The on again, off again saga…

When will the Fed make the decision already to increase interest rates? By how much and by when? This has continued to be one of the dominating factors for the markets over the past few weeks. Every economic report that comes out makes investors update their best guess at when this will happen. It seems that, to an extent, the Fed is, basically, leading the markets around in circles on what looks like a wild goose chase. The question really comes down to whose fault it is…that is if you were interested in assigning blame for this. Is it the Fed’s fault because they are not being decisive or, at the very least, they are being secretive? Or is it the fault of the markets at large because they put so much emphasis on what the Fed says or does not say?

Trying to guess what the Fed will or will not do, to a large extent, seems like a big waste of time. We all know that, at some point, they will raise interest rates, if for no other reason than because they have to, but do we have to be held hostage until they make and announce their decision? I believe that the answer this question is a resounding, ‘yes’. The reason that I believe this is because it doesn’t really matter what the Fed does or when they do it, all that matters is that there are enough investors and traders that are active in the markets that believe that this is important. When it comes to the markets, perception is reality. So what investors and traders believe is real is what is real, regardless of if it is really real or even if it is anything that is important.

The best way to combat this is simply to acknowledge that the situation exists, taking it into account for our individual trading. We do not need to be part of the charade; we just have to be a witness to it, reacting accordingly to whatever they may do. There are plenty of other things going on in the markets to keep us busy, such as a few large mergers and some very intriguing Initial Public Offerings. There have been a few major companies that have just been made public over the past several months, some of which have occurred very recently. There have also been announcements by other companies with regard to new breakthroughs in medicine and fuel technology.

The Greek tragedy in Europe is another thing that is more than enough to keep us guessing and off balance when it comes the markets. It was only a few short years ago that a lot of people around the world wanted the Eurodollar to replace the US dollar as the world’s reserve currency. Now there’s never ending talk about the fall of the European Union. There’s no way to know or to predict what will happen in the future, but we do know that there has never been a successful unified union in the world’s history with a shared common currency that was not one sovereign nation. This leads a lot of people to not only question if the European Union will disband, but when will it officially disband. If Greece defaults on its debts, there could be a cascading effect throughout the union, with Greece being only the first nation to fall. There are plenty of others that have the potential to be the next, or even the first, if Greece does not default.

Russia and China are reportedly waiting in the wings, ready to help to pick up the pieces if they’re needed, but they both have a similar agenda, which is to end the US dollar’s position as the world’s reserve currency. A lot of people may not understand exactly what that would mean, and they may not believe that it matters much either way, but the truth is that the US dollar, being the reserve currency, allows the US to print as much money as they want to with little or no repercussions. If the US dollar were replaced by another currency as the reserve currency, it would have an immediate and lasting effect on the US economy.

As I pointed out above, there are a lot of interesting things to worry about and to pay attention to, other than chasing the Fed around, hoping that they’ll actually make a decision or share the decision that has already been made.

The debate is on…

Most investors are familiar with mutual funds, as they have been marketed for many years by the mutual fund companies and are part of or most people’s 401Ks and IRAs. However, Exchange Traded Funds (ETFs) have been around for over 20 years in the United States, but have not been marketed as heavily as mutual funds.

Mutual funds have also been perceived as the better investment vehicle for the buy and hold crowd, as they are considered a generally more passive investment.

In the last few years, many investors have turned to EFTs over mutual funds because they have many of the same characteristics of exchange trades stocks and, therefore, can be more actively traded.

I won’t go into a long discussion about the benefits of active swing trading over buy and hold investing. However, if you look at the overall market, it has been much more favorable for swing trading over the last 12-14 years or so, and have just recently risen to the former levels of 1999 prices.

So to lay it out simply, investors who bought in 1998 or 1999, and have held on to their mutual funds, have lost more than a decade of growth versus a more active swing trader who may have been able to take advantage of trading ETFs.

Here are the main reasons to buy ETFs over mutual funds:

1. They Trade Like Stocks

When a new investor buys shares in a mutual fund, he or she pays the end of day NAV (net asset value). Since ETFs are traded on the exchange, they act just like any individual stock issue and can be purchased any time at the current price during the market hours.

2. They’re Cheaper

The management fees are generally less in the ETF world, as they just need to pick the basket of shares that follow their sector or specialty, and are much less likely to have highly paid fund managers acting as expensive stock picking gurus.

3. They Allow for Flexibility

When an investor purchases shares in ETFs, unlike mutual funds, they may use the same kind of orders used when purchasing individual stocks, like pending limit orders, pending stop entry orders, stop loss orders, and take profit limit orders, just like stock trading. This ability to trade an ETF just like a stock is a great advantage for more active swing traders, allowing them to apply many different trading strategies to their ETF positions, something that just can’t be done to mutual funds.

4. There’s a Lower Barrier to Entry

In addition to applying order types, with ETFs, an investor can also buy long or sell short any number of shares that s/he would like, even down to one share if desired. This is a real advantage for the investor with a small portfolio, as many mutual funds have much higher minimum purchasing requirements.

5. They’re Optionable

For investors with experience trading options, you can trade puts and calls on many ETFs, just like any other optionable stock. These are not just for buy-and-hold investors, the active trading community has also embraced these financial vehicles thanks to their ease-of-use and unparalleled liquidity.

These are the main differences between traditional mutual funds and ETFs, as well as advantages of owning an ETF versus a mutual fund.

So if you’re an active swing trader, or even a more long-term investor, are these compelling enough reasons to look into ETF trading?