ETFs (Exchange Traded Funds) Revisited
Mutual Funds for the 21st CenturyMay 15, 2003
Last year (Column 13) we introduced the topic of exchange traded funds. This topic is worthy of further discussion.
The easiest way for a public investor to preserve the value of a portfolio composed of stock market investments is to diversify. By doing so, one minimizes the risk associated with owning shares of a company that severly underperforms the market. Many investors, believing they are immune to this risk because they have superior stock picking skills, ignore the advantages of diversification.
The question is, can one easily diversify and continue to take advantage of our favorite investment strategy, covered call writing? The answer is yes.
Investors have always been able to own a diversified package of stocks by buying traditional mutual funds. But today's investor has a much better choice: The exchange traded fund, or ETF (some ETFs are called iShares). These investment vehicles have many advantages over traditional funds, the most signicicant of which is that they are optionable. This means call options are available and an investor can buy the ETF and write a covered call option. This strategy not only gives the investor a well diversified portfolio of stocks, but also allows him to gain the advantages of covered call writing: protection to the downside, decreased portfolio volatility, and increased likelihood of earning a profit.
Underlying Name Symbol FORTUNE 500 Index Tracking Stock FFF FORTUNE e-50 Index Tracking Stock FEF iShares Dow Jones US Financial Sect IYF iShares Dow Jones US Technology IYW iShares Dow Jones US Telecommunicat IYZ iShares Nasdaq Biotechnology IBB iShares Russell 1000 IWB iShares Russell 1000 Growth IWF iShares Russell 1000 Value IWD iShares Russell 2000 IWM iShares Russell 2000 Growth IWO iShares Russell 2000 Value IWN iShares Russell 3000 IWV iShares S&P MidCap 400 IJH iShares S&P MidCap 400 BARRA Growth IJK iShares S&P MidCap 400 BARRA Value IJJ iShares S&P MidCap 600 BARRA Growth IJT iShares S&P MidCap 600 BARRA Value IJS MidCap SPDRS MDY Nasdaq-100 Index Tracking Stock QQQ Select Sector SPDR-Basic Industries XLB Select Sector SPDR-Consumer Service XLV Select Sector SPDR-Consumer Staples XLP Select Sector SPDR-Energy XLE Select Sector SPDR-Financial XLF Select Sector SPDR-Industrial XLI Select Sector SPDR-Technology XLK Select Sector SPDR-Utilities XLU See list of optionable ETFs below Vanguard Total Stock Market VIPERs VTI
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Current list of ETFs with options Access to Loans Essential in Volatile Economy, Markets