This is a transcription of the Mullooly Asset Management Podcast for October 10, 2012.
Brendan: Hello and welcome to the Mullooly Asset Management Podcast for October 10, 2012. This is Brendan and today we’re going to continue our conversation from last week with Tom from Mullooly Asset Management about Exchange Traded Funds.
Tom, with the growth of ETFs, it seems like you can get very specific in what you own and how you invest. Can you give me some examples of this?
Tom: Well, there’s literally hundreds and hundreds of different exchange traded funds that you can invest in. In fact, you can invest in Exchange Traded Funds that only own initial public offerings. You can invest in an Exchange Traded Fund that just owns real investment trusts that own just shopping centers. You can own a basket of internet stocks. You can invest in Exchange Traded Funds that just invest in regional bank stocks. There’s so many different sectors, this is just a couple of examples, but there’s so many different sectors and ways to invest through Exchange Traded Funds.
Brendan: Yeah, definitely sounds like you have a lot of options there. So how do you know which sector to invest in?
Tom: Well, Brendan, the beauty of the point and figure approach that we use to manage our client’s money, that allows us to pinpoint precisely which sectors have the strongest performance or have the best relative strength. And then what we do is, once we identify the sectors that we want to be in, then we can drill down and find an Exchange Traded Fund that owns just a handful of those stocks in that sector or just the entire sector. There’s a lot of flexibility now using Exchange Traded Funds to help clients manage their money.
Brendan: Definitely sounds that way. So I’m guessing that it really pays off to know what you have in your ETFs, right?
Tom: Yeah, you’re exactly right. For example, there’s an agriculture fund, the ticker symbol is DBA, in that basket right now, in October of 2012, you’re going to find things like live cattle futures, futures on sugar, soybeans, corn, cocoa, hogs, and even things like wheat in that basket, so it does give you a lot of diversification, but it’s just the futures on these different agricultural products, it’s not the companies that invest in it.
Likewise, you know, if you were to invest in, if you were looking for a way to play the changes in oil prices, you might want to think about an Exchange Traded Fund, the symbol is DBO, and that is 100% of the futures that trade on light crude oil.
As we mentioned in a previous podcast, there’s two ways to invest in the S&P 500, there’s the traditional cap-weighted S&P 500 that most people are used to, where the big names really drive their performance. And, you know, the big names in the S&P 500 right now, from a cap-weighted perspective, are Apple, Exxon, Microsoft, IBM. But you can also invest when small caps and mid-cap stocks are working better, you can own the equal weighted S&P 500 and that takes all 500 stocks and divides them into equal percentages, so you get a lot more play with mid-cap and small-cap names, just something to know that’s out there.
You can also invest in gold, you can either own gold futures, or through GLD, or the gold mining stocks, which is symbol GDX. There’s also a small cap basket, GDXJ for small cap miners, so if you like gold, you can buy GLD, if you like the mining stocks, you’ve got another option there.
So there’s a lot of different options that you can look at, but you’re right, going back to your original question, Brendan, you really do need to know what’s inside the Exchange Traded Fund.
Brendan: Yeah, it definitely sounds that way. Do you want to talk a little bit about leveraged funds?
Tom: Yeah, I think it’s important that we do. I do get a lot of calls from investors asking about these leveraged funds and you need to know what happens to your fund if you own a leveraged fund. There are some leveraged funds that move 150% of the daily move, sometimes 200%, or 2 times the daily move, and there’s also funds that trade 3 times the daily move. And we say daily move, and it’s important that you know the difference. Because sometimes investors will hear that it’s 2 times the index, and this is what they think, Brendan, they’ll say, “Well, the S&P returned, for example, 10% last year. If I buy this 2 times leveraged fund, I’m going to make 20%.” But that’s not really how it works. The leveraged funds work on 2 times the daily move.
So let me give you an example. If you look at a leveraged fund, if you buy the S&P 500, for instance, SPY is the symbol for their Exchange Traded Fund, if that goes up 1% today, you could expect a 1% move in the S&P Exchange Traded Fund, SPY. If you own the leveraged fund and it’s 2 times the leverage move, if that underlying index goes up 1% today, you can expect that your ETF is going to go up 2% today. And if you own a 3 times leveraged fund, it’s going to go up 3%. So it tracks whatever the index is, whatever that does today, that’s the move you’re going to get times 2 or times 3.
Now, that also works in reverse, so suppose you owned the leveraged index for the S&P 500 and the S&P 500 goes down 2% today, well, a 2 times leveraged fund means your investment is going to go down by about 4% today. And a 3 times leveraged fund is going to go down 6% today.
So a lot of times, these are not really appropriate for individual investors. In fact, in many of the 401K accounts that I manage for investors and deferred comp plans that I manage for individuals, these types of investments are restricted, they can’t even own them, because there’s so much risk and so much volatility that goes on with these investments.
So like we usually say, if you’re relying on a podcast for investment advice, we think you’re making a big mistake. None of the securities that we mention in the podcast should be considered investment advice. In fact, none of the securities that we’ve mentioned in this podcast or any podcast represent a past specific investment from Mullooly Asset Management.
So we strongly urge our listeners to always consult with their investment advisor before making a decision to buy or sell any type of investment.
If you don’t have an investment advisor, we’d be happy to talk to you and answer whatever questions you have. You can find us on the web at Mullooly.net, that’s M-u-l-l-o-o-l-y.net, or you can call us here in New Jersey at 732-223-9000.
Well, Brendan, that wraps up another podcast for this week and we’ll look forward to speaking with everybody again next week. Talk to you soon.