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5 Reasons to Master ETF Trading

Tuesday, June 3, 2008 | Chris Rowe

Next Thursday, we're going to open the gates to the BIGGEST thing we've ever done for the readers of The Tycoon Report.  So in light of this groundbreaking event, I'm dedicating my article this week to the importance of mastering ETFs.  Mastering them - as opposed to merely understanding how they work - can mean the difference between mediocre returns (or worse - negative returns) and explosive growth on your investments.

Wildly successful investing requires one key thing: Understanding something in a way that most people don't yet understand it.

I'm dead serious about this folks.  I've been wanting to write this article for you for a long time, but I have been holding back on talking to you about it until now.

I know some of you are new to investing.  But I have a question for those of you who have been investing for decades: Can you remember the TREMENDOUS growth in the popularity of mutual funds?

According to Morgan Stanley, it took the mutual fund industry 45 years to accumulate $600 billion in assets, and a total of 50 years to reach $1 trillion.  But it has taken the ETF industry just over 15 years to accumulate nearly $800 billion in assets!

I'll get right to the point.  If you haven't been asleep for the last 5 years, it's already obvious to you that the ETF industry is exploding.  I'm sure 95% of you have traded them already.  That doesn't make you special, sorry.  Some investors will only understand, in hindsight, why they should have mastered them immediately after reading this article.

I'll make this easy for you by listing 5 reasons why you absolutely must master ETF trading, and fast.

1. Fits like a glove.  Take a look around.  It's a new world, and ETFs arrived just in the nick of time to take advantage.  If you understand ETFs well enough, you can access global markets like China, which traded up 500% in about 1 year, or Brazil whose market traded up about 900% since late 2002!

Whatever country you live in, you must look around and figure out which markets have the greatest reward/risk ratio.

Around the globe, 10 years ago, individual investors were so excited about taking control of their own accounts through online trading that they ran out there with their new internet connection and wire instructions forgetting one key element: They forgot that they weren't professional investors!

Who could blame them?  They were getting screwed by either their stock broker or fund managers, who practically held their money hostage.  And it didn't look THAT complicated in 1997 - 1999 if you recall.  Just buy something that said ".com" and you'd win.  (But we know how that story ended.)

We all know that it's almost never that easy.  Before the late 1990s, individual investors would jump for joy if they were "lucky" enough to get that cold call from a New York stock broker, because individual investors had no access to any good information or investment product without a connection to a pro (and even harder to find, one that was honest).

So finally they accessed their own account through the web from 1997-2002, then they learned how to use the web to find information on their own from 2002-today, and lately, they seem to understand how to interpret the information too!  With the explosive growth in ETFs, we've come full circle, as investors can now access to the tools they need to easily take advantage of the conclusions that they arrive at!  Don't take your eye off the ball though...

Why is it absolutely imperative that you understand your ETFs?  You mean, aside from the fact that the U.S. stock market is only something like the 30th best performing market?

ETFs allow you to participate in explosive emerging markets.

If you don't adapt to the new global economy and start understanding the world economy as a whole, then I guarantee about 95% of the do-it-yourself investors reading this article will fall way behind those who do.  In fact, if you don't embrace the global markets as a major part of your portfolio, then instead of moving away from the pre-1997 era of not having access to "Wall Street", you'll inevitably be moving backwards.

Don't sweat it, we're getting smarter by the gigabyte, and with the rapid and easy flow of information these days, it's hard to remember what it was like before the internet.  You WILL have a good understanding of the global economy as long as you read.  But don't even bother unless you know how to turn your information into cash.  ETFs are the key.

The first reason was the longest, I promise.  Here are the other 4...

2. Not only do global market ETFs give you the ability to invest overseas, but you can use them as a tool to figure out which markets are the strongest.  In other words, you can do "relative strength studies" to position yourself in the  foreign indexes that have the highest probability of success!

So now, with ETFs, we can find the strongest place to put our money, and we can act on it.  If you're not doing this, then you're just playing in the minor leagues.  That's not meant as an insult.  It's actually very simple once you learn it.

3. Sector Rotation.  There is an ETF for every sector out there.  If you still view the "stock market" as one of the top three U.S. indexes (Dow-30, NASDAQ & S&P 500) or top indexes in whatever country you're in, then you're trading in the dark.  Again, this is not an insult.  I understand that everywhere you look watch and read, the media programs you to think of "the market" as one or all of the major indexes. 

This is a long story, so let me sum it up like this: Although people say the stock market topped out in the year 2000, the fact is it happened in April of 1998.  From that point, most stocks were trading lower while a few kept the major cap-weighted indexes moving higher.

But that's not even the point.  The point is that the Dow-30, NASDAQ and S&P are just indicators.  They give indications of what's going on in the U.S. stock market.  But to be (what I call) a success in the market, you absolutely MUST see the stock market for what it is: Lots of different groups of stocks (sectors) that each have different behavioral patterns.

This is probably the most important understanding that an investor can possibly have about the stock market.  If you don't understand that one sector (like financial stocks) has a completely different agenda than another sector (like energy stocks), then you shouldn't be handling your own investments.

If you can't name the S&P 500's ten sectors, it's a red flag.  (I'll give you a pass if you can name 9 S&P sectors, since they tend to combine 2 of them into one).  Try it:

4. U.S. citizens: The dollar is getting clobbered, and there is no end in sight!  The currency you have sitting in your wallet - okay, your bank - is declining!  Just as you have to understand the new world (the global economy), you must also understand that the green paper in your wallet is just a promissory note.  It's kind of a stock that fluctuates up and down.  And these "stock certificates" you have been holding in your wallet, bank and stock account have been in a bear market for the last 6 years!

So when you think about the money you have "stashed away" somewhere, don't look at it as cash you're sitting on.  Look at it for what it really is:  You are "invested" in the U.S. dollar.  But you don't have to be.

Think of all the times you decided NOT to sell a stock, because it was down, in order to buy another stock.  Well that's exactly what you are doing when you put U.S. dollars into a stock.  You're exiting your down position in the dollar to get into the stock.

ETFs allow you to benefit from the decline in the U.S. dollar and/or the rise of foreign currency ... without having to get into Forex trading.  So basically, when 99.9% of everyone around you is complaining about the declining dollar, you can mentally pat yourself on the back and cheer (or if you're like me, literally pat yourself on the back and cheer).  I just have a weak frontal lobe.

The only question is, which one do you invest in?

Okay, this article is getting to be too long and I have way too much to say so I'll shorten this one.  (Told you I have been keeping this one in me for a while!)

5. No need for margin!  You can trade "ultra" ETFs designed to correspond to twice the return of the underlying index.  This can be especially useful in an IRA where margin is not allowed, if (for example) you want to to trade an ETF that corresponds to 200% of the gain in the Dow Jones U.S. Oil & Gas index.  Check the symbol: DIG.

Then you have short ETFs, which have an inverse relationship to the underlying index.  So you can own the ETF that moves up when the financial stocks move down (like SKF).  You also have "Ultra Short" ETFs that have twice the inverse relationship!
This is awesome for an IRA too, because you aren't allowed to short stock in an IRA but you can own inverse ETFs.  What if you don't want to keep trying to call the bottom of this bear market?  What if you wanted to join Chris Rowe in profiting from it?

Inverse ETFs are extremely fun in a market like the one we're in.  Again, while everyone you know is complaining about the stock market tumbling down (or a particular sector, such as financials, getting hammered), you can pat yourself on the back.
But as we learned in 1997-2000 when individual investors traded their own account simply because they had the tools to do so, having the tool at hand isn't enough. 

Once again in 2008 everyone with a computer has the tools.

In Closing

The tables have turned.  Hedge Funds and professional investors have lost their edge.  In fact, now small investors have the advantage.  There is nothing standing between you and the types of profits that used to only go to the over-privileged, super connected insiders. 

Because of the internet, huge institutions no longer have the ability to take advantage of you based on access to information.  The only way the institutions can take advantage of an educated investor now is when you trade based on your emotions.  But guess what ... since they are human too, you can do the same to them!

Institutions buying or selling stock is like a bull running through a china shop.  Individual investors are small enough that they can nimbly move in and out of positions, taking advantage of "the big guy."

Think about what people do in order to learn how to make a profitable career.  First they strive to do well in high school.  Then they take out $100k in student loans.  They study day and night relentlessly (or drink relentlessly, depending on the college and student).

Think of the 4 years of hard work, maybe many more, afterwards that people put into building the education so that they can get a job so they can get out of debt and on with life.  It puts what Teeka's going to be releasing next Thursday in sharp perspective: A chance, at a tiny fraction of the time investment, and an even smaller fraction of the monetary investment, to do for your investing career what college can do for your professional career.  And since Teeka isn't just our "ETF Expert," but one of the most respected in the world, a better professor can't be found.

Of course, I'm the President and co-founder of Tycoon, so you might be tempted to take what I'm saying with a grain of salt.  But understand this:  I can make 20 times the amount of money that I do at Tycoon by managing a fund (and at some point, I will go back to money management). 

I'm not going to say something about a colleague because it's good for our bottom line because, frankly, if I were in this for the money you wouldn't be reading this right now.  I give you my word as a man that I mean every word that I've typed in this article.  So look out for the new ETF Master Trader.  We have a mission here at Tycoon, and that is to empower the individual investor. 

We want to help millions, and I guarantee you that we'll do it.
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Chris Rowe
Chief Investment Officer
Technical Analysis Millionaire
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