Highlights in this issue:

*** Do you always pick the laggard in a high-flying sector? I have the answer to your problem…
*** Invest in the “big boys” for as little as R24.60…
*** Discover the top 5 must-have “shadow” stocks for 2010…

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From the pen of Karin Iten…

Dear Investment Academy Reader,

Are you one of those people that can recognise a high-flying sector but aren’t sure how to pick that sector’s winning shares to bank HUGE gains? Or do you wish your shares would track the movements of an index more closely? Do you want to invest in the top 40 shares of the JSE, but simply don’t have the capital?

If you answered “yes” to any (or all) of those questions, here’s the solution

They’re called Exchange Traded Funds (ETFs) and they’re the hottest investment tool out there.

An ETF is an investment vehicle that trades on the stock exchange like an ordinary share. But, unlike a share, an ETF is an open-ended basket of shares that passively tracks benchmark indices (such as the FTSE 100 or the JSE Top 40 Index). By trading ETFs, you don’t gain exposure to only one share; you’re essentially exposed to a preselected basket of shares listed on the index the ETF tracks.

Invest in the “big boys” for a fraction of the cost

Say, for example, you want to invest in the likes of Sasol (currently trading at R297) SAB-Miller (R218) and BHP-Billiton (R228.90), but you don’t have the capital to do so, why not invest in the Satrix 40?

This ETF comprises of the top 40 companies on the JSE across all sectors, including the resource, industrial, retail and financial sectors. Currently trading at R24.60, it offers sound value, consistent performance and strong rand hedge qualities.

The reason everyone’s so excited about ETFs is because, unlike active investing (which attempts to outperform any given market or index), ETFs are considered to be a passive form of investing. And they deliver the performance of the market or index it tracks. So the best long-term growth opportunities come from ETFs.

But that’s not all.

Fund managers don’t generally do any better than the market, even on a long-term basis. So, instead of investing through them, trading ETFs ensures that, at the very least, your investment performs as well as the market or index does. This way, you’ll not only benefit from the performance, you’ll also pay much, much lower rates.

4 Immediate advantages of ETFs

ETFs are well-diversified investment vehicles. By trading an index, your exposure is enhanced (your interest isn't just invested in one company) and your risks are reduced (remember the vital rule of diversification).

But that’s not all ETFs have going for them. ETFs are:

1.    Cost-effective:
Investing in ETFs allows you to create your own well-diversified portfolio without paying a fortune. Plus, the only purchase cost you pay is the broker’s commission fee.

2.    Transparent:
Unlike managed funds, when you buy an ETF you know exactly what companies you’re investing in and what percentage exposure you have to each.

3.    Easy to trade:
Unlike unit trusts, you can buy and sell ETFs through the day. This means you can take advantage of intra-day highs and lows.

4.    Flexible:
Because you can short (sell) or go long (buy) ETFs, you’re able to take advantage of the index’s bullish and bearish moves. And did I mention that through ETFs you can gain exposure to international markets without affecting your R4 million offshore allowance? They’re also easy to buy and sell. And you can do so through your broker in the same way you buy and sell shares.

Here’s to your financial freedom,

Karin Iten
For the Investment Academy