10/15/13 – Short Post from New York

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Oct 15, 2013 10:08:39 AM

and tagged Commentary, Economics Lessons

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First of all, thank you to everyone who wrote nice things about my appearance on CNBC yesterday—much appreciated. It’s fun to do that kind of appearance because you never know exactly what will be discussed, and you have to prepare. Keeps me on my toes!

This will be a short post because I’m in New York attending a conference on ETFs put on by iShares. ETFs, for those who haven’t run into them, are exchange-traded funds—that is, a portfolio of assets (stocks, bonds, what have you) that is traded like a single share of stock. They are similar to a mutual fund that tracks a specific stock or bond index, such as the Barclays Capital 1-3 Year Treasury Index. ETFs trade on one of the major stock markets and can be bought and sold throughout the trading day, like a stock, at the current market price. And, like stock investing, ETF investing involves principal risk—the chance that you won’t get all the money back that you originally invested—market risk, underlying securities risk, and secondary market price. ETFs have become a major part of the investing landscape over the past several years, changing the way many people and institutions invest.

They’ve done this by making strategies and assets available, and easily tradable, in a way that previously either wasn’t possible or wasn’t as cost-effective. A good example is GLD, the gold ETF. Before, if you wanted to buy gold, you had to purchase coins or bars, which could be lost or stolen, or you could pay storage. Now, you can buy an investment that aims to track the price of gold, just like buying a stock, without these concerns.

Similarly, there are ETFs that let you own a portfolio of stocks, or bonds, of precious or industrial metals. Because they’re fairly easy to set up and operate as compared to mutual funds, very specialized portfolios can be created at a lower cost. ETFs are, however, subject to management fees and other expenses. And unlike mutual funds whose shares are continuously sold by the fund, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund. At Commonwealth, Brian McCormick has developed a research tool that lets advisors sort through the ETF universe to select and evaluate exactly what they need for clients—which is pretty cool, and something I’ve seen nowhere else.

ETFs are a good example of how financial innovation can actually help investors. Although I’m pretty current on what’s happening in the space, I want to be sure I have all the latest news, which is why I’m here today.

Investors should consider the investment objectives, risks, charges, and expenses of the investment carefully before investing. The prospectus contains this and other information about the investment. You can obtain a prospectus from your financial representative. Read the prospectus carefully before investing.

As for our friends in Washington, DC, once again it seems we have a pending deal in the Senate, which will then be sent to the House at the last minute for a do-or-die vote. I say “once again” because this is the playbook from 2011 all over again. Hopefully, things play out similarly this time around. The concern is that the Tea Party caucus may be that much angrier and less willing to compromise precisely because this is what happened in 2011. Senator McConnell is back in the game for the Republicans, which is a good sign, and not much has been heard from the Tea Party recently—at least in the national press—so the outlook isn’t that bad.

We will see. If the deal being bandied around does pass, it will kick the can down the road for the next couple of months, averting a current disaster but recreating the same type of uncertainty the fiscal cliff brought about at the end of last year. That would certainly hurt the economy, just as it did last time.

With any luck, we’ll have good news to discuss tomorrow.

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