If you are of a certain age, you may remember the "excitement" that accompanied the advent of the money-market fund (no, seriously) back in the late 1970s ("Wow, you mean I can earn interest on my money when it's not invested?! How cool is that?!"). If so, you may also recall disco dying a hideous, but well deserved death as well. But I digress. In any event, yes, those were exciting times. Today, new investment vehicles get cranked out by the truckload and few people seem to bat an eyelash. This could be due in part to the fact that no one can quite keep up. I am primarily referring to the veritable plethora (to quote another '70s icon, Howard Cosell) of exchange-traded funds [ETFs] that have and continue to roll off the ETF assembly line.

An exchange-traded fund is essentially a mutual fund that invests in a certain investment vehicle category and that trades on a stock exchange just like a regular stock. And nowadays, new ETFs just keep coming. Large cap, small cap, inverse crude oil, green energy, and so on and so forth" they just keep coming. I personally am waiting for the roll out of the "Big J Fund," which will only invest in the stocks of large-cap companies whose name starts with the letter "J." I'll tear off the front page of the prospectus and display it proudly. I'll also know at that point that we have finally gone "over the bend" (to quote my wife during a more haggard moment).

Last week - and for much of this new year - I have been suggesting a need on the part of investors to move beyond the simple approach of the past two decades, namely, "just put all of your money into the stock market," and to consider the possibility that the stock market may "idle" for a while and that some new investment techniques might be in order. I would like to continue in this vein this week with more discussion of ETFs. In the past month I started my tenure as co-editor (along with the lovely and talented Clare White) of Optionetics' ETF Investor newsletter. As I mentioned, one of the hardest parts of dealing with ETFs is the fact that there are just so gosh darn many of them, and also the fact that a great deal of "overlap" is starting to build up. In other words, if you decide you want to invest in large cap growth stocks, there are several such ETFs now to choose from. In essence it boils down to this:

"With great choice comes great opportunity - not to mention a whole lot of confusion."

Okay, it ain't exactly Plato, Confucius or Socrates, but you get the picture.

Developing a Reasonable Structure

One thing that is helpful in all complex tasks in life is a little organization or "structure." If one has a structured approach for looking at data, it becomes a lot easier to make sense of what you are looking at. No exception here. Of course, at the same time there are many ways to structure things and often there is no "one best way." Still, something is better than nothing, so in Figure 1 you will find a structure that I use for monitoring ETFs for possible investment. You will note that this structure contains only categories and not individual ETFs. There are several reasons for this.

Okay, yes, the fact that I am inherently lazy probably does play a role. However, beyond that the list would run on for pages upon pages if I were to include all 792 ETFs in the IBD database (of course, that was as of about 30 seconds ago, so that figure could be much higher by now). In any event, the general idea here is to get investors to consider the possibilities that are now available right under tThis list therefore is by no means "definitive" or all encompassing. There are plenty of other ways to break out or characterize the roster of available ETFs. But once again, the purpose here is simply to "narrow the focus" a bit in order to get a clearer picture.

Exchanged Traded Fund Structure

Figure 1 - A Structure for Categorizing and Evaluating ETFs

A New Way of Looking at Things

As I have been explaining in recent months, we have presently an entire generation of investors who basically only know one way to invest - put your money into a portfolio of broad-based, stock market related investments and "hope for the best." And for the better part of two decades, that approach actually worked out pretty well. At least until 2008. Then investors with no understanding of stock market, investment or economic history were jarred from their stupor as the financial markets melted down virtually across the board. And even now, many seem to feel "trapped" and that they have "no control" over what will happen to them or their money.

To many, the Old Paradigm was "the stock market always goes up" and now the New Paradigm appears to be shaping up as "beg the federal government for free stuff." But in reality, investors have never had a greater ability to shape their own destiny than they do today. While many are locked into "hoping the stock market goes up," the fact of the matter is that via ETFs (which, remember, trade just like stocks in a brokerage account) you can go short small-cap stocks, long gold, short crude oil, long the U.S. dollar, short China, long junk bonds, or, as it turns out, pretty much vice versa. In fact it can be argued that nowadays there is no excuse for not making money since you can now go long or short any variety of investment vehicles (Okay, no pressure now).

Summary

In the immortal words of Bob Dylan, "The times they are a 'changin'." Much of what investors have learned over the past quarter century may or may not serve them well in the years ahead. As I have discussed this week and last (see Old Dogs Need New Tricks), the money-making possibilities are virtually limitless for those who are willing to shed the old way of thinking and to essentially think for themselves and avail themselves to the opportunities that are all around them.

So let me encourage you to move forward in this endeavor by quoting the immortal words of another iconic Bob (who also happens to have "Sponge" and "Squarepants" in his name), and to say to you, "Good luck with that."

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Jay Kaeppel
Staff Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site