Each morning while making some hot wake-up beverage I spend a few minutes watching CNBC, General Electric's (NYSE: GE ) TV channel for the financially inclined. (Though it is also the hub for Dennis Miller's and John McEnroe's new nightly rantfests.)
I like CNBC because it's darned good entertainment for a stock jock like me. Seriously. Nothing against the network, but if I want stock prices I'll check out the Quotes & Data section at Fool.com. Stock picks? We've got newsletters for that here, too. Occasionally CNBC will have an interview that holds my attention -- I really enjoyed Roger McNamee in yesterday's Squawk Exchange, for example -- but otherwise, I'm in and out, delightfully entertained by the graphic gyrations of the markets and a few large-cap losers.
Still, I have to give CNBC its due. No other news source is better at pelting the viewer with economic news and ideas. And, actually, there's some real value to that. Like it or not, the hither and thither of the economy has a profound impact on the stock markets and individual stock and mutual fund prices. For example, when oil first topped $50 a barrel in late September the Dow Jones average skyrocketed for two days before returning to earth. Were you a macroeconomically inclined investor, you may have seen the massive increase in oil prices coming. And you may have lamented at the time that you wished there was a way to capitalize on your knowledge in your portfolio.
Well, dear Fool, you could have. For instance, you could have invested in the stocks of ChevronTexaco or ConocoPhillips, hoping the bump in prices would lead to long-term profit gains. (And, as this chart suggests, you would have been pretty happy thus far.)
Or if you were the skydiving type who had a nice stash of cash lying around, you could have bought oil futures contracts, betting the price of Texas tea would rise (or fall) by a specific date in the future, allowing you to either quickly make a bundle or lose the entire investment.
For average Janes and Joes, though, a low-cost mutual fund that specializes in energy stocks, such as the highly rated Vanguard Energy (VGENX) fund, would probably seem most attractive. After all, sector funds can rapidly diversify your holdings but at the cost of locking up your investment for at least a year. (There are other reasons, too, why Motley Fool Champion Funds lead analyst Shannon Zimmerman generally advises against sector fund investing.)
Clearly, each of these options has strengths and pitfalls, as with any investment choice. But there's a fourth way, and it may be the best option of all: ETFs, otherwise known as Exchange-Traded Funds.No commitments, please
One of the great strengths of ETFs is that they trade like stocks. That can be important if you're following the economy because the winds can blow hot or cold very quickly. Again, witness oil prices. As the closing bell rang yesterday oil futures closed at $46 per barrel. That's down 16% from a high of $55 in late October.
Now ask yourself, what if you made a bet on energy stocks via a mutual fund and oil prices just kept sliding for months? If you didn't have the funds to dollar-cost average into new shares you'd be locked in at a decidedly unfavorable price, facing hefty redemption fees were you to close the position. Not so with an energy-oriented ETF. You'd be able to lock in gains for no more than the price you'd pay your discount broker to trade any stock in your portfolio.Live short, don't prosper
This isn't to say that you should make a living trading in and out of ETFs to follow the sways of the economy. Far from it. With per-trade fees at firms such as Charles Schwab and E*Trade Financial running between $10 and $20 per share, you could rack up big fees that would destroy your returns.
That said, macroeconomic trends can be decidedly short-term. And knowing which stock to invest in to take advantage of, say, rising heating oil prices can be like trying to blindly pick the ace of spades from a deck of cards. Sure, you'll get lucky once in a while, but you'll lose more often than not. By carrying several, or even dozens, of stocks in their funds, ETFs provide the diversification the mutual fund investor seeks, with the flexibility and low costs the stock investor loves.
You with me? Good. Let's take a look at two trends that are all the rage these days and two ETFs that might help you take advantage of them.The dollar's falling! The dollar's falling!
It hasn't been fun to be an American in Paris lately. And not just because of the election or the war. The U.S. dollar has slid against the euro faster than an Olympic luge racer going for the gold. Only yesterday did the greenback regain a little ground against its currency counterpart from across the pond.
Amid the ugliness astute Fools will search for opportunities. In this case, industries that sell the bulk of their wares overseas profit because the exchange rates allow them to get more than they ordinarily might here in the good ol' U-S-of-A. But such machinations can also artificially prop up the stocks of exporters otherwise facing trouble. Take chip firms, for example. Manufacturers such as Intel (Nasdaq: INTC ) generate more than 70% of sales offshore, yet the sector is expected to see minimal growth into 2006 and is facing an inventory glut to boot.
You could short Intel, as I recommended last month, to take advantage of the downturn, but that would be hugely risky. A better strategy might be to short the whole darn sector. Barclays PLC (NYSE: BCS ) offers an ETF that will let you do exactly that. The iShares Goldman Sachs Semiconductor Index (AMEX: IGW ) pays no dividend, it is down more than 16% over the last year, and its underlying stocks are priced at a hefty earnings premium compared with the overall market.
Heat me up, Scotty
We're gearing up for winter here in the Rockies. If you're along the East Coast of the U.S., your preparations might include getting a delivery of heating oil. So far, it's been relatively pleasant out our way, but that's expected to change this weekend, and it could get worse in the coming months.
TheWall Street Journal reports that oil prices could skyrocket were this winter to be as bitterly cold as the 2000 freezeout. And that could send prices northward yet again, especially since drilling capacity in the Gulf of Mexico was damaged by this year's spate of hurricanes. It all adds up to an environment that should keep oil prices above $40 a barrel and may send them back above $50.
But wait, you say, isn't that speculating? You bet it is. The average investor needn't work this hard to get good, solid, market-matching returns in the way of an index fund. But for you more aggressive types, speculating is always going to be a part of your portfolio -- probably between 2% and 5% of your total investable funds.
Even at today's lower prices, any company making its profits from oil is bound to keep doing reasonably well. But not all oil stocks are equal. So, again, why not diversify and get all the best of the industry? The ETF choices vary here, from Vanguard's brand-new energy index fund to iShares funds tracked against the Dow and S&P energy indexes. Neither, however, appears as good as State Street'sSector Energy SPDR (AMEX: XLE ) , which pays a 1.48% dividend and trades for 19 times the earnings of its underlying stocks. That's below the S&P 500's price-to-earnings ratio of 21.The Foolish bottom line
In combining the flexibility of stocks and the diversity of mutual funds, ETFs offer a lower-risk way for more aggressive investors to place bets on everything from interest rates to the popularity of gold. (Indeed, State Street launched its StreetTracks Gold Trust (NYSE: GLD ) fund yesterday to heavy buying.)
It's in this manner that ETFs depart so drastically from their mutual fund cousins. In fact, you probably ought to think of ETFs more like stocks, and sector ETFs like the speculative, high-risk, high-reward stocks that populate our Motley Fool Rule Breakers newsletter. And as you do be warned: Speculations can, and often do, fail.
That's why it's so important in even informed speculations to follow the sage Foolishness of legendary investor Benjamin Graham, who demanded a margin of safety for every investment he made. For the macroeconomically inclined, there's no better way to buckle up the speculative portion of your portfolio than with a good ETF.Fool contributorTim Beyerswishes the Squawk Box crew would bring back those faux Caddyshack commercials. But even if they don't, he'll keep watching. Tim owns no interest in any of the companies or ETFs mentioned. For more on ETFs, he suggests you take a good look at the Fool's newETF Center. If you want to take a peek at Tim's portfolio you can do so by checking out his Fool profile, which ishere. The Motley Fool isinvestors writing for investors.