Investing in ETF Sectors

If you have been reading the Scrooge Guide for long you will know that we usually speak highly of ETF’s (exchange traded funds). ETF’s are like a mutual fund but without the high management expenses so they usually outperform a mutual fund by several percentage points. That extra edge can add up to several hundred thousand dollars of extra income over a lifetime of investing. One of the ways to invest in ETF’s is to look at the sectors and determine which one is on the growth curve. For instance as soon as the price of oil started ratcheting upwards a couple years ago you could be certain the energy sector would benefit. If you go to www.iUnits.com and look at the one-year result for their energy sector ETF you will see that it grew 61% over the last year (ending end of July - but it has increased a lot more in August). Another hot sector, real estate, did 31% growth over the last 12 months. Of course since these two sectors have increased so much over the past year they may be ready for a down turn so they may not be the best investment choices at this time. If you do decide to invest in them keep a very close watch on them and sell if they drop more than a few percentage points in one day. I’m often asked for a recommendation of a good low cost online broker. One of the best that I have found is Interactive Brokers (www.interactivebrokers.com). They have offices in several countries and offer very good rates. For instance you can trade shares through them for two cents per share, and as low as one cent for larger blocks. So as an example if you bought 100 shares of the or iShares) natural resources sector (iUnits ticker XEG) it would only cost you $2 to make the trade. Compare this to a more common “discount broker” or bank where you will be paying upwards of ten to twenty times this amount. This means you can go in and out of the sector with little transaction cost. With the Interactive Broker trading platform on your computer (it’s free) you can also sets stops, so that your stock will automatically be sold and converted to cash if it drops to a predetermined level. This is a great way to protect your investments from sudden drops in value. Also, if you identify a stock or ETF in a downward spiral you can sell it short and make money from it’s decent. Many a clever investor made millions on the drop in price of Nortel a few years ago. Be aware, though, their user interface for the trading software will take some time to learn - it's not the easiest of systems.
Scrooge