Category Archive 'ETFs'

A must-read: Bloomberg’s pitfalls and perils of investing in commodity ETFs

ETFs, Value investing

While sitting in a doctor’s office the other day, I happened across an article in Bloomberg magazine entitled “America’s Worst Investment” (magazine cover shown here) that explained why . Since Bloomberg is pretty reputable, and since I had previously invested (and lost money) in , a commodity ETN (exchange-traded note) that tracks the Rogers International Commodity Index, of fame, I was really interested in what the article had to say.

As I’ve posted here before, I’ve quite a bit in the past to do the bulk of my passive, buy-and-hold investing. They’re an easy way to diversify and since most of them track indices, there’s not much to think about compared to the difficulties of evaluating an individual stock. After reading Jim Rogers’ books, I was interested in diversifying into commodities, and when someone finally came out with an ETN that reflected his index a couple of years ago, I bought in.

The Bloomberg article is quite eye-opening and explains why commodities ETFs that are based in futures can be a no-win situation for individual investors. You’ll have to read the article to fully grasp the pitfalls of these vehicles, but one vocabulary word I learned was ““, something I had never heard of. It boils down in essence to the nature of a futures contract. Unlike an , where you have the right but not the obligation to buy or sell an underlying security, in futures contracts, you have the obligation to take delivery of the underlying security or good unless you rid yourself of that contract in some way.

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Investing in ETNs (exchange-traded notes)

ETFs, Personal finance

Ever since reading some years back, I’ve followed Jim Rogers and his investment advice off and on. Back in 1998, he created something called the , which was the broadest commodity index available and attempted to represent both developing and developed countries’ consumption patterns.

The only problem was that it was hard for the average individual investor to actually invest in the RICI. This changed last year with the advent of . Their offerings of products include four that are related to the RICI, RJI (the Rogers International Commodity ETN), RJA (agriculture), RJN (energy), and RJZ (metals).

Having invested and written about before, I wanted to look into what were all about. But because they’re relatively new, not nearly as much has been written about them. Seeking Alpha had a few good articles, and I’m still in the midst of reading RJI’s prospectus to try to understand what it is that I’d be getting into if I invested in it.

Here’s what I’ve been able to gather at a basic level. Underlying exchange-traded notes are senior unsecured debt securities rather than equities (which underly ETFs). In addition to carrying market and other risks common to ETFs, they also carry issuer risks in that if the issuer defaults or is unable to make payments on the note, you as an investor in an ETN are basically out of luck. (However, most issuers are presumably established and credit-worthy, so theoretically this risk is minimal, though certainly not zero.) ETNs also issue no distributions or interest payments and do not impart ownership of assets to holders.

Currently, they also carry a favorable tax treatment, but .

I’d be curious if anyone had any opinions about ETNs, the RICI or commodities in general. Plenty of recent financial articles have been written about whether the recent performance of commodities has been fueled by speculation or if their bullish performance is here to stay for the long-term (as Jim Rogers would probably argue). Thoughts, anyone?

Hmm…one example of the risks of investing in emerging markets

Current events, ETFs

News broke earlier today that , including CANTV (VTN), whose trading was halted on the New York Stock Exchange (though not before dropping 15%), and Electricidad de Caracas owned by US-based AES Corporation (AES).

Regular readers of this site probably remember that I own a few ETFs and find them a convenient way to get exposure to foreign markets. In fact, ILF is an ETF specializing in Latin America, and I’m curious to see how the news about Venezuela will affect it tomorrow, if it will at all.

The truth is that I’ve stayed away from investing in Latin America, largely due to my husband’s influence and opinion about the region. He grew up in the and has plenty of experiences to share about how things work in many Latin countries. That doesn’t mean that Latin America’s a place to avoid — in fact, it’s very possible that because of our lack of objectivity, we’re missing out on good investment opportunities.

Still, news like today’s is a good example of the risks of investing in emerging markets, regardless of region. When investing in them, it’s easy to focus on the high double-digit growth rates and forget about underlying risks. Even though I don’t have any direct exposure to Latin America in my investments, I’ll still be watching how things develop in Venezuela with great interest.

Exited my position in ICF (REIT ETF)

ETFs, Value investing

Today, I sold off my position in ICF. I purchased my shares a more than a month ago at $96.35 and sold them at $102.40 for a gain after fees of 6.26%. Because I have some short-term capital-loss carryovers from way back when, I don’t expect to incur any capital gains taxes on this transaction.

What made me decide to sell now?

I had originally wanted to (as mentioned previosly, we don’t own any property at all) and thought that by investing in commercial real rather than residential estate and dollar-cost averaging into an index, I’d addressed the riskiest aspect of REIT investing. But shortly writing about my investment, I was advised in a comment in the same post by a reader and more experienced value investor that a REIT index might not be the best way to go at this time.

That prompted me to delve much deeper into understanding REITs (due diligence I should have done earlier), because, as I’ve said many times before, I set up this site in large part to learn more about investing.

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All this industry consolidation’s great, but what’s next?

ETFs, Value investing

I woke up yesterday to discover that , a real estate ETF, had shot up by 4% due to Blackstone Group’s purchase of Equity Office Properties Trust (EOP) for $36B, including $15B in debt in the largest private-equity deal, ever. Since EOP is a major component of the 31 REITs that comprises ICF, it, along with most other REIT ETFs, went up thanks to the announcement of the deal.

Being relatively new to making my own investment choices, I find it sort of astounding that two of my previous choices have also benefited from ongoing industry consolidation as well. Just a couple of months ago, Smithfield Foods (SFD) announced it was purchasing Premium Standard Farms (PORK), a purchase I’d made last year and had concluded I’d bought at too high a price.

The announcement allowed me to exit my position gracefully and with a profit. Nucor (NUE) has also indirectly benefited from all the M&A activity within the steel sector. I can’t point to a hard figure for how much its stock price increase has been driven by this activity, but certainly it seems anytime there’s speculation, NUE shoots up at least a few percentage points that day.

I don’t have any illusions of being a prescient stock picker. And the general consensus is that there are few if any value purchases to be made in the market these days.

So what gives?

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