Comments on: Understanding Exotic Investments

By: How to Destroy Your Investment Portfolio | Frugal Dad

How to Destroy Your Investment Portfolio | Frugal Dad — Sun, 27 Sep 2009 17:35:24 +0000

[...] investment industry loves creating new investment products, every few months some new exotic investment is brought to the market. Investors jump at these investment vehicles without understanding the [...]

By: How to Destroy Your Investment Portfolio | Start Living Frugal

How to Destroy Your Investment Portfolio | Start Living Frugal — Tue, 15 Sep 2009 12:21:13 +0000

By: Alex Fernandes

Alex Fernandes — Fri, 11 Sep 2009 10:53:59 +0000

Thanks for sharing such great post, it gives clear idea about investment, so it will help many people to understand.

By: Masood Jan

Masood Jan — Tue, 01 Sep 2009 22:13:34 +0000

Watch out for deterioration of ETFs. Depending on what your interested in, commodity ETFs (HNU, HOU) contango effectnwill cause the value of your ETF to dimish significantly if your holding it for a period greater than 3-4 weeks. Triple leveraged financial ETFs (FAS, FAZ) can make you lose your shirt overnight. Ishares ETFs are more investor friendly, particularly for new investors. Mainly because their single leveraged. Also, XIU, XFN issue distributions, so that’s another positive.

By: Manshu

Manshu — Mon, 24 Aug 2009 23:34:37 +0000

Thanks for letting me guest post Ray.

@Ian: Rebalancing may not fully reflect the price of the ETF, because it is ultimately trading like a stock and price is determined by demand and supply on the market, at a particular time.

By: Ray

Ray — Mon, 24 Aug 2009 18:28:58 +0000

The Re-balancing of leveraged ETFs can be a whole post, but the basics is that they try to keep the same securities:net asset ratio, so they buy when the index goes up (assets increases) and sell when index goes down (assets decrease).

your investment would be 100 * daily price, the stocks dnt split or reverse split on daily bases they just buy/sell the underlying security. But as you have noticed the moves can be fairly big and you can get hurt very bad if not careful.

It’s nice to play with these etfs with small amounts, but should not hold them any longer than couple of days.

By: Ian

Ian — Mon, 24 Aug 2009 18:10:27 +0000

Thanks for the informative post. I’m curious about the leveraged ETFs. I understand about how they are rebalanced each day and how this can cause up and down movements to eat away at your profits (i.e. index: 100->110->100 causes the investment to go $100->$130->$91). Is this re-balancing entirely reflected in the price of the ETF? I notice that, for example, HXD has large changes between close price and open the next day, I assume due to the daily re-leveraging. So, if you purchase 100 shares, is your investment always 100 * daily price or are there splits/reverse-splits or other changes that you have to keep an eye on too? Regardless, I’m not foolish enough to invest in these since clearly I’m no expert (or a gambler).

By: MoneyEnergy

MoneyEnergy — Mon, 24 Aug 2009 17:26:35 +0000

Be careful with leveraged ETFs. *Do not hold them long-term.* They are not meant to be held much longer than a month, and ideally, some analysts say they should be used for day trading or for trades under a week. This is because they rebalance so frequently (daily) and end up costing you quite a bit.

By: Alan

Alan — Mon, 24 Aug 2009 10:20:15 +0000

Your article on this blog is fantastic.
Well done! I’m a big fan of your blog and be sure to keep up the great work.
I plan on returning and linking to your site.
Sincerely,
Alan H.