Types of ETFs (Part 3)

Commodity ETFs

Commodity ETFs offer investors to invest in commodity, which offer as an alternative to buying physical commodity or futures contract. Inverse commodity ETFs are also available, which allow investors to make profit when the prices of commodity fall, as well as leverage commodity ETFs which allow investor to double the return.

Below are some of the commodity ETFs:

Ticker Symbol Commodity ETF
GLD Gold Trust
USO Crude Oil
UCO Crude Oil (2x)
SLV Silver Trust
BOIL Natural Gas (2x)
SCO Short Crude Oil (-2x)
KOLD Short Natural Gas (-2x)
GLL Short Gold (-2x)
ZSL Short Silver (-2x)

More information can be found from:

https://www.spdrs.com

http://www.proshares.com/

http://www.ishares.com

How Do You Evaluate ETF?

The best way to protect investors in investing ETF is to read the prospectus, and understand the strategies, costs, risks and investment goals. The ETF prospectus can be obtained from the website of the company that manage and issue the commodity ETFs, else, get it from the broker.

Risk of ETF?

It is possible that the fund manager committed mistakes and result in tracking the movement of the underlying assets. This is known as tracking error which causes the investor to suffer unrealised losses if he/she chooses to buy or sell during the period of tracking error. This is even more likely with leverage and inverse ETFs, since it requires more complex skills for the fund manager to perform the tracking.

Types of ETFs (Part 2)

Leverage ETFs

Leverage ETF allow investors to boost their return 2 or 3 times higher. For example, should S&P 500 index goes up 1 percent, leverage ETF would provide a gain of 2 or 3 percent. However, the losses will be magnified should the index fall. A 1 percent loss of the index will convert to 2 or 3 percent loss with leverage ETFs.

How the underlying performance of leverage ETFs can be achieved by the fund manager is by using derivative instruments such as future contracts, equity swaps and etc.

Below are some of the Leverage ETFs:

Ticker Symbol Market Type
UDOW Dow 30 Index (3x)
SSO S&P 500 Index (2x)
XPP FTSE China 25 Index (2x)
UPV MSCI Europe Index (2x)
DXD Short Dow 30 Index (-2x)
SPXU Short S&P 500 Index (-3x)
EWV Short MSCI Japan (-2x)
EEV Short MSCI Emerging Markets Index (-2x)
URTY Russell 2000 Index (3x)

For information can be found from http://www.proshares.com/

Currency ETFs

Currency ETFs are available as an alternative channel for exposure to foreign currency investment. For example, Exchange rate for Australian Dollar (AUD) to US Dollar (USD):

1 AUD = 1.0210 USD

Ticker Symbol for Currency ETF → FXA

Price of FXA → 102.10

Should AUD gets stronger and USD gets weaker, prices of FXA will go up, and investor will make capital profit.

Below are some of the Currency ETFs:

Ticker Symbol Currency ETF
FXA Australian Dollar Trust
FXB British Pound Sterling Trust
FXC Canadian Dollar Trust
FXCH Chinese Renminbi Trust
FXE Euro Trust
FXY Japanese Yen Trust
FXM Mexican Peso Trust
FXRU Russian Ruble Trust
FXS Swedish Krona Trust
FXF Swiss Franc Trust

For information can be found from http://www.currencyshares.com/

Types of ETFs (Part 1)

Other than index and sector ETFs, there are other types of ETF which allow investors to invest.

Regional & Country ETFs

ETFs are available if investors are interested to invest in other regional markets index such as the BRIC (Brazil, Russia, India, China), or indexes in different countries, such as Japan, Germany and Hong Kong.

Below are some of the ETFs:

Ticker Symbol Market Type
BIK S&P BRIC 40 Index
FEU STOXX Europe 50 Index
AIA S&P Asia 50 Index
GML S&P/Citigroup BMI Latin America Index
GAF S&P/Citigroup BMI Middle East & Africa Index
VWO MSCI Emerging Markets Stock
MCHI MSCI China Index
RBL S&P Russia Capped BMI Index
EWJ MSCI Japan Index
EWH MSCI Hong Kong Index
EWA MSCI Australia Index
EWG MSCI Germany Index
EWS MSCI Singapore Index
EWM MSCI Malaysia Index

More information can be found from companies below who manage the ETFs :

Inverse ETFs

ETFs are available if investors are interested to make gains by betting against the direction of the market. In order words, short selling by buying the ETF. So let say you feel that S&P 500 index is going to fall due to some kind of financial shock news, and you decide buy ProShares Short S&P500 (ETF). So when S&P 500 index drop points, you make money.

A good scenario would be during a bear market, where all the stocks and indexes are declining. Instead of selling away the holding stocks which give investors high dividend yield, investors can buy inverse ETF to hedge against potential capital losses.

Below are some of the inverse ETFs:

Ticker Symbol Market Type
SH Short S&P500 Index
DOG Short DOW 30 Index
PSQ Short NASDAQ-100 Index
EUM Short MSCI Emerging Market Index
RWM Short Russell 2000 Index
YXI Short FTSE Xinhua China 25
SBM Short Dow Jones U.S. Basic Materials Index
DDG Short Dow Jones U.S. Oil & Gas Index
REK Short Dow Jones U.S. Real Estate Index

More information can be found from company below who manage the above inverse ETFs :

http://www.proshares.com/

What Is Exchange Traded Fund – ETF?

ETF is a type of security that tracks the movement of index, prices of commodity, currency, bonds and many other available assets. It is being traded like a stock in the exchange where investors are able to perform buying and selling of ETF.

Why Trade ETF?

Index & Sector Investing

ETF provides investors a variety of investment opportunities, instead of getting a single return by investing in one company; investors get the chance to receive the return of a group of companies. This reduces the risk of investing in one single company which gives negative return.

Imagine if you decide to invest in Company A in the banking sector, which turns out to give a negative return of 20% due to whatever reasons (scandal,  lawsuit, bad earnings). However, by investing in ETF which tracks the movement of a group of banks, the positive return of other banks will offset the negative return of Company A.

Example below:

Company Return
A -20%
B +10%
C +18
D +15
E +17
Scenario Company A ETF (A,B,C,D,E,F)
Investment Amount $10,000 $10,000
Return -20% (-20+10+18+15+17)/5 –> 8%
Value $8,000 $10,800

The downside? Well investor could miss out the higher return of companies which are performing very well. The question is, how good are you in picking the right company?

Below are some of the popular ETFs based on Index & different sector listed on NYSE ARCA Exchange. More information can be found on https://www.spdrs.com/

Ticker Symbol Type
SPY S&P 500 Index
DIA Dow Jones Industrial Average Index
XHB Homebuilders
XLY Consumer Discretionary
XLP Consumer Staples
XLE Energy
XLF Financials
XLV Health Care
XLB Materials
XLK Info Tech
XLU Utilities
XRT Retail
XOP Oil & Gas Exploration & Production
XES Oil & Gas Equipment & Services
KIE Insurance
KME Mortgage Finance
KBE Banks
KRE Regional Banks
XHS Health Care
XHE Health Care Equipment
XBI Biotech Select
XPH Pharmaceuticals
XTN Transportation
XAR Aerospace & Defense
XLI Industrial
XME Metals & Mining
XSW Software & Services
XSD Semiconductor Select
XTL Telecom

Things You Should Never Do As an Investor

Never Listen to Friends’ “Insider News”

As an investor, you should never follow your advice from your friends who claim to have “Insider News”. Why?

Firstly, you do not know how accurate his information is. He could have been misguided by another friend of his who also claims to have “Insider News”. It would not have been “Insider News” when you and your friend have nothing to do with the business.

Secondly, there are no such things as “insider news”, because it is against the law for the management of the company to divulge any non-public information.

Thirdly, as a professional investor, you should NOT invest based on rumour. Knowledge is wealth, ignorant is poverty.

Never Listen to “Experts or Gurus”

Those so called experts are just like us, they can be wrong. In fact, they are wrong most of the time. But if they are the real experts, they would know what to react if things go the other way round, and still make profit out of it (Hedging). But the experts would not openly admit their mistakes and say they are wrong. If you follow their advice and got hit badly, then who is to blame?

Don’t Believe What You Read In The News

News are created for the sole purpose of keeping the readers entertain. Journalist will always think of creative headlines to attract the readers, and they will make the fact & figures sound either very bullish or bearish. How many times have you read things like:

  • The market reached X months high.
  • A Major Pullback Is Expected
  • Economy Is Slowing Down Due to……..
  • ….. Signal Recession

By then you react to the news, you are already on the other side of the trade.

Never Put All Your Money Into One Stock

Putting all your money into one basket is like taking a bet, what if you are wrong and the share price go the other way, and you lost almost all your money?

Remember, no one can predict the market.

Never Buy Low And Think You Can Sell High Without Doing Thorough Research

There is always a good reason why the stock price is getting lower and lower. Buying lower, it might get even lower. By the time it gone up, you would have lost all your confidence and want to get out as soon as possible. So after spending months or even years constipating with the stock, you did not even make any money!

Always do your research and follow your rules. If you are confident with the company, set a target buy price, set a cut loss target, set a target sell price. Don’t be greedy when it is making money, don’t be stubborn when you are losing money and not cutting your losses.

What Are The Important Financial Ratios To Look At? (Part 2)

Current Ratio

This ratio indicates whether the company possessed more current assets than its current short term liabilities. It is calculated by dividing Total Current Assets against Current Liabilities.

Any value less that 1 is a bad sign.

For example,

Company A Company B
Current Assets $2,000,000 $2,000,000
Current Liabilities $1,000,000 $3,000,000
Current Ratio 2 0.67

Imagine if you can only sell your car now for $10,000, while you owe the bank $20,000. How would you feel?

Debt to Equity Ratio

This ratio measure how much debt the company has borrowed in proportion to shareholders’ equity. It is calculated by dividing total liability against total equity (total assets – total liabilities).

Imagine if you own a house worth $300,000, have a mortgage loan of $200,000. So effectively you have $100,000 equity. But at the same time, you also took up additional personal loan of $60,000.

So your debt to equity ratio is equivalent to $60,000 / ($300,000 – $200,000) = 0.6

Value less than 1 makes you feel safer because should you go jobless, you can still sell off your house to pay off the loan. And return the remaining $40,000 to your parents if you happen to borrow it from them.

However, having higher debt to equity ratio might not be a bad thing. It really depends on the business nature. Imagine if you can borrow $60,000 from your parents for 1 per cent interest, and then lent that money to your friend for 5 per cent interest. In between, you earn 4 per cent!

In that sense, financial companies will tend to have high debt to equity ratio.

Gross Margin

Formula for Gross margin = (Revenue – Cost of Goods Sold) / Revenue x 100

For example,

Revenue $100,000
Cost of Goods Sold $60,000
Gross margin 40%

Imagine you bought 10 books for the price of $200, and then you sold all of them for $1000.

The gross profit will be $800, and the gross margin will be 80%.

It is important to look at gross margin rather than looking at gross profit itself. Because as a public company, a gross profit of $2 Million might look like a lot, but it may only reflect a 10% gross margin, if the cost of goods sold is way too high.

In the end, a 10% gross margin might put the company at a loss after deducting expenses like salary of workers and etc.

What Are The Important Financial Ratios To Look At? (Part 1)

Return On Assets – ROA

This indicates how the company is using its assets to generate income. It is calculated by dividing its net income against total assets. For example,

Net Income = $1,000,000
Value of total assets = $3,500,000
ROA → $1,000,000 / $3,500,000 * 100 = 28.57%

The higher the ROA, the better it is. If you are to do a comparison between companies within the same industry.

Company A Company B
Net Income $1,000,000 $1,000,000
Value of total assets $3,500,000 $7,000,000
ROA 28.57% 14.29%

It will be a better choice to consider invest with Company A, because it is generating more income with lesser assets.

Return On Equity – ROE

This indicates how the company is using its shareholders’ money to generate income. It is calculated by dividing its net income against shareholder’s equity.

Shareholders’ equity is calculated by deducting total liabilities from total assets.

For example,

Total Liabilities (Debt) = $1,000,000
Total Assets = $2,500,000
Net Income = $200,000
Shareholders’ equity –> $2,500,000 – $1,000,000 = $1,500,000
ROE → $200,000 / $1,500,000 * 100 = 13.33%

The higher the ROE, the better it is.