Reading List – a sample of what’s going on in ETF Land:
BP’s Legal Drama Could Impact These EFTs: Shares of oil company BP lost 4% after the U.S. Department of Justice said its 2010 oil spill was a case of gross negligence. With a settlement unlikely, here are the ETFs likely to fall if BP’s fortunes continue to sink.
4 International ETFs Yielding more than 5%: Many international dividend paying stocks pay out much higher yields than U.S. stocks. The combination of high yields and international exposure at the same time looks pretty enticing.
Exactly How Many ETFs Are Going to Close?: According to ETF Deathwatch, 25% of all U.S. ETFs face a risk of closing. Any ETF or ETN that is at least six months old and fails to generate at least $100,000 in average daily trading volume the preceding month joins the list. However, considering many of these ETFs come from sponsors that can afford to keep floundering funds open, the number is really closer to 18%.
3 Inverse ETFs For September: September is one of the worst months for stocks. Here are three inverse ETFs that capitalize on negative trends in the world.
New ‘Tail Hedge’ ETF Hunts Black Swans: The tail hedging strategy protects a portfolio from extreme market oscillations as a result of unpredictable, random and unexpected events, or so-called Black Swan events.
Lawrence Carrel, author of “Dividend Stocks for Dummies,” advocates for dividend-heavy portfolios, saying volatile markets are a ripe time to pick paying stocks. With stock values unpredictable, investors find comfort in knowing that they will at least be paid the dividend even if they lose out on stock value, he said.
“More people want the income from dividend stocks now… they’ve had an awakening,” Carrel said. “They are not gung-ho about growth anymore.”
In his book, Carrel outlines several myths that investors harbor about dividend-paying stocks.
Myth 1: Avoid dividend-paying stocks in volatile markets
On the contrary, Carrel sees rocky times as the right time to invest in stocks where you can recoup profits without selling the shares.
“In general, it’s a little less risky,” Carrel said. “There’s the idea that if I’m going to be in an environment and I can’t be sure where the stock price is going to be, at least I will be able to walk away with profits from dividends.”
For the full article go to MarketWatch.
In a follow up to the previous posting on PowerShares’ suite of small-cap sector ETFs, the beauty of sector plays is that you can follow a trend without taking single stock risk.
For instance, if you think oil is going to go up in price you might want to purchase stocks of some oil companies. Let’s take an example from 2006 when oil was surging. In this case, you bought BP, the formerly named British Petroleum, at the beginning of 2006. Over the course of that year BP experience some serious problems, such as a refinery explosion that killed 15 people in Texas. It later came out BP had suffered a series of deadly incidents due to poor safety standards. Then BP had two big oil spills in Alaska and managers were later indicted and fined for manipulation of the crude-oil and propane markets. By the end of 2006, BP’s stock was flat but ExxonMobil had jumped about 30% on surging oil prices.
This is called single stock risk and the problem is obvious. You made the right call on oil, but you picked the wrong stock. You just happened to pick the oil stock that was subsumed with scandal. However, if you buy a sector ETF holding large-cap oil stocks, you get instant diversification because you own shares of many oil companies. You capture the upside in the oil prices and in this case, one bad stock has a negligible effect on the portfolio.
Daily Finance has a broader look at how to become a savvy investor in sector ETFs.