Mark Freeland wrote:

- quote -

There is no reason to expect that an individual stock price would
reflect assets. You generally don't buy a stock to buy the company's
assets--you buy a share of the company's business. The value of Adobe
is rightly deemed to be quite a bit larger than the value of Adobe's
assets.

The NAV of a company has a completely different meaning than that of a
fund, and comparing them is a mistake. A company operates a business,
and fund does not.

- quote -

That's an odd idea, considering that an ETF's NAV is based on stock
prices, which (according to your own theory) in turn is based on
financial statements many weeks out of date.

This whole discussion depends on the belief that the market can
misprice securities, so I'm assuming that.

ETF X holds securities x1, x2, and x3. Because the market can misprice
x1-x3, there's no particular reason to assume that x1+x2+x3 is a better
estimate of fundamental value than X is. In fact, the difference
between X and x1+x2+x3 may reflect a *correction* that X is making to
the sum--that is, the ETF investors are correcting for the mispricing
of one or more of the underlying securities.

A related possibility is that the value of the whole X is not equal to
the sum of the parts x1+x2+x3. That is, there may be a diversification
effect that makes the whole more valuable than the sum. The other side
of this coin would be the whole being worth less than the sum if the
ETF isn't being managed well (e.g., front-runners knowing what the fund
is going to buy and getting to those purchases before the fund does).

Finally, there's the matter of ETF expense ratios, which tend to make
the wholes worth less than the sums. Oh, and to some small extent,
there's the matter of realized capital gains that can't be controlled
quite as well with an ETF, making it (ever so slightly) less valuable.

All this is even more clear with CEFs. You will sometimes read about
CEF premiums and discounts being evidence for inefficiency in the
markets. I agree that they're evidence, but I believe that the
aggregate price of the underlying assets that more likely represents
the inefficiency, not the prices of the CEFs.

Oh, and lest I forget, there can also be excess demand for an ETF or
CEF because it's the only one that grants simple, convenient access to
a particular asset class. Obviously, this would tend to make the whole
more valuable than the sum.

Darin

Ben wrote:
- quote -

Ben, even without fraud, there's wonderful irony in the question -

a) A corporation's stock price does not necessarily reflect its
underlying assets; the deviation from NAV is orders of magnitude greater
for a corporation than for an ETF. Corporations almost always trade at
varying premiums (M* shows over 90% of stocks trading at a premium).
http://www.investopedia.com/terms/n/nav.asp

b) A company's financial statement is many weeks out of date, even if
100% accurate at the time, so it less accurately reflects the *current*
state of the company than an ETF's NAV reflects the value of its
underlying assets.

c) Accounting is very much an art (even conforming to GAAP), so the idea
that there is a single possible "correct" financial statement is absurd
on its face (in contrast to the mechanical calculation of a fund's NAV -
though there is the issue of fair market pricing there).


--
Mark Freeland
nNeEwTs[at]sonic.net

Elle wrote:
- quote -

That's called fraud, and isn't analogous to an ETF trading at a
(published) discount or premium.

"Ben" <spamblam[at]hotmail.com> wrote
- quote -

Would you buy stock in Company X making widgets Y knowing that its financial
statements do not necessarily reflect its true financial condition?

I have an Enron feeling about ETFs. Since one's portfolio can do just as
well with index funds, then there's no reason to venture into something
outside one's comfort zone. Do you push clients into doing things outside
their comfort zone?

Elle wrote:

- quote -

Why not?

- quote -

Who cares? First, you said you were looking at investing for the
long-term, e.g. 20 years. Now you are shooting down suggestions because
of the possibility of one-day crashes like one that happened 20 years
ago--and from which the market immediately rebounded. An ETF is merely
a basket of stocks; there is no reason to think it would behave
unpredicatably relative to a benchmark. Use common sense.

- quote -

You seem to think you know everything. If so, why are you here asking
for advice and opinions? If not, then stop looking for excuses to shoot
down every suggestion and opinion that is posted here. If you don't
know everything, then testing your theories would be smart.

Your purpose in asking people to make suggestions and share their
thoughts seems to be to be find excuses to snipe at people's
suggestions and thoughts. Grow up.

This thread ("Living off dividends...") has drifted afield from
personal financial planning. Henceforth we would appreciate posts to
be more succinct and more related to financial planning.

As usual, comments on newsgroup operation should be directed to the
moderators and not to the newsgroup.

-HW "Skip" Weldon
Columbia, SC

"Elle" <elle_navorski[at]nospam.earthlink.net> wrote in message
news:NNeze.14165$jX6.13707[at]newsread2.news.pas.earthlink.net...
- quote -

I certainly am. The last sentence elided concerned your lack of faith in
the usefulness of some past data:

- quote -

Yes, only - until you provide a definition that suggests otherwise. 20% is
considered a small percentage of the whole in many contexts. If you do not
consider it small, you can always explain why, and what maximum percentage
of the market you do consider small.

- quote -

To do an apples to apples comparison, let's compare those international ETFs
with their open-ended index counterparts. In order of trading volume (July
6), the top ones are:
iShares Japan (EWJ) - 6.5m - no open end counterpart
iShares EAFE (EFA) - 1.8m - several cheap oepn end
alternatives
iShares Brazil (EWZ) - 1.4m - no open end counterpart
iShares Taiwan (EWT) -1.3m - no open end counterpart
streetTRACKS Gold (GLD) - 1.3m - no open end counterpart
iShares Emerg Mkt (EEM) - 1.2m - only* Vanguard Em Mkt (VEIEX)
iShares Mexico (EWW) - 0.7m - no open end counterpart
iShares UK (EWU) - 0.4m - no open end counterpart
iShares South Korea (EWY) - 0.4m - no open end counterpart

http://screen.morningstar.com/etf/Lists/ETFReturns.html

* indexfunds.com shows 4 MSCI funds; two are DFA, which march to their own
drummer and are only available through advisors, and one is a Vanguard
institutional fund. Even VEIEX does not track the 26 country MSCI Emerging
Market index, but a smaller set of 18 countries.

You get the idea. I'll gladly consider whether market prices of all
international ETFs always closely reflects their NAVs when you can provide
open end alternatives. Otherwise, the question is moot, and we should move
on to those ETFs for which there are alternative choices.

This eliminates the ETFs where one sees the largest deviations between
market price and NAV, where one has the greatest liquidity risk, etc., thus
voiding the worst cases in the data that you don't trust anyway :-)

- quote -

I think it is you missing the point ...

You raised the issue of whether ETF pricing had been "tested" - suggesting
that we cannot look at data to date, because ETFs constitute a too small
(undefined term) portion of the market. But if market share is the metric
that determines whether past data is sufficient to understand price
behaviour under different market conditions, then based on market share one
doesn't have a clue as to how closed end funds prices will behave.

Do you feel that closed end fund pricing is a total mystery, or has past
behaviour (despite the small portion of the market these funds represent)
been sufficient to understand how their pricing works? If the latter is
true, then that shows "small" market size in and of itself does not mean
that an investment vehicle has not been "tested".

I don't feel this is a false dichotomy, but if you do, please expound upon
that, and differentiate between understanding pricing of closed end funds
and of ETFs, given their similar market sizes.

- quote -

"Response" is dangling in this sentence (i.e. response of what?). Do you
mean the response of the market which the ETFs could move, or the response
of the ETFs' discount/premium, or some other response? If you are talking
about motion in ETFs' pricing, you need to describe how ETFs moving the
market relates to their mispricing.

It would seem to be just the opposite - if ETF prices were falling faster
than the market as a whole (providing the opportunity to move the market),
then there then arbitrageurs would be busy buying the ETF shares and selling
the underlying securities, forcing the securities prices down to where they
catch up, er, down, to the ETF prices.

On the other hand, if ETFs were not "big" enough to affect the market
significantly, then the security prices would not be affected by their
selling, and an ETF pricing mismatch (price < NAV) would be corrected on
only one side - from the arbitrageurs buying ETFs (retarding drop in ETF
prices), rather than correcting on both sides. Thus you need to explain
your concern here.

There is a positive feedback loop here (the more selling that goes on, the
further the market drops, the more people want to sell in a panic), but
that's independent of ETFs.

- quote -

ETFs constitute too small a percentage of the market to have been "tested",
yet they constitute a large enough percentage to possibly "move the market".
Okay.

US-based ETF assets are up roughly three-fold since 2001 ($228B in Feb) -
hard to see that making much of a change (still under 3%, by your
calculation).
http://www.investoffshore.com/blog/archives/000330.php

Your calculation mixes apples and oranges. It mixes percentage of domestic
market (20%) with ratios of worldwide equity of US-based ETFs and US-based
open end funds. If you want to "keep the international ETFs in the
discussion", then the percentage of worldwide equity held by US-based open
end mutual funds is likely much smaller than 20%. Possibly even small
enough for you to call it "small".

- quote -

All of which says that for you, however accurate or inaccurate ETF pricing
would be during a panic should not affect your decision to use them; you
would ride out these unpredictable moves, just as you ride out the
unpredictable moves in mutual fund pricing, even if not quite as
unpredictable.

The bottom line is that for all the fears, real or imagined, that you have
expressed regarding ETFs, they don't apply under the conditions you would be
using ETFs.

- quote -

"Sufficient" doesn't mean good, it just means that you believe you have a
decent portfolio. For example, you've surely read enough commentary that a
cap-weighted portfolio is not a great approach, because it is
momentum-based, it is top heavy, etc. Similarly, there are problems in
using MSCI indices (EAFE is Japan-heavy, Emerging Markets is limited to 26
countries and you can't even find an index fund covering that many - see
above), etc.

So one thing you stand to gain by broadening your horizon is greater
diversification, by filling in gaps or changing weightings. Note that I am
not saying I believe one way or the other that diversification is a good
thing - but since you have implied that you do, I am indicating how you can
improve (according to this metric) your portfolio.

You like investing at Fidelity. That limits you to an EAFE index (no
emerging market stocks), and domestic index funds covering the "total
market", or sliced into S&P 500 and "extended market". (There is also the
4-in-1, but that just combines existing options, and ONEQ, if one really
wants a NASDAQ fund.)

You could invest in a broader international fund - there are good index
funds, like Vanguard Total Int'l Stock, but then you would have to pay
$75/purchase. Alternatively, you could complement your Fidelity
international fund with, say, Vanguard Emerging Mkts VIPER (VWO), which is
the emerging markets component of Vanguard Total Int'l Stock index fund, at
as little as $8/purchase.

Or you could forgo the convenience and invest directly through Vanguard.
That would be losing something too (you asked whether you had something to
lose by sticking with low cost index funds).

- quote -

Note to moderator - this discussion more properly belongs in
misc.invest.mutual-funds. If I make any subsequent postings along this
line, I would like to cross post the my first response, and then drop
misc.invest.financial-plan. Opinions/suggestions? (Drop the thread would
be an acceptable suggestion :-)

--
Mark Freeland
nNeEwTs[at]sonic.net

Elle <elle_navorski[at]nospam.earthlink.net> wrote:

- quote -

Rich's point is that if an ETF allows swapping blocks as small as 50K
shares into the underlying securities and if there are many large
investors buying that ETF, you can assume that any significant arbitrage
opportunity will be traded away by those large investors. Basically,
any large index ETF with significant trading volume (and liberal
exchange options) is going to very closely peg the underlying
securities. I don't think you're really taking on any significant extra
risk there. Whether you have 50,000 shares to trade only becomes
relevant if it's a fairly rarely traded fund that doesn't have lots of
large investors.

- quote -

You're overly cautious.

- quote -

If it's less cost, then of course, but in some common cases, the ETFs
are slightly cheaper.


Michael

"Mark Freeland" <nNeEwTs[at]sonic.net> wrote
liberal snipping; people here are smart enough to look back
- quote -

Only?

- quote -

Yes, let's do. Many people use ETFs for their international diversification,
since it seems the savings is more signficant for international ETFs vs.
international index funds compared to domestic ETFs vs. domestic indices.

Keep the international ETFs in the discussion.

- quote -

I think you're missing the point: Mutual funds' NAVs reflect the underlying
value of the securities held. ETF prices do not necessarily do so.

If ETFs could move the market (and maybe they do at this point), then I
think the response to a Sept. 11 or Black Monday, 1987 might be more
extreme.

But in 2001, using some rough numbers, ETF money was maybe 20%*(85/3418) =
less than 1% of all stock equity.

snip
- quote -

My common sense tells me that, for my time horizon and portfolio allocation
(1) I should not join the panic and sell; (2) that the market controls
installed after 1987 would shut down the market in such a situation; (3)
that whatever happened with ETFs just before the market closed down would be
far less predictable than with mutual funds.

- quote -

In my opinion, without data, the appropriate advice is not to bet on
something whose behavior is, in fact, not well understood.

You do not know what will happen with ETFs in a panic, so you're implying
one should trust blindly.

- quote -

Correct. I have already stated some will describe me as overly cautious on
this point. But unless I become a day trader, and as long as I am satisfied
that the index funds I do hold sufficiently diversify my portfolio, I have
nothing to gain nor lose by sticking with low priced index funds. Isn't this
so?

This is definitely my prerogative (note the correct spelling). I am
confident I am in the minority but also will suffer no notable detriment by
staying out of ETFs for the immediate future and possibly forever. Plus, I
may be in the minority the way people who predicted the bubble bursting c.
2000 were in the minority.

Elle wrote:
- quote -

What constitutes "small"? - mutual funds held only 20% of the U.S.
equity market in 2003 (from your citation). And obviously a much
smaller percentage of foreign markets (where you find the ETF spreads
that your articles are complaining about - let's keep this apples vs.
apples).

If size is the significant factor, then you would say that closed end
funds have not been "tested". I think that is clearly not true:

"While the total amount of ETF assets at the end of 2000 was still
relatively small when compared to the approximately $4 trillion of
assets in equity open-end investment companies ('open-end funds' or
'mutual funds'), ETF assets were much closer to the $89 billion of total
assets invested in unit investment trusts ('UITs') and the $135 billion
of total assets invested in closed-end investment companies ('closed-end
funds').

"Moreover, during the first three quarters of 2001, net new investment
in ETFs amounted to approximately $24 billion, as compared to
approximately $13 billion for equity mutual funds. By the end of
September 2001, shareholders had invested more than $64 billion in a
total of 92 ETFs. Trading in ETF shares reportedly has accounted for as
much as two-thirds of the daily volume on the American Stock Exchange
('AMEX')".

http://www.sec.gov/rules/concept/ic-25258.htm

On the other hand, other factors such as cash flow may be more relevant
to pricing behavior. Here, ETFs have been better "tested" than mutual
funds.

- quote -

Does your "common sense" tell you that if the market is in free fall,
you are better waiting until the end of the day to get out (which is
what you would do with a mutual fund), or selling somewhat earlier in
the ride, even if you don't get exactly 100c on the dollar?

This is not something I personally would evaluate without data, because
I don't believe there is an obvious answer. You seem to feel otherwise
(by implying that mutual funds are less problematic in a panic). That's
your perogative.

--
Mark Freeland
nNeEwTs[at]sonic.net

"Tad Borek" <borekfm[at]pacbell.net> wrote
snip
- quote -

I don't know what your sources are, but "often" isn't good enough for me. I
know of no legal guarantee routinely attached to ETFs stating that the fund
value matches the underlying value of the stocks within, say, some x%.

I do see reports like that at
http://www.indexfunds.com/PFarticles...new_etf_ST.htm

"... ETFs are traded through the day on the American Stock Exchange at
prices that aren't guaranteed to match the underlying value of the stocks in
the portfolio.

With many ETFs the variations are negligible. But some of the funds trade at
prices that can vary considerably from the correspondent NAV at the time of
the trade. In such cases an investor who inadvertently buys an ETF at a
premium to its underlying value is exposed to natural corrective forces
(namely savvy traders who exploit the difference between the trading price
and the NAV)."

On the other hand, this article is dated 2000. It is optimistic that some of
these problems will be fixed.

I have yet to see anything dispositive on the subject. I want a legal
guarantee, but I think the way ETFs operate precludes an ETF company from
being able to offer any such guarantee.

- quote -

In 2001, stock mutual fund assets were worth about 3,418 billion dollars.
ETF assets were worth about 85 billion dollars. See

http://www.etfinternational.com/new/...nu=productinfo

http://www.ici.org/funds/abt/faqs_mf_stock_funds.html

Given the small portion of the market ETFs represented then, I am not
prepared to conclude ETFs have been "tested." Their very design implies to
me that they could be problematic in a panic. I am applying the "common
sense test." I won't be swayed (1) when other good alternatives exist, and
(2) simply because a lot of people will say "it can't happen." They're not
actually even saying that.

I grant that more information about the underlying value of an ETF is more
readily available to the consumer today than when ETFs first appeared in the
early 1990s, and so this will help preclude any disaster due to rapid and
extreme fluctuations in the stock market. But given that index funds'
expense ratios have become so competitive, and the type of index fund
available increasingly diverse, I see no reason for me to own ETFs.

Of course ETFs have become quite fashionable, but I think those for whom
they hold an attraction tend to be day trader oriented and not
buy-and-holders. If so, this too doesn't inspire confidence.

I suppose salespeople love ETFs because they can sell their seeming fashion
and make their commission. Or they can argue that ETFs are a good way to
ensure sufficient diversity at low cost. I for one think index funds do the
same thing, but typically without the stock transaction commission and the
risks that to me remain a concern.

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote
- quote -

I should have said "do not NECESSARILY reflect... "

That the price of a share of an ETF does not necessarily reflect the price
of its underlying securities is a well-reported fact.

- quote -

This is not the point I was making above. One may be able to make such an
exchange, but the question is whether the value of these securities matches
exactly what one paid for the ETF shares, at the same time one made the
original ETF purchase. It doesn't necessarily, though I note in my post to
Tad that improvements on this point have been made.

Call me overly cautious. When I can hold index funds that do the same thing
and at the same or sometimes less cost than ETFs, then the rational choice
to me is to stick with the index funds.

"Elle" <elle_navorski[at]nospam.earthlink.net> writes:

- quote -

Why do you believe that? Have you read ETF prospecti? If iShares
stuff is typical, blocks of on the order of 50,000 shares can be
freely exchanged for the underlying securities and vice versa.

iShares, at least, publishes the tracking error for its index
funds and they are very, very small.

- quote -

What about 9/11?

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

Elle wrote:
- quote -

There are two kinds of investments here, and they're different, though
they may be listed in the same place on the web and in newspapers.

ZTR is a closed-end mutual fund. Those almost always trade at a premium
or discount, and they don't really have a good mechanism for making it
narrower.

ETFs are a bit different...it's true that they are priced by market
demand as well, but the ability to arbitrage away premiums or discounts
means that they trade very close to NAV. It leads to a surprisingly
narrow spread, often <0.05%, and close to 0% for the biggest ETFs.

But ZTR has some other issues! Note that big decline in NAV, and
corresponding total return. The yield doesn't tell the story.

and (2) ETFs are untested in mercurial markets such
- quote -

What about post-9/11?

-Tad

"Ben" <spamblam[at]hotmail.com> wrote
- quote -

I do not like the facts that (1) ETF prices do not reflect the underlying
value of their holdings; and (2) ETFs are untested in mercurial markets such
as Black Monday, 1987.

- quote -

I don't think that's necessary. The dividend growth of companies over time
is readily available, as are yields. I'm only interested in established
companies and maybe a few younger ones. This is not like picking stocks so
as to maximize short-term return. It's a long-term effort.

There are also ETFs. For example, Zweig Total Return (ZTR) averages
between 10-15% annually, and pays monthly. You buy and sell it like a
stock. There are others; I assume ZTR has a good reputation because of
the Zweig name.

You might try maintaining a fantasy fund to test your theories. I use
marketocracy.com for this purpose (in fact, I have an equity-income
fund), since it is the most realistic of the fantasy-investing Web
sites that I've found.

"jIM" <noreplysoccer[at]hotmail.com> wrote
- quote -

But you said you would use dividend/share for initial screening and so to
help decide whether to purchase a stock in the first place. That criterion
makes no sense, as far as I'm concerned.

I agree that after purchase, one should not care about subsequent changes in
the stock's yield, assuming the company's fundamentals remain strong.

- quote -

I wouldn't call buying a stock in a financially troubled company, "value
investing." It's speculation and serious gambling. But that's just myself.
Maybe it is "value investing," of some kind of subcategory of the same.

Plus, maybe someone can defend an investment in Ford right now as not all
that risky. I haven't looked at its fundamentals in a few years but instead
just go from skimming general business news reports.

- quote -

I'd say adding something like Ford or GM to one's dividend growth portfolio
is more akin to adding junk bonds to a bond portfolio: It's part of the
diversity strategy. It's not a bad choice, as long as such positions make up
only a small portion of one's portfolio. So, fair enough.

Which segues somewhat into the idea that there are some mutual funds that do
that which I've been proposing. So far though I have not liked what I've
seen, with the exception of maybe adding a REIT mutual fund to one's own
stock portfolio mix.

"Why are you interested at all in dividend / share, as opposed to the
yield
( = dividend / price )? "

simple- a dividend changes less frequently than a stock price, and the
price of a stock has little to do with the quality or amount of the
dividend. If the goal of the portfolio is ot generate dividends, I
would concentrate on the portfolio value, the dividends of the equities
in the portfolio and concern myself little on the yield, which
fluctuates daily with stock price.

"But it does sounds like you're assuming that megacaps automatically
have
more stable dividends. I'm not comfortable with this, based on what
I've
seen. For example, Ford (along with GM) makes me nervous, but that's
just my
personal risk tolerance. "

I use mid caps and small caps for most of my dividend stream. To
stablize, I will also add positions in large companies. I added Ford 2
months ago after it's price fell (that's value investing, right?). The
idea is it generally fits what I want (pays a steady dividend) and
diversifies my portfolio some (I owned no automotive OEM). I would add
several other large caps, like Kodak, GM or any other big company which
falls temporarily.

"Ben" <spamblam[at]hotmail.com> wrote
- quote -

Oh okay, I get it. True. Thanks for clarifying.