Why we recommend index funds and
exchange traded funds

 

Index funds and exchange traded funds are more efficient.

Our Model Portfolios do not invest in individual stocks, but only in certain types of mutual funds and other diversified investment funds. To be more specific, we invest in various kinds of market index-based funds and industry sector funds.

Index funds and sector funds are specific types of mutual funds designed to track a particular market index or industry sector. Exchange Traded Funds (ETFs) are a new type of index-based investment fund that tracks particular market indexes and industry sectors.

What are index funds?

Index funds are simply specially-designed types of mutual funds.

• They are called index funds because their purpose is to track a particular market index.

The Russell 2000 Index is an example of such a market index. The Russell 2000 Index is a popular index of small capitalization (small cap) stocks. A large number of mutual fund companies offer a Russell 2000 index fund (with unchanging, fixed allocations in the stocks represented by the index) in addition to actively-managed small cap mutual funds run by a portfolio manager.

• The mutual funds industry created index funds because of the failure of mutual funds managers to consistently beat the market indexes.

We use index funds for our investment strategies because they are more efficient. Our statistical investment technology tracks the market by zeroing in on the changing performance of different market indexes.

• We deliver long term performance, and reduce portfolio risk, by using advanced market timing technology to know when to be in or out of different indexes -- and how much to allocate to each.

We don’t try to analyze the performance of different mutual fund managers or attempt to decipher which ones will do the best in the future. Hardly anyone does a consistently good job of picking mutual fund managers.

Special kinds of index funds.

In some of our investment strategies, we employ special types of index funds:

• Inverse Funds
• Leveraged Index Funds

Inverse Funds are index funds that are designed to deliver the inverse of the performance of a particular index. For example, an inverse Russell 2000 fund will go up in value by 5% when the Russell 2000 Index goes down by 5%.

• We use Inverse Funds primarily to make money during bear markets.

Leveraged Index Funds use leverage and are designed to deliver some multiple of a given index’s performance. For example, ProFund’s UltraSmallcap leveraged index fund is designed to deliver 2-times the performance of the small-cap Russell 2000 Index.

• Our Max Xtender model portfolio strategy uses Leveraged Index Funds and also Inverse-Leveraged Index Funds.

What are exchange traded funds (ETFs)?

Exchange Traded Funds ("EFTs") are the newest form of index-based investment vehicle. ETFs are similar to index funds and sector funds in that they are designed to track specific market indexes or industry sectors.

The difference is that Exchange Traded Funds are listed on a stock exchange and are traded all day, just like an individual stock. In contrast, mutual funds are not listed securities and only trade once daily, based upon their end-of-day, net asset values (NAV). Exchange Traded Funds can be bought and sold just like any other stock.

• In short, Exchange Traded Funds are just like index funds and sector funds except that they trade like stocks rather than mutual funds.

This is why the popularity of Exchange Traded Funds has exploded in recent years. To view an up-to-date list of available Exchange Traded Funds, visit the ETFConnect.com site.

We offer an exchange traded fund (ETF) version for each of our strategies.

When you subscribe to one of our investment newsletters, you will have the option of following any of our strategies by investing in Index Funds, or alternatively in Exchange Traded Funds. We provide an ETF ticker symbol along with an Index Fund ticker symbol for each allocation in the Model Portfolio ... you decide whether Exchanged Traded Funds are a better option for you.