High Performing ETFs

Exchange traded funds (ETFs) have been in existence since the early 80s, but in the past 10 years they have become increasingly popular amongst investors. ETFs are funds that track indexes such as the S&P 500, Dow Jones Industrials, etc. When you buy shares of an Exchange Traded Fund, you are buying shares of a portfolio which tracks the yield/return of its respective index. The main difference between an ETF and other mutual funds is that ETFs don’t try to outperform their index, they just replicate its performance. ETFs are not attempting to beat the market. Lets take a look at other differences.


ETFs vs Mutual Funds
Both ETFs and mutual funds are inexpensive ways to own the market. There are some major differences however

– FEES: ETFs are typically less expensive when compared to the expense ratio of the average index mutual fund.

– COMMISSIONS:ETFs are typically less expensive in terms of commissions too. They can be anywhere from commission-free to $7-$10 per trade. Mutual funds on the other hand can be expensive to trade (upwards of $40), especially if your brokerage doesn’t also own/manage the particular fund.

– LIQUIDITY: Buying or selling an index fund means you’ll get end of day pricing. ETFs trade like stocks

3 New Threats Facing Unsuspecting Investors

The North American Securities Administrators Association (NASAA) released its most recent list of top financial products and practices that aim to exploit laws and take advantage of unsuspecting investors.  The full list contains ten threats and was compiled by the securities regulators in NASAA’s Enforcement Section and it includes both new and long-standing threats.  Below we highlight three of the newest threats from the list.  For the full list, please visit the NASAA website.

Three New Threats

  1. Crowdfunding over the Internet– the 2012 Jobs act signed this year into law helps ease some of the burdens that small business face when raising capital.  Croudfunding, made popular by non-profits during recent disaster relief efforts, is one of the most publicized new ways of raising funds even though provisions related to crowdfunding are not yet available and will not be until sometime in 2013.  Investors should look at these new investment markets carefully before committing their funds.
  2. Using Self-Directed IRAs to Conceal Fraud – State securities regulators have investigated numerous cases where a self-directed IRA was used in an attempt to lend credibility to a bogus venture like a Ponzi scheme. Scam artists are using self-directed IRAs because of their implicit safety and tax-reducing characteristics.  But beware, investments help in IRA’s have the same inherent risks as any other investment.  Just because it is in an IRA doesn’t make it safe or real for that matter.
  3. The Immigrant Investor Program – this is a program linked to job-creation investments from foreign investors that is becoming quite popular because it can grant a U.S. visa to foreign nationals who invest a minimum of $500,000 into a new commercial enterprise.  This program is particularly alluring because its connection to the federal government might make it appear safer and because domestic investors may be intrigued by the prospect of big funding from investors in China or other foreign countries with traditional or growing economic power.
photo credit: David Shankbone

Ready to Buy that Annuity? Not so fast.

Annuities have become a popular investment tool in a retiree’s arsenal. Annuities have great appeal for the investor looking to mitigate the risk of losing a large portion of their principal when they need it most. But many people considering annuities don’t fully understand how they work.  An annuity is a contract between you and an insurance company, designed to meet retirement and other long-range goals. You make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.

Below are some important considerations that should be noted before purchasing an annuity contract:

1. Early Withdrawal Penalties
If you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties.

2. Type of Annuity
There are generally three types of annuities — fixed, indexed, and variable. Variable annuities are securities regulated by the SEC. An indexed annuity may or may not be a security; however, most indexed annuities are not registered with the SEC. Fixed annuities are not securities and are not regulated by the SEC.

3. Death And Taxes
Annuities typically offer tax-deferred growth of earnings and may include a death benefit that will pay your beneficiary a specified minimum amount, such as your total purchase payments. While tax is deferred on earnings growth, when withdrawals are taken from the annuity, gains are taxed at ordinary income rates, and not capital gains rates.

Remember, if you withdraw your money early from an annuity, you may pay substantial surrender charges to the insurance company, as well as tax penalties. Annuities aren’t suitable for everyone. As always, be sure to consult with an attorney or financial advisor before making investment decisions.

photo credit: Steve Snodgrass

Changing Jobs? Don’t Make this 401(k) Mistake

The average US employee switches jobs 11 times before retiring. That means you could potentially participate in 11 different 401(k)s or other retirement savings plans during the course of your career.

If you’re starting a new job or looking to change careers, you’ll have to make a decision about your 401(k). The good news is – 401(k) plans are portable.  You could  consider moving it to your new employer’s plan if the plan accepts transfers. You could move your assets to an individual retirement account (IRA) or withdraw the money as a lump sum. Or you may be able to leave the account where it is. Before making a decision, know that each option has its own unique benefits, risks and penalties.

If you leave the money where it is or roll it over into a new plan or IRA – you won’t lose the contributions you’ve made, your employer’s made (if you’re vested) or earnings you’ve accumulated in the old 401(k). Your money will maintain its tax-deferred status until you withdraw it.

If you do instead decide to withdraw the money – beware of the penalties.

Believe it or not, many people make the mistake of asking their employer or plan administrator to cut them a check after they leave their job, without considering all the consequences. Doing so can be extremely costly.

First, your employer will withhold 20 percent of your account balance before cutting you a check, just to prepay the tax you’ll owe. Also, the IRS may consider your payout an early distribution meaning you could owe a 10 percent penalty for early withdrawal in addition to paying federal, state and local taxes. After all is said and done, you could lose more than 50 percent of your account value this way.

Lets also not forget the the opportunity cost involved. If you took $10,000 out of your 401(k) instead of rolling it over into an account earning 8 percent tax-deferred earnings, your retirement fund could end up more than $100,000 short after 30 years.

If you can, keep your money in a 401k or IRA somewhere. It will allow it to compound tax deferred.

Regardless of which route you choose, always remember to evaluate your new plan closely before deciding to move your assets over. Make sure the new plan has plenty of investment choices, includes all the options you prefer, and that the fees aren’t too high. If you’re unhappy with the options provided by your new employer’s 401(k), consider a rollover into an IRA. If you’re unsure, talk to a trusted professional that is licensed to offer suitable advice on such matters.

By law, you must have at least 30 days to decide what to do with your 401(k) when you switch jobs, so you have time to consider all your options before making a move.


Sources: US Securities and Exchange Commission. Financial Industry Regulatory Authority, Inc.  Photo credit: Dave Dugdale