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Editor’s Note: This is a guest article sent by Sachin
To say that the current global investment market has given investors pause for thought would be a major understatement. They want out of the nuthouse, and they want some security for their money, for once. The 2008 crash did one useful thing, if nothing else- It redefined the relationship between investors and the investment market more than anything since 1929. The US market went from the biggest market of all time to a testimony to the powers of debt collection, and took its professional credibility with it.
Exchange Traded Funds (ETFs) started in the 90s, largely as an alternative to mutual funds. They were like the small mammals among the dinosaurs, and were “boutique” investments with high unit prices for investing in baskets of stocks which were usually based on specific indices. Unlike mutuals, they could also be traded in real time on the markets, so they gained some popularity as low risk, high value investments.
ETFs are managed funds, (small percentile fees) and they’re generally managed by major leaguers like Vanguard, Deutsche Bank and other heavyweights. That level of management helped separate the wheat from the chaff when the mortgage securities disaster happened. There were several ETFs specializing in mortgage securities, and they, like anything and everything connected with those securities, were hammered by the markets.
The markets were wrong. Further investigation of the ETFs discovered they were holding bulletproof, AA rated mortgage securities, not the unspeakable garbage which destroyed that market. A very sharp V in the prices of these ETFs was the result. (Interestingly, Citigroup, when it received its TARP money, cherry picked as many of these types of mortgage security as it could find, and was very nearly back in the black within 12 months.)
ETFs as an investment option
ETFs offer a degree of remove from direct exposure to the market’s neuroses. Investing in portfolios and indices means not having to deal with the moves of a few stocks on a daily basis, which saves both nervous systems and valuable time and money. ETFs are now major traders in their own right, thanks to the 2008 crash. The high value ETFs generally went out of favor, but were reinvented by traders as high volume trading materials. Institutional and other buyers also contributed a lot to volumes. Some ETFs even give excellent day trading margins, an outcome clearly not foreseen by the original ETF concept.The ability to invest in indices has also evolved. ETFs now invest in currencies, bonds, commodities, and other less accessible areas for private investors. This level of flexibility, and the ability of fund managers to isolate specific investment modes far outstrips the mutuals. The mutuals, in fact are now setting up their own ETFs, largely because the ETFs have been busily making obsolete the traditional mutual investment mixes which are comparatively vague, like “income, capital growth, etc.,” which don’t compare well to “aerospace, oil, mining” as investment options.As the “best and brightest” wade through the various legal possibilities of debt recovery in its most literal senses, it’s no great surprise to find the ETFs have got a grip on the global market. There’s now more than a trillion dollars under management in ETFs around the world. Investors have voted with their money, and the market is now having to listen, whether it likes it or not.
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