During the severe winter that much of the U.S. has been enduring, numerous economic reports have largely been shoveled and dumped into a snow heap. Lackluster readings on jobs, retail sales, housing starts and home sales have been shrugged off by economists as reflecting the chill of ice and snow storms and freezing weather across much of the U.S.
The trouble is, we don't have a good gauge of how and when things will start looking normal again.
While part of the nation warmed up last week, the February jobs report -- due March 7 -- is still at risk of being blurred by the weather.
So, like just about everyone else (other than ski resort operators), economists are looking forward to the spring. When consumers and the rest of us come out of hibernation, the numbers crunchers will hope to get a more accurate reading of the economy's true temperature, or growth.
The ABCs of ETFs
Exchange-traded funds are hot and are winning over mutual fund investors. Hear why you may want to give them a look.
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Mark Hamrick: From Bankrate.com, This is "Your Money This Week."
We connect the dots between what's happening in the world and your wallet.
I'm Mark Hamrick reporting from Washington.
Mutual funds have been the bread and butter for most retirement accounts, whether 401(k)s or rollover IRAs for years.
But recently, there's been a new kid in town: ETFs, or exchange-traded funds.
We'll chat with an expert on the subject, Tom Lydon, about how the investing world is undergoing innovation with ETFs and what should investors do.
Bankrate's Sheyna Steiner weighs in with a look at why investors bail out of the stock market and why they shouldn't sometimes.
And, as always, we take a look back at this week in business history.
All of that and more coming up on "Your Money This Week."
Out of his office in sunny Newport Beach, Calif., Tom Lydon has been managing other people's money for more than a couple of decades now. He's president of Global Trends Investments. But a number of years ago, he sensed a change was in the air, with exchange-traded funds, ETFs.
And so, he's also editor and propriety of ETFtrends.com, which provides all kinds of information on ETFs.
To begin, I asked him how he came to get so involved with ETFs.
Tom Lydon: After managing money for a few decades and being a huge fan of mutual funds, we saw that these ETFs, exchange-traded funds, were starting to gain popularity.
Once you lift up the hood, you understand a few things. No. 1, they're transparent. You understand that they are index-based for the most part. And because you don't pay a manager, the fees are extremely low. They're tax efficient, and not only that but very liquid. Unlike a mutual fund, you could buy it in the morning and sell it in the afternoon. With a mutual fund, you can only liquidate it or buy it at that closing date's price.
So we began in the early 2000s shifting client assets over to ETFs. And as more ETFs came on the market, which gave more choices, we found ourselves in the mid-2000s almost wholly owning ETFs. With that, we felt that it was the right thing to do for our clients on many fronts, but most importantly, we had to educate them about what ETFs were all about.
Mark Hamrick: That's one of the reasons why we thought it would be terrific to have you on the podcast, is to go into some of that. Do you feel like the average American, who is at least in the market, has a decent understanding of ETFs? Or, is there still a way to go there?
Tom Lydon: Five years ago, I wouldn't say so, but today, especially with the volatility that we've seen in the marketplace where many investors, whether they have a manager or they're self-directed investors, and doing it themselves, they've really latched on and gotten involved in their portfolios. In addition, technology has helped considerably with being able to provide more information and having more access to research. So it's been a perfect environment for ETFs. More and more investors have been utilizing ETFs to help diversify portfolios and also take advantage of certain trends as they've developed.
We've seen a great move in equity since the low in 2009, and fixed income areas have also provided great opportunities for investors. But I think there're going to be multiple headwinds down the road, and ETFs offer opportunities to hedge those headwinds as well.
Mark Hamrick: You began by talking about being a fan of mutual funds. ETFs are -- still in terms of the assets held -- are a fraction relative to mutual funds, correct?
Tom Lydon: They are. There are $1.7 trillion in ETFs in the U.S., and over $10 trillion in mutual funds. It's chipping away at the market share of mutual funds. Maybe one day it will really compete, but for the most part, especially with mutual funds being a dominant player in the 401(k) space and ETFs just getting started, it's going to be a long road. You're continuing to see added fund flows move to ETFs on a monthly basis and compete head-to-head with mutual funds. But still with that huge number, as far as over $10 trillion in mutual funds, it's going to be tough to take them down any time soon.
Mark Hamrick: Obviously a number of different key players have embraced them, such as Schwab. I've seen that. What are some of the other key developments that have helped them to grow as much as they have?
Tom Lydon: I think one thing, when you talk about with mutual funds, is active management. Unfortunately, actively managed mutual funds have underperformed their benchmarks. Seven out of 10 have underperformed. They have higher fees and they're not tax efficient. So they, even during down times, have kicked off distributions, which for many folks aren't welcome. Investors, through all of the ups and downs, to some degree have been disappointed. They're saying, “If I can't beat the market, I might as well buy the market very inexpensively,” and ETFs offer that.
I also think that accessing different areas of the marketplace is really key and critical. As I mentioned, fixed income. It's not just money market funds, but short-term treasuries, corporate bonds, high-yield, emerging market debt. All of those areas, as people are shopping for yield, are available. And they're available on an index-based ETF so that investors know what they're buying.
But as we face the end of a 30-year decline in an interest rate environment, we know that there's going to be challenges down the road. Investors, especially in the fixed income area, are going to look to areas that could have yield, but it won't chip away at their principle. That's going to be one of the biggest challenges.
Mark Hamrick: And so how do you think of that opportunity, then, can be leveraged for people who look into ETFs in the future, whether they're looking to move in or out of fixed income?
Tom Lydon: The next wave in the ETF space is moving away from the pure conventional indexes, like the S&P 500. Many felt that active management in the ETF space was going to be the next huge evolution, but it's actually become the smart data or active index space that is picking up a lot of momentum.
For example, Rob Arnott, who does fundamental indexing, and the folks at Research Affiliates. Picture a value-oriented approach within an index, and then on an annual basis selling off those high-flying stocks that have done quite well and buying more of those stocks that haven't done quite well in an inherent discipline within an index.
For an average investor and an average advisor, that sounds pretty comforting as far as something that you should do. But when you leave it up to the average investor, it's really difficult, emotionally, to follow through that discipline on a regular basis. Those disciplines are now available within an ETF structure, so you don't have to worry about pulling the trigger yourself. I think that's a huge innovation in the ETF world, and it's letting people at least think about the benchmark that they're going after.
The S&P 500 has done very well over the years, but it's a cap-weighted index. So there are a handful of stocks that make up the vast majority of the weighting. So these types of structures with an equal weight or a fundamental weighted index, over time, actually do well and many times better. So it's a consideration for investors as far as moving away from these legacy and traditional indexes.
Mark Hamrick: What's a cautionary comment about ETFs that people should be aware of?
Tom Lydon: Just like with stocks, there are a lot of choices. And for investors you can be a kid in a candy store. For example, if coffee has been moving for the last couple of weeks, and everybody's talking about the demand and the prices going through the roof, or gold miners happen to be taking off recently. You can get caught up with what's moving.
If you don't have an investment strategy, it doesn't mean that ETFs are going to save you. You can shoot yourself in the foot with an ETF just as well as you can with a penny stock.
So the idea is that they're meant to be used as tools. Make sure that you have a solid investment strategy discipline and stick to it. You can get fancy. There are a lot of sexy ETFs out there, but make sure you know what you're buying. Lift up the hood and look underneath. Understand the underlying index and use these ETFs wisely.
Mark Hamrick: Do your homework and stick to your discipline, right?
Tom Lydon: That's it. If you're doing well with your core portfolio and you want to begin with a small amount and get into some areas that you might not normally invest in -- that's fine. But keep everything in perspective, because the whole idea about ETFs is that they're meant for the average investor. They're transparent and there are low fees. They really are, I think, the most innovative investment vehicle of this century, but they have to be used wisely.
Mark Hamrick: You've been on the cutting edge, and I'm very grateful for your time. I look forward to maintaining this conversation with you about an area that's exciting and innovative as well. I appreciate your time. Thank you very much.
Tom Lydon: Thank you, Mark.
Mark Hamrick: Tom Lydon, president of Global Trends Investments. He's also editor of ETFtrends.com.
And for more information about investing, check out Bankrate.com, and look for the "Investments" tab at the top of the screen. From there, you can find a virtual treasure trove of information on everything from stocks, bonds, mutual funds, and ETFs, too.
Through the inevitable ups and downs, the stock market can take on a variety of personalities, from hero to villain, and in the process, either inspire investors, or scare them away.
How do individual investors react through both the calm and the volatility?
For that, we turn to Bankrate Senior Investing Analyst Sheyna Steiner.
Sheyna Steiner: People think about risk in strange ways. Merely driving on the interstate can be a death-defying adventure, yet stock market volatility can send even the most stalwart individual into a panic.
The fact of the matter is that most individuals make lousy investors. They get scared and sell when the stock market goes down, and then they buy back in when stocks go up.
Even in the bull market of 2012, individual investors still underperformed the market. A study from Dalbar reported that the average stock investor got a return of about 7.5 percent, compared to nearly 11 percent for the S&P 500.
Chasing trends and reacting to stock market volatility can send your portfolio wildly off course. To avoid that fate, build a portfolio appropriate for your risk tolerance and time frame and then take a hands-off approach by checking your balance quarterly, rather than monthly.
For more on this and other personal finance issues, visit Bankrate.com. I'm Sheyna Steiner.
Mark Hamrick: Finally, our look at this week in business history …
You might be familiar with the fashionable designer brand Louis Vuitton. But did you know that the real Louis Vuitton died over a century ago, on Feb. 27, 1892? He founded the famed French fashion house in 1854.
All these many years later, the parent conglomerate LVMH is a luxury brand powerhouse, behind products including clothing, cosmetics, jewelry, watches and wine.
You've been listening to "Your Money, This Week."
If you enjoyed the podcast please check us out on iTunes and rate and subscribe to our program.
We're hoping you can help us get the word out. Also check out our other podcast, "Special Report," with breaking news and special features.
For more on this and other personal finance issues, visit Bankrate.com. And you can follow us on Twitter @bankrate and I'm at @hamrickisms.
Thanks to producer Lucas Wysocki for his work in the studio and to our editor, Doug Whiteman.
I'm Mark Hamrick. From all of us here at Bankrate, here's hoping you have a great week.
In the meantime ...
Four reports are due this week:
- The Conference Board releases February consumer confidence data, Tuesday at 10 a.m. (all times Eastern).
- The Commerce Department releases January new home sales, Wednesday at 10 a.m.
- The Commerce Department releases revised fourth-quarter gross domestic product, Friday at 8:30 a.m.
- The University of Michigan releases February consumer sentiment, Friday at 9:55 a.m.
Two of those reports are particularly worth watching because they will peer into the mindsets of consumers, notes economist Joel Naroff. In the Conference Board's last report on consumer confidence, released in late January, consumers' feelings about the current situation and their expectations for the future improved. As a result, the closely-followed index saw its second straight monthly increase overall.
But the big picture may not be quite as encouraging. Since we're already about two-thirds of the way through a frosty first quarter, Naroff, the founder of Naroff Economic Advisors, says he wouldn't be surprised if growth for the quarter has been cooled all the way down to 1.5 percent. But because of the weather distortions, he's ready to dismiss a low reading. "I don't think anybody other than a politician is going to think a whole lot about it," he says.
You've been warned: Get ready for a next round of the Washington blame game involving what the economy is or isn't doing.
Economy coiled for the spring?
If the bad weather merely delays significant hiring and spending until the second quarter, then watch out. Naroff says growth in the next quarter come in as strong as 4.5 percent or 5 percent. If, on the other hand, we go back to only modest or sub-par growth, there could be a fair amount of disappointment, including among investors.
Retail industry expert Michael Niemira says spending might very see a burst as the tulips start popping up through the soil. "I suspect that consumers are tired of the bouts of adverse weather, and I would expect that there will be a sharp rebound as spring gets in the air," says Niemira, chief economist for the International Council of Shopping Centers.
This week in business history
Even if you don't have a celebrity's deep pockets and can't afford Louis Vuitton, you might at least have heard of the fancy designer brand. Did you know that the real Louis Vuitton died over a century ago, on Feb. 27, 1892? He founded the famed French fashion house in 1854. Today, parent conglomerate LVMH is a luxury brand powerhouse behind products including clothing, cosmetics, jewelry, watches and wines.
Have you been holding back on purchases because you've been staying inside? Or are you doubling-down on Louis Vuitton products? Let me know what you think.
Follow me on Twitter: @Hamrickisms.