Long-term Investment with ETFs

Posted by Rob

May 21, 2008

Beating inflation is an important factor to become a successful investor. In the tougher economic conditions in the final quarter of 2007 through into 2008 Central Banks, retail banks, equity brokers and the worlds top exchanges are feeling the squeeze. High street retailers in the UK and US are under pressure as the price of food and commodities continue to rise. What is one solution for investors to help offset rising costs? Some would consider investing a pot of money in government bonds or high-interest savings accounts. Of course diversification is very important to minimise risk, however, there are tools that can enable investors to beat inflation over the longer-term.

For active traders, trading CFDs/Options or other derivatives on a day or swing-trade basis can offer room for profit, but successful day trading requires a lot of practise and skill to achieve consistent profits.

Another solution that is looking ever-more attractive are ETFs or Exchange-Traded Funds. ETFs enable smaller investors to reduce their risk by buying shares in an ETF rather than individual companies. An ETF commonly tracks an index, so for example an investor could buy shares in a FTSE 100 tracker ETF that means each share is made up of a percentage of the top 100 performing companies on the London Stock Exchange.

Investing with an ETF reduces risk because the money is invested across a sector or index rather than just in one company. An ETF can be traded throughout the trading day unlike a mutual fund - which can generally only be sold once during the day - ETFs can also be sold short to profit in a bearish market making them a versatile investment tool.

With the rising cost of fuel and increases in other energy related commodities such as natural gas, it is becoming evident that such sectors offer room for profit to help offset inflation in other areas of daily life.

With economists throwing around figures in the region of $200/bbl for oil, we can expect oil prices to remain bullish. The “global demand for oil is expected to grow significantly by 2012, especially in emerging markets“. However, unlike oil, natural gas is an environmentally-friendly resource that provides energy for millions of homes globally.

Below are a couple of Natural Gas ETF funds that have seen steady rising profits over the past 12 months. The first is First Trust ISE-Revere Natural Gas (FCG), and the second is United States Natural Gas (UNG).

Technical Chart: FCG Weekly

FCG Weekly (21-05-08)

FCGs weekly chart shows a strong bullish trend from January. Although notice that the 14-day RSI is well above the 70 line, indicating the ETF stock is overbought. For a longer term investment this ETF looks good and has performed well, however, we may see a retracement in the shorter time-frame.

Technical Chart: UNG Weekly

FCG Weekly (21-05-08)

The weekly chart for UNG shows a rise back up from a double-bottom formation. The 14-day RSI also shows that the price hasn’t yet reached overbought status by crossing above the 70 line. Although we prefer to look at ETFs on a longer time-frame, some traders will choose to day-trade or swing-trade this stock. At present the chart is reaching a key point as it reaches previous highs from May/June of 2007.

Technical Chart: FCG vs UNG 12 month

When we do a side-by-side comparison of the two ETFs (Blue FCG, Red UNG), we can see that FCG is out-performing UNG. In fact, the middle of March has sen a sharp bullish climb for both ETFs. With continued demand for natural gas on a global scale, ETFs such as these offer potential for bullish profit.

ETF Expert gives a nice analysis on selling under-performing ETFs to avoid large losses. It raises an interesting point-of-view in contrast to the buy-and-hold methodology of investors such as Warren Buffet.

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