A mere 15 years ago, selecting the right exchange-traded fund (ETF) was no big challenge. That's because the first ETF wasn't introduced until 1993, and the second didn't follow until 1995. Since then, however, the growth rate among these versatile investment vehicles has been exponential - so fast, in fact, that the monitoring firm Morningstar now tracks the performance of 854 ETFs, with new funds being added almost weekly.
So, from this mushrooming roster of new ETFs - now covering virtually every market sector, both domestic and international - how do you select the right one (or, more likely, ones) for your portfolio?
If you're not already familiar with ETFs, here are four reasons why you should consider adding some balance to your portfolio.
Big Banks May Be Forced to Buy Back Bad Mortgage Loans
Major U.S. banks are under pressure from government officials, as well as groups of investors and insurers, to repurchase or modify bad mortgage loans they pooled into securities and sold to unwitting buyers.
In the latest effort, a group of investors with roughly $500 billion invested in 2,300 mortgage securities is trying to force the large banks that originated or are now servicing faulty subprime-mortgage loans to repurchase or modify them, The Wall Street Journal reported.
Some investors "had no idea that their money was being invested in mortgage-backed securities," Dallas-based attorney Talcott Franklin told The Journal. "And yet somehow these people are now the ones being punished, and that's just not right."
We Want to Hear From You: Should the U.S. Federal Reserve Keep Interest Rates Low?
After their meeting yesterday (Tuesday), U.S. Federal Reserve policymakers said they are more worried about deflation than inflation and vowed to look for ways to help along an economy that is experiencing worrisomely slow growth.
In fact, the central bank's rate-setting Federal Open Market Committee (FOMC) said it plans to keep the benchmark Federal Funds rate at its record-low level unchanged between 0.00% and 0.25% for the 20th consecutive month. And, central bank policymakers said rates could remain that low for "an extended period."
In the near term, that appears justified. Core inflation is running at just 0.9%, below the Fed's comfort-level target of 1% to 2% - where it says the inflation rate needs to be for price stability. Fed Funds futures at the Chicago Board of Trade (CBOT) now show that traders believe there is a 54% chance the Fed won't increase short-term rates until its November 2011 policymaking meeting.
In the interim, faced with a still-wheezing economy, the central bank may even start buying back large blocks of U.S. Treasury bonds - a technique that pushes liquidity out where its needed.
Will The Fed Fall Back on Treasury Purchases to Fuel Economic Growth?
Faced with a faltering recovery, the U.S. Federal Reserve today (Tuesday) will again consider ramping up purchases of Treasuries, a policy known as quantitative easing, to promote growth.
The Standard & Poor's 500 Index closed yesterday with a 1.5% gain on speculation that the Fed would at least indicate to investors that it is prepared to take further action to support the economy.
The Fed conducted its last major round of Treasury purchases from January 2009 to March 2010, buying $1.25 trillion in mortgage-backed securities and about $175 billion in debt owed by government agencies. The Fed planned on gradually reducing its balance sheet as the debt matured or was prepaid.
But last month the Fed signaled it might resume its quantitative easing steps when it voted to reinvest the principal payments in longer term Treasury securities. And with little improvement in the U.S. economy since then, analysts think the central bank is preparing to take the next step.
"The Fed's rhetoric will get the markets ready for the real possibility of expanding their balance sheet at a later meeting this year," Richard Clarida, a Columbia University professor and global strategic adviser for PIMCO, said Monday in a Bloomberg radio interview.
July's Narrowing Trade Gap Lifts Hope for U.S. Economic Recovery
The United States in July posted the biggest drop in its trade deficit in 17 months, as imports plunged and exports shot higher, according to a government report that could lift hopes for the economic recovery.
The U.S. trade deficit narrowed by 14% to $42.78 billion from a downwardly revised $49.76 billion the month before, the Commerce Department reported yesterday (Thursday).
U.S. exports expanded 1.8% to $153.33 billion - the highest level since August 2008 - from $150.57 billion in June. Imports registered their biggest decline since February of last year, falling 2.1% to $196.11 billion from $200.33 billion in June.
Obama Stimulus More About Politics Than Jobs
U.S. President Barack Obama yesterday (Wednesday) finished unveiling of a $350 billion stimulus package that the White House hopes will assuage the fears of troubled homeowners and create jobs. But with midterm elections looming and Congressional Democrats expected to sustain heavy losses, it's unlikely the plan will even get passed - much less generate any meaningful economic growth.
Indeed, the true aim of Obama's new stimulus is to put Republicans in a difficult position.
"The president has changed the conversation from whether to renew or terminate President Bush's tax cuts to his own tax-cut agenda, and is promoting a couple of business-friendly proposals that Republicans have previously promoted," David Wessel wrote in The Wall Street Journal. "So Republicans either oppose them, and look hypocritical, or back him: a win-win for Democrats."
Obama's new proposals employ a front-loaded approach with tax cuts to spur business spending and infrastructure projects to promote job creation.
Money Morning Mailbag: Small Business Owners Find Hope in Big Banks' Lending Promises
Larger financial institutions are increasing loans to big companies, but small business owners are still feeling the credit crunch.
U.S. Federal Reserve Chairman Ben S. Bernanke noted at a lending conference in July that there was a serious gap developing between large businesses that were building up cash and smaller ones still unable to get credit, and blamed tight credit for preventing small businesses from hiring.
"Making credit accessible to sound small businesses is crucial to our economic recovery," Bernanke said at the conference.
According to the National Small Business Association's 2010 Mid-Year Economic Report, 41% of small businesses were still having trouble obtaining credit in July.