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Exchange-traded funds (ETFs) are excellent investment tools but most have a flaw that investors and advisors generally miss. Lets take a look under the hood and introduce some new and revolutionary ETF merchandise. Primarily, ETFs are nothing at all much more than an index fund that trades like a stock. Since of their simplicity, flexibility, low expense and tax efficiency they are developing rapidly. Last year the Barclays iShares fa.. Is your financial advisor missing a critical piece to the ETF? Exchange-traded funds (ETFs) are excellent investment tools but most have a flaw that investors and advisors usually miss. Lets take a look under the hood and introduce some new and innovative ETF goods. Primarily, ETFs are absolutely nothing more than an index fund that trades like a stock. Due to the fact of their simplicity, flexibility, low price and tax efficiency they are expanding rapidly. Last year the Barclays iShares loved ones of ETFs brought in more new money than the Fidelity mutual fund machine. Diversification Unfortunately, a lot of investors and advisors are constructing portfolios of ETFs without having seeking inside the box and seeing exactly where the cash is going. One particular of the chief objectives of a portfolio is diversification and a lot of ETFs are not very diversified. This is simply because the businesses in the ETF are weighted by size especially by the market value of its outstanding stock. This can outcome in an unwise concentration of danger and uneven performance. The index fund communitys preoccupation with market place cap weighting may have a sturdy theoretical basis but to me it is contrary to frequent sense. To be blunt, I spend very little attention to it while building worldwide portfolios for clientele. Most investors would agree that just simply because a company is larger doesnt mean that it is a much better investment. Lets look at the most well identified index the S&amp;P 500 index. Numerous investors consider that investing in the S&amp;P 500 indicates that their cash is getting divided equally among 500 companies. This is far from the truth. Simply because the firms are weighted by size, 22% of your investment is going to the ten largest firms in the index and 60% of your investment is going to the largest 50 companies in the index. Unequal Weighting, Unequal Returns This is why I have been advising customers to invest in the Rydex S&amp;P 500 equal-weight ETF (RSP) which weights every single business in the index equally. Get extra info on this affiliated portfolio by clicking  [http://www.learnbonds.com/bank-bonds/ read] . Get further on the affiliated wiki - Click this web site:  [http://www.learnbonds.com/bond-fund-yields/ guide to sec yield] . In 2003 the equal weight S&amp;P 500 ETF beat the S&amp;P index by 11%, in 2004 it beat the index by 5% and year-to-date it is up slightly even though the S&amp;P index is down. In my book, The New Global Advisor, I ask readers a provocative query. We discovered  [http://www.learnbonds.com/high-yield-bond-funds/ team]  by searching Google. If you wanted exposure to the dynamic biotechnology business, would you prefer to mostly invest in a handful of large properly know biotech organizations or would you choose to spread your investment over thirty biotech firms? If youre the former, you may well invest in the iShares Nasdaq Biotechnology ETF (IBB) whereby 25% of your investment would go to three businesses. For these that prefer broader exposure like some modest cap companies, I have found a new loved ones of ETFs named Powershares. The new and revolutionary Powershares household of ETFs basically creates its own indexes based on guidelines-primarily based quantitative evaluation that they refer to as intelligent indexes. This appears to me to be far more useful than blindly following market place cap weighted indexes. There are two Powershares that I specifically like at this point. Two I Like The 1st is the biotech Powershare (PBE) that consists of 30 biotech organizations. If its holdings were weighted by marketplace cap, two companies would account for much more than 60% of its holdings. Instead your exposure is spread among 30 various businesses with no business accounting for far more than five% of the total. 30% of your exposure is to massive cap organizations, 26% is to mid-cap firms and 43% is to little cap firms. The biotech Powershare is an aggressive position so dont get carried away. I consider it is a intelligent play on the tremendous possibilities for capital appreciation in the biotech business which is displaying some momentum soon after trading sideways considering that early 2004. The annual charge is only .60%. The other Powershare that I like is the International Dividend Achievers Powershare (PID) that includes 42 ADRs traded on U.S. exchanges. I am usually not a massive fan of ADRs given that they usually trade at a premium to the underlying safety but they do supply some comfort to investors given that they meet U.S. reporting needs and can be easily purchased on U.S. exchanges. The ADRs in this Powershare have to pass a stiff test: 5 fiscal years in a row of elevated dividends. Again the prime holdings are no far more than 5% of the total index and so you get great diversification. A Better Way to Get Worldwide Diversification One problem with the most widely employed international index, the MSCI Europe, Asia &amp; Far East Index (EAFE) is its concentration in Japan and the United Kingdom which account for almost 50% of the indexs total value. Meanwhile exposure to promising countries such as Ireland and Hong Kong are significantly less than 2%. This interesting  [http://www.learnbonds.com/bond-market-holidays/ go here for more info]  use with has some offensive cautions for the purpose of this activity. Final year, this Powershares index beat the MSCI EAFE index by 7% and firms in the ETF averaged a 29% return on equity. The index is re-balanced quarterly and has an annual charge of .50%. Correct now 67% of the organizations in the index are large cap, 20% are mid-cap and 13% are tiny cap businesses. Acquiring the appropriate blend of ETFs takes some time and effort. Keep in mind that all ETFs are not equal so decide on cautiously.