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In recent years exchange traded funds (ETF’s) have become the talk of the town. I have recently ventured into the world of ETF’s and have been quite impressed with them.

An ETF is similar to a mutual fund with the exception that it is traded like a stock. The nice thing about ETF’s compared to mutual funds is the initial cost. Most quality mutual funds will require a $3,000.00 initial deposit; while ETF’s can be started for as little as $500.00. ETF’s usually track a specific sector or index, and new ones are being created all the time.

The advantages of ETF’s are their cost, liquidity, and the ability to give investors instant diversification. It is much easier to buy an ETF than to buy a basket of stocks on your own.

Some argue that the disadvantage of ETF’s is that they are relatively new and do not have a long enough track record. However, I think ETF’s have been around long enough now that investors who take their time can build a very solid portfolio consisting of ETF’s.

If I was given the chance to start over again, I would definitely purchase ETF’s before I started to invest in individual stocks. Investing in individual stocks for a person that is completely new to the market is simply not the way to go in my opinion. There is so much to know and learn about investing in individual stocks that make it almost impossible for a new investor to be successful. Therefore, I think the best advice for a person new to the markets is definitely to start with ETF’s or at least a mutual fund.

Remember there are sharks out there on Wall Street looking to take the money out of the hands of the small individual investor. However, if you keep your investment portfolio well-diversified it is harder for them to manipulate the markets as a whole as opposed to one individual stock.

Now that more and more Malaysians are more aware of REITs in Malaysia, I’m sure that it’s just a matter of time that Malaysians will be exposed to investing in Exchange Traded Funds (ETF) in our country.

The question is What are the ETFs that are available in Malaysia?

1) CIMB FTSE ASEAN 40
This fund follows the FTSE/ASEAN 40 Index which consists of the largest 40 companies by full market value listed on the stock exchanges of Indonesia, Malaysia, the Philippines, Singapore and Thailand that qualify for inclusion in the FTSE/ASEAN Index.

2) CIMB FTSE Xinhua China 25
This fund follows the FTSE/Xinhua China 25 Index which consists of the 25 largest and most liquid Chinese stocks (Red Chip and H shares) listed and traded on the Hong Kong Stock Exchange (HKSE).

3) MyETF Dow Jones Islamic Market Malaysia Titan 25
MyETF-DJIM25 is the first Shariah ETF introduced in Asia. The benchmark index for MyETF-DJIM25 is the Dow Jones Islamic Market Malaysia Titans 25 Index. It’s status as a national ETF derives from the participation of 7 government linked investment companies as its initial seeders. The 7 are Khazanah Nasional Berhad, Kumpulan Wang Persaraan (Diperbadankan), Kumpulan Wang Simpanan Pekerja, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji, Permodalan Nasional Berhad and Valuecap Sdn. Bhd.

4) ABF Malaysia Bond Index Fund
The Fund is Southeast Asia’s first bond exchange traded fund. It is essentially a unit trust, but its units are listed on Bursa Malaysia. The Fund is a portfolio of Malaysian government bonds comprising a basket of Ringgit denominated bonds. The index basket consists of Malaysian government bonds.

5) FTSE Bursa Malaysia KLCI ETF
This fund follows the performance of FTSE Bursa Malaysia KLCI*. When you buy the FTSE Bursa Malaysia KLCI ETF, you are effectively buying into the Malaysian market performance by owning top 30 Malaysian companies.

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An Exchange Traded Fund (ETF) is a hybrid between a stock and an index and is a vehicle for investing directly in a specific market. ETFs are traded on the stock exchanges as regular stock but reflect the performance of a specific index. Like stocks, shares are bought and sold through a broker, dividends are paid to stockholders, and shares can be bought on margin. The difference is that ETFs are a fixed portfolio of securities that mirror a particular index. Think of an exchange traded fund as a mutual fund that trades like a stock.

ETFs may be the better investment if the market is doing well and one of your specific stocks is not. For example, when you buy DIA, you are buying a piece of the portfolio of stocks that compromise the Dow Jones Industrial Average (DJIA). Buying separate shares of the 30 stocks that comprise the DJIA in order to have a portfolio that mirrors the index would not be practical.

The first exchange-traded fund was the S&P 500 index fund (nicknamed spider because of the SPDR ticker symbol), which began trading on the American Stock Exchange (AMEX) in 1993. Today there are hundreds of ETFs trading on the open market.

Here are some important points to know when investing in ETFs:

1) You can easily buy them through your broker and buy as little as one share.

2) You can short them and purchase on margin.

3) Expense ratios for most ETFs are lower than those of the average mutual fund.

4) You pay your broker the same commission that you’d pay on any regular trade.

5) Be prepared for tax implications as there is less incidence of capital gains consequences. Also, dividends may be issued.

6) Valuation is not precise – the ETF may not mirror the index 100%. It is not uncommon to see a 1% or more difference between the ETF and the index’s year-end return.

7) ETFs provide instant diversification.

Popular ETFs include:

1) QQQ: Mirrors the Nasdaq 100.

2) SPDRs: Standard & Poor’s Depository Receipts. The main SPDR tracks the S&P 500.

3) HOLDRS: Merrill Lynch issues specific sector ETFs that are traded on the AMEX.

4) iShares: Barclay’s brand of ETFs that trade on the AMEX. Barclay has put out a number of technology-oriented iShares that follow Goldman Sachs’s technology indexes.

5) Vipers: Vanguard’s brands of ETFs cover many different areas of the market including the financial, healthcare and utilities sectors.

6) DIAMONDs: Diamonds Trust Series that tracks the Dow Jones Industrial Average. The fund is structured as a unit investment trust. The ticker symbol of the Dow Diamonds is DIA, and it trades on the AMEX.

Silver is a precious metal which as historically taken second place to gold, but only to gold. It’s valued for many decorative uses, including jewelry and knick knacks of various kinds. It is useful for tooth fillings, photographic film and various industrial applications.

However, that tends to outweigh silver’s emotional connotation as a store of monetary value, much like gold. Until 1965, United States dimes, quarters, half-dollars and dollars were 90% silver. However, the price of silver got to the point where those coins were worth more for their silver content than for their face value.

Silver’s price really took off in the 1970s, along with gold and many other commodities. Its price rise went along with gold’s fast climb to $800.

However, silver going from $11 or so an ounce in 1979 to almost $50 an ounce was due to primarily to manipulation of the market by the Hunt Brothers. They ultimately failed to corner the silver market, and the price collapsed back to where it started.

This hurt many people who bought silver on its way up. This event occurred at the end of a decade where price rises in commodities were ordinary events and mainly attributable to economic events.

Presently silver is rising, thanks partly to worldwide economic problems. Like gold, silver tends to rise in times of uncertainty.

However, there are practical problems associated with direct ownership of silver. If you own silver coins, they can be stolen. Same with silver bullion. You can store coins and bullion, but then you’re paying out money to continue to own it.

You can also buy shares of stock in silver mining companies, but then you have the additional risk that the company is poorly run or simply has an inventory of poor mines. They can lose money even as the price of silver is rising.

On April 21, 2006 iShares launched its Silver Trust (NYSE:SLV) exchange traded fund. The fund owns a reserve of silver. If you buy shares of the ETF, you have ownership interest in those reserves — all 304,000,000 of them. It has over nine thousand tonnes of silver in trust.

The fund’s expense ratio is 0.5%.

Anyone considering investing in silver whether through SLV or some other way, should bear in mind that its price has fluctuated a lot over the years. Sometimes people say that there’s a natural ratio of the price of gold to the price of silver, and that when silver’s price is below this ratio it’s cheap compared to gold.

However, there’s probably no cosmic law dictating the relative values of gold to silver — only the marketplace.

Because silver has many industrial uses, its price also fluctuates with economic events in those industries. That is, with supply and demand.

Therefore, it may be overly simplistic to conclude that just because you see a lot of economic turmoil and the value of the US dollar going down, that means silver is a good investment.

Exchange Traded Funds (ETFs)

First let’s review the different types of ETF’s and what they give investors access to.

1.0 ETF ESSENTIALS

ETF is short for Exchange Traded Fund and they allow investors to buy a commodity, country’s stock index, currency, or bonds. The use of ETFs has exploded in recent years from 1 in 1993 to 819 in 2009 (Source: ICI/SSgA) and give investors access to:

• 32 countries

• 16 commodities

• 14 currencies

• 30 different parts of the bond markets

Source: Matt Hougan, IndexUniverse.com

The largest ETFs with respect to assets under management are:

• SPDR S&P 500 (SPY) $85 Billion

• SPDR Gold (GLD) $40 Billion

• iShares MSCI-Emerging Mkts. $39 Billion

• iShares MSCI-EAFE $35 Billion

• iShares S&P 500 $22 Billion

Source: National Stock Exchange 2.0 TYPES OF ETF 2.1

2.0 TYPES OF ETFs

2.1 BULL AND BEAR

A bull ETF will mimic the daily percentage change of whatever asset it represents. For example an ETF that is based off of the price of oil will increase 2% when the price of oil goes up 2%. If the price of oil falls then the ETF falls along with it. A bear ETF will move inversely to the daily percentage gain/loss of whatever assets it represents. So an oil bear ETF will increase 2% when the price of oil goes down 2%.

2.2 LEVERAGE

Many ETFs are leveraged so for a 2X ETF if the underlying assets increase by 4% in a day the ETF will increase by 8%. There are also 3X ETFs that will move 3 times the daily percentage gain/ loss however both of these ETFs are mainly used for very short-term trades.

3.0 PROBLEMS WITH ETFS

A lot of inexperienced investors figure that they can buy an oil ETF like HOU.TO or USO (which are bull ETFs) and when the price of oil increases in the coming years they’ll make tons of money. Well there are two huge problems with this theory, Contango and Reverse Compounding.

3.1 CONTANGO

To understand what Contango is you have to understand the difference between futures market price and the commodities spot price. The definition of Contango is when the futures price of a commodity exceeds the spot price so if we had the spot price for oil is at $80.00 USD and the January futures are trading at $85.00 USD Contango exists. You may also hear the term “Backwardation” which is just the opposite of Contango.

Many new investors misunderstand the difference between the futures price and the spot price and think that commodity ETFs are solely a play on the spot price. They’ll look at the difference in the oil futures and the current spot price and come to the conclusion that by investing in an oil bull ETF like USO, the ETF will go up in January where the futures are trading at a $5 premium. They don’t realize that the net effect on the ETF will be zero.

For example say USO has $20,000,000 USD of March oil futures and has to sell all of them at $40.00 USD/barrel (they can’t take delivery as they have nowhere to store the oil) and then they buy April futures at $50.00 USD/barrel. So USO owned 500,000 barrels but once they bought the April futures they’ll only own 400,000 barrels. Now they have 25% less barrels but the each barrel is worth 25% more than it was in March so the net effect is zero. Also when they roll the futures forward to the next month they have to pay a premium which will add to the funds cost.

3.2 REVERSE COMPOUNDING

Since the goal of ETFs is to replicate the daily percentage gain/loss of whatever asset the fund represents this will inherently lead to reverse compounding over time. Here’s a simple example, if you have $100.00 lose 50% you will have to make 100% on the remaining $50.00 just to get back to $100.00. Obviously its very rare for ETFs to move that much in a day but overtime with small percentage moves the ETF will slowly start to decay and this problem is exacerbated with leveraged ETFs.

The stock market is a much more complex and confusing entity that many consumers realize. Many different types of securities are traded every day by small investors as well as huge corporations and even countries. Securities commonly traded on exchanges around the world are known as exchange-traded funds or ETFs that are often exchanged using simple market timing.

What is an exchange-traded fund?

An ETF is an investment much like a share of stock and is traded in much the same way on a centralized exchange. Unlike a share of stock that is a piece of ownership in a company, an Exchange Fund is comprised of assets that can include stocks, bonds, and commodities. They are traded by average consumer investors using retail brokers on a secondary market and by large corporations that purchase funds in huge blocks of thousands of shares.

The ETF definition does not shed much light on how investors use these funds to generate a profit on the market. Just like with regular shares of stock, individual and corporate investors use a strategy known as market timing when buying and selling ETFs. Investors use an ETF funds list, ETF news, and a calculation known as an ETF expense ratio among other tools to determine whether a particular fund it a good investment. Factors influencing the value of a fund and numbers related to its value fluctuate from day to day. Timing the market using information is how investors buy and sell ETFs to generate a profit. Investors may also look for opportunities to generate large profits by trading an emerging market ETF or financial services ETF. A high yield ETF such as these can be bought for relatively small amounts of money and pay off big if the fund’s net assets should rapidly increase in value. Investors on the primary market also participate in overseas exchanges through the purchase of an international ETF.

The securities market is filled with many different types of investments. An exchange-traded fund is just one of those many that both individual as well as corporate investors use to generate profits. Buyers and sellers use market timing and information from a variety of different sources in order to predict future prices of ETFs. Exchange funds are traded all over the world on different centralized exchanges and offer a more robust and secure portfolio than traditional securities.