Why ETFs Are the First Step on the Road to Wealth

Editor's Note: Earlier this week, Shah forecast that markets are gearing up for a year-end rally, a rising tide that will lift the major indexes as well as the big ETFs tracking them. Today, we're revisiting exactly why Shah likes ETFs - and which ones are most worth your money. Here's Shah...

Ask me to name the greatest retail product to ever come out of Wall Street and I'll point to exchange-traded funds - better known as ETFs.

ETFs are great for lots of reasons, but mostly because they are supreme disruptors.

Their introduction in 1993 disrupted the staid, overly hyped, unnecessarily expensive, inefficient, self-serving, and much-too-opaque mutual fund industry.

Besides being financial sector disruptors, ETFs are extraordinary personal disruptors. And whenever you find a spot where two or more disruptors/catalysts converge, you've also identified your biggest extreme profit opportunities.

Today I want to show you how to employ this "disruptanomics" one-two punch to your maximum personal advantage.

It will uncomplicate your financial life by establishing a foundation for your extreme profit investments.

And that will set you up for extreme wealth.

We'll set you up for all of this... one step at a time...

Why I Dig ETFs

etfsLet me start by openly admitting my bias: I love ETFs... even more than I've always disliked conventional mutual funds.

That "bias" is actually a big part of the reason I view ETFs as such a foundation for meaningful wealth.

During my time as a professional trader, you see, I would never place my money where I couldn't see what someone was doing with it, where it was expensive to park, or where I couldn't - during market hours - turn my shares into cash when my indicators told me it was time to "take cover."

In describing all those shortcomings, I've just described conventional mutual funds.

Lots of investors own mutual funds - because that's what they were "sold" for many years by the industry that tried to enslave them.

The upshot: Those fund holders have no concept about how badly they're being exploited.

Most mutual funds are way too expensive. Some also have sales charges and exit charges (called front and rear "loads" in broker parlance) and so-called 12b-1 fees and transaction charges.

Unless it's an index fund, you're only told what's in your mutual fund portfolio every quarter - and even then there's a 30-day time lag. With mutual funds, it's possible to lose money on your investment and still have to pay capital gains taxes.

And there's the whole price realization uncertainty thing: Even if you sell a fund early in the trading day, you're still going to get that evening's closing price. That doesn't do us a damn bit of good if we see the market slipping - and sell - only to have stocks plunge a few thousand points afterward.

No thank you.

Anatomy of a Winner

You have none of these issues with ETFs.

(I have detailed some pricing issues in past reports, but those issues were limited to major "down" markets. And let's face it: In a market that bad, you'll have problems with investments of all types - not just ETFs.)

Exchange-traded funds are just better products.

ETF expense ratios are, on average, about half those of most managed mutual funds. According to Morningstar, the average expense ratio on a managed mutual fund is 1.42%. On an ETF, the average is 0.53%... but on most ETFs, the expense ratio is closer to 0.40%.

With ETFs, you know what's in the underlying portfolio. Almost all ETF sponsors have product websites where you can see what's in the fund portfolios. Even "managed ETFs" - which trade in and out of stocks - have to post their holdings every day.

You will have capital gains when you sell your ETFs - if you bought them at a lower price. So you won't get socked with a capital gains tax bill if you haven't sold them, which happens too often with mutual funds.

Missing Out? If you're not making gains like this, you could be cheating yourself out of tens of thousands of dollars. Click here to learn more...

Most important, for me, is that I can sell my ETFs any time during the day and know what price I've gotten. Sometimes you can trade ETFs before and after hours if there are buyers or sellers on the other side of your trade when the exchanges are closed.

There are all kinds of offerings, but one basic theme.

There are more than 1,500 ETFs in the market. Another 150 are introduced every year. Not all ETFs that make it to market live forever. More than a few die off every year - for different reasons - but mostly from lack of investor interest in them.

What makes the great majority of ETFs so valuable is that most of them are basically indexed products.

And they're indexed in unique ways.

There are baskets of stocks, or futures, or bonds, or derivatives - or hard assets, such as physical gold - which make up underlying portfolios and represent an industry, an asset class, a country's stock market... or even fixed-income securities of different yields, risk profiles, and maturities. Whatever the underlying "stuff" is in the portfolio, an ETF gives you specific exposure to what you want to trade or invest in.

The best examples of ETFs being mostly indexed products are the major market benchmark indexes. Those three ETF products are, in my professional opinion, the most important for investors and traders.

The "Big Three" ETFs

Although there may be different ETF products that track the same benchmarks, the ones that have the most assets under management - meaning the biggest, most liquid ETFs that have huge daily trading volumes - are the ones you should look at.

They're always your best bet.

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The best ETF to track and trade the benchmark Standard & Poor's 500 Index happens to be the first ETF ever introduced - the SPDR S&P 500 Trust (NYSE Arca: SPY), which made its debut back in 1993.

With $244 billion under management, SPY is huge. It's also liquid - trading an average of more than 70 million shares daily. And it has a microscopic expense ratio of only 0.10%.

That makes it a winner in my book.

The best ETF to track and trade the Dow Jones Industrial Average is the SPDR Dow Jones Industrial Average ETF (NYSE Arca: DIA). DIA has $19 billion under management, trades more than 3 million shares a day, and has a 0.17% expense ratio.

The best ETF to track and trade the tech-focused Nasdaq Composite Index is the PowerShares QQQ Trust Series 1 (Nasdaq: QQQ). QQQ controls $58 billion, trades an average of nearly 27 million shares a day, and has a 0.20% expense ratio. QQQ is 58% technology stocks, with Apple Inc. (Nasdaq: AAPL) making up about 12% of its total weight.

Starting out as everyday trading vehicles - as a way to invest long term in the market or as a hedge against falling stocks - these big benchmark index "stocks" are my go-to ETFs.

When I watch the market, I watch the Dow first (because that's the index most news shows talk about and it's the one the typical investor is the most in tune with), the S&P 500 second, and the Nasdaq third. These benchmarks are the U.S. markets in most everybody's mind. They're all different, but all important.

You can take down extraordinary gains when you understand how Wall Street really works. Shah's been on the inside, and in his free, twice-weekly Wall Street Insights & Indictments, he reveals how to trade the bigger picture for maximum returns. To get his insight and start beating the Street, just click here.

Because the easiest and cheapest way to play the market - for you and for institutional money managers - is to buy one of these ETFs (depending which stock index you are interested in), they are super important to watch. I watch and trade all three ETFs.

I'm a big-picture trader. Because I trade a lot of money, the most important thing to me is being on the right side of the market. These three indexes and ETFs are "the stock market" to me - and to the money managers who trade U.S. stocks.

If you are on the right side of the market, it's hard not to make money. The simplest way to make money is by buying one or all three of these cheap ETFs... when the market is going up. As a trader, that's what I do. And if I don't believe the trend will continue to go higher, I'll sell.

And if I think the markets are headed lower, I'll short these three ETFs.

The Simple Things...

Making money really is simple if you don't complicate things. That's why these ETFs, in particular, are so valuable. You're watching the market and trading the same thing you're watching. There's no disconnect.

While there's no disconnect between watching the market and trading an ETF that tracks it, ETFs can face intraday pricing disconnects when any of the underlying stocks or futures that make up the portfolio stop trading for any reason. I've written about that and offered a solution.

Trading these big ETFs is easier than trading any stock because you're trading the market. And the market is a lot easier to understand (as a giant entity) than a single public company that has products, management, and all kinds of "firm-specific" issues - including how its stock trades relative to other stocks in its industry and relative to the market.

Trading individual stocks is great, and of course I do that.

But there's nothing easier than trading the market. That's what I do most and make the most money doing.

If you want to make a lot of money and set yourself up to trade a lot more stocks a lot more successfully, start here. I promise you'll become a much more profitable investor.

Consider it the first step on the road to wealth. That's why I love ETFs.

Don't Miss These Trades - They're CRUSHING the Market

The major indexes are driven by a few overpriced stocks. The rest of them - I'm talking thousands of stocks - are garbage.

But targeting the market's worst stocks is a great way to get rich. So long as shares are plummeting, you could be making a killing again and again.

And I'm the one person able to identify which stocks have about a 100% chance of dropping to the ground.

Since April 21, my Zenith Trading Circle recommendations have outperformed every investment on the market with average gains of 44% per day (including partial closeouts).

In fact, one of my latest plays closed out with a 955% return.

Don't cheat yourself out of the chance at thousands up for grabs here. Click here to learn more.

Follow Shah on Facebook and Twitter.

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

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