benefits from these markets. Objectives: In the analysis of personal objectives, an individual has to be realistic and come up with a mix of investment options that suit him/her. In my case, I tend to invest for the long term since my main goal is to secure the house that has a mortgage and build an investment portfolio for the long term purpose (Laffie, 2005, p.115). There are several ETF options that would allow me to invest in these markets and thus build a good investment portfolio. Investment Options Analysis Making investment decisions is a difficult and challenging task for most investors especially novice investors. As a result it is prudent for one to analyze all the investment options and products available in the market. Through analysis of the different products and options, the investor has the opportunity to choose the best investment option to choose from. Below is the analysis of different investment options from which a potential can invest in. EFT Analysis Analyzing EFTs depend on the various EFT investment options that need to analyzed. According to research, most of the EFT products are sold in Europe and thus the task of analyzing EFTs should be done in Europe. Swiss Based ETFs For instance, the Swiss Performance Index (SPI) is an index that tracks the performance of 223 components. While on the other hand there is the FTSE RAFI has only 31 components, this index is important in the tracking of various indices in the Swiss market. The FTSE RAFI is an EFT based system that appreciates as the tracked indices grow. Investing in ETF is simple and it requires very little investment to invest in. For instance, a retail investor can be part of this ETF if he/she has around 100,000 Swiss francs. Another important ETF is the Powershares RAFI Switzerland fund which incorporates investment in a cross section of industries and companies listed in the Swiss stock market (Kristof, 2010). This ETF is capitalized to the tune of 13.7 billion Swiss Francs with a price to earnings ratio of 13.5%. The return on investment for the equity in the Powershares RAFI ETF stands at 11.94%. The total rate of return on this ETF stands at around 0.55% per annum with very little management fees. The ETF is listed in the Switzerland and Italy as witnessed by table 1 in the appendix section. There are several ETF products in Switzerland that track the Swiss Market Index (SMI). The SMI is one of the most used indicators in tracking the Swiss stock markets. This index is used with a blue chip index which tracks top 20 of the largest Swiss stocks. The table 3 in the appendix shows a number of ETFs which track the SMI. From the table we witness that the Comstage ETF is swap based meaning that it does hold the components of the SMI but enters into a SWAP agreement with a bank. The agreement allows the brokers to exchange the performance of the of SMI index with performance of the real holdings of the fund (Wagner, 2008). The Comstage ETF has one of the best performances in the Swiss market; this is because of the replication method it makes use of. The other two big players in the ETF industry include CS and UBS which have lower performance due to the exposure to the market. The CS and UBS have a very large market presence in the Swiss Market. A retail investor with interest in investing in the ETF market in Switzerland would go for the Comstage ETF (Hall, 2004). However, the SMI is not the best index to use in investing in the Swiss market Other Managed Funds (ETFs) Apart from ETFs from Europe there were other managed funds that returned good earnings from the invested funds. The US market presents an opportunity for investors interested in making money through ETF based products. The standard benchmark used in the United States of America is the S&P 500 index; this index includes in its analysis the top 500 companies by capitalization in the US (Laffie, 2005). Some of the best ETF based investments in this market are analyzed below: Powershares FTSE RAFI US 1000 Portfolio: This ETF is weighted according to the 1,000 companies in the US which are ranked according to value. This index outperformed the S&P 500 and the Russell 1000 index in the period between 2005 and 2010. For instance if an investor had invested $ 10,000 in 2005 would now be worth $ 12, 607 against the other performing fund of S&P whereby an investor would be worth $ 11, 364. Ishares Morninstar Large Core Fund: Another ETF based product is the Morningstar Large Core fund, this ETF categorizes shares and funds by capitalization and investment style. It groups a number of objective criteria to fit nine possible criteria. This ETF does not place growth or value characteristics as being predominant. The total expenses of this ETF stood at 0.2% while the ETF outperformed the S&P 500 over the period of the last five years. The analysis of this ETF is shown by table 2 in the appendix. In the selection of the best ETF product to invest in, it is important to note that indices are not created equally and it is important to conduct research on which ETF you have to track. Allocation strategy used in ETF can be applied in several key markets such as the US and Switzerland (Faerber, 2006). Finding information on ETFs and indices is quite simple since several legal requirements allow data on ETFs and indices to be transparent. Personal Asset Allocation The art of investing requires careful planning in asset allocation since the way you allocate your assets reflects the return on your investment. For instance, if you have $ 100, 000, you should invest in a number of investment options. Time factor is one of the most crucial factors to watch out while investing. Looking at the Swiss market, we witness that the some mutual funds have been performing very well compared to some ETFs. Therefore, it not easy to conclude that mutual funds are better than ETFs or vice-versa, the most important factor is tracking these investments over a suggested period of time (Ferri, 2011). A look at ComStage Stoxx Europe 600 ETF Household goods based product we notice that this ETF tracks household goods stocks in the Swiss market. This ETF has performed well over the past two years returning 40.2% compared to the ComStage Stoxx Europe 600 Food & beverages ETF which returned only 24.1% as witnessed by table 4 in the appendix. In comparison to the United States of America where there is a mid cap fund that has returned over 41.87%. This performance is better than the ETF based investment option in Switzerland (Wagner, 2008). This mutual fund is known as the JB holdings fund and it has invested in different segments based on a selected benchmark. A list of investments in the JB holdings fund is shown by table 5 in the appendix. Based on the analysis of the different ETFs and funds listed above, it is difficult to choose the best investment option by solely choosing and ETF or fund based investment (Madura, 2008). The best investment decision to undertake when investing in an ETF or fund is to analyze the industry or benchmark used in implementing the fund or ETF product. Time factor is also very important since most ETFs or funds take a minimum of three years for the investment to make marginal gains. Current Investing Trends The current investment market is very competitive with a lot of products on offer for potential investors. From the analysis above we are able to establish that many investors still invest in traditional investment instruments. Some of the common and most preferred investment instruments include bonds, stocks and active investment funds. Investors choose the best suited investment product or option based on factors such as cost, returns and objectives (Ward, 2004, p.87). These factors are very important in investing and we are going to analyze these factors in relation to ETFs. Cost: ETFs are cost effective for investors to invest in comparison to other managed funds. This is because the fund manager does not take his time to conduct analysis as compared to other investment options such as active investment funds. Management fees for ETFs are low compared to other investment options with fees standing from 0.15% to 0.90 % (Shen, 2000, p.104). For instance, a look at the FTSE RAFI ETF, it has a low maintenance fee of 0.55% per annum same as the Ishares Morninstar Large Core Fund ETF. Regular fees make ETFs less attractive as it is witnessed by the DAX 30 which was a long term investment and thus it erodes profits. As a result, various ETFs have low management fees and are cheaper for an investor to maintain an ETF compared to active investment funds such as unit trust of hedge funds (Ferri, 2011). Returns: The most important factor in undertaking an investment is based on returns on the invested funds. Different investment options do not guarantee good returns but ETFs allow good returns on invested funds. For example, the Powershares FTSE RAFI US 1000 and the ComStage Stoxx Europe 600 has one of the best market returns. The ComStage Stoxx Europe 600 luxury goods based ETF returned an average of 41.87% per annum. Thus it is important to conclude that ETFs and investment funds return good investment results (Shleifer, 2002). Objectives: Different investors have different objectives in their investment decisions. For instance, a large investor will want to invest funds in different investment options for short terms gains. Investing in ETFs requires modest finances and many ETFs are currently designed to ensure that retail investors to invest in ETFs. Investment in the ETF and investment funds markets is very challenging but it is important to invest in growing markets. For instance, the Asian and Latin American markets are growing at a rapid base and as a result, an investor should target ETFs and funds which target these markets (Ryan, 2009). Based on the assessment of the factors above, it is prudent to conclude that investing in ETF as the best investment decision for any investor. Moreover, other investment products offer little returns compared to ETFs while some of them have become risky for investment. For instance, government bonds offered by some European countries are not safe since these countries have likely chances of default. The above analysis of ETFs shows that investing in ETFs is cost effective since management fees paid out to brokers is minimal. On the other hand, the returns from ETFs are better than other investment options. Timing and analysis of good investment options is necessary in choosing the best investment market (Brennan, 2004). Timing is very important since with time new and upcoming markets are growing and playing catch up to more traditional markets of Europe and the United States. Conclusion Investing is a very crucial task that requires patience and expertise for an individual or organization. Due to the complexity in the task of investing, several experienced and professional individuals have emerged in the investments field. Numerous investment products and options are available currently compared to the past. Most of these products have been designed to make the task of investing easy and rewarding. In the process of investing, thorough analysing is necessary for an investor to choose the right invest option. According to successful investors, it is important for an investor to invest in the long term and invest in a number of investment options. Investing in ETFs for the long term has been beneficial since investors have been able to reap investment growth of up to 30% for a long period. For investing to be rewarding, it is important for investors to invest in a number of investment options. This is because the stock market is very unpredictable and thus investing should be done for the long term. References Abner, D., 2010. The ETF handbook: how to value and trade exchange-traded funds. London: Taylor & Francis. Bernstein, P., 2002. A Primer on Exchange-Traded Funds: CPAs Should Know the Difference between ETFs and Mutual Funds. Journal of Accountancy, 193(1), p.94-98. Bernstein, W., 2002. The four pillars of investing: Lessons for building a winning investment strategy. London: Penguin Publishers. Brennan, J. and McCave, M., 2004. Straight Talk on Investing: What You Need to Know. New York, NY: Springer. Brookings Papers on Economic Activity, 1(1), p.87. Dorsey, P. Mansueto, J. and Morningstar Inc, 2003. The five rules for successful stock investing: Morningstar's guide to building wealth and winning in the market. Chicago, IL: John Wiley and Sons. Faerber, E., 2006. All about bonds and bond mutual funds: the easy way to get started. Manchester: FK Publications. Ferri, R., 2011. The ETF Book: All You Need to Know About Exchange-Traded Funds. Sydney: Routledge. Greenwald, B. Kahn, J. and Sonkin, P., 2004. Value Investing: From Graham to Buffett and Beyond. Boston, MA: McGraw Hill Professional. Greenwood, D., 2006. The Dividend Puzzle: Are Shares Entitled to the Residual?. Journal of Corporation Law, 32(1), p.30-33. Hall, P., 2004. Bucking the Trend: the Unsupportability of Index Providers' Imposition of Licensing Fees for Unlisted Trading of Exchange Traded Funds. Vanderbilt Law Review, 57(1), p.42-49. Kristof, K., 2010. Investing 101. Lowell, MA: John Wiley and Sons. Laffie, L., 2005.Tax Benefits of Royalty Trusts: Another Way of Investing in Commodities. Journal of Accountancy, 200(1), p.114-116. Larimore, T. Lindauer, M. and LeBoeuf, M., 2007. The Bogleheads' Guide to Investing. Austin, TX: Pelshiver. Madura, J. and Ngo, T., 2008. Pricing Behavior of Exchange Traded Funds. Journal of Economics and Finance, 32(1), p.11-15. Niskanen, J. and Falkenbach, H., 2010. Reits and Correlations with Other Asset Classes: A European Perspective. Journal of Real Estate Portfolio Management, 16(1), p.107-110. Ryan, J., 2009. Managing Your Personal Finances. Washington DC, WA: Prentice Hall. Shen, P., 2000. The P/e Ratio and Stock Market Performance. Economic Review - Federal Reserve Bank of Kansas City, 85(1), p.103-106. Shleifer, A., 2002. Inefficient Markets: An Introduction to Behavioural Finance. Oxford: Oxford University Press. Wagner, D., 2008. Trading ETFs: Gaining an Edge with Technical Analysis. Berlin: Kogan Page. Ward, B., 2004. Demography and the Long-Run Predictability of the Stock Market. London: FK Publiushers. Appendix WEIGHT NAME SECTOR 15.54 Nestle S.A. Consumer Staples 12.87 Novartis AG Health Care 11.71 UBS AG Financials 9.48 Roche Holding AG Health Care 9.00 Zurich Financial Services AG Financials 7.91 Credit Suisse Group AG Financials 5.93 Swiss Reinsurance Co. Financials 3.20 ABB Ltd. Financials Table 1 Symbol Name % Net Assets GE GENERAL ELECTRIC CO 5.66% IBM INTL BUSINESS MACHINES CORP 5.19% PG PROCTER&GAMBLE CO 4.48% JNJ JOHNSON&JOHNSON 4.32% WFC WELLS FARGO&COMPANY 4.13% BAC BANK OF AMERICA CORP 3.62% PM PHILIP MORRIS INTERNATIONAL 2.98% WMT WAL-MART STORES INC 2.69% PEP PEPSICO INC 2.59% OXY OCCIDENTAL PETROLEUM CORP 2.14% BRK/B BERKSHIRE HATHAWAY INC-CL B 2.09% Table 2 Name TER Curr Replication Issue Date Dividends Period CS ETF (CH) on SMI 0.38% CHF Full Repl. 2001-03-15 Distributing Annually UBS-ETF SMI 0.35% CHF Full Repl. 2003-09-02 Distributing Annually db x-trackers SMI 0.30% CHF Swap 2007-01-22 Distributing Annually ComStage ETF SMI 0.25% CHF Swap 2008-11-28 Accumulating - Table 3 Performance Volatility Name 1M 3M 6M 1Y 2Y 3Y 3M 1Y 3Y CS ETF (CH) on SMI 1.0% 2.0% 4.4% -2.9% 24.1% -3.0% 5.7% 14.4% 24.1% ComStage ETF Stoxx Europe 600 Food & Beverage 0.5% -0.3% 3.6% 13.4% 32.9% n/a% 5.2% 14.6% n/a% ComStage ETF Stoxx Europe 600 Personal & Household Goods 0.5% 0.3% 8.5% 20.2% 40.2% n/a% 6.8% 17.7% n/a% Table 4 Structure Share funds Fashion/Accessories/Jewels 47.70 % Distillers & Vintners 13.30 % Footwear 10.30 % Personal Products 6.30 % Specialty Stores 5.30 % Hotels, Resorts & Cruise Lines 4.50 % Apparel Retail 4.00 % Others 8.50 % Liquidity 0.20 % Table 5 Read More