Tuesday, May 17, 2011

US Treasury to tap pensions to help fund government

The Obama administration will begin to tap federal retiree programs to help fund operations after the government lost its ability Monday to borrow more money from the public, adding urgency to efforts in Washington to fashion a compromise over the debt.

Treasury Secretary Timothy F. Geithner has warned for months that the government would soon hit the $14.3 trillion debt ceiling — a legal limit on how much it can borrow. With that limit reached Monday, Geithner is undertaking special measures in an effort to postpone the day when he will no longer have enough funds to pay all of the government’s bills.

Geithner, who has already suspended a program that helps state and local government manage their finances, will begin to borrow from retirement funds for federal workers. The measure won’t have an impact on retirees because the Treasury is legally required to reimburse the program.

The maneuver buys Geithner only a few months of time. If Congress does not vote by Aug. 2 to raise the debt limit, Geithner says the government is likely to default on some of its obligations, which he says would cause enormous economic harm and the suspension of government services, including the disbursal of Social Security funds.

Many congressional Republicans, however, have been skeptical that breaching the Aug. 2 deadline would be as catastrophic as Geithner suggests. What’s more, Republican leaders are insisting that Congress cut spending by as much as the Obama administration wants to raise the debt limit, without any new taxes. Obama is proposing spending cuts and tax increases to rein in the debt.

“Everything should be on the table, except raising taxes,” House Speaker John Boehner (R-Ohio) said on CBS’s “Face the Nation.” “Because raising taxes will hurt our economy and hurt our ability to create jobs in our country.”

The Obama administration has warned that it is dangerous to make a vote on raising the debt limit contingent on other proposals. But Boehner is demanding that Congress use the debt vote as a way to bring down government spending.

“I’m ready to cut the deal today,” Boehner said. “We don’t have to wait until the 11th hour. But I am not going to walk away from this moment. We have a moment, a window of opportunity to act, because if we don’t act, the markets are going to act for us.”

Geithner’s plan to tap federal retiree programs as a temporary means to avoid a government default comes as the Obama administration has shown growing interest in altering those programs to curb the debt in the long run.

Administration officials have expressed interest in raising the amount that federal employees contribute to their pensions, sources told The Washington Post.

The Republicans have suggested that the civilian workforce contribute more to its retirement in the future, effectively trimming 5 percent from salaries. The administration has not been willing to go that far in talks being led by Vice President Biden.

Treasury secretaries have tapped special programs to avoid default six times since 1985. The most protracted delay in raising the debt limit came in 1995 after congressional Republicans swept to power during the Clinton administration.

But today, the government needs far more money to cover its obligations than in the past, making the special measures less effective than they used to be. The government needs about $125 billion more a month than it takes in each month.

In a letter released last week to Sen. Michael Bennet (D-Colo.), Geithner wrote that a default would risk a “double-dip” recession.

“Default would not only increase borrowing costs for the federal government, but also for families, businesses and local governments — reducing investment and job creation throughout the economy,” Geithner wrote.

But several prominent congressional Republicans have dismissed the Obama administration’s assertion that the country would face dire consequences if Congress does not vote to raise the federal limit on government borrowing by August. Many of the skeptics are affiliated with the tea party.

In the Senate, freshman Sen. Pat Toomey (R-Pa.) has said the Obama administration has been exaggerating the effects of hitting the default mark. He says breaching the limit would cause only a partial government shutdown.

Other freshman Republicans have said that Geithner could raise money to avoid defaulting by selling investments in private companies. The Republican Study Committee, which represents more than 150 lawmakers, sent a letter to Geithner last week pressing for more details about the Aug. 2 deadline.

U.S. Will Have To Default One Way Or Another

Jim Rogers, author and contrarian investor, says the U.S. will have to default one way or another
"I still own my gold I haven't sold any gold and if it goes down I hope I'm smart enough to buy some more just like with silver we should watch thestreet.com you know
there you have answers to questions like that , I am not a very good trader I am hopeless short term market timer just some day I say Oh my Gosh I should go out and buy some gold something will be going on or silver or whatever and I buy some more gold ...this time we are seeing a lot of money printing , they are printing staggering amounts of money which leads to more and more inflation , prices are going to go up then we have the problem of the central banks around the world which are printing money which has always led to Inflation ...I know bonds are going to go down eventually and I doubt if I will get the market timing very well but, no, I plan to short bonds. As I say I might go over and do it in a few minutes."
- in The Street.com

SS Trust Fund – “We lost $1.1 Trillion last year!”

Yes, that is a correct headline. In its annual report to Congress last week SS acknowledged that its condition had sharply deteriorated in 2010. This sentence from the report is all you really need to know about what the status is:

The open group unfunded obligation over the 75-year projection period has increased from $5.4 trillion (present discounted value as of January 1, 2010) to $6.5 trillion (present discounted value as of January 1, 2011).

Note that this is a present value calculation. The total unfunded obligation has grown by a cool $1.1 trillion in just a year. In other words, if we had to shore up the TF to the level that it was just a year ago the USA would hav

e to write a check for $1.1 T. The unfunded status was a disaster a year ago at $5.6T, it got worse by 20% during 2010. The cost of “fixing” SS goes up as a result. To put things in balance one of these two extremes are now required:

For the combined OASDI Trust Funds to remain solvent, the payroll tax rate could be increased an immediate and permanent 2.15%, (or) scheduled benefits could be reduced by an immediate and permanent 13.8%.

If you think this a ho-hum result, think again. If benefits get cut across the board by 14% we will have many seniors who will fall into a hole. An increase in payroll taxes of 2.15% is simply not going to happen anytime soon. There is no support in Congress for an increase like that. It would mean that taxes on all workers/employers wou

ld have to go up by $110b in the first year and rise every year thereafter. This would be a very regressive tax increase that hurts lower end workers the hardest. For 2011 there is already a payroll tax holiday of 2%. If the required increases take place in 2012 it would mean a 3.2% reduction in wages. Kiss the economy goodbye under that scenario.

I underlined the TF’s use of the words immediate and permanent as this language highlights the fact there can be no delaying on the fixes necessary at SS. One thing that you can take to the bank is that nothing will happen with SS

in 2011 or 2012. This is a problem that will simmer for at least another 24 months. This delay will prove to be very costly for all involved. Both the required tax increases and/or the required cutbacks will be much larger than today.

The NPV of the unfunded liabilities at SS are now growing by at least $100b a month. One would think that this massive cost would spur some response in D.C. Don’t count on it. As a result, SS is going to come off the rails in about two years.

How Much Gold and Silver - and Which Assets - Should You Own?

It is no longer a matter of whether or not you should buy gold and/or silver but, rather, which type of investment(s) and how much. You don’t need a lot but you do need some – and here is a primer on just what type of investment vehicles are available and recommendations on just how much you should buy.

Gold is the best hedge against uncertainty there is and it is also a useful thing to have in your portfolio if inflation is rising, as some foresee, or if the U.S. dollar were to decline further, as expected. Don’t take my word for it but instead read this1 article identifying 87 gold analysts who think the environment is such that the price of gold will go parabolic to $5,000 or more!

How Much Gold Do You Need?

The U.S. firm Ibbotson Associates, in a study for Canada’s Bullion Management Group, found investors can potentially improve their balance of risk and reward with a precious metals weighting of 7.1 per cent in conservative accounts, 12.5 per cent in moderate accounts and 15.7 per cent in aggressive accounts. Precious metals can include silver and platinum, but it’s a term that primarily means gold.

Another U.S. firm, Wainwright & Co. Economics Inc., looked at the need for gold in one’s portfolio from an inflation protection point of view and concluded from their research (seehere2) that “a U.S. equities portfolio in which 15% of the assets are diverted to gold bullion would be effectively immune from damage due to a rising gold price and that is, we believe, equivalent to immunity from inflation.”

Which Vehicle Should You Choose?

a) Physical Gold and Silver
Gold in bars or coins makes sense if you are concerned about the complete breakdown of society but you will have an asset that needs to be securely stored. Read this3 article with suggestions on how to go about buying and storing physical gold and this4 article on why silver looks to have even greater upside potential than gold.
b) Individual Gold and Silver Stocks and/or Their Long-term Warrants
Gold and silver stocks have an added degree of risk because you not only need gold prices to rise (and gold stocks and gold bullion don’t always move in unison) but you also need your precious metals company to be a well-run business. For greater leverage on your invested dollars consideration should be given to an investment in commodity-related long-term warrants. This5 article spells out the details on currently available warrants that warrant your consideration.
c) Precious Metals Mining Mutual Funds
PM funds hold the stocks and/or warrants of gold, silver and platinum companies involved in the producing, developing, exploring or buying (via royalty payment arrangements) of such metals. While they are among the most expensive in terms of the fees they charge they have a long history of bringing the benefit of rising gold prices to individual investors (and the opposite, of course). Go here6 for specific stock and mutual fund recommendations.
d) Exchange-traded Funds
There are two kinds of gold ETFs:
1. One tracks the price of gold bullion and is thus a clean, convenient proxy for holding physical gold. Go here7 for a primer on these types of ETFs offered for sale in Canada and the U.S.
2. The other tracks an index of gold mining stocks such as those in the S&P/TSX Global Gold Index and the large-cap and mid-cap producers in the AMEX Gold Miners Index. For more information read this8 article.
e) Closed-end Funds
Closed-end funds are conventional mutual funds that trade like a stock and thus can be bought or sold any time during the trading day (mutual funds can only be sold at end-of-day prices). Closed-end funds differ from ETFs in that they can trade at significant discounts or premiums to the net asset value, whereas ETFs will veer away from their net asset value only temporarily and mildly. Some closed end funds invest in the stocks of precious metals mining companies while others offer a way to hold actual gold. For more details on this subject read this article9.
Two key questions to ask:
1. Am I investing in gold stocks or gold bullion?
2. Am I exposed to Canada-U.S. currency fluctuations?
Remember, gold is priced in U.S. dollars and a rising Canadian dollar will undercut your gains. This won’t be a problem if you own a precious metals fund that holds TSX-listed gold stocks, but it might be if you have a fund tracking gold bullion prices.
f) Gold and Silver Coins
Owning gold and silver coins are another alternative to consider and this10 article advises you of the pros and cons of doing so and the types of coins available and preferred.


Gold’s rise to $1,500 per ozt. and beyond (For an excellent article on the significance of the designation of ozt. go here11) has created a lot of excitement and raised expectations of more gains to come but the reason why gold’s a legitimate asset class for investors today is its potential to shine when all else is bleak.

In conclusion, how much gold and/or silver do you have in your portfolio?

Is a Stock and Commodity Meltdown about to Take Place

  1. The dollar continues to control the short term movements in both stocks and commodities
  2. We are about to see some fireworks across the board in the next few trading sessionsand im leaning more towards lower prices
  3. I feel as though we are at a tiping point similar to March 9-10th on the SP500...
  4. This week should shed some light on what the market wants to do, Rally or Selloff

spdr video by chris vermeulen

Editor's note: This video will be launched in a new window once the video graphic is clicked.

ETFs to Buy in May

Roll the dice on ETFs this week, why not? As Jamie Dlugosch at MSNMoney.com said today:
If you are not trading in this market, you are either stubborn or ignorant. For those die-hard buy-and-hold followers, it is probably a combination of the two. ... For the rest of us interested in making money in a market rigged against the little guy, we have no choice but to be nimble. Thank goodness Wall Street created exchange-traded funds.

Think ProShares UltraShort Technology (ETF) (NYSE:REW) and PowerShares Dividend Achievers (ETF) (NYSE:PFM) to get started.

While corporate profits continue to impress, stocks have traded sideways over the past two weeks. Consider yourself lucky that we have not gone lower.

I expect that to change soon. As such, I would strongly consider an ultra-short ETF for your portfolio this week. My choice would be ProShares Ultra Short Technology (REW).

The cross currants of stocks, richly priced combined with a macro environment of inflation and a weak consumer hamstrung by high unemployment and anemic wage growth, are creating a perfect storm for stocks to lose ground.

The only think holding us up is a very loose monetary policy.

For this week's pick I'm swapping out the short S&P 500 selection for the downside exposure to the technology sector. Stocks in that group are likely to lead the way down. If stocks do lose value this week, this fund will help you offset any losses on the long side.

I recently completed an educational series on trading stocks during earnings season. My conclusion was that stocks are overdue for a pause. Prices versus expectations are pretty well matched. In many cases the prices have exceeded expectations.

source: http://money.msn.com/top-stocks/post.aspx?post=209654dc-d546-447f-a638-a865ef764d15


Top 10 Gold Plays Revealed

The Gold Report: What are some of your strategies for picking stellar gold stocks and limiting risk?

John Doody: We cover 70 mining and royalty stocks. In the selection process, we reduce it to our top 10. It's an ideal number because if one stock falls by 50% in value, it only affects your portfolio by 5% total. If a couple of stocks double or triple, they can really pull up the whole portfolio. If someone argues for investing in 8 or 12 stocks, we wouldn't argue with that. But I see too many people at gold shows who have one or two and think they are diversified. They aren't. Too many others have 20 or more, which is too many to follow and too many to have outstanding portfolio returns.

Our premise is that the market is inefficient and doesn't value all 70 stocks we cover appropriately all the time. Since an ounce is an ounce is an ounce, GSA's metrics can show which companies are undervalued and which ones are overvalued. These are our market capitalization per ounce numbers, market capitalization meaning shares times price. What's the market capitalization of an ounce of reserves? What's the market capitalization of an ounce of production? That's the initial filter.

We look at a whole range of factors and ask the big questions. Is it a producer or is it just getting started? Where are the mines located? Are they in politically safe areas or are they risky locations? Are they open-pit mines primarily or underground mines? What's the cost to produce an ounce? What's the operating cash flow from the mines?

We only look at producers or near-producers. No exploration stocks, because there is no data. Some of these exploration companies do mature and get our coverage later on.

We build our Top 10 portfolio based upon integrating all of these factors and don't get over-weighted in one sector or the other. For example, we have one silver stock in the portfolio. And, I've always felt silver is a derivative of gold. As gold goes up, silver will come along. But our real focus is on gold.

TGR: Of those Top 10 stocks, how many of those projects have you visited?

JD: About half. A lot of them have a whole bunch of projects, such as Goldcorp Inc. (TSX:G; NYSE:GG). I've been to two or three of their mines. But, others only have one. (more)

Don't Count Copper Out Just Yet: FCX, JJC, SCCO, WIRE

While all eyes were on the demise of silver prices last week, more important news from the copper industry has proverbially been swept under the rug. (For related reading, see 5 Metals That May Be Brighter Than Gold.) There has been somewhat of a silent implosion of copper prices and, by extension, the pullback of copper mining stocks like Southern Copper (NYSE:SCCO), FreePort McMoRan (NYSE:FCX) and the iPath Dow Jones-UBS Copper ETN (NYSE:JJC).

Those two stocks along with the ETF and their peers recently accelerated an already-existing pullback that can be dated back to January. Freeport has given up 19% for the year and the Southern has fallen by 28% year-to-date. The fund is off 9%. As has been the case since the beginning of the pullback, the latest round of lower lows was prompted by China's state officials working to cool inflation by ratcheting up the country's bank-reserve requirements; it was the fourth such crimp from the country this year. The significance of China can't be understated, given that the country uses about 40% of the globe's copper supply each year.

When is the slide going to end? The likely answer is soon, barring a catastrophe.

TUTORIAL: Commodities Guide: Copper

Doctor Copper
Unlike gold or silver, copper actually has a great deal of industrial utility. Yes, gold and silver are ideal in a few electronics applications, but some forecasters suggest global demand for copper is expected to reach 24.8 million metric tons by 2015. Gold, on the other hand, saw demand of only 3,812 tons last year.

That demand disparity tacitly underscores a key theme - while speculation on silver and gold prices may be a bit of a game led by irrational traders, the supply/demand dynamic and ensuing prices for copper are ultimately dictated by the economy. Indeed, some analysts use copper price trends as an economic barometer, so much so that it's sometimes called "Doctor Copper."

Using copper as an indicator of economic health has historical merit. Copper prices plunged in late 2008, but actually began their recovery at the beginning of 2009 - a few months before the equity market started to rally. Moreover, copper prices started to hit lower lows in early 2001, well before that recession was officially acknowledged as such. In short, copper activity can be a good early-warning system.

Impact on Stocks
The profits of copper miners have followed the lead of copper prices. Freeport McMoRan's most profitable year ever was 2007's $4.92 per share. This record was achieved when copper prices were persistently high, hovering around $3.50 per pound for most of the year. The following year was the worst in a long time, as copper prices hit a multi-year low that took them back to the prior recession's prices. It's a similar story for Southern Copper - a great 2007, then a couple of tough years with the light at the end of the tunnel only showing up in 2010.

It wasn't just the miners' crimped margins that hurt investors. Suppliers also got whacked when the bottom fell out of the copper market. Encore Wire (Nasdaq:WIRE) earned $4.86 per share in 2006. By 2007 - before copper prices fell - demand for copper had already slumped, leading to a mere profit of $1.30 per share that year. That struggle only started to fade last year.

So,copper falling back from its peak of around $4.60 (per pound) in February to the current price around $3.90 is nothing to dismiss, especially if it's really an indication of waning demand. The thing is, it's not an indication waning demand.

The Sweet Spot
The alarm bell may have been ringing a little too loudly last week. Yes, copper prices have fallen about 15% over the last three months. They also fell back from multi-year highs that, bluntly speaking, shouldn't have been reached in the first place. In that regard, China's overseers made a reasonably-wise call.

The price implosion may have had as much to do with the rising U.S. dollar as it did actual copper demand. The fact is, copper at $3.90 per pound is still on the high end of the sustainable range, which as we saw in 2006, 2007 and 2010, is in the "not too hot, not too cold" $2.80-$3.90 area. So, don't sweat the dip or the size of the pullback.

Bottom Line
The International Copper Study Group's review of Q1's activity indicated not a slump in demand, but rather a kink in the supply chain. And, Credit Suisse expects the price dip to be seen as a buying opportunity by purchasing managers, suggesting copper prices could rise from the mid-$8000's per metric ton now back to more than $10,000/MT in the second half of the year.

Almost on cue, demand has already swelled since the beginning of April. Yes, copper is still alive and kicking, and copper's investors may have less to worry about than they think.

Commodity Boom Period Coming Soon says Michael Langford

The bearish market in Gold and Silver will end next week and we will see a bullish trend , Commodity Boom Period Coming Soon says Michael Langford , proprietary trader at StreamTrading.com says the commodity markets, which have remained bearish, will look to stabilize soon as we enter a positive phase in the commodity cycle.

Eric Sprott Discusses Silver's Prospects And Last Week's Raid With Max Keiser

Eric Sprott, who according to some catalyzed the initial move lower in silver following his sale of PSLV units, to be followed by a bullish clarification that he transferred all proceeds into other silver holdings, was on Max Keiser late last week in an interview that anyone interested in the silver market should listen to. Among the key summary highlights: "I will be a buyer of silver today. I will be a buyer of silver tomorrow. We have not lost any faith in what has happened to silver." As for what happened with that instantaneous $6 dollar drop in silver on May 1: "In my mind it was just one of those raids that we experience from time to time. There was no particular reason for it. And then we end up with 5 margin rate increases. It just reeks of someone manipulating the price of silver down. I have no fear of silver here. Yes it will be parabolic, but it's going to be way more parabolic than what we have today... I believe that gold today is the de facto reserve currency. It's outperformed everything for 11 years. Silver has always been a currency, people are now treating it as a currency, and it's a very, very small market. There is no way that with roughly $50 billion of silver inventory around that we can make it a currency, so I see the price going much higher." And on the ridiculous recent trading volume in silver: "One of the things we should look at is the trading of silver in the paper markets, I mean the Comex and the SLV. Last week it averaged 1.2 billion ounces per day. There is only 700 million ounces mined in a year. There is only 33 million ounces of physical silver that is available for delivery by the commercial shorters. If something like 3% of the people that were trading silver in one day demanded physical delivery, there would be no silver on the Comex.... The key market is the physical market. I don't think this raid is going to work." Much more on Sprott's views of the silver raid and the silver market in general in the full interview.


Gold Stock Technical Trade Support You Must Know in Today’s Market

The gold stocks (NYSE:GLD) are in a correction which could turn out to be the largest and deepest since the crash of 2008.Now is not the time to panic but to evaluate where the gold stocks may go and where buying will come in to support the market. We utilize moving averages, Fibonacci retirements, Bollinger bands and price action to get a good idea of where the market may bottom. Additionally, we always consult sentiment polls, fund flows and options activity.

Starting with the large caps (NYSE:GDX) here is what we see.

The lower 200-day Bollinger band marked bottoms in 2004, 2005, 2006 and 2007. It is currently at $49.99 and rising. The 400-day MA (currently at $52.26) marked key support points in 2003, 2006, 2008 and 2010.

The bullish percent index is at 43% which is oversold but not extremely oversold. There is a confluence of support in the low $50s. The 38% retracement from the 2008 low is at $46. That is our realistic worst-case scenario.

Meanwhile, GDXJ (NYSE:GDXJ)(the larger juniors) closed Friday at $34.69. Our chart below shows a confluence of support at $31-$32. The 200-day lower Bollinger band is at $26 but will reach $30 before the end of June.

To sum it up, the gold stocks are oversold and nearing that very or extreme oversold condition. This is a volatile sector. Use the volatility to your advantage. During corrections like these, you must wait for a very oversold condition rather than just a plain oversold condition. Not only do you protect yourself but you give yourself the chance to profit quickly as the gold stocks tend to rebound very quickly when reaching a very oversold state.

Jordan Roy-Byrne, CMT

5 ETFs Flaws You Shouldn't Overlook

Exchange-traded funds (ETFs) can be a great investment vehicle for small and large investors alike. These popular funds, which are similar to mutual funds but trade like stocks, have become a popular choice. However, there are some disadvantages that investors need to be aware of before jumping into the world of ETFs. In this article, we will look at some of the disadvantages of ETFs. Good information is an investor's most important tool. Read on to find out what you need to know to make an informed decision.

Trading Fees
One of the biggest advantages to ETFs is that they trade like stocks. As a result, investors can buy and sell during market hours as well as put advanced orders on the purchase such as limits and stops. Conversely, a typical mutual fund purchase is made after the market closes, once the net asset value of the fund is calculated.

Every time you buy or sell a stock you pay a commission; this is also the case when it comes to buying and selling ETFs. Depending on how often you trade an ETF, trading fees can quickly add up and reduce your investment's performance. No-load mutual funds, on the other hand, are sold without a commission or sales charge, which makes them advantageous, in this regard, compared to ETFs. It is important to be aware of trading fees when comparing an investment in ETFs to a similar investment in a mutual fund.

If you are deciding between similar ETFs and mutual funds, be aware of the different fee structures of each, including the trading fees. And remember, actively trading ETFs like stocks can severely reduce your investment performance as commissions can quickly pile up.

Underlying Fluctuations
ETFs, like mutual funds, are often lauded for the diversification that they offer to investors. However, it is important to note that just because an ETF contains more than one underlying position doesn't mean that it can't be affected by volatility.

The potential for large swings will mainly depend on the scope of the fund. An ETF that tracks a broad market index such as the S&P 500 is likely to be less volatile than an ETF that tracks a specific industry or sector such as an oil services ETF. Therefore, it is vital to be aware of the fund's focus and what types of investments it includes.

In the case of international or global ETFs, the fundamentals of the country that the ETF is following are important, as is the credit worthiness of the currency in that country. Economic and social instability will also play a huge role in determining the success of any ETF that invests in a particular country or region. These factors must be kept in mind when making decisions regarding the viability of an ETF.

The rule here is to know what the ETF is tracking and understand the underlying risks associated with it.

The biggest factor in any ETF or stock or anything that is traded publicly is liquidity. Liquidity means that when you buy something, there is enough trading interest that you will be able to get out of it relatively quickly without moving the price.

If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position in relation to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and ask. With so many new ETFs coming to market, you need to make sure that the ETF is liquid. The best way to do this is to study the spreads and the market movements over a week or month.

The rule here is to make sure that the ETF you are interested in does not have large spreads between the bid and ask prices.

Capital Gains Distributions
In some cases, an ETF will distribute capital gains to shareholders. This is not always desirable for ETF holders, as shareholders are responsible to pay the capital gains tax. It is usually better that the fund retains the capital gains and invests them, rather than distributing them and creating a tax liability for the investor. Investors will usually want to re-invest those capital gains distributions and, in order to do this, they will need to go back to their brokers to buy more shares, which creates new fees.

Lump Sum vs. Dollar Cost Averaging
Buying an ETF with a lump sum is simple. Say $10,000 is what you want to invest in a particular ETF. You calculate how many shares you can buy and what the cost of the commission will be and you get a certain number of shares for your money.

However, there is also the tried-and-true small investor's way of building a position. This way is called dollar-cost averaging. With this method, you take the same $10,000 and invest it in monthly increments of, say, $1,000. This is called dollar-cost averaging because some months you will buy fewer shares with that $1,000 because the price is higher. In other months, the share prices will be lower and you will be able to buy more shares.

Of course, the big problem with this strategy is that ETFs are traded like stocks; therefore, every time you want to purchase $1,000 worth of that particular ETF, you have to pay your broker a commission to do so. As a result, it can become more costly to build a position in an ETF with monthly investments. For this reason, trading an ETF favors the lump sum approach.

The rule here is to try to invest a lump sum at one time to cut down on brokerage fees.

The Bottom Line
Now that you know the risks that come with ETFs you can make better investment decisions. ETFs have seen spectacular growth in popularity and, in many cases, this popularity is well deserved. But, like all good things, ETFs also have their drawbacks. Making sound investment decisions requires knowing all of the facts about a particular investment vehicle - ETFs are no different. Knowing the disadvantages will help steer you away from potential pitfalls and, if all goes well, toward tidy profits.