Doc2 has made some very common yet incorrect mistakes in his comment above. ETFs under the 1940 act are in no way shape or form derivatives. This is where CNBC got it wrong also, thus the purpose of this blog post. Under the 1940 Act, if you buy an ETF you own the underlying holdings. If you own 50K shares of the ETF then you have the option of exchanging the shares for the underlying holdings. If you do not have 50K shares, you own part of the 50K share bloc. This block is not owned by the market maker as Doc states, but is held in trust separate from the fund company and the market maker. Clients do have a right to this partial share in cash form, just not to receive the actual stocks. Why would you anyway? Imagine the trading cost to sell 500 companies on the S&P 500 with just a 10k investment! Just sell the ETF in one transaction.

ETFs do get their value from the underlying holdings. This value can be tracked by adding a few symbols to an ETF. For example IVV, the S&P 500; If you want to know the net asset value, go to yahoo finance and enter the ticker ^ivv-iv. This will give you a 15 second quote of all the underlying holdings. It is true that ETFs can and will trade away from these values, but there are market makers in the market looking for arbitrage opportunities which push the prices back to NAV. If an ETF is trading far away from NAV there are several ways to still get the ETF at or very close to NAV. Experience and a good ETF education can save clients a significant amount in trading costs (errors) IF done properly.

ETFs created within the 1933 Act will many times not own the underlying instruments. Most individual investors should not and will not own these types of ETFs. iShares and Vanguard, two of the largest providers of ETFs only have a small number of 1933 Act ETFs.

There is are lot more facts to cover but this is the basics. Keep Cost Low, Maintain a Diversified Portfolio, Invest for the Long Term

If the company that sponsors this “unleveraged” position in stocks (e.g. Bear Stearns, Lehman Brothers, MF Global), then what exactly does a client own, and how do they receive it?

Your argument that ETFs aren’t derivative positions is materially false. Clients (except for Authorized Participants) have absolutely no right to underlying holdings. Your statement that ETFs derive their value from underlying assets (which they don’t have) is also false. ETFs trade freely of their “underlying assets” and are worth only what another investor is willing to pay – much like an options contract. Even if an ETF holds a basket of underlying assets, as you argue (this is extremely unlikely, by the way, as most undoubtedly use futures and other instruments to mimic and index), the average client has no right to underlying assets – whether they exist or not.

We do plan on having our 4th annual pilot workshop in February. A date has not been set yet, but in the past we have had a workshop on a Wednesday and Saturday. The workshops are a little over three hours and are designed to teach participants how to best allocate their funds for retirement. This year Wiser Wealth will add a section on investor behavior and how that relates to life time returns.

Casey

Are you planning any workshops for the ASA Pilots and Flight Attendants anytime soon?

Thanks,

Ed

Capt Mark Scardino
ASA ATL

DJP iPath DJ-UBS Commodity Index TR ETN 3.2B
AMJ JPMorgan Alerian MLP Index ETN 2.6B
VXX iPath S&P 500 VIX Short-Term Futures ETN 1.4B
RJI ELEMENTS Rogers Intl Commodity ETN 919M
VXZ iPath S&P 500 VIX Mid-Term Futures ETN 788M
INP iPath MSCI India Index ETN 719M

There are a lot of factors in choosing an ETF. I would argue that 60% of financial advisors do not fully understand how to choose an ETF. A quick way to get a diversified portfolio is to look at an ETF allocation fund. iShares provides S&P allocation funds. They have conservative to aggressive allocations. You can visit their website at http://www.ishares.com. It is also hard to go wrong with Vanguard funds. You can build your own allocation simply by choosing their Total Stock Market ETF and All World ETF. I would add a little commodities in there as well. If you would like a professionally built portfolio we can build an ETF model for you for a fee. This would be worth it if her balance is over 50K.

I will agree that there are times that an annuity could be beneficial, usually of the fixed variety, but I rarely see it. The math on the longterm use of annuities just does not add up. Clark Howard and Dave Ramsey are the two biggest spokespeople for this. The concept of the annuity is a great selling point. It’s like a free lunch….. The potential for risk free gains….. but there is no such thing as a free lunch! It is the fees that will erode your rate of return vs. my ETF portfolio invested in 12 global asset classes taking on moderate risk with over 6700 companies all costing .25%. Why would you want a guarantee that you make money 20 or 25 years from now. The market has never lost money over that time. With proper asset allocation (a conservative allocation) prior to retirement, years like 08 would not even be an issue.

Fiduciary responsibility in the brokerage business will clean up a lot of the annuity sales, especially from the weak (most expensive) players.

Don’t knock something if you only point out one issue with the product. I can do the same with an ETF or any investment. List the cons…and the PROS. You get the point. Andy in Charlotte, NC

Thanks Allot.

We were trying to show visually the directional changes (on a risk/reward scatter-plot) for the US Sectors relative to global sectors (which would include a small portion of the US).

Hope this helps,
Kyle

ETNs do trade like ETFs which makes your investment very liquid. Your risk in the investment is the credit of JP Morgan as you do not actually own anything but a promise from them to track the performance of the Master Limited Partnerships (MLP) energy sector. Master Limited Partnerships do not fit well in an ETF because you would need to receive a K1 each year for gains or losses, possibly affecting your personal tax return. Because an ETN is a note rather than an investment directly into the partnerships, you get the returns (good or bad) and pass on any tax consequences (you may get a 1099). Being that it is in an IRA for you, maybe that is not a big deal. Is it safe? Look at it this way: JP Morgan now owes you money and your rate of interest is based on the returns of the Energy MLP index. IF JPM goes out of business, you will get 0 back. So, for the security of your investment you have to look at the credit quality of JPM.

I did a quick search for Energy MLPs and did not find an ETF. There was an article at Seeking Alpha by a writer that described your ETN as an ETF. Blind leading the blind there!! If you want an energy ETF check out ishares.com and look over their energy ETFs. Vanguard has a diversified energy ETF as well. These two companies are the BIG players in ETFs thus can bring the volume and assets under management to give you a better trade.

Hope this helped.

From the JPM site:

Benefits of investing in the JPMorgan Alerian MLP Index ETN

Exposure to a portfolio of energy MLPs through a single investment.
Quarterly coupons based on the cash distributions, if any, paid on the MLPs in the Index, less fees.
No K-1 forms will be received by investors as a result of their investment in the ETNs. The coupons are reported as ordinary income on Form 1099.
The ETNs trade on the NYSE, Arca.

Main risks in the ETNs

The ETNs may result in a loss.
The ETNs are exposed to the credit risk of JPMorgan Chase & Co.
The ETNs may not have an active trading market and may not continue to be listed over their term.
The payment at maturity or upon early repurchase of the ETNs will be based on the VWAP Level of the Index and not on the closing level of the Index. The VWAP Level of the Index will most likely differ from the closing level of the Index or the IIV.
The coupon payments on the ETNs will be variable and may be zero. The Accrued Tracking Fee reduces the potential coupons and/or the payment at maturity or upon early repurchase.
The Issuer’s obligation to repurchase the ETNs is on a weekly basis, and is subject to substantial minimum size restrictions.
You will not know how much you will receive upon early repurchase at the time that you elect we repurchase your ETNs.

Our Managed ETF 401k platform costs 75bps. This includes trading, custody, reporting, etc. You then add about 30bps for ETF costs for a total of 105bps. This obviously does not include your fee but I think you can see it is extremely competitive on price. The portfolio consists of 20 asset classes, approximately 90 ETFs, up to 25 customized allocations based on a 12 quesiton risk tolerance questionnaire. Each participant receives a proposal and IPS. We take full fiduciary responsibility. Participants open accounts online and the portfolio is built automatically. The minimum investment is $100. We buy fractional shares of ETFs. The larger accounts will receive reduce pricing on a participant level. We can roll administration costs into the Asset Management fee if the sponsor would like. There is an automatic annual review system built in for each participant and you are the advisor of record on all correspondence. If you would like to learn more please contact me at your earliest convenience. Thanks.

John-David
(404) 633-2772

In short smaller school endowments that had much simplier strategies blew Ivy League schools with ‘smart’ strategies out of the water. It seems the formula for sucess is more bonds and less hedge funds.

The expense ratios of the ETFs held by the Target Date funds are included in the Target date funds’s expense ratios. iShares calls this the “net” expense ratio. I called iShares to double check that. So, TGR has an expense ratio of .31%, this is the total cost of investing in the fund including the underlying ETFS.

Since the target date ETFs are made from other iShares products, iShares discounts the expense ratios of the underlying ETFs to the target date funds making it cost effective to hold a target date fund over all the ETFs within the target date fund.

Hope this helps.

TDX could be cheaper on the long run

IJR appears to be a very good choice for small cap ETF exposure based on your research and my own follow-up efforts. But do you know which small cap ETF is the favorite of Morningstar and why? It is not IJR.

Best,

Denny

I don’t think there is a high likelyhood of total loss.

Hope this helps,

Kyle.

All I know the product that I bought from a small broker in US is called “principle protected notes
linked with foreign currency exchange”. I actually does not know if it is ETN.

My broker told me it is a senior notes.

I just want to know the likely hood that I can get part of money back.

Thanks again.

I assume you are in Canada on Europe where PPNs are extremely popular. I am not an expert on debt issued on foreign exchanges but may be able to offer information only if I had more information on the specific PPN you have, who you purchased through, and the ballpark amount of capital allocated to the product

You could start by going to the Lehman website, find the category of the debt you own (asset back or not) and get all the information you can about repayment.

Also, you need to find an expert especially if most or all your wealth is in a Lehman PPN.

It will most likely be months before the dust has settled with Lehman since many of they structured debt involves options and other non-liquid investments.

The picture on the front is lovely.

Allen Taylor

Tom Humes