The Tycoon Report

The Wrong ETF to Trade

Thursday, April 5, 2007 | Chris Rowe

Well, in the last several articles that I wrote, I showed you a few different technical indicators, and I gave short lessons on trading.  I'll take a break this week to give you a brief update on what The Tycoon Family has been up to, and then I'll answer some questions that you've submitted (mainly on ETFs).
 
On February 1, 2007, I used my Thursday slot to write an article titled "How Can We Help You?" asking you to submit questions, comments, suggestions and an idea of what you want to learn more about.  This way we can take your feedback and give you exactly what you want.  

As promised, you will see our response to your feedback, questions, ideas and needs in three basic forms:

1) Our daily Tycoon Report articles filled with actionable, educational, fun and easily digestible content;
2) The New Education Products that we create for you;
3) The look, feel and ease of use of both The Tycoon Report newsletter and our websites: TheTycoonReport.com (free) as well as our paid member only website/services.

THANK YOU!  You have made us a better publisher/service, and have helped us understand what you want (and what competitors have disappointed you with).  Please keep it up. 

You've probably seen the changes made to TheTycoonReport.com, but that's nothing compared to what we're still working on.  And you'll see that, because of you, we are about to not only make our competition look inadequate, but we're going to actually change the entire industry.  How?  Based on what we create for you, we're going to force the competition to step their game up or get out!

Now to answer some questions and comments ...

ETFs are index-linked baskets of securities that trade on exchanges like individual stocks.

I received lots of questions about ETFs from readers of my last two articles: "Today's Dangerous Market Indicators"  and "How to Reduce Risk While Staying Invested."

I'll answer some of them here, but all of your questions on ETFs, as well as questions you didn't even know you should be asking, will soon be answered for you by Teeka Tiwari in his ETF education course coming April 16th.  Keep in mind that once you gain a clear understanding of how they work, you will probably want some hand holding, and some info on which sectors are showing the strongest relative strength (as I can see in your inquiry below).

(Two comments based on last Thursday's article: "Today's Dangerous Market Indicators")


QUESTION/COMMENT:

Including a list of the current sectors that recently moved to the bullish side would have been helpful.

Anonymous

QUESTION/COMMENT:

Fabulous! It would have more helpful if you would have given us some web sites to get that information regarding sectors. I marked my charts up with your information today to use for the future. Thanks for your insights!

Anonymous

ANSWER:

Most education courses tell you how to do something and wish you the best of luck.  But I've gotten a sneak peek at the education course that Teeka has been putting together, and, without blinking, I personally vouch for the fact that anyone who takes it will definitely get much more than they bargained for.  After showing you which ETFs are most beneficial, and which to stay away from, there will be a special treat.  Hint:  it involves continued access to the exact same relative strength information that Teeka personally uses to trade within the best sectors.   


QUESTION/COMMENT (Based on "How to Reduce Risk While Staying Invested"): 

Chris, for me, this was one of the more useful articles I have received from Tycoon.  My funds are predominantly in IRAs, so this was particularly meaningful.  Is there somewhere I can get a complete list of ETFs and Ultras?  Thanks very much.

Richard T.

ANSWER:

Hi, Richard,

I almost don't want to answer this question as it may hurt more than help because it's like asking me for a complete list of restaurants in a state.  The problem is that they're all different, and some appear on the surface to be better than they really are and so on.

ETFs can be used to really make it very easy to far outperform the market every single year.  Just like having a bunch of restaurants to choose from can make make your life easier ... if you dine at the wrong restaurant, you may be disappointed in the service, the cost, and the food.

I'll give you an example of what I mean, and then I'll tell you where to find a lot of ETFs (which is like giving you the Yellow Pages - you don't know what's hot and what's not).

Assets of ETFs in the U.S. grew by 38% last year to $417 billion.  There were 156 new offerings, which brought the total number of funds to 359.  I mean, there are more and more ETF providers adding to the development pipeline every day, and each new ETF seems to have increasingly sophisticated approaches. 

The benefit here is that you are provided with new strategies that were previously only available to highly sophisticated investors. 

The downside is that while certain ETFs' strategies may be attractive, you may not always be getting what you paid for.  Check this out ...

Take a look at Victoria Bay Asset Management's United States Oil fund (AMEX: USO.)  This famous ETF's benchmark is the spot price of West Texas Intermediate light, sweet crude oil delivered to Cushing, Okla., minus expenses.   (I can actually hear some of you who've traded this one vomiting right now.)

The USO said it will invest in energy futures contracts, cash-settled options and other instruments including short-term U.S. Treasury securities.  Millions of investors thought that this meant that it would track the price of light, sweet crude oil (WTI).  Can you blame them?  When this ETF was launched in April of 2006, it was launched at the exact price that crude oil was being quoted on CNBC (I think about $69.00).

This was pitched by the media saying that "the USO's structure means that investors won't have to pursue such speculation on a contract-by-contract basis through the futures markets themselves.  Instead, the USO creates a diversified pool of contracts and provides ease of entry and exit from one's position."  

SUPER!  But here's what happened if you bought it ...

When Light Crude was quoted right around $69.00 a barrel, this ETF was launched at about $69.00/share.  But the ETF started underperforming Crude right away ...

When Crude made it up to $77.95 in July 2006, this ETF only hit just under $75.00 (a 13% gain in Crude and 8.7% for the ETF).  

By the end of July, when Crude dropped to about $61.00, this ETF was at $52.46 (an 11.6% drop in crude from $69.00 compared to a 24% decline in the ETF from $69.00).

But, as Crude tanked down to $50.00, the ETF made it down to $42.56! (a 27.5% drop from $69.00, compared to a 38.3% drop!)

USO was pitched by the media to the world as the ETF to own when you don’t know how to trade the actual Crude futures!!

What about the rebound?  While investors who bought USO considered the possibility that maybe USO has larger swings (both up and down) than crude futures do, the fact of the matter is that USO rebounded from its low to its recent high by 11.64% while crude rebounded 14.1%.

So again, it was launched at $69.00 when Crude futures were at $69.00.  As I write this (Wednesday, April 4th), Crude is quoted at $64.10 a barrel and USO is at $52.20.  What a mess!

Now, I told you that (against my better judgment) I'd give you one place to start looking at different ETFs:  www.amex.com.  But, fair warning:  some of these restaurants have rats and roaches.  I dine with Teeka since he knows all of the "hot spots," and because the places where he dines, where he knows all of the waiters and cooks on a first name basis, have the best food and service.   Think about it.


QUESTION/COMMENT (Based on "How to Reduce Risk While Staying Invested"): 

Chris Rowe didn't mention what the rules on these ETFs are: such as, are there any minimum amounts, and are there any holding periods?

ANSWER:

There's no minimum investment or holding period for ETFs.  

And, for the final two comments left by readers by clicking the "rate this article" link that you see below which are based on last week's article (for your personal enjoyment - yes, these are real)...


QUESTION/COMMENT:

it stinks!

ANSWER:

Really.  I think they probably have a cream for that.  I'll keep an eye out for ya.


QUESTION/COMMENT

I love you, Chris.

ANSWER:

Um...  ...  ...  I love you, too?


“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider