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John Thomas Financial Chief Market Analyst Wayne Kaufman on the pros and cons of investing in exchange-traded funds.
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Good day for your 401K.
The S&P 500 closing today at its highest level in five years five years.
Just before the financial crisis hit the index is also up more than four and a half percent over the past week.
As the markets extended the New Year's rally.
Exchange traded funds are very popular now with a lot of investors -- ETFs as they're called.
They allow you to diversify over an entire market sector but here that's what caught our IB amount -- money investors pumped to to ETFs hit a new record in 2012.
A 187 billion dollars.
That's far more than the previous record set back -- 2008 so with this for you should be investing Wayne Kaufman chief market analyst at John Thomas financial joins me now.
So EP -- a lot of mutual -- Europe a lot of financial advisors like them because they're cheaper than actively manage mutual funds.
And you have some interesting insights into the told the bait you know actively managed mutual funds -- needed to buy some kind of sector finer NE TF.
You -- mutual fund managers don't do what you think they do -- -- A lot of them don't and there are in all fairness there are many who are very good.
And they outperform their benchmark indexes.
But too many of them are closet indexing as they just -- a mirror the benchmark and the essentially get paid for doing nothing.
-- -- -- -- Explain a little bit.
Closet indexer is meaning they buy everything in the index of say they they by the S&P 500 -- a large cap mutual fund.
And sell everything in the S&P 500 that as Indy 500 is up 14% as a wise there up 14% everything's great.
That's right and they get paid their fees and investors have figured this sound that's why so much money is going into the ETFs and that's popular reason now.
Well that's not the only reason but they're cheaper and -- fees are typically lower its fees are on the fees are lower and it it makes sense investors are Smart for doing that.
Mutual fund managers frequently need to -- so much -- over diversified.
So they can't really outperform but there are some who do.
So if investors though if they by broad.
Based ETFs than they have exposure to the market and it's hopefully for them not as volatile.
But if they by sector or even one level lower industry group ETFs that may be surprised -- the amount of volatility that they still have to put up with.
RA here's what I like you're bullish for next for this -- -- next year that's next your lives here at 313.
A tremendous amount of reasons but first and foremost towards the end of last year when everybody was worried about the fiscal cliff.
I saw that certain index -- small cap mid cap transportation indexes they were.
Going to close the year at all time yearly closing behind the NASDAQ marketplace was gonna close the year.
At its best level in twelve years that they argue with that and and so all these people who.
Sold during the summer now they're buying back.
So there's there's a lot -- Are you worried about all this debate going on in Washington the debt ceiling.
Eyes in defense spending sequestration.
On an on and on they have been negative impact we were talking about by the fiscal cliff in December.
Do you think those things you know things will the -- -- Policy mistakes -- my number one concern and that's.
From Washington policy but the market here is had a very important inflection point is is this is this could be what I call the point of recognition.
Valuations in the market based on bond yields vs equity yields since August of 2011 when Europe was giving big problems.
They rose to levels never before seen which showed tremendous fear on the part of investors right now they're back in the lower part of that.
Of that range if we could break through that it shows that investors.
Will not be demanding as much of a risk premium as they have been that would be very bullish for the market mom I think there's a very good chance we -- All time highs this year are in the S&P and and you know one sector Naimi alike and then we -- ago.
Well -- I didn't get -- compliance approval for name but I'm I'm very I'm bullish on financials and on consumer.
-- -- that gives us a lot to chew over and mull over wane thanks for coming on tonight you very well really appreciate it happy new year.
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