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Tags: ETFs

Four Black Monday Takeaways Wall Street Hopes ETF Investors Never Understand

By Keith Fitz-Gerald, Chief Investment Strategist, Money Map Report • September 11, 2015

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Keith Fitz-GeraldKeith Fitz-Gerald

Exchange-traded funds - ETFs for short - are billed as among the most investor-friendly products ever created, thanks to low fees, intraday pricing, and unprecedented flexibility versus the mutual funds they've ostensibly "replaced."

In reality, ETFs are yet another Wall Street creation designed to separate you from your money.

Proponents will undoubtedly cry foul, as will many Wall Street professionals when they read this. That's understandable - they've got a lot to lose. According to Morningstar, there are more than 1,400 ETFs trading in U.S. markets, holding an estimated $3 trillion in assets. In 2005, that figure stood at $300 billion. In 1990, it stood at nothing.

We're going to talk about why that's the case today and, of course, four key takeaways every ETF investor should understand.

Don't get me wrong - ETFs aren't a landmine if you understand how to use them, as I'm about to show.

Chance, to paraphrase Louis Pasteur, favors the prepared mind...

...to which I'll add "especially when it comes to profits."

A Quick Bit of History Sets the Stage

To understand why ETFs are such a rigged game, we have to go back to another Black Monday - Oct. 19, 1987.

I recall it very clearly.

On the heels of what had been a banner summer and two rockin' years leading into that fall, the markets were fueled by a combination of low interest rates, merger mania, and leveraged buyouts. Then, as now, debt was key and IPOs were hotter than hot. The character Gordon Gekko, played by Michael Douglas in the 1987 movie "Wall Street," figured prominently in the social meme when he said: "Greed is good."

At the same time, insider trading was rampant and the SEC was clamping down, despite being outmaneuvered at nearly every turn. Traders turned to hedging as a means of protecting against temporary downturns. This, too, should sound familiar.

To keep things from getting completely overheated - and you knew this was coming - the Fed stepped in to increase short-term interest rates. Predictably, all hell broke loose.

Keen to protect their positions, institutional managers scrambled and billions of dollars' worth of sell orders hit on Oct. 19 within minutes. I stood slack-jawed as the tape went by.

While the institutional damage was bad, the individual experience was worse.

Those holding mutual funds were particularly hard hit because they couldn't sell until the markets had closed. By then the Dow had fallen 22.6% in a gut-wrenching one-day drop that saw nearly $500 billion wiped from the slate.

ETFs

Click to Enlarge

Never mind that the markets recovered quickly. The damage had been done - there had to be a way to sell during market hours using investments covering a basket of securities.

Three years later, State Street Global Advisors launched the first U.S. ETF. Created to track the S&P 500, the Standard & Poor's Depository Receipts ETF is now known as the SPDR S&P 500 ETF Trust (NYSE Arca: SPY), or "spider" for short. Other broad index-based alternatives sprung up in short order.

Today there are more than 1,400 ETFs covering everything from indices to very, very specialized investments, from the iPath Dow Jones-UBS Livestock Subindex Total Return (NYSE Arca: COW) to the Market Vectors Gaming ETF (NYSE Arca: BJK).

According to Wall Street, they're vastly superior to mutual funds because they have higher daily liquidity, lower fees, and can be traded throughout the day.

If you're starting to smell a rat, you're not alone.

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Appreciation is great, but it’s possible to get even more out of the shares you own. A lot more: you can easily beat inflation and collect regular income to spare. There are no complicated trades to put on, no high-level options clearances necessary. In fact, you can do this with a couple of mouse clicks – passive income redefined. Click here for the report…

Claim My Free Report

Keith Fitz-GeraldKeith Fitz-Gerald

About the Author

Browse Keith's articles |

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

… Read full bio

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Larry Okarski
Larry Okarski
7 years ago

TITLE: "Four Black Monday Takeaways"

I guess I missed them, what were they? 4pm price on a mutual fund sale no matter what time you placed your order during the day, that could have been explained better. Anybody who buys a mutual fund today should know this.

Program Trading was supposedly the proponent of lower prices in 1987, occurring in the Futures Exchanges of Chicago. Today you don't need the SPX or XMI, you have the SPY etf to short against your portfolio (yet discounts on SPY's NAV promote the same downward spiral that futures did in '87).

Don't get me wrong, I have nothing against futures contracts, after all it was the XMI Futures on the CBOT that saved the world on Black Tuesday 1987, by being the only stock futures open at 11:30 am. While not a perfect match to the S&P, where else could you cover your shorts?

Have a great weekend, and find APRIL FOOLS book for a chapter "Missiles of October".

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