Special Report on Specialty Funds

03/19/2004 12:00 am EST


This week's issue is devoted to exchange traded and specialty funds that provide an easy way invest in bullish and bearish trends and various sectors, regions, and investment themes and styles. Here's an overview of how to use ETFs as part of your investment strategy.

In a slight departure from our usual format, we focus on specialty funds. Some need little explanation. For example, we feature an overview of various Rydex funds from Larry Edelson, which are designed to benefit from rising interest rates and/or falling stock prices. We also include counter-balance funds to protect against inflation, from Richard Young. We also include John Mugarian's fund selections to hedge your stock and bond portfolios against expected near-term risk. And Doug Fabian offers fund ideas to bet on both sides; he offers a bearish play on the NASDAQ and a bullish play on the more defensive healthcare sector. The balance of this Money Show Digest issue focuses on exchange traded funds (ETFs), and for those unfamiliar with this market, we offer this overview:

An ETF is a "basket" of securities that can be bought and sold on an exchange just like an individual stock. Investors can use ETFs to gain broad diversification through a single vehicle. First launched in 1993, ETFs have been growing rapidly in number and popularity for both individuals and institutions. ETFs trade with the ease of stocks while offering the broader diversification of mutual funds. Unlike mutual funds which are priced at the end of each trading day, ETFs are priced throughout the day. And the more liquid of the ETFs are highly suitable for traders, as these funds can generally be bought long or sold short. ETFs, like index funds, also have lower fees than actively traded funds.

The first ETF was the Standard and Poor's Depository Receipt, known as the Spyder, which was designed to track the S&P 500. Five years ago, the QQQs were launched; known as the Cubes, these were designed replicate the NASDAQ 100 and became extremely popular as an easy way to invest in the high-tech boom. The third in the trio of major ETFs were the Diamonds, which track the 30 stocks in the Dow industrial average. Today, there are some 150 ETFs, which cover the gamut from a single country to a global portfolio; from a particular industry sector to a broad market index; from stocks to bonds. For example, in this issue, we look at ETFs that focus on biotechnology and semiconductors from Bernie Schaeffer, an oil service ETF from Neil George, and a retail ETF from Price Headley.

Numerous advisors maintain entire portfolios that are designed around ETFs. In this issue, we look at Joe Battipaglia's exchange traded portfolio for US equities, a technical portfolio currently positioned for short-sellers from Richard Rhodes, and an equity iShare portfolio developed by John Bollinger. We add that ETFs are also available to track fixed-income investments and in this issue, we cover an unusual ETF focused on tax-favored dividends, as well as one recommended as a hedge against rising interest rates. ETFs have also become an increasingly popular way to invest abroad, as there are now ETFs representing various countries and regions. Barclay's iShares cover some 46 separate country indices. In this issue, we feature the top international ETFs from Janet Brown.

Finally, we would note that investors need not get confused by all the acronyms. Overall, there are HOLDRs from Merrill Lynch; VIPERs from Vanguard; Spyders from S&P, and iShares from Barclays.  The distinction is simply which firm has issued the fund. These ETFs trade on the American exchange, although we'd note that the NASDAQ recently launched its own ETFs, called BLDRs. And there are new ETFs on the horizon, including ones that are expected to track gold and commodities.  Personally, we're excited to see the expansion of the ETF market due to their low-cost structure and the convenience they offer. ETFs, as well as other specialty funds, are increasingly popular within the advisory community and we will continue to share the best ideas and recommendations in this expanding market with our readers. We hope you enjoy this special report.

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