7 Easy To Understand ETFs To Replace A Savings Account

Understand ETFs To Replace A Savings Account

Topic Covers:   ETFs, Personal Savings

If you have a savings account or certificate of deposit (CD), you're probably not making much more than 1% each year from interest. That's better than spending the money, but in order for it to truly to grow in value, it has to perform better than the rate of inflation. According to the U.S. Bureau of Labor Statistics, the 2012 average inflation rate was 2.1%. Most financial planners use 3.0% as the historical average.
Investing in exchange traded funds (ETFs) is the hottest trend since the mutual fund. There are 1,445 U.S.-listed exchange traded products with a total trading volume of $1.2 trillion monthly. A 2011 Charles Schwab study found that 44% of investors planned to expand the use of ETFs in their portfolios.

Within these 1,400-plus product offerings, there are many easy-to-understand ETFs that have the potential to outperform inflation. To yield better results, you have to take on more risk, but some ETFs offer much lower risk than individual stocks. For investors with a longer-term time horizon, these ETFs can build long-term savings better than a savings account or CD.

Index ETFs

Index ETFs follow a large market index. Investors use these funds as core holdings along with bond ETFs, which are explained later in this article. When developing an investment portfolio, it is important to take a balanced approach. Some financial planners recommend that the younger you are, the more weight stock market index ETFs should have in your portfolio.

 

Here are three index ETFs to take a closer look at:

SPDR S&P 500
The SPDR S&P 500 (NYSE: SPY) is an index fund that mirrors the performance of the S&P 500. It is the largest ETF in the world, as well as the oldest. The fund's fees are only 0.09% - far below the category average of 0.35%. Over the last five years, this fund has quadrupled the performance of most savings accounts each year: SPY yields 2.1%.

 

iShares Russell 2000 Value Index

If you want to capture the performance of smaller companies, you need the iShares Russell 2000 Value Index ETF (NYSE: IWM). With an expense ratio of 0.2%, its cost is still below the industry average, and this fund is a favorite among small cap investors. IWM yields 2%.

Vanguard Total Stock Market ETF

If you want the broadest representation of the U.S. stock market, consider the Vanguard Total Stock Market ETF (NYSE: VTI). The fund follows an index that invests in a sample of stocks from the New York Stock Exchange and the NASDAQ. Like any Vanguard product, it is inexpensive, with an expense ratio of just 0.05%. VTI yields 2.1%.

 

Bond ETFs

Bond ETFs allow you to invest in the safety of bonds without the risk of holding one or two individual bonds. These funds invest in hundreds or thousands of bonds at the same time, making your money relatively safe. Don't expect to see big price gains in these ETFs. It's the dividend yield that should interest you. The older you are, the more your investment dollars should be in bonds.

 

Here are two bond ETFs to consider:

iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG)
This fund gives investors exposure to the higher-yielding corporate bonds on the market. It has a yield of more than 5% and an expense ratio of 0.5%.
iShares iBoxx $ Investment Grade Corporate Bond ETF

Higher yields come with higher risk. To capture the returns of higher-rated bonds, look at the iShares iBoxx $ Investment Grade Corp Bond Fund (NYSE: LQD). This ETF not only gives you the safety of investing in a large basket of bonds, but all are highly rated with little chance of default. The expense ratio is only 0.15%, and the yield is 3.1%.

Sector ETFs

Sector ETFs are riskier than the index ETFs discussed previously. Investors use these securities to add more weight in an area of the economy that they believe may outperform the rest of the economy in coming years.

You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
If you are interested, consider these two:

Financial Select Sector SPDR

With an average trading volume of 51.5 million shares, the Financial Select Sector SPDR (NYSE: XLF) is the most popular sector ETF. The fund invests in a basket of stocks that represent the financial sector.

The largest holdings in the fund are Wells Fargo (NYSE: WFC) and JP Morgan Chase (NYSE: JPM). Expenses are a respectable 0.18%. The fund yields 1.7%.
STRONG>PowerShares QQQ Trust Series 1

Although not technically a sector ETF, the PowerShares QQQ (NASDAQ: QQQ) is the ETF of choice for investors who want to capture the performance of the technology sector. Of the fund's assets, 63%, including all of the top 10 holdings, are invested in technology stocks. The fund has an expense ratio of 0.2%. This fund has no yield.

The Bottom Line

Keeping money in a savings account might feel safe, but its value is eroding due to inflation. That might change in future years as interest rates rise, but for now, a relatively safe way to put your money to work is through ETFs.
Use this article as a guide to start learning more. Take a look at each fund's website and learn all you can about each security you are interested in adding to your portfolio. You should be able to talk to your friends or family about the details of the fund before investing real money. If you can't do that, you're not ready to invest.
 

Can Regular Investors Beat The Market?

Can Regular Investors Beat The Market?

Topic Covers:

 Day Trading, ETFs, Investing Basics, Investment, Portfolio Management, Stocks

 We all invest with the hopes that one day we will have enough money to live off our investments. The question remains, can a regular investor like us really beat the market? Do we have what it takes to win over the middlemen and institutions that have millions or even billions invested in the market? According to Terrance Odean, a finance professor at the University of California, Berkley's Haas School of Business, "Many of the mistakes investors make come from a lack of any understanding of the innate disadvantages they face."

David and Goliath

The answer to this question is not an easy one, and the answers will vary depending on who you ask. By "beating the market" we're talking about everyday working Americans who try to obtain greater capital gains and income return than the S&P 500.
David E. Y. Sarna author of "History Of Greed," explains it this way, "We all have some larceny in us. We buy securities because we think we know someone or something others don't. I don't think anyone can consistently outperform the S&P 500 without assuming greater than market risk."

 Some of us might have the tools (and connections) required to make knowledgeable decisions that will lead us to a portfolio with higher returns, but others like stockbrokers, bankers and big corporations most likely have an advantage, right? While many people in the financial industry have insider information which they cannot legally trade on, they also possess the necessary financial statement analysis skills to develop a greater insight about a given company. Robert Laura, author of "Naked Retirement: A Stimulating Guide To A More Meaningful Retirement" and President of SYNERGOS Financial Group says, "The reality is there will always be a lure to try and beat the market, especially since those who have beat it consistently are revered so highly (Bill Miller, Peter Lynch) and/or are compensated well (hedge fund managers). I think the market can be beaten, but even a broken clock is right twice a day. Best way to describe it: It's possible but not probable."

According to Laura, the sad reality is, the average individual investor has little chance of beating the market. He says the common investor uses mutual funds, are stuck in 401(k) plans which essentially track the broader index, and pay higher fees as compared to stock, index funds or ETFs. Also many mutual fund type investments don't use stop loss order to protect gains and thus do not always provide the type of protection individualized portfolios can perform. As he puts it, "investors are set-up to fail from the get-go."

Investing in 401(k)s is no better. "Most 401(k)s aren't benchmarked and most companies don't have a good investment policy for selecting funds within the program. You can't even get some asset classes in many and most advisors are sales people, not fiduciaries and just taught how to sell funds," he adds.

The good thing is many more investors are taking responsibility and interest in their investments. They are taking the initiative to learn how their investments work and are less intimidated. Laura says investors are learning that individual stocks aren't as scary as everyone suggests and there is valuable information available to everyone if they know where to find it and how to apply it.

 He adds, "The advent of ETFs and Index investing allow people to mimic the market, instead of trying to beat it, which is a better, less expensive perspective to have."
A Lost Cause?

Founder of FinancialMentor.com, Todd R. Tresidder, said in 2010 "All the evidence supports the disappointing fact that regular investors as a whole underperform the market. As long as they try to 'beat the market' they actually underperform."
The best way for regular investors to achieve better risk-adjusted returns is by focusing not on out performance, says Tresidder, but instead by losing less. In other words, regular investors have one competitive advantage - liquidity. "Big investors are the market but the little guy is nimble and can buy or sell without affecting the market - something the big guy can't do. Systematic risk management can work to provide regular investors with similar or slightly improved investment performance relative to the market at substantially less risk," he says.
Helping the Odds

What can an investor do to increase their chances of "beating" the market? Laura says there are several things:

Use low cost funds and/or a low cost platform for trades. The best way to make money is to save money.

Establish and follow a discipline which translates into just doing what you said you are going to do.

Give every investment in your portfolio a buy price, hold price and sell price along with one or two reasons to buy, hold or sell at that value. This gives you specific criteria to act and provides your portfolio with purpose and specific direction.
Watch for headline risk. Set up email alerts for your investments so as new information comes out about them, you are aware of it in the early stages to consider changes. Mark your calendar for things to watch like earning dates, intellectual property timelines and industry reports like Federal Reserve meetings, unemployment numbers, new housing starts and other information that will affect the specific sector or security.
 Sarna suggests investing in what you know and understand, such as solid, profitable small-caps and even microcaps in niches you can monitor and understand. These can appreciate much more rapidly than equivalently-priced large-caps.

 The only way to get above market returns is to develop a competitive advantage says Tresidder. "It is either developed through knowledge and information flow, or it is developed through extensive research resulting in an investment strategy that exploits irregular market behavior."

According to Tresidder, the only way to outperform the markets is to develop a competitive advantage that exceeds transaction costs and passive market return.

The Bottom Line

The debate of whether an individual investor can beat the market is as old as the stock market itself. Those who have found fortune investing will often preach that they possess superior analytical skills which allowed them to predict the market. Those investors who suffer losses will tell a much different tale.