Chapter 23
Using ETF's with AIM
Electronically Traded Funds (ETF's) are a simple but brilliant idea. Each ETF is a basket of stocks like an open mutual fund but trades like a stock and closed-end fund. You can buy or sell an ETF through your broker anytime just like a stock. You can also do things with ETF's that you can't do with mutual funds – short them, put in limit orders and buy or sell them any time without waiting for the end of the day like with mutual funds.
Shares of ETF's are traded with other buyers and sellers. If you want to buy, there's another investor who wants to sell and vice versa. Basically the price you see is the agreed to price for both buying and selling. There is a bid and ask range but usually it's only a couple of cents and not worth worrying about. You will see another excellent way I recommend to play ETF's with AIM in one of the free bonuses I will e-mail you after you give me your e-mail address after buying my e-book.
I will only touch on the basics of ETF's and then get into the nitty-gritty of using them with AIM. There are two excellent books that will tell you everything you want to know about ETF's. The first book is The ETF Book by Richard A. Ferri. The second book is Investing with Exchange-Traded Funds Made Easy by Marvin Appel. Read these two books to get a good overview of ETF's.
Use Limit Orders with ETF's, Stocks, Closed-End Funds and LEAPs
We all know that the stock market is in a free-fall as of October 10, 2008 when I'm writing this. We also know the prices for ETF's and other investments could go lower. So when do we buy? Do we buy now? Do we wait? Well, we can have the best of both worlds. We can buy now but put in a limit order. That means if we like an ETF like iShares FTSE/Xinhua China 25 Index Fund – FXI, here's what I recommend you do.
You can easily get the current 52-week high, low and current prices by going to Yahoo Finance or the New York Stock Exchange website which is http://www.nyse.com and typing in the ETF symbol box in the quote box at the top of the page. As of October 9, 2008 checking FXI tells us the following: 52-week high – $73.19; 52-week low – $26; current price $26. Well that certainly meets my definition of buying at or near the 52-week low. But can I do even better than buying at the 52-week low? Yes I can.
My instincts and readings tell me we will have a continuing downturn for anywhere from 3 to 6 months. Now is still a good time to buy. So what do we do? Well, I realize that ETF's are not as volatile as a stocks or LEAPs which is good if I am not an extreme risk taker. But still ETF's are volatile enough for AIM – all the ones you'll see listed here have very good high/low spreads – most over 100%.
So here's what I do with FXI and other ETF's and other investments I want to buy now. I put in a limit order with my broker. It's very simple to do and a limit order stays on the books for I believe 90 days. So for FXI, I see the current price is $26. I can place a buy order with my broker at say $23 or $21 or even lower and wait to see if the price drops enough for my buy to be made..
You will see many ETFs suffered the same fate in this bear market – they are all at or near their 52-week lows. Basically when you buy an index ETF you are betting on the direction of the market. Buying these ETFs is like buying the indexes and the stock itself. Going down and start going up. You're betting that the market will soon swing from bear to neutral and then to a bull market By putting in the limit order you don't have to worry about watching the stock ticker all day so you don't miss buying at the lower price you want to buy at. Using limit orders is very good strategy for making more money when the bull market finally comes around. And it will!
The Dow actually dipped to about 6,500 before it rebounded and currently it is that about 12,000 so you see AIM would've made you good profits on ETF's if you had bought on the way down to 6,500 and eventually you would've gotten some sells on the way back up to 12,000.
Types of ETF's I Recommend
After reading Richard A. Ferri’s book, The ETF Book, I was convinced to buy ETF's that are mirror images of established indexes, buy ETF's related to countries, buy ETF's related to industries, and buy ETF's related to Real Estate Investment Trusts (REITs). These are considered passive ETF's which means there is no fund manager making the decision. The ETF mirrors the index it tracks, so theoretically if the Dow Jones Industrial Average goes up 5%; your ETF tracking the Dow Jones Average goes up 5%. Vice versa, if the Dow Jones Average goes down 5%, then ETF goes down 5%.
I think you see from the below sample of large index ETF's (again you will find several spreadsheets listing these ETF's in your free Adobe Acrobat version of my investing book) that they are all down at or near their 52-week lows just like their big brothers the indexes themselves at the time I wrote this).. When the indexes go back up, the ETF will go back up. Take a look at the sample of index funds listed below. You’ll see the vital info on them including the 52-week highs, lows, current price and yields. These index ETF's don't pay large dividends like the REIT ETF's you'll see a little further down in this chapter.
On the next page you'll see a sample of index ETFs. You will see they have all suffered the same fate in this bear market – they are all at or near their 52-week lows. Basically when you buy an index ETF you're betting on the direction of the stock market itself. Buying these ETFs is a bet that the indexes and stock itself will stop going down and start going up. You're betting that the market will soon swing from bear to neutral and then to a bull market. Remember that life and stock markets go in cycles. At the bottom of the Great Depression in 1931, the Dow Jones Industrial Average hit its all-time low of 31. Even with this bad bear market, it's still around 8,200. And I don't think it will go that much lower before it starts turning around. With the benefit of hindsight as I rewrite this in 2011 we know that the Dow Jones Average went down to around 6,500 and has since rebounded and is now around 12,000.
I will also give you examples of global, industry, and REIT ETF's and you will see they look pretty similar to the index ETF's. I think ETF's are an excellent way to invest in a severe bear market because they are conservative, are balanced among many stocks, pay good dividends for the most part, and have good high/low swings. Look over the different spreadsheets I think you'll see ETF's can play an important part in your AIM portfolio.