Sunteți pe pagina 1din 23

Midcap ETF Review for Investing in Top Markets

Index Fund Performance of CSD, RPV and RYJ as the Best Picks During and After the Financial Crisis

A Market Brief by

Steven Kim

MintKit Investing
www.mintkit.com

Disclaimer This brief is provided as a resource for information and education. The contents reflect personal views and should not be construed as recommendations to any investor in particular. Each investor has to conduct due diligence and design an agenda tailored to individual circumstances.

2013 MintKit.com

Summary
Given the attractions of an exchange traded fund, a midcap ETF review for the stock market paves the way for investing in lusty firms of moderate size. For this purpose, the first order of business is to select a timespan for sizing up the returns on investment. On one hand, a lengthy window of observation provides a heap of data for a thorough analysis of performance. On the other hand, the broad-based approach has its drawbacks as well. One stumper springs from the dynamism within the financial forum. Due to the explosive growth of index funds in the millennium, a prolonged timespan has the side effect of brushing aside numerous entrants that have stepped into the arena only in the recent past. For this reason, the wily investor has to strike a balance between the conflicting factors in order to pick an apt window of evaluation. In striking a compromise, a time frame of three years seems like a fitting choice in general. From a different stance, the financial crisis of 2008 was a watershed in the global economy. In recognition of the landmark, a duration of five years ending in spring 2013 has the advantage of spanning the epic blowup and its aftermath. For this reason, the longer window of half a decade can provide a host of pointers on the true nature of motley markets. In addition to grasping the price action in the arena, the wise investor takes into account a number of additional factors relating to the short run as well as the long range. A case in point is a modicum of liquidity needed for the artful player to enter and exit a given market in a timely fashion. A second hallmark of the savvy investor lies in an aversion for levered vehicles. The reason stems from the constant threat of sudden death and/or gradual demise that dogs any type of rickety scheme based on high gearing. Due to the specter of certain doom,
3

only a heedless speculator lusts after shaky contraptions pumped up by the gimmicks of leverage. In other words, the wise investor relies only on sturdy rigs that move with the target market in a direct and forthright way. In sifting through a database of index funds focused on midsize firms, a straightforward approach is to begin with a muster of the front-runners in the field. Then the other factors such as liquidity and risk can be brought to bear on the appraisal. In line with this thrust, we begin with a tally of raw performance over the course of three years ending in the autumn of 2013. The resulting list of candidates can then be whittled down further by a couple of secondary screens. As we noted above, the first filter deals with the liquidity of the ETF in the marketplace. Meanwhile the second criterion concerns the directness of the setup; that is, the absence of leverage. Based on this regimen, the top 3 index funds turned out to be CSD, RPV and RYJ. The purpose of these pools is to keep pace with their respective benchmarks: the Beacon Spin-off Index, the S&P Pure Value Total Return Index, and the Raymond James SB-1 Equity Index. Among these pacers, CSD turned out to be the clear winner. Moreover the return on investment for the spearhead displayed a series of higher peaks as well as rising troughs over the span of half a decade. Of the pair of runners-up, the average payoff for RPV over the past three years was comparable to that for RYJ. On the other hand, the former pool broke down more severely than the latter during the financial flap of 2008. After the smashup, though, RPV for the most part kept up with its rival and managed to eke out a slightly better performance in recent years. To place the turnout of the high flyers in context, the eagles were compared against a couple of renowned benchmarks of the stock market. Looking at the big picture, the Standard & Poors index of 500 giants stands out as a popular proxy for the bourse as a whole. Meanwhile the S&P 400 Midcap Index is arguably the leading beacon within the vale of midsize stocks.
4

Each of the foregoing yardsticks has spawned an index fund of its own. The offsprings carry the ticker symbols of SPY and MDY respectively. On the upside, the trio of winning funds for midcap stocks namely, CSD, RPV and RYJ trumped the popular benchmarks of the bourse by a solid margin.

* * *

Keywords: Midcap, Top, List, ETF, Review, Exchange Traded Funds, Index, Fund, Stock, Market, Risk, Return, Performance, Volatility, SPY, MDY

* * *

* * * In order to pick the best index fund for a zesty portfolio, a basic step is to identify the pacesetters in the field. In sizing up the candidates, the key criteria include the return on investment along with the degree of price volatility. As a rule, the foregoing traits are interlinked rather than independent. For instance, an exchange traded fund on a growth streak is apt to be more flighty than a plodding rig that trudges along at a lumbering pace. In sorting out the tangled factors, a straightforward move is to start by culling the leading vehicles in terms of growth. Then the other aspects such as risk and liquidity can be brought to bear on the appraisal. Before we plunge into the task, however, we will begin with a smattering of background material. In order to obtain a solid grasp of index funds, the mindful investor has to take note of the key issues along with the buzz words in the field.

Basic Terms and Prime Benchmarks


In the parlance of the stock market, the overall worth of a company is known as its valuation. The latter feature is given by the price of the equity multiplied by the number of shares outstanding. As an example, consider a corporation that has issued 10 million shares. Moreover we assume that the current price of the stock happens to be $20 per share. In that case, the valuation of the firm is the product of the last two figures, which comes out to $200 million. On occasion people like to refer to the total value of a firm as its capitalization, or more tersely as the cap. As a result, we end up with labels such as largecap and midcap.
6

On the other hand, the terminology takes on a slightly different meaning for the wonks in the sphere of venture financing. In this neck of the woods, the capitalization refers specifically to the paid-in capital of a fledgling firm. To bring up an example, a newborn venture might be launched with a stash of seed capital amounting to $34 million. In that case, the latter figure represents the capitalization of the company upon its inception. On the other hand, the valuation of a firm could differ from its capitalization from the very start. For instance, a snazzy venture based on a breakthrough technology might be highly prized by a band of early investors in the business. If so, the price of each share could be so lofty that the valuation of the startup as a whole exceeds its capitalization by a factor of 2, or 7.4, or some other number. In the stock market, a company boasting a huge valuation is known as a largecap. The latter term refers to the corporation as well as its equity. As a rule of thumb, the cohort of 500 biggest firms listed on the bourse are deemed to be largecaps. A standard bearer of the stock market lies in an index of 500 heavyweights compiled by a financial advisory named Standard & Poors Corporation, an outfit which also goes by the nickname of S&P. The composite yardstick of the big fish happens to be the most popular proxy of the stock market among the professionals in the field, be they active traders or passive researchers. Moving down the ladder of size, a company or an equity boasting a middling level of valuation is pegged as a midcap. In this domain, a common yardstick lies in a benchmark of 400 midsize stocks compiled by Standard & Poors. Last as well as least in terms of brawn, we come to the valley of the small fry. As the name suggests, a smallcap refers to a bantam firm or its equity. From a larger stance, the total number of companies listed on stock exchanges within the U.S. at any stage comes out to roughly 10,000. In concert with the previous paragraphs,
7

we can deduce that the bulk of public companies fall into the bantam category that contains around 9,000 firms. From a different angle, the vast majority of companies that traipse into the arena come and go in quick succession. When a firm is listed on a stock exchange, it might make a splash for a while but the newbie is apt to flop before long and quit the field within a matter of years. The high rate of turnover has a practical import for the players in the know. From the standpoint of a market watcher, for instance, there is scant sense in trying to keep track of the entire swarm of small fry at all times. In line with this dictum, one benchmark of the minnows involves a troupe of 600 lightweights monitored by Standard & Poors. On the downside, though, this index of smallcaps is less renowned than the other yardsticks from S&P that happen to deal with the largecaps or midcaps. In the land of midget stocks, another beacon lies in a yardstick compiled by a market watcher named the Russell Company. Before presenting the benchmark of lightweights in greater detail, its helpful to begin with a kindred index for weighty stocks. As a starting point, a yardstick known as the Russell 1000 Index keeps track of the thousand biggest firms in the stock market. For this reason, we can regard this gauge as a compound benchmark of the largecaps together with the midcaps. By contrast, the Russell 2000 Index covers the next segment of 2,000 sizable firms. For this reason, the gauge is widely regarded as a proxy of smallcap stocks. In line with earlier remarks, the classification of a company is relative rather than absolute. To spotlight the distinction between relative and absolute sizes, we note that a company worth a billion dollars might have been a colossus at the onset of the 20 th century but counts as a mere lightweight in the modern era.

An outfit at the upper end of the largecaps is also known as a megacap. Clearly, the band of megacaps makes up a subset of the broader class of largecaps. Looking in the opposite direction, a shrimp at the lower end of the midget category is also known as a microcap or a nanocap. As we noted earlier, the stock market is chock-a-block with thousands of minnows. From the standpoint of the nimble investor, any attempt to move a sizable amount of cash in or out of a bantam stock is likely to shift the price level by a hefty amount. For this reason, the bulk of the small fry are unfit for investment by most players, whether in the form of lonesome investors or communal pools. As it happens, the range of valuations within a single category seldom varies a great deal from one year to the next. At the dawn of the 21 st century, a handy classification by size is found in the following lineup (Wikipedia, 2013). Megacap: Over $200 billion Largecap: Over $10 billion Midcap: $2 billion $10 billion Smallcap: $250 million $2 billion Microcap: Below $250 million Nanocap: Below $50 million

We note that the classification of a midcap is marked by a threshold on the high side as well as the low end. The situation is similar for the smallcap category. In contrast, the other slots within the framework above happen to be open-ended on one side. As an example, neither a megacap nor a largecap has a ceiling on the valuation of the equity. At the lower end of the spectrum, neither a microcap nor a nanocap comes with a floor by way of capitalization. Moreover the valuations fall under the lower bound for smallcap

stocks. As a result a nanocap, for instance, can be viewed as a microcap as well but not as a smallcap. To sum up, a widespread feature of communal funds lies in the classification of stocks based on the value of the enterprise reckoned by the investing public. Where size is concerned, the main groupings take the form of largecaps, midcaps and smallcaps. Another aspect of communal funds involves a distinction between the apparent go-getters versus the prospective firebrands. In this light, the financial analyst likes to classify stocks according to the past turnout and future outlook for capital gains. In particular, a growth stock is an equity whose price has risen faster than average for the bourse as a whole over the past few years, and is likely to outrun the competition going forward. On the whole, the investing public has a penchant for zippy assets rather than sluggish ones. For this reason, peppy stocks tend to be more pricey than the average level for the bourse as a whole. In sizing up a stock, a standard gauge lies in the price/earnings ratio; namely, the price of the equity divided by the earnings per share for the company over the past year. For a growth stock, this yardstick tends to be higher than the average figure for the larger market. Another factor involves the nominal value of the assets owned by a company. An example in this vein is the original cost of acquisition for an entire building or a piece of equipment. The book value of a business refers to the combined worth of the assets carried on the balance sheet. Not surprisingly, the ratio of the market price to the book value per share for a growth stock is wont to be higher than the average figure for the bourse as a whole. On the flip side, a value stock comes with a dimmer outlook than the mean forecast of growth for the equity market. Given its muted appeal for investors, the security is likely to display a lower ratio of price to earnings per share. The same can be said for the price/book quotient.

10

According to received wisdom, a value stock is a bargain compared to an overpriced peer. And in fact, a cheapie can outshine a costly peer as time goes by. On the other hand, a blind faith in bargains often turns out to be misplaced. As a counterpoint, some pricey stocks can outshine their cheaper rivals for years on end. For instance, consider a stock that is more costly than the norm in relation to its earnings per share. In the financial community, the main reason for paying a hefty price today springs from the prospect of a juicy payoff in the future. According to the traditional models of finance, the investing public is perfectly rational at all times. In that case, a stock that is expensive compared to its peers must offer outstanding prospects downstream. In keeping with this dogma, many a market watcher automatically tags an overpriced equity as a growth stock without bothering to assess its actual outlook for the future. By one line of reasoning, then, the corps of growth stocks ought to outshine the legion of value stocks. And that would in fact be the case if investors were completely rational, as pictured by the mythology of finance. In practice, though, value stocks as a group can outpace the so-called growth stocks for prolonged spells; and vice versa. This fact of life of course contradicts the canons of classical finance. The stumper happens to be another nail in the coffin of orthodox theory. From a larger stance, a portfolio that holds a mixture of value stocks and growth shares is known as a blend. The attraction of a balanced portfolio stems from the fact that the lucid investor has no compelling reason for choosing a value fund over a growth pool as a matter of course. In the chaos of the financial forum, the madding crowd has a habit of shoving one portion of the stock market or even the bourse as a whole to extremes of high and low that give short shrift to the actual conditions in the past and present as well as the likely prospects for the future. Given the loony actions of the herd, one approach to investment

11

may well trump another whether the assets in play happen to be value stocks, growth shares, or anything else. Despite the wanton ways of the financial ring, however, the market displays a slew of recurrent traits. For one thing, growth stocks tend to be more volatile than their peers in the value group. For a second thing, growth stocks are prone to excel when the bourse at large happens to be tramping higher; and to fall behind in the throes of a downstroke. Given this background, the choice between growth stocks and value shares depends in part on the investors appetite for risk. For the adept player, another vital factor lies in the outlook for the bourse as a whole over the course of the planning horizon.

Selection Criteria
Since the purpose of an investment is to earn a profit, a candidate asset ought to be fruitful as well as hardy. These generic traits apply to tangible goods as well as virtual wares. An example of the former lies in commodities or real estate, while an instance of the latter involves currencies or index funds. Since the eve of the millennium, the field of exchange traded funds has grown at an explosive rate. Along with the upthrow, a raft of entrants have popped up only within the past few years. For this reason, the greenhorns offer no track records to speak of. On one hand, a large trove of data can serve as the fodder for a comprehensive probe. On the other hand, an investor who insists on an extensive history will thereby exclude scores of youthful funds. Given this backdrop, the mindful player has to trade off the amount of data against the number of candidates. In that case, a track record of 3 years appears to be a suitable compromise between the opposing factors. In picking the best widgets for investment, a second criterion involves the liquidity of the market. A sluggish niche marked by low turnover is a turnoff for the nimble investor who
12

wants to enter and exit the market in a timely fashion. As a defensive measure, a turnover of 10,000 shares a day seems like an apt threshold on the low side (Mintkit Core, 2013). A third factor concerns the use of leverage, or lack of such. On a positive note, a levered position can turn in an outsize gain when the market is on a roll. On the flip side, though, a high level of gearing results in a crushing loss during the downstroke that duly follows every upsurge. As a practical matter, the uptake of leverage opens up a can of worms which is anathema to the genuine investor bent on building up a nest egg for the long haul. The bogeys at hand include obvious threats as well as obscure snags. To begin with, a bugbear of modest size involves the standard notion of risk. The use of leverage gives rise to wild swings to the upside as well as downside. The thrashing of prices shows up in all time frames, from less than a week to more than a decade. The manic flailing due to a levered position is a headache that the sober investor does not need to tolerate. From a larger stance, though, the volatility in price is a minor nuisance compared to the gross specter of a complete bustup. To compound the muddle, however, the prospect of utter ruin is ignored by the bulk of participants in the marketplace. The cavalier players who brush aside the lethal threat run the gamut from casual amateurs to gung-ho professionals. To add to their plight, the victims of a blowup rarely manage to recognize the true cause of the mishap even after the fact. In most cases, the stunned clients walk around in a daze and chalk up the bombshell to a wanton act of providence. In reality, though, such a punchout is the inevitable outgrowth of a reckless wager. In this way, the uptake of leverage is a rash move that ends in tears sooner or later. In some cases, the gearing results in the cutdown of wealth in slow motion. A good example involves a communal fund in which the operators purchase a series of stock options in a flaky effort to magnify the impact of a rise in price within the target market.

13

In practice, though, the bulk of options expire without yielding any kind of payout to the buyers. More generally, the purchase of turbocharged tools is a losing game over the long haul for millions of punters. The sad fate is a universal precept that applies to every market. A rampant example involves the purchase of call options in order to jack up the returns from a stock index. Sadly, though, the plungers in search of quick profits are headed for the poorhouse sooner or later. Depending on the context, the manager of a communal fund may opt to take up leverage in other ways. An example lies in a customized loan from a commercial bank, or a standardized contract in the futures market. On the downside, though, the levered scheme is sure to bring gobs of grief in due course. The threat of a total wipeout is far greater than most people reckon. To reveal the scope of the problem, we turn to the financial crisis of 2008 along with its aftershock. In the throes of the maelstrom, every major benchmark of the stock market lost more than half the value it had reached at its prior peak. In that case, a modicum of leverage by a mere factor of 2 resulted in the obliteration of the entire principal from the outset, and then some. In certain fields such as the futures market, a ramp-up by a bulging factor of 10 is par for the course. Meanwhile other domains such as currency trading allow the gamblers to take up leverage by a factor of 50, or in some cases 100 or even higher. As we have seen, however, even a modest amount of gearing is the path to certain doom. From a larger stance, a glut of risk is the main cause of the ceaseless hail of blowups in the circus of finance. A fine example involves the swarm of hedge funds that flit around the marketplace. In this arena, even the elite outfits namely, the lucky punters that have managed to squirm their way into the top tier of heavyweights are fated to fall flat and die off in droves. More precisely, the ghastly rate of attrition thins out the ranks of the high flyers at the jaw-dropping rate of one-half of their number every couple of years (Kim, 2011).

14

Given the raft of hazards both blatant and subtle, taking up leverage is an assured way to lose out over the long range. For this reason, we will exclude any vehicle that resorts to gearing in a rash attempt to jack up the returns on investment. In other words, the proper candidates for a sound program of investment rely on the trusty tack of tracking the target market in a forthright way without bulking up on the steroids of leverage.

Top ETF List for Midcaps


In the world of communal funds, a venerable resource is found in an information provider named Morningstar. At the Web site maintained by the market watcher, one feature is a basic list of exchange traded funds. The data on the pools includes a tally of performance over the past 3 years as well as a measure of popularity in terms of the volume of trading. As we discussed earlier, a candidate asset ought to feature a dollop of liquidity in order to enable the investor to buy and sell a stake in a timely fashion. For this reason, we will consider only funds that sport a trading volume of 10,000 shares a day as a representative figure. As an additional filter, an ETF ought to boast a modicum of price history in order to support a meaningful analysis of performance. For this purpose, a window of 3 years seems like a fitting requirement. In line with earlier remarks, the most popular benchmark of the stock market among professionals be they active practitioners or passive observers is found in the Standard & Poors index of 500 heavyweights. The tracking fund for the touchstone trades under the ticker symbol of SPY. According to a recent tally, SPY turned in an average return of 17.07% per annum over the course of 3 years ending in autumn 2013. In terms of transaction volume, the index fund is prone to chalk up roughly 129 million shares a day. As we move on, we come upon the realm of midcap stocks. In this domain, the standard bearer takes the form of the S&P 400 Midcap Index.
15

The tracking fund for the latter benchmark goes by the handle of MDY. As a ballpark figure, the turnover for the blend fund amounts to some 2.4 million shares per day. Over the span of 3 years ending in autumn 2013, the return on the index fund came out to 18.02% per annum. Among the active candidates featuring a turnover of 10,000 shares or more, the best performance was turned in by a vehicle based on the Beacon Spin-off Index. The pool is part of a fund family known as Guggenheim Investments. The vessel, which sails under the banner of CSD, boasts a turnover of roughly 68,000 shares a day. The live wire bagged a windfall of 26.99% a year on average. Meanwhile the runner-up in the derby was a fund based on the the S&P 500 Pure Value Total Return Index, another yardstick belonging to the S&P family. The corresponding vehicle sports the call sign of RPV. The latter pool, which claims a turnover of some 51,000 shares a day, snagged an average gain of 22.90% per annum over the past 3 years. The tracking fund happens to be another member the clan known as Guggenheim Investments. We note that the underlying index for vehicle at hand deals with the value stocks within the S&P 500 benchmark. In that case, the tracking rig ought to be listed under the category of largecap funds rather than midcap pools. Yet the information provider, Morningstar, has tagged RPV as a midcap fund. Perhaps the choice of label stems from the fact that the worth of value stocks tends to be lower than the average level within the entire category of largecaps. Here we find a good example of the muddled state of affairs in the world of exchange traded funds. The pitfalls and workarounds in this portion of the financial woods are examined further in the last section of this report.

16

Moving on, we find that the third place in the rankings was nabbed by an index fund based on the Raymond James SB-1 Equity Index. The tracking pool, branded as RYJ, has a trading volume in the ballpark of 25,000 shares a day. The hustler secured a return on investment of 21.20% a year on average (Morningstar, 2013). Curiously, each of the top 3 index funds in the midcap league deal with companies focused largely on the U.S. rather than abroad. For this reason, we can infer that the past 3 years have not been kind to the equity market in other parts of the world. Within the real economy, the emerging countries have outpaced the developed nations by a comfortable margin. On the other hand, the bourses of the sprouting regions have for the most part floundered in the interim. Put another way, the equities in the budding regions have yet to recover fully from the pounding they received during the financial crisis of 2008 and its aftermath. As we have seen in this section, a numeric tally provides a direct and forthright way to summarize the performance of the leading candidates. On the other hand, a graphic display of the price action can provide the deft investor with further cues on the essence of the markets.

Graphic View of Performance


In the modern era, a watershed cropped up with the financial crisis of 2008 along with the Great Recession. The extreme conditions during the debacle served to reveal the inner fiber of motley assets ranging from stocks and commodities to currencies and realty. Given this backdrop, a survey of the landscape during and after the financial flap can provide a wealth of clues for the savvy investor. The chart below, adapted from MSN Money (money.msn.com), spans a period of 5 years ending in autumn 2013.

17

In order to mark out a baseline, the blue curve in the exhibit renders the course of SPY over the course of half a decade. The nasty plunge on the left side of the image portrays the smashup of the stock market, including the largecaps, during and after the financial crisis of 2008. A few years onward, another blowout popped up with the crash of the bourse in the autumn of 2011. Meanwhile, the purple arc on the exhibit depicts the behavior of MDY over the same time frame. Since the latter vehicle deals with the midcaps of the bourse, its progress has been a lot more sprightly in recent years compared to the path of the giants tracked by SPY. Turning now to the top list of dynamos, the red squiggle on the chart depicts the course of CSD. Despite a series of setbacks along the way, the go-getter clambered upward at a measured pace after hitting the deck in spring 2009. In particular, the firebrand turned in a series of higher peaks over the past three years. The story is similar for a sequence of rising troughs. In this sense, the pathway resembles the trail for SPY as well as MDY.

18

Meanwhile, the amber curve renders the action for RPV. On the downside, the latter vehicle broke down far more than its rivals in the throes of the financial flap. Even so, RPV turned in a respectable showing in the years to follow. Thanks to the comeback, the battler came in third over the entire stretch of half a decade spanned by the chart. To round up the review, we turn to the green trace that depicts the course of RYJ. On a positive note, the index fund did not fare too badly during the meltdown in spring 2009. Partly as a result, the go-getter took second place in the rankings over the entire stretch of 5 years. On a negative note, though, the hustler lagged a bit behind RPV over the last 3 years of the timespan.

Wrapup of Midcap ETF Review


In order to pinpoint the best vehicles for investment, an obvious point of departure lies in the performance over the past few years. A stumbling block, however, stems from the fact that a lot of exchange traded funds are relative newcomers to the field. As a result, the saplings of this breed do not have much of a track record. In that case, an investor who insists on a lengthy history will end up with a scanty pool of candidates. In this knotty setting, the worldly investor has to trade off the length of the track record against the size of the candidate pool. At this early stage in the evolution of exchange traded funds, a reasonable compromise between the opposing factors is a minimal life span of 3 years. From a different stance, a graphic display of the price action can provide an intuitive feel for the nature of the market. A showcase lies in the wild ride during and after the financial crisis of 2008.

19

Moreover a concurrent display of the assets under review can highlight any divergence in performance. For the case study at hand, the difference in behavior is floodlighted by the severe crackup of RPV compared to its rivals during the tempest of the financial crisis. Despite the severe thrashing, however, the fighter managed to turn in one of the best results within the realm of exchange traded funds. To place the performance of the champions in context, the beacons were compared against a couple of renowned yardsticks of the stock market. For this purpose, the touchstones took the form of the leading benchmarks for the sphere of midcap stocks as well as the equity market as a whole; that is, MDY and SPY respectively. As things turned out, the trio of winning funds namely, CSD, RPV and RYJ trounced the renowned benchmarks of the bourse by a handy margin.

Tips and Caveats


In sifting through a database of index funds, a mindless review of performance is apt to spit out a bunch of levered vehicles as the top picks. As we have seen, however, gearing happens to be a double-edged sword that cuts both ways. For this reason, a secondary group of pumped-up funds is wont to display the worst results within the same lineup. Depending on the fortunes of the stock market at large, the two groups of boosted vehicles have a habit of switching places. In other words, a ragbag of sizzling funds during an uptrend will likely turn into the worst losers in the midst of a downstroke; and vice versa. In this spasmodic setting of feast followed by famine, the extreme swings in price bring scads of grief to the hapless investor. Unfortunately, no one knows in advance whether the payoff from a soup-up fund will be a bonanza or a catastrophe. Upon closer inspection, though, the plight of the woeful investor is a lot worse than that. In order to pursue a levered ploy, the stewards of a pumped-up fund are obliged to go out on a limb in one way or another. An example in this vein involves the use of turbocharged tools in the options market or the futures pit.
20

On the downside, though, each mode of leverage comes with its own form of reprisal. For instance, consider the use of futures contracts in order to take up leverage by a mere factor of 2. Around the time of the financial crisis in 2008, the main benchmarks of the U.S. bourse lost well over half of their values from peak to trough. These yardsticks included the big fish in the lake which tend to be the least flighty or equivalently, the most stable. The chief benchmarks of this stripe are found in the Dow Jones Industrial Average and the Standard & Poors 500 index. When the target market crumples by one-half or more, a levered scheme based on futures contracts or bank loans ends up taking a big hit. As a result, the initial principal will be wiped out completely even in the subdued case of gearing by a piffling factor of two. During the smashup, the external investors in a communal pool lose their entire pot of capital committed to the operators at the outset. And once a fund goes bust and conks out, the game is over for good. In the case of an obvious swindle along the way, a band of bludgeoned clients may be able to file a lawsuit and snatch back some of the ill-gotten gains scooped up by the hucksters. As a rule, though, there is no way for the victims of such a disaster to recoup any of their losses. Thats what happens in the case of largecap stocks which tend to be the most sedate and robust of all. The predicament is of course a lot worse for the bourse as a whole as well as a multitude of smaller niches. An example in this vein involves the equity market for emerging countries, technology ventures, or sapling firms. From a larger stance, the specter of a blowup applies to other modes of leverage as well. A showcase involves the uptake of option contracts in order to limit the damage to a portfolio in case the target market breaks down. For instance, the managers of a levered fund could buy a series of call contracts in order to take advantage of an uptrend in the stock market.
21

Looking at the big picture, though, the bulk of options traded in the marketplace fade away and die out without providing any kind of payout at the point of expiration. When an option expires worthless, the net impact on the owner is the loss of the cash premium paid at the outset in order to procure the contract in the first place. More generally, the buyers as a group are swept into the abyss by an endless river of losses. In this way, the purchase of options is a losing proposition for the mass of punters. To recap, levered funds are dicey schemes that lure myriads of investors with fond hopes of making a fast buck. The wild-eyed dreamers can rest assured, however, that taking on leverage is an assured way to lose money, whether by way of sudden death or slow demise. A vital issue that lies beyond the scope of this report concerns the lack of a panacea in the financial forum. Given the absence of a cure-all, each investor has to assess the prospective choices in light of individual circumstances. A prime example of a personal trait lies in the tolerance for risk. Another sample involves the way in which a given asset complements the other widgets within a multihued portfolio. Given the diversity of needs and wants, the best choice of vehicle for one person could well turn out to be a lousy pick for someone else. For instance, a particular actor might decide that a high rate of growth is not worth the heartburn caused by the violent thrash of prices. Turning to a different issue, the canny player would do well to consult multiple sources of information in order to obtain a credible and rounded view of the assets in play. An example in this vein is a confirmation of past statistics as well as the current state of an exchange traded fund. Another sample involves the long-range outlook for the target market tracked by an index fund. The field of ETFs is still in its infancy. Due to the jejune state of affairs, the information available on the Web including the data provided by popular portals such as Yahoo
22

Finance (finance.yahoo.com) is often beset by loads of flaws. An example lies in a bunch of performance figures which turn out to be incorrect, inconsistent and/or misleading. Given the slew of sinkholes in the field, the heedful investor has to tread carefully before making a crucial decision of any sort. The hazards of faulty information, along with a quiver of remedial measures, are discussed at length in an article titled Cruddy Information on Exchange Traded Funds (MintKit Core, 2011). The primer provides a solid foundation for seeking out the top choice of exchange traded funds, whether by way of a midcap ETF review or any other approach to fixing up a cogent program of investment.

References
Kim, S. Wildcats of Finance. 2011. http://www.mintkit.com/Wildcats-of-Finance tapped 2013/9/17. MintKit Core. Cruddy Information on Exchange Traded Funds. 2011. http://www.mintkit.com/cruddy-information-exchange-traded-funds tapped 2013/9/17. Mintkit Core. Smallcap ETF Review for Investing in Top Markets. 2013. http://www.mintkit.com/lib tapped 2013/9/17. Morningstar. ETF Performance. http://news.morningstar.com/etf/Lists/ETFReturns.html tapped 2013/9/17. Wikipedia. Market Capitalization. http://en.wikipedia.org/wiki/Large-cap tapped 2013/9/17.

23