Exchange Traded Funds and iShares
Are they a value investing proposition?
What are exchange traded funds (ETFs)
? They are securities that track an index but trade like a stock on an exchange. As a result, their price changes throughout the day due to buying and selling.
And because it trades like a stock, an ETF does not have its net asset value (NAV)
calculated every day like a mutual fund does. This makes life more difficult from a value investing perspective.
Advantages and Disadvantages
Advantages of ETFs include the diversification of an index fund as well as the ability to sell short. Also, the expense ratios for most ETFs are lower than those of the average mutual fund.
But you have to pay the same commission to your broker that you'd pay on any regular share order.
The problem with these funds from a value investing perspective comes down to the question of how do you value a basket of stocks that make up a particular index?
One could compare the average market price earnings ratio to historical values for that market. You are still left with the judgement as to whether a low price earnings ratio represents undervaluation or a deeper malaise.
Types of ETFs
Well known ETFs include the emerging markets ETF and one of the most widely known ETFs, the SPDR (Spider), which tracks the S&P 500 index.
Barclays exchange traded funds and iShares are available for a range of international indexes and sector types such as small caps, mid caps etc.
iShares are ETFs that offer investors the ability to invest in global, regional and country indices; for example, iShares Brazil, iShares Canada.
Sector exchange traded funds provide a means to gain exposure to particular industry groups in a diversified manner.
Each iShare represents a proportion of ownership in each stock that makes up an index. Their price closely tracks that of the basket of underlying stocks.
This means that iShares ETFs do not trade at a discount to their net asset value (NAV) as often happens with listed investment companies (LICs).
Because iShares trade daily like common stock, iShares day trading is possible for the speculator.
iShares are a good way for the average investors to get the diversification of a large number of companies without having to buy each individual stock, and in that sense are similar to index funds.
ETFs and iShares are flexible and cheap, unlike mutual funds. The amount you want to invest is up to you. And just like buying company shares, you pay brokerage.
Should value investors be concerned with ETFs and iShares? I don't take any interest in them other than knowing what they are about.
Trying to place a value on an index at any point in time, which can be made up from a basket of 50 or many more companies, is a different proposition from valuing an individual stock!
So from a value investing point of view, if I can't value them, I choose something I can!
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