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Stocks & Equities
What is an Exchange Traded Fund (ETF)?
Exchange Traded Funds or ETFs operate very much like mutual funds except that instead of taking in capital and issuing redemptions on a daily basis they are closed end which means they trade like a stock and are bought and sold on a normal stock exchange. ETFs can be actively or passively managed. They come in all types and at all risk levels. For our purposes, we are going to focus on passively managed indexed ETFs as a means of tracking the performance of a market, style or industry index.
How to Use ETFs?
Our discussion on ETFs will center on using them to create a passively managed segment of your portfolio. The purpose of the indexed ETF is that it tracks a particular index. For example, if you wanted to allocate 10% of a $100,000 portfolio to the TSX Composite index, then you could purchase $10,000 worth of units in an ETF like the S&P/TSX Capped Composite Index Fund which bears the trading symbol XIC. A quick look through iShares.com and you will quickly see that you have access to a wide range of indexed ETFs for virtually every industry in the Canadian market, U.S. based and global equities, as well as style funds, such as the Dividend Aristocrats Index. The same products are also available from other ETF providers such as www.claymoreinvestments.com and www.vanguardcanada.ca as well as all of the major banks.
Passive Mutual Funds (Index Funds) versus ETFs
Although most mutual funds are actively managed, there is a certain class, indexed mutual funds, which provides the same type of passive stock market exposure as indexed ETFs. The difference between the two types of instruments is the structure. Indexed mutual funds are open end funds and receive contributions and redemptions on a daily basis. The fund itself manages these transactions and issues new fund units or redeems existing units for cash based on the daily calculated net asset value (NAV).
ETFs are closed end funds and maintain a consistent number of units which trade on an exchange like a regular stock. The ETF itself does not deal with contributions or redemptions on a daily basis. Just like with a stock, when you want to acquire units you buy them on an exchange and when you want to redeem you sell them on the exchange…the ETF itself doesn’t have anything to do with these transactions.
There is no clear answer for which is better – indexed funds or indexed ETFs. The open ended structure of the indexed mutual fund does require the fund to maintain a higher ongoing cash balance to ensure they can honour daily redemptions. This can create a “cash drag” as not all capital is fully invested and earning a return. ETFs don’t have to deal with daily redemptions and therefore don’t need to carry as much cash. Another interesting characteristic of ETFs is the ‘in kind’ redemption feature which provides tax deferral for unit holders. When an index fund sells stock to fulfill redemption requests, the capital gain tax liability is spread amongst the unit holders, regardless of whether or not they are redeeming. Investors in ETFs can realize return by either selling their units on the open market or by exercising the ‘in kind’ redemption, whereby they would receive a basket of securities proportional to their fractional interest of the securities owned by the ETF. For the “in kind” redemption, no tax liability is incurred unless sales from the basket of securities are made.
Understanding Discounts and Premiums
Another thing worth knowing is that because ETFs trade on an exchange, the price is determined by supply and demand and at times, ETF units can trade at a premium or a discount to their net asset value. Normally, this isn’t too much of a concern as discounts and premiums tend to be very marginal. However, it is worth noting whether you are paying a discount or a premium on the ETF when you purchase it. In general, indexed ETFs should trade at a very modest discount to their NAV.
Conclusion
Indexed Exchange Trade Funds (ETFs) can be highly efficient vehicles through which investors are able to purchase diversified exposure to an entire market index, sector, or geographic region. Benefits include a competitive fee structure, simplicity of trading, tax advantages over indexed mutual funds, and unique features such as in kind redemption. However, ETFs come in all types and risk levels and it is important that investors much understand the type of investment they are purchasing. We advocate the appropriate use of non-leveraged ETFs that are indexed to diversified indices, but warn investors against more exotic ETFs such as those that use leverage or are tied to the performance of commodities or other risky assets.
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They [Different commodities] move in general in the similar direction but maybe at different times. Now, say if the price of corn goes up substantially, the farmers can right away increase the production of corn and a year later the additional supplies will then essentially contain further price increase and the price will go down.
In the case of the oil industry and also for copper, once you have shortages developing, until new large reserves come on stream and until new mines essentially produce, the response time is very long and we have essentially in the world, coming from emerging economies – those would be China and India – very rapidly rising oil demands.
In China over the last fifteen years, oil imports, they have risen three times. China consumes now almost ten million barrels of oil a day. So the demand is there, if they slow down somewhat, long-term it’s there. Every oil well eventually runs dry. It cannot produce forever. New oil is very costly to produce. In other words you have to go and drill and you have to then extract the oil and there’s a lot of safety regulations and very costly, probably around eighty Dollars a barrel.
Ed Note: You might also like:
Crude Oil is Probably Among the Most Attractive Commodities
Faber : I think it’s too late to Buy US Stocks
MADRID (MarketWatch) — Oil futures shot higher on Tuesday, paring losses from a day earlier as investor optimism grew ahead of weekly data on U.S. crude supplies that’s expected to show a drop in inventories.
Crude oil for January delivery jumped $1.15, or 1.1%, to $98.48 a barrel in electronic trading.
Brent crude for January delivery rose 87 cents, or 0.8%, to $110.26 a barrel. A continuous futures chart from FactSet shows Brent at the highest levels since September.
“WTI has been bought on expectations of another strong week of refinery demand for crude while Brent has been a reluctant follower on news that oil from Libya’s east may soon begin to flow again,” said Ole Hansen, head of commodity strategy at Saxo Bank, in emailed comments. “Upside in WTI seems limited to $100 for the time being not least considering that a Brent Crude price much above $110 seems limited at the moment.”
Oil prices on Monday settled down 0.3% on the New York Mercantile Exchange for their first loss in seven sessions after Federal Reserve officials said the central bank could begin tapering down its stimulus program at its meeting next week.
Oil prices rose 5.3% last week for their best performance since July, according to FactSet data tracking the most-active contracts.
Apple Inc. (NASDAQ:AAPL) is set to acquire PrimeSense Ltd, an Israel based developer of chips for three dimensional machine visions for around $350 million, according to a report from Bloomberg citing a source familiar with the matter.
“Apple buys smaller technology companies from time to time, and we generally do not discuss our purpose or plans,” a company spokeswoman Kristin Huguet told Reuters via email.
Sensing technology interests Apple
Prime Sense develops sensing technology that enables the digital devices to take a three dimensional scene, and the same technology has been used in Microsoft’s Xbox Kinect. PrimeSense’s investors include Canaan Partners, Silver Lake, Gemini Israel Funds and Genesis Partners, according to Bloomberg.
PrimeSense develops depth-sensing technology that enables 3D camera in a mobile to support apps like indoor navigation tools of 3D shopping catalogs. The company claims that innovative technology developed by them enables the person to click picture of their living room into a furniture store to know that whether a sofa they are planning to purchase would be a fit in the space. The digital devices once equipped with these technologies can track movements and objects thereby converting them into depth and color.
Apple’s Strategic Startup acquisition
Apple Inc. (NASDAQ:AAPL) may use PrimeSense motion detectors for Apple smart TV product as envisioned by late Apple co-Founder Steve Jobs in his biography by Walter Isaacson. However, Apple smart TV launch has been postponed due to content deal issue. There is no Apple smart TV launch news in sight until the second half of 2014 or later. So, one will have to wait to see how Apple will integrate PrimeSense in its product line.
Apple acquired Israel flash storage chip maker Anobit in January 2012, and PrimeSense marks its second acquisition in Israel.
Apart from PrimeSense, Apple has acquired other major companies recently including software navigation companies like Embark, HopStop.com, Locationary and WiFiSLAM. The company bought Chomp to face lift its App store, and AunthenTec was acquired with the purpose of designing the touch ID security, last year. Apple has around $146.8 billion in cash and investments, and there can be some major acquisitions in the future, as well. The iPhone maker has been keen to acquire such start-ups to develop new products and integrate these technologies.
…..Against Washington and Wall Street
It’s time to get ready to rebel against Washington and against Wall Street investment bankers who play with your money. I’m dead serious about it.
Why? Because the war cycles — as I’ve told you before — are ramping up in a way that has not happened in at least 100 years.
Mind you, the war cycles — a kind of volatility index that measures the cycles of mass human social unrest — are not something to take lightly.
Early this year, in January, I told you how they are ramping up and look what happened:
In April of this year, North Korea threatened to nuke the west coast.
Then in April and May, Egypt erupted in social unrest that led to the ousting of President Mohamed Morsi in July.
Then there was the April Boston Marathon bombing.
And just two weeks ago, on the Money and Markets cruise, I showed everyone who attended how the trajectory of the war cycles is pointing to an acceleration in social unrest starting immediately.
And what’s happened in the last two weeks alone?
China has claimed the airspace over the Spratly and Senkaku Islands, setting off a potential major dispute. Washington sent in B-52 bombers and China countered by sending in an aircraft carrier and jet fighters.
The clash isn’t over. China will own that airspace. And its next move — which could come at any time — will be to take sovereignty of the East and South China Sea, of its shipping lanes and the very big oil and gas deposits near the Spratly and Senkaku Islands.
Meanwhile …
The Ukraine is splitting in two. A civil war is right around the corner, where half the Ukraine sides with Russia and the other half with Europe.
This is a serious situation. And while it may seem like it’s all happening in distant lands and won’t affect you, believe me — it’s coming to the streets of America.
The reasons may be different, and I’ll get to them in a minute, but for the next six years — until the war cycles peak in 2020 — it will be time to batten down the hatches and protect and grow your money like never before.
It will also be time to get ready to join the rebellion against Washington, from the ground up, to get rid of the current form of government, which is as far from what our founding fathers envisioned as can be imagined.
So exactly how will the war cycles show their face in the US of A?
First, the war cycles are international in scope. So while right now we are largely seeing domestic social unrest in many areas of the world, I can assure you that not only are you going to see more of that, but there is also going to be international unrest.
North Korea will act up again. More importantly, the China, Spratly, Senkaku Islands dipute WILL lead to military conflict between Japan, Korea, Indonesia, the Philippines, Vietnam and yes, the United States WILL get involved. I have no doubt about it.
It may not happen tomorrow, or next month. But I am 100 percent confident that in the months and years ahead that because the war cycles are now ramping up near vertically, they are going to lead to a major war.
Second, there’s a major economic war going on behind the scenes. And you need to know about it TODAY.
Washington is getting ready to confiscate large portions of your wealth. I never thought it would come to this, but it has.
I can see it clearly now. It started in September 2011. That’s when Ben Bernanke announced QEIII, but the money-printing failed to have the desired effect. Gold, instead of soaring, plunged. And it keeps on plunging.
Instead, what started to soar is collectibles and portable wealth such as gold coins … jewelry … diamonds … art work … rare books … rare watches … and more.
Savvy investors are now hoarding their wealth and getting it off the grid as much as possible.
WHY? Because all the money-printing in Europe and the United States is not working.
You see, the money-printing was designed not just to try and bolster the economies of Europe and the U.S. — it was also designed to inflate away Europe’s and Washington’s debt problems by devaluing currencies.
But here’s the catch: Right now, with the exception of the equity markets (for good reason which I’ll explain in a moment), disinflation still rules the day in the U.S. and in Europe, clear cut deflation has the upper hand.
In a nutshell, money-printing is not working to inflate away Washington’s or Brussels’ huge debts. So both governments are now turning AGAINST their citizens and are preparing to outright usurp their wealth to pay off gargantuan mountains of debt.
Just connect the dots:
Europe has now approved Cyprus-style confiscation of depositor funds should another bank in the euro zone go down the drain.
In addition, from a rock-solid source I have that is behind the scenes in Washington …
– Leaders in Europe and Washington are seriously considering the 10 percent wealth tax that the International Monetary Fund recently proposed as a solution to pay off government debt!
And here’s the real kicker:
– Again, from my rock-solid source, Washington is also seriously considering nationalizing all U.S. retirement accounts and pensions — a confiscation in disguise.
Look, I’m not the paranoid type. I’m not an alarmist or one who sits around conjuring up conspiracies. Far from it.
But when I connect all the dots — from my studies on the war cycles to what’s happening around the world and behind closed doors … and then I factor in what the markets are telling me, what the NSA spying says, what Obamacare and its 16,000 new IRS agents being hired to enforce it means, I come to one and only one conclusion:
The massively indebted governments of Europe and the United States are now gearing up to pay off debts with your money.
That’s why the rich are now starting to hoard and hide their wealth. That’s why most commodities are still in a deflationary mode. After all, you can’t hoard copper, oil, or corn.
It’s why the NSA spying is continuing with no end in sight, and instead, according to recently released Snowden documents, and as reported by CBS News, the agency is collecting nearly five billion phone records each day, including information from cell phones belonging to Americans overseas.
Ironically, this is the reason the stock market is doing well. Equities are considered non-confiscatable. Equities are now becoming safer to own than cash in a bank. Just ask anyone in Europe. Equities also pay a better dividend as well, and carry none of the risks that government debt do.
Equities have done well in the past when the war cycles have turned up, and they are doing the same again today.
So get ready. As the war cycles heat up, the roots of rebellion will grow.
The good news: Ultimately, there will be a home-grown rebellion that throws the bums in Washington — all of them — out on their butts. A new day will come.
A new government more like our founding fathers envisioned will emerge: A better life, better freedom and equality and the pursuit of happiness for all.
But for the next six years it’s going to be hell.
As for gold and other precious metals, their time to shine again will soon be here.
Gold is moving toward a major January low. Silver to a major February low.
Once the lows are in, the precious metals will really shine, for in the end, they are not hedges against inflation, but hedges against governments run amok.
Stay safe and stay tuned,
Larry
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