How the Coming Changes to China’s Market will Affect the World

Chinese Stocks Will Never Be the Same Again

Part of my job as an investment advisor is to review new and prospective client portfolios. I like doing this, since it tells me how investors feel about the markets. One trend I’ve noticed during the past several months is the lack of international stock exposure in most investors’ portfolios.

This situation isn’t too surprising, considering the relative underperformance of international stocks vs. U.S. stocks. The chart here of the Vanguard FTSE All-World ex-US ETF (VEU) shows that global markets have indeed struggled of late. While this international equity fund is well off its lows, VEU does remain below both its 50- and 200-day moving averages.

Compare this fund with the Vanguard Total Market VIPERs (VTI), an ETF that reflects the entire U.S. equity market. Here we see a big spike in the value of VTI since that mid-October slide. The fund now is well above its 50- and 200-day moving averages and trading right at its all-time high.

Still, I think that generally, there is a somewhat unhealthy lack of diversification out there among many investors. While you may want to be overweight in U.S. stocks during the current bull phase, I think you also should have some targeted international equity exposure in your portfolio to take advantage of the value proposition in oversold segments and to offer you some relative protection if a rotation out of U.S. stocks occurs.

One area I like right now is China. In fact, that nation’s equity markets are poised to never be the same again, and that’s because on Monday, China will launch what’s called the “Shanghai-Hong Kong Stock Connect” program.

This program allows retail investors around the world to invest in mainland Chinese equities, also known as China’s A-Shares market. The linking of the Shanghai and Hong Kong exchanges will allow approximately 23.5 billion yuan ($3.8 billion) of daily trading between the two markets, and that will essentially open up the mainland China equity markets to an influx of new foreign money.

The bullish tailwind can be seen in ETFs such as the db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR), a fund pegged to stocks in the Shanghai Exchange. In fact, the big spike higher in ASHR is something subscribers to my Successful ETF Investing newsletter have been taking advantage of for some time.

If you’d like to find out how you can invest in this new China equity market, as well as many of the domestic market’s best ETFs, then I invite you to check out Successful ETF Investing today!

Welcome to ETF University

Today, I am proud to tell you about a new website my team and I created called ETF University (ETFU.com). We created this website for one primary reason, and that is to help investors learn more about the world of exchange-traded funds (ETFs).

As you may know, I have been a passionate advocate of ETFs for many years. That advocacy has been expressed extensively in my various publications. I’ve also discussed the copious virtues of ETFs on my radio show and my weekly podcast.

Yet early this year, I realized that while I had been writing and speaking about the benefits of ETFs for some time, there still were many questions out there about ETFs, such as how they work; how you buy them; what are the advantages and disadvantages of using ETFs, etc. I also realized that there wasn’t really a single, trusted source that investors had that would answer these questions, at least not a source that would answer these questions the way I think they should be answered.

So, rather than look around for various sites to fill this knowledge void, we decided to create ETFU.com. I want you to think of ETFU.com as your one-stop source for anything and everything related to the world of exchange-traded funds.

Here are just some of the features you’ll find at ETFU.com:

• ETF News: Read all of the latest and greatest updates from the world of exchange-traded funds, including details on new fund offerings, new fund families, new fund categories and new fund strategies.
• Weekly Editorial: Here you’ll find my weekly commentary on topics such as the markets, politics, the Fed, global economic trends and just about anything driving the price of stocks, bonds, commodities and currencies.
• Educational Videos: We are currently in the process of producing a series of educational videos designed to teach investors all of the basics of how to invest using ETFs. Think of this series as an introductory college course on exchange-traded funds, a sort of “ETFs 101.”
• Special Reports: Here you’ll find special audio, video and written reports on specific topics related to ETFs. Planned topics include how to invest in fixed income using ETFs; which ETFs are best for getting international equity exposure; how to use commodity ETFs, etc.
• Top 10 ETF Lists: Do you want to know which 10 ETFs are the biggest? How about the 10 best-performing ETFs? What about the top 10 sector ETFs? If lists are your thing, then this featured section of ETFU.com is for you.
• ETF FAQs: Here you’ll find a list of the most frequently asked questions (FAQs) regarding exchange-traded funds, including how they work, how they differ from mutual funds and how to buy and sell ETFs.
• All-New Weekly Podcast: To go along with the new content at ETFU.com, I’ll also be doing a weekly podcast titled “ETF Success with Doug Fabian.” This weekly audio presentation will get you up to speed on the markets and will provide you with helpful hints and education on all things ETF related. Today marks “Episode 1” of the ETF Success with Doug Fabian, so be sure and check it out today.

These are just some of the current and future planned features available to readers, absolutely free, at ETFU.com. The only thing we ask of readers who want complete access to this content is to simply join us.

I strongly encourage you to join ETFU.com as soon as possible.

ETF Talk: The Cheapest Way to Own the S&P 500

The diversity of investment offerings from Vanguard, a low-expense-ratio exchange-traded fund (ETF) provider, is showcased in this week’s ETF Talk that features Vanguard S&P 500 ETF (VOO), an S&P 500-based ETF.

VOO is one of Vanguard’s most popular funds; it held $21.8 billion in assets under management at the end of the third quarter. This fund’s expense ratio of just 0.05% is 95% lower than the average for funds with similar holdings.

VOO tracks the performance of an index that measures the investment return of large-capitalization stocks. It attempts to replicate the results of the S&P 500, holding each stock in approximately the same proportion as its weighting in the index.

Like the S&P 500, VOO has performed strongly this year by rising 10.71% so far. VOO also offers investors a bit of income with a 1.83% dividend yield.

VOO’s top 10 largest holdings comprise 17.63% of its assets. Its five largest positions are Apple Inc. (AAPL), 3.43%; Exxon Mobil Corp. (XOM), 2.28%; Microsoft Corp. (MSFT), 2.17%; Johnson & Johnson (JNJ), 1.71%; and the General Electric Company (GE), 1.46%.

The S&P 500 is having a very strong year, so if you want to go long in the large-cap segment of the domestic equity market, consider putting your money to work in the low-expense-ratio Vanguard S&P 500 ETF (VOO).

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.

Top 10 ETF FAQs

I get a lot of questions every day about ETFs. So, this week I decided to compile a list of the top most frequently asked questions (FAQs) to help investors understand the basics of ETFs and how they work. So, here you go!

1) What is an ETF?

An ETF, or exchange-traded fund, is an investment fund traded on stock exchanges. An ETF holds assets such as stocks, commodities or bonds. Most ETFs track an index, such as the S&P 500 or Dow Industrials, etc.

2) What are the advantages of investing with ETFs?

There are many advantages of investing with ETFs. The primary advantages of using ETFs include their low cost, ease of use, transparency, wide variety of choice, tax efficiency and liquidity.

3) What are the disadvantages of using ETFs?

ETFs do require some specialized knowledge to understand how to use them successfully. In some cases, they can be more complicated than mutual funds. When purchasing an ETF, you also incur a transaction fee. If you are making small purchases month after month, over time those fees can reduce your total return. There are more than 1,600 ETFs listed on U.S. exchanges, so the sheer number alone can be intimidating for some investors.

4) Where, and how, do I buy ETFs?

The purchase or sale of ETFs is done through a brokerage account. Popular national brokerage firms such as Fidelity, Schwab, TD Ameritrade and Vanguard are good choices for your brokerage account. Once you have a brokerage account, you can follow that investment firm’s instructions to buy and sell ETFs online.

5) What are the main differences between ETFs and mutual funds?

ETFs are priced throughout the trading day, while mutual funds are priced just once a day at the close of trading. ETFs are completely transparent, meaning you always know what an ETF holds. Mutual funds are only required to report their holdings quarterly. ETF purchases do involve a transaction fee, but there are no sales charges or deferred sales charges like there are with mutual funds. ETFs also are much cheaper, more tax efficient and offer far more choice than mutual funds.

6) What are some common mistakes made when investing with ETFs?

Investing involves risk, and using certain ETFs (e.g. ETFs that use leverage) can be inappropriate for some investors. Some small, i.e. thinly traded, ETFs have wide bid/ask spreads. This can cause investors to buy at a high price and to sell at a low price. ETFs require some specialized trading knowledge to sidestep these and other mistakes. Educating you on how to avoid these mistakes is one of the missions of Doug Fabian’s Weekly ETF Report.

7) Are ETFs for stocks only?

No. ETFs allow investors to allocate to stocks, specific market sectors, foreign stocks, fixed income, commodities and currencies. The growth in the number and variety of ETFs over the past several years means that almost every type of asset class that is publicly traded now is accessible with ETFs.

8) Do ETFs pay dividends and interest like mutual funds?

Yes. ETFs pass through dividends paid from stocks, as well as interest from fixed income securities, directly to shareholders. Distribution frequency varies depending on the ETF, as some ETFs pay monthly while others pay quarterly or semiannually.

9) What are the tax advantages of using ETFs?

ETFs offer greater tax advantages to shareholders than mutual funds. Because most ETFs are structured like an index fund, there is an extremely low turnover rate in the holdings when compared to mutual funds. It is the buying and selling of assets within a mutual fund that tends to create tax issues, but there is very little of that when investing with ETFs.

10) Are there costs and sales charges when purchasing ETFs?

When purchasing an ETF, you likely will incur a transaction fee that is charged by your brokerage firm. While there are no sales charges, commissions or redemption fees associated with ETFs, you likely will have to pay the small transaction cost associated with buying and selling any asset.

If you have questions about anything ETF related, just send me an e-mail.

Milton Friedman on Immigration

“You cannot simultaneously have free immigration and a welfare state.”

–Milton Friedman

The great Nobel Prize-winning economist was an ardent supporter of freedom and free markets. On the immigration issue, Friedman was all for an open-borders style policy — provided we do away with the welfare state and the myriad benefits that immigrants would be “entitled” to once they arrived. In this quote, Friedman illustrates the problem with government once it gets involved in providing goods and services to citizens. The result is usually a lack of freedom for everyone.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Weekly ETF Report readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug.

In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor about the recent election’s potential impact on the market. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

All the best,

Doug Fabian