What are the Disadvantages of ETFs?

Posted by dfederman on Jan 12, 2012 in Investor Education | Comments Off

In general, the advantages of ETFs compared to mutual funds are that they are significantly lower in cost and much greater in transparency. And, of course, ETFs, like Index mutual funds, provide broadly diversified exposure to an asset class without the problem of style drift that mutual funds incur.

So what are the disadvantages of ETFs? The disadvantages, when it comes down to it, boil down to how investors use ETFs. For example,there are 1400 ETFs from which to choose. How do you know you are choosing the right ones?

Below are some of the characteristics of ETFs that trap investors, and therefore can be viewed as “disadvantages.”

Niche ETFs – Many ETFs are sliced so thin, there is not real diversification. For example, there is an ETF that tracks Peruvian mining stocks in which three companies account for 45% of the funds holdings. There is also an ETF that tracks smartphone suppliers and another that tracks hard drive makers. This type of market segmenting attracts short-term speculators who are looking to make a quick profit by trading or selling short. Furthermore, many of these niche ETFs have less than $10 million in assets, which is not enough for the fund company to earn a profit.If the fund company cannot earn a profit, they may need to close the fund, causing you a headache.

Leveraged ETFs - These ETFs sound good in theory, but are terrible in practice. Due to the nature of volatility, these 2x and 3x bull and bear ETFs never accomplish what the investors thinks it will accomplish. These ETFs are intended to track DAILY price changes, not long-term trends. Inevitably, these bull and bear ETFs attract greed and fear.

ETFs with few assets - If you’re choosing an ETF, make sure it has plenty of liquidity. i.e. You want to make sure you can easily get in and out of the fund at a fair market price.

Momentary pricing – Remember the “flash crash” on May 6, 2010? Active traders who chose to sell their ETFs during the DJIA’s 1000 point decline caused a permanent loss. This would have been impossible for mutual fund investors because mutual funds price once a day. So in this sense, momentary pricing is a disadvantage.

Buying Time for Europe?

Posted by dfederman on Jan 11, 2012 in Investor Education | Comments Off

Description

Recent stock market activity appears to be headline driven, depending on the latest news from the euro zone. The euro zone nations are reeling from crisis after crisis. Is now a good time to pick up some bargains?

The S&P 500 Index has been a hostage to the headlines, up one day and down the next, depending largely on events in Europe and questions about what they could mean for the U.S. economy. A recent example was the November 30 rally on the news that the Federal Reserve will lead an effort by six central banks to increase global liquidity and avert a credit crisis.¹

While the action was a welcome intervention following tense negotiations among heads of state, it is likely that the agreement will not address the root cause of the problem: a lack of confidence in European sovereign debt.²

Too Much Borrowing

Europe’s challenges stem from a history of significant government borrowing by Italy, Spain, Greece, Ireland, and Portugal, among other countries. When the Greek financial crisis first erupted in 2010, questions about contagion led to borrowing costs that suddenly were unaffordable for Greece and many of its euro zone neighbors. A one-trillion-euro bailout fund was created in October 2011, but it quickly became apparent that the fund was not adequate. Standard & Poor’s has put euro zone countries on credit watch, indicating their bond ratings may be lowered if the situation is not addressed.³

Looking Ahead: Slow Growth and Contraction

The Organization for Economic Cooperation and Development (OECD) anticipates that economic growth will be muted — or it will potentially contract; with the United States in better shape than many countries within the euro zone.

Source: OECD Economic Outlook, November 2011.

What Investors Can Do

Although there are no guarantees, the following strategies may help to maintain a portfolio’s value as events unfold in the euro zone:

• Diversify bond holdings. Many sovereign nations, including the United States, maintain strong credit ratings and the capability to repay bondholders. That said, diversifying fixed-income holdings to include corporate and municipal offerings and being selective in your choices could make your portfolio less dependent on developments in one area of the bond market.⁴
• Investigate revenue streams outside of Europe. Organizations that do a significant amount of business in North America or emerging markets may help to insulate your portfolio from the worst of Europe’s problems.⁵
• Look for companies that generate cash. Organizations with consistent profits may be in a strong position to withstand a credit crunch if lending standards tighten.

Diversifying your bond holdings, looking for revenue streams outside of Europe, and identifying companies that generate cash may be beneficial strategies for mitigating the impact of euro zone developments on your portfolio.

Source/Disclaimer:

¹Source: money.cnn.com, “Dow Closes with Largest Gain Since March 2009,” November 30, 2011.

²Source: Standard & Poor’s Equity Research U.S. Sector Outlook, “Debt Drag,” November 22, 2011.

³Source: Standard & Poor’s, “Standard & Poor’s Puts Ratings on Eurozone Sovereigns on CreditWatch with Negative Implications,” December 5, 2011.

⁴Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Interest income on municipal bonds may be subject to the alternative minimum tax. Municipal bonds are federally tax free, but other state and local taxes may apply.

⁵Emerging markets are generally more volatile than the markets of more-developed foreign nations, and therefore you should consider this market risk carefully before investing. Investors in international securities may be subject to higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities.

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January 2012 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by  Dan Federman, CFP^® , a local member of FPA.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.

Medications and Seniors

Posted by dfederman on Jan 5, 2012 in Investor Education | Comments Off

Medications are the most effective and popular tool physicians use to treat and cure illnesses. As time progresses, there are more and more medications available for the treatment of disease.

This progress in medicine allows us to live longer and more independently than ever before. At the same time, it seems that we may be taking too many pills. As a group, older Americans take more medications than any other portion of the U.S. population. The use of medications in older adults is likely the result of the increased occurrences of chronic conditions such as diabetes, heart disease, and high blood pressure. Without the effective use of medications, these conditions would be uncontrollable, and they could lead to disastrous results for many older Americans. As advantageous as medications may be, however, there are associated risks that appear to be amplified as an individual ages.

Physically, as the body ages, the ability to absorb medications into the blood stream changes. This affects how the medications react once they have been taken. Many older adults are taking a variety of medications to control more than one chronic condition. Problems with medications can manifest themselves in a number of ways. The first and most common is that the individual may experience adverse side effects that occur in addition to the desired therapeutic effect. Side effects may vary depending on the individual’s disease state, weight, gender, ethnicity, and general health. The older an individual is, however, the more likely the individual is to experience side effects.

Another, more problematic issue with medications is drug interactions. Drug interactions occur when the combination of two or more medications causes a negative reaction. There are three types of drug interactions described by the Food and Drug Administration (FDA). The following is taken from the FDA website:

Drug-condition interactions occur when a medical condition you already have makes certain drugs potentially harmful. For example, if you have high blood pressure or asthma, you could have an unwanted reaction if you take a nasal decongestant.

Drug-food interactions result from drugs reacting with foods or drinks. In some cases, food in the digestive track can affect how a drug is absorbed. Some medicines also may affect the way nutrients are absorbed or used in the body.

Drug-alcohol interactions can happen when the medicine you take reacts with an alcoholic drink. For instance, mixing alcohol with some medicines may cause you to feel tired and slow your reactions.

In order to get the best results possible from your medicines and avoid the interactions described above, The Estate Planning & Elder Law Firm suggests you take the following steps:

Keep an updated list of current medications with you and share them with each physician you see. Many problems arise when an individual sees multiple physicians and none of them is completely informed about other prescribed medications.

Be sure to tell your physician of all medications you take, especially over-the-counter medicines, herbal supplements, and vitamins.

Limit alcoholic beverages if instructed by a physician. Americans over the age of 65 consume more alcoholic beverages than any other age group in America. Studies show a small amount of alcohol can have health benefits, but too much alcohol causes problems.

Take all medications exactly as prescribed, and, if you find yourself having a problem with a medication, then make an appointment to see your physician. Do not simply stop taking any medicine.

Consult a pharmacist. The American Society of Consultant Pharmacists and the Commission for Certification in Geriatric Pharmacy certifies pharmacists as Certified Geriatric Pharmacist (“CGP”). Individuals with a CGP designation have demonstrated expertise in the principles of geriatric pharmacotherapy and the provision of pharmaceutical care to the elderly. If you are an older adult and have questions regarding how your medicines affect you, then you may consider having a CGP perform a medication review. While the CGP cannot change your medicines, the CGP can analyze how you are taking your medications and make suggestions for you to take to your physician to help you get an improved result.

Medicines allow us to live longer, happier, and healthier, but as with anything else, too much can be a bad thing. The Estate Planning & Elder Law Firm recommends that seniors be proactive when it comes to medications. If you are interested in having a medication review, The Estate Planning & Elder Law Firm can assist you with finding a CGP.

High Yields Prove Elusive

Posted by dfederman on Jan 3, 2012 in Investor Education | Comments Off

Description

With Treasuries paying rates in the low 2% range, investors have to search far and wide to find better yields

Where can you find yields higher than the Treasury? Find some suggestions here.

Historically, many retirees and preretirees have looked to their portfolios as a potential source of income. In the current environment, finding these sources is no easy task. Ten-year U.S. Treasury bonds yield only 2.2%, and dividend-paying stocks within the S&P 500 are yielding 2.5%.¹

But there are opportunities for higher yields that investors may want to consider. Higher yields can mean greater risk, so it is important to understand risk and potential return with any investment.

Potential Sources

When looking for yields that currently exceed U.S. Treasury securities, you may want to review the following:

• As of September 30, 2011, corporate high-yield bonds, as measured by the Merrill Lynch High-Yield Master II Index, generated yields of 9.54%. Keep in mind that the yields of some corporate high-yield bonds compensate investors for default rates that historically have been higher than the broader fixed-income universe.²
• Higher-yielding sectors within the S&P 500 have included Telecommunication Services, which yielded 5.59% as of September 30, 2011, and Utilities, which yielded 4.27%.³ Standard & Poor’s believes that expense control and broadband growth will support dividends for the Telecommunication Services sector. For Utilities, Standard & Poor’s anticipates that higher revenue among electric utilities and expanding gross margins for gas utilities will cause the sector’s dividend yield to be maintained.
• Emerging market sovereign debt, as measured by the Merrill Lynch Emerging Market Sovereign Bond BBB U.S. Dollar Index, yielded 4.65% as of September 30, 2011. Emerging market debt provides exposure to markets where economic growth currently exceeds the developed world while avoiding troubled European markets.⁴

Yield and Your Portfolio

The following tips may help you evaluate higher-yielding investments at a time when finding yield remains a challenge.

• Review an investment’s exposure to risk as well as its potential return. High-yield bonds historically have experienced higher default rates than investment-quality issues. Keep in mind that bond prices decrease when interest rates rise, opening bondholders to downside risk if inflation increases and market interest rates rise from their current lows. Holding a bond to maturity eliminates this secondary market risk.
• Diversify sources of yield. Relying too much on one or two income-oriented securities can leave you exposed to unanticipated changes in the financial markets.
• Consider your asset allocation. Since yield is available from both stocks and bonds, you may be able to create a high-yielding portfolio within the framework of your desired asset allocation. Within a stock allocation, equities within the S&P 500 Dividend Aristocrats have increased dividends every year for at least 25 years. Municipal bonds may present tax benefits for fixed-income investors.⁵

The variety of yield sources available presents opportunities to craft an income-generating portfolio suitable for many different risk profiles and time horizons.

Source/Disclaimer:

¹Yields are as of September 30, 2011. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and if held to maturity, they offer a fixed rate of return and fixed principal value.

²Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. They may not be suitable for all investors.

³Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.

⁴Emerging markets are generally more volatile than the markets of more-developed foreign nations, and therefore you should consider this increased market risk carefully before investing. Investors in international securities may be subject to higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities.

⁵Municipal bonds are federally tax free, but other state and local taxes may apply.

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December 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

Required Attribution

Because of the possibility of human or mechanical error by McGraw-Hill Financial Communications or its sources, neither McGraw-Hill Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall McGraw-Hill Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.
© 2011 McGraw-Hill Financial Communications. All rights reserved.