An ETF Newsletter From the Investing Minds That Brought You the Forbes/Lehmann Income Securities Investor
 
 

Forbes/Lehmann Income Securities Investor is one of our most successful products for a reason. Editor Richard Lehmann -- "Forbes' Secret Weapon" -- has again and again delivered stock-market beating results for a mind-boggling 6 consecutive years with fixed incomes and preferreds. Now, he has turned his attention to the rapidly growing world of Exchange-Traded Funds (ETFs).

According to Richard, ETFs are quite simply the best investment idea to come along in the last generation. The origins of ETFs can be found in academic studies which support the idea that all managed mutual funds, over time, will under-perform an indexed fund representing a broad cross-section of the market. With some 13000 funds in existence, the law of averages combined with luck can easily account for a handful of funds having a string of superior results.

On the other hand, ETFs buy a basket of securities representing a cross-section of a particular market. Most important, they make very few changes to that basket of securities. The fund sponsor creates new fund shares as demand requires. Sellers can either sell their shares on the open market, or turn them in to the fund sponsor who will give him the equivalent in underlying securities. This feature means that, unlike closed end funds, the fund will never vary much from the underlying net asset value of its holdings. Over time, such an ETF will outperform all but the most fortunate conventional/open-end funds. Why? Because it has a number of factors working in its favor:

  • There is a minimal management fee and no 12b-1 fees for distribution costs, advertising and trailing commissions to the selling brokers.

  • There is a minimum of capital gains distributions since the fund hardly trades. In other words, NO unexpected year-end tax consequences.

  • The typical mutual fund holds up to 5% or 10% of its assets in cash to meet share redemptions while the ETF holds virtually none. That means that ALL of your investment money is working for you.

  • There is no cost for the portfolio turnover so common to conventional mutual funds, nor do you share the costs in buying and selling holdings to accommodate new investors or those who are liquidating.

  • Your cost basis in the fund is what you paid for your shares. You don't inherit unrealized gains and losses accumulated from prior years or prior holders and distributed to whoever holds the shares at year end. You also don't end up with taxable gains in years when your fund has declined in value.

  • Shares can be bought and sold anytime of the day during trading hours. This can be important in unstable markets.

  • The investor always knows what the fund holds. Conventional fund holdings are not transparent, being reported only quarterly at most. Hence, when a Merck - Vioxx type situation comes up, you may not know your exposure for three months. Also, you aren’t exposed to short term portfolio style changes a manager may make between reporting periods to try to make up performance shortfalls.

Even if you have avoided mutual funds and made your own selection of individual securities in the past, ETFs provide instant diversification through one purchase versus the cumulative commissions for the purchase of a multiple of positions. Having decided to invest in ETFs is not enough -- you need to decide in which of the hundreds of ETFs to invest. This is where the ISA ETF Investor newsletter is essential.

Our goal is to provide guidance as to which ETFs are going up and which are in decline. We have split the ETF universe into three portfolios: U.S., International and Sector. The U.S. portfolio tracks the broad U.S. Economy and is diversified as to market capitalization, growth and value. The international portfolio tracks international economies and is a way for the typical investor to achieve diversity away from securities dependent on the U.S. economy and the US dollar. The sector portfolio seeks the largest gains by investing in specific sector ETFs. We will advise you about strategies that can be used to hedge your risk or enhance your returns. Finally, fees do count and we’ll compare them for you.

Looking forward, ETFs are early in an evolutionary cycle where more and more intellectual input will be provided as they get more and more complex and focus more and more on specific niche sectors of the market. We’ll keep you up to date on these changes and what they can mean for you.

Each month the ISA ETF Investor will provide you with recommendations of funds to buy by sector, for the US market and for the international market. We’ll also tell you what new products are coming out and what’s happening in markets around the world.

 

 

         

  Meet our Forbes Guru: Richard Lehmann

Richard Lehmann is President and Founder of Income Securities Investor Inc. He has served on numerous creditors' committees, including the one set up by Chemical Bank for the municipal bonds of the Washington State Public Power Supply System. With over 30 years of bond investing experience, Richard Lehmann is a recognized expert on fixed income securities, high-yield bonds, bond defaults and investing in distressed securities. Richard is also a regular columnist for Forbes.

The Forbes/Lehmann Income Securities Investor is intended for individual investors and portfolio managers interested in building their wealth using fixed income securities. The newsletter provides recommendations for both investment and below investment grade securities and strategies that allow investors to make a steady monthly income while preserving their capital. Besides that, the letter also offers strategies for those more interested in capital appreciation.

In addition to Lehmann’s capital markets forecast and articles explaining fixed income investing, each issue will have at least nine new recommendations in the areas of corporate bonds, convertibles and preferreds. Every month Lehmann singles out one outstanding opportunity as his “pick of the month.” You also get an updated listing of all previous recommendations.

 



 

 

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