Why is ETF Management Fee/Expense Ratio Lower?

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The 21st century has seen a phenomenal rise in the popularity of ETFs as an investment tool. From virtually nowhere, it has become a platform that can rival mutual funds/Unit Trust in terms of assets under management (AUM) and diversity of the asset classes it covers. One of the key feature (most will say its benefit) of ETFs is that ETFs, on the whole, usually sport a lower management fee compared to mutual funds given the same asset class and AUM. There are, I think, 4 main reasons why this is so, which I shall explain shortly.

Firstly, ETFs are Index Funds. While there might be some ETFs that are managed funds (are there?), most ETFs are index funds, i.e. the underlying portfolio/prices follow that of published stock indexes. Index funds are in general cheaper to manage as there are fewer trades to deal with. They are, in investment speak, passive in nature. This lowers their brokerage fees and trading slippage. Also, they do not need the service of an army of security analyst to dissect the individual stocks and try to beat the market. Index funds do not beat the market, they’re the market! Given the academia overwhelming evidences that markets are efficient and market timings and security selections are a fool’s errand, index funds in general and ETFs in particular have become the investment tools of choice with more converts flocking to its open arms by the moments.

Secondly, even after accounting for its index fund nature, ETFs are still cheaper in terms of management fees compared to its index mutual funds brethren. One reason could be because in the setup of ETFs, there is division of labour which makes it cheaper to operate compared to a mutual fund. For example, mutual fund companies are required to setup and operate a sales channel. It needs employees and office space to man the phone calls and take in orders. Even if it’s done through the internet via electronic means, mutual funds still need to hire IT staff and expansive computer software and hardware to operate. ETFs do not have such a drawback as it’s traded via brokers. So, you’ll have to consider brokerage fees (if there’s one) as a sale charges on your ETFs you trade. However, brokerages and stock exchanges (the platform on which ETFs are traded) are optimized for such a task and can do it efficiently given the volume they handles. ETF companies can further save money on the accounting and upkeep of customers’ records as it’s offloaded to the exchanges and stock brokers.

Thirdly, ETF management companies can act as authorized participants. Authorized participants are empowered to create or redeem ETF creation units. They serve a useful purpose of bringing the ETF prices in line with the underlying stocks prices that comprise the ETFs. They create ETF shares when ETF prices exceed the underlying stock prices and vice versus. Through this act of arbitrage they generate liquidity and a fairer market where the prices of ETFs are based on the underlying securities. Along, the way, they also generate a tiny arbitrage profit for themselves. Given the depth and breadth of the ETF market, I reckon that this arbitrage profit is fairly size-able if the inflow/outflow of funds to/from the ETFs are huge.

Fourthly, there exists a huge ETF derivative market in the synthetic ETF arena. Synthetic ETFs do not buy the underlying securities with its funds. Instead, synthetic ETFs are swaps that use the fundings as collateral and the ETF sponsors promise you the performance of the indexes. I shall dealt with the actual risk of being synthetic in another post but suffice to say, this arrangement increases the flexibility of the fund management companies and allows them to offer the product at reduced management fees since they can earn profits elsewhere as a swap counter-party and sell financial equity-linked products.

Considering these factors, I expect the management fees of ETFs to continue at its current lower level. It’s even plausible that the expense ratios might fall to zero if the ETFs have a really large AUM and profits from businesses such as arbitrage are huge.

Fish Oil as a Brain Food Supplement

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While we have our daily 3 meal for nutrition and energy, some of us would like to supplement our food intake with food supplement pills. There are quite a number of food supplements on the market currently. They include pills such as vitamins, multi-vitamins, minerals, herbs etc. One of the more beneficial food supplements which I would like to introduce is fish oil.

Fish oil is extracted from deep-sea oily fish such as salmon. It consists of omega-3 fatty acids such as DHA and EPA which is of particular benefit to our health. Fish-oil soft gels as a product have been on the market for quite some time and many studies have been made regarding the impact it has on our body ecosystem. It’s one of the few food supplements that have been proven to be highly beneficial to our body. Benefits of fish oil include examples such as reduced inflammation on our body. However, for this article, I would like to concentrate on and focus on the benefits of fish oil for the brain. I shall quote scientific studies made previously on the efficacy of this product.

For the Elderly

Deficiency in DHA, which is a component of fish oil, is often related to memory and cognitive decline. According to a Louisiana State University study, DHA may help protect the brain from cognitive problems associated with Alzheimer’s disease.

Researchers at Aberdeen and Edinburgh universities in Scotland have found that people who eat oily fish or take fish oil supplements score 13% higher on IQ tests and are less likely to show early signs of Alzheimer. Researchers found that the omega-3 oil slows down the brain’s ageing process – by up to two years. Fish oils slow the brain’s ageing process by reducing inflammation, which in turn reduces damage to the blood vessels that supply the brain. Laurence Whalley, a Professor of Mental Health at Aberdeen University and head of the research team, said: “The brains of fish oil users seemed to be faster. The results suggest to me that they have younger brains than the nonusers.”

For the Infant

The human brain develops rapidly during the last trimester (13 weeks) of pregnancy and the first months following birth. Norwegian researchers completed a study of the effect of maternal fish oil supplementation on IQ (intelligence quotient) in the child at 4 years of age. A total of 341 pregnant women took part in the study. They were randomized to receive 2 teaspoons (10 ml) per day of cod liver oil or the same amount of corn oil from the 18th week of pregnancy to 3 months after delivery. At 4 years of age, 84 children had their IQ tested. The children whose mothers had supplemented with fish oil and who had been breastfeed for at least 3 months after birth scored an average of 4 points higher. The researchers point out that this increase is highly significant in overall terms and would be difficult to attain through normal teaching procedures.

For the Depressed

According to The American Journal of Psychiatry, low blood levels of EPA are seen In depressed patients. The study was conducted on seventy patients with persistent depression despite ongoing treatment with a normal dose of a standard antidepressant. Patients were given EPA at various dosages for 12 weeks in addition to unchanged background medication. Patients were then assessed.

The vast majority completed the 12-week study with no serious adverse events. The 1 gram per day group showed a significantly better outcome than the placebo group on all scales. All rating scales scores improved with the 1 gram dosage of EPA vs placebo, with strong beneficial effects on items rating depression, anxiety, sleep, lassitude, libido, and suicidality. Other dosages produced mixed results. Some had lesser effect. Some showed no measurable benefit.

For the Schizophrenic

A study from the Orygen Research Centre in Melbourne suggests that omega-3 fatty acids could also help delay or prevent the onset of schizophrenia. The researchers enlisted 81 ‘high risk’ young people aged 13 to 24 who had previously suffered brief hallucinations or delusions and gave half of them capsules of fish oil while the other half received placebo. One year on, only three percent of those on fish oil had developed schizophrenia compared to 28 percent from those on placebo. A study conducted at Sheffield University in England reported positive results with fish oil on patients suffering from schizophrenia. Participants of the study had previously taken anti-psychotic prescription drugs that were no longer effective. After taking fish oil supplements, participants in the study experienced progress compared to others who were given a placebo.

For the Suicidal

Can fish oil help curb suicides? That’s the startling finding in a new study just published in the Journal of Clinical Psychiatry. It links suicides by military personnel to low level of docosahexaenoic acid — found in fish oil — and finds that troops with higher levels of DHA in their blood were less likely to take their own lives.
Men with depressed DHA levels were 62% more likely to have committed suicide than those with the highest levels. The DHA found in fish oil seems to provide psychiatric benefits. DHA supplements boost the impact of antidepressant medications and reduce attention deficit disorder. They’re just preliminary findings, but they could lead to new ways to shield troops from the mental ravages of war.

Conclusion

Mom always says fish is brain food and she’s right! Personally, after taking fish-oil soft gels, my health has improved. Previously, I frequently have sore throat and mental fatigue. After taking the soft gels, the 2 symptoms are relieved! I couldn’t be happier.

Diversification: the Japanese and Technology Stocks Case Study

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From Wikipedia: In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of its constituents. Therefore, any risk-averse investor will diversify to at least some extent, with more risk-averse investors diversifying more completely than less risk-averse investors.

Basically, diversification is all about not putting all your eggs in one basket or else you risk breaking all your eggs at a go if you fall. However, one thing to note is that diversification does not increase your returns; it only reduces the deviation around your portfolio’s average returns. If you’re lucky (that is, a big IF), a narrow, concentrated portfolio could reap you a higher reward. This mentality is however, unwise – we seek certain rewards by taking calculated risk, not by gambling and seeking higher returns. If you want to gamble, you can always bring some money to the casino for some thrills. At the very least, if you lose all your money you brought along, you can call it quits and not risk your life savings.

There are many ways and degrees of diversification. Some books, for example, suggest that a dozen stocks are good enough. As we shall see from the Japanese and technology experience, even hundreds of stocks diversified over a continental force are often not good enough. Let us first review the Japanese experience.

In 1989, Japan was truly a Land of the Rising Sun. Its people are smart, hardworking and enterprising. From a war-torn era, they build a rich and prosperous continental force whose economy is second only to the United States in size. They designed and built cars and electronics products that thrashed their competitors’. Even patriotic Americans and ex-war rivals such as the Chinese bought better built made-in-Japan products in favor of their national products. In that epic year, the Nikkei 225 stock index hits an apex of 38,916 points. Japanese and overseas investors alike were hysteria. Having made some money from the stocks and buoy property market, they prophesy that the best is yet to be and Japan as a nation will rightly rule the world from a small corner in North-East Asia. However, the miracle was never to be and the economy plummeted. The stock market and land prices dived to unprecedented lows. Japanese investors who are fully invested lost their retirement funds. More than 2 decades later today, the Japanese stock market still has not recovered. At of 23 Jan 2012, the Nikkei 225 stands at 8765. If you were to invest at the Japanese peak, you would have lost a whopping 77%.

The other example I would like to quote is the infamous dot-com boom-and-bust. The dot-com boom era starts in the mid-90s. Internet companies such as Yahoo! and Amazon come into being and revolutionize the way we work and play. While Yahoo! and Amazon survived the era, there’re many other Internet companies with dubious business model which didn’t. They bankrupted when the funding went dry and brought the stocks investors down with them. An example is pet.com which sells pet supplies. The stock index that most closely tracks the technology sector is the US Nasdaq composite index. From a high of 5048 attained in 10 Mar 2000, it dropped precipitately to 1114 in 9 Oct 2002. Right now, more than a decade later, it still stood at a low of 2784 as at 23 Jan 2012.

Much has been talked about the 2 different eras. Some foresee the imminent crashes coming during their time. Tell-tale signs of the 2 bubbles are fundamental valuations such as the PE and price-to-book ratios. While valuations during most periods range from 10 to 20 for the PE ratios, many companies during those periods were out of whack in this regard. Some companies were valued at hundreds of times of their earnings. For the case of dot-com companies, the situation is even worse; most dot-com companies were burning cash and did not have a profit margin to speak of.

It’s now easy to view the bubble using the historical rear-view mirror. However, while we are in the midst of a major current bubble of our time, we tend to forget the norms and get too engrossed in the “next-big-thing”. Some of the more enlightened ones will see the light at the end of the tunnel but most will lose sight of the future and our gambler animal instinct will take over. We’ll ignore financial history and purge into the would-be bubbles head-first.

How should we avoid bubbles then? IMHO, the best way to circumvent the mania is to have a stable asset-allocation strategy that you can hold tight through thick and thin, whether the markets wane or bane is irrelevant. We first decide on the percentage we would like to allocate to stocks and bonds/cash. While the bonds and cash portion of our portfolio will have lower returns than stocks, they do a great service stabilizing the entire portfolio. By maintaining a fixed stocks/bonds ratio, we will convert bonds into stocks during years when stocks is doing poorly and exchange stocks to bonds when stocks have a bull run. This naturally results in a buy-low-sell-high cycle for stocks (buy low when stocks drop and sell high when stocks boom). Using the Japanese and technology bubble as an analogy, a discipline investor with a balanced portfolio of stocks and bonds would have offload at least part of the inflated stocks as the bubble become manic. As the stocks plunged into oblivion, the patient investor could now pick some of the equities at a deep discount and wait for the stock market to recover. Given the lower price levels the Japanese and technology stocks prices are right now, their future returns should be higher than when they are at their all time highs.

After deciding on the asset allocation strategy, we next decide on the stocks allocation. Most of us have a home bias. For example, an American will invest most of his/her stocks in American companies while a Singaporean will do likewise in a Singapore companies. However, as we have seen, this is full of problems. What happens if you were to invest your retirement savings in Japanese stocks in 1989? Of course, you’ll not be able to retire! The best strategy IMHO is to diversify as widely as possible – that is, to be globally diversified. The funds we invest in should best encompass all the major companies in the world so that when one economy or sector zigs, others might zag. There are a number of ETFs and Unit Trusts (mutual funds) in Singapore and US that index the world stock markets. Such funds are frequently large and have low expense ratio. Be sure to check the prospectus that they are index funds so that there will not be tracking errors from the world economy and the fund managers will not have leeway to speculate with your money.

Investments are all inherently risky. But, if we diversify prudently and wisely, we should be able to lower non-systematic risks while enjoying the fruits of calculated risks.

子曰：唯小人与女子难养也

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百度百科简介:孔子（公元前551年9月28日－公元前479年4月11日），子姓， 孔氏，名丘，字仲尼，汉族，鲁国陬邑（今中国山东省曲阜市南辛镇）人，中国春秋末期的思想家和教育家，儒家的创始人。

孔子为什么会说唯小人与女子难养也这么偏见又具争议性的话呢？作为一个教育家，难道他没有女门生弟子吗？难道孔子患上性别歧视症？小人难养，这无话可说，为什么偏偏要加入女人？这个偏激的言论令人费解。

唯小人与女人难养也这个议题相信大家也已有所闻吧，今天再来谈谈。初次听这句话时，可能很不顺耳，但如果我们能从当时的社会，生活，政治大背景来瞧瞧，或许孔子所言的确有几分理由。

首先，让我们谈谈孔夫子所生长的年代。前言提到，孔子是春秋时代人。春秋属于乱世，是一个群雄割据，勾心斗角的年代。据史书记载，春秋二百四十二年间，有四十三名君主被臣下或敌国杀，五十二个诸侯国被灭，有大小战事四百八十多起。在这大时代大背景的前提下，壮丁都尚且难以自保，更何况是弱不禁风的弱女子。孔子认为女人难养可能就由此而来吧。

第二，难养也可以被理解成难以自力更生，自食其力。说到春秋，就算那个年代太平盛世或在没有纠纷的乡下小农村，女人也不见的可以自力更生，自食其力。古代士农工商以务农最为普遍。女人虽然也能务农，但毕竟这份活儿很粗重，日晒雨淋的很辛苦。再说，在那个封建的社会里，女性的言行举止受到很大的束缚，七十二行，很多行业都把女性排挤在外。女人的传统职责还是在家里相夫教子。女人要自养，难也！

第三，这关系到孔子的个人政治生涯。孔子虽然桃李满天下，但不受鲁国君主的重用，率众弟子周游列国，辗转于卫、曹、宋、郑、陈、蔡、叶、楚等地，然而均未获重用。其间，在匡、宋、蒲等地，孔子一行多次被困遇险。在这历险中，拖着众妻女而行显然不智。孔子可能由此感叹女子难养也！

以上三点，也不是为孔子辩论什么，而是小弟的浅见。

水

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阴天带来雨水
烈火带来蒸汽
高山带来河流
下游带来沼泽
海岸带来汪洋
大地带来井水
天怒带来洪水
低洼带来淹水
空气带来乌云
寒冷带来冰川
峻山带来急流
陡壁带来瀑布
劳动带来汗水
口舌带来唾液
肉体带来血液
水壶带来茶水
铝罐带来饮料
早晨带来露水

水源带来生气！

Meet the Bogleheads

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http://bogleheads.org

Quote: “The Bogleheads forum is dedicated to the civil discussion of investing, personal finance, and consumer issues.”

There’re many investing forums on the net, but this is perhaps the best investment site.

The investment strategy of this finance forum espouses the investment philosophy of Jack Bogle (hence the domain name), i.e. simplified, low-cost, passive and widely-diversified investing. The philosophy is derived from academic studies and papers published from major universities from around the world. It’s also the best practice adopted by major financial institutions such as endowment and pension funds. The investment vehicles of choice for Bogleheads are ETFs and mutual funds in bonds and equities. Their favorite investment company is Vanguard, which is a low-cost, index-oriented investment provider which is previously helmed by Jack Bogle. While Singaporeans can’t buy USA’s mutual funds, we’re able to invest in Vanguard’s ETFs (or any other USA ETFs) via a brokerage such as E*Trade (which has a Singapore local office) or Vanguard in USA (which provides select free trades).

Among all the topics, one of the most talked about topic on this forum is saving and investing for retirement. Other possible reasons for saving and investing are education for our children, paying off for a house or general wealth enhancements. You can create an account for free and join in the discussion or if you’ve any questions, you can ask the folks. The advice of Bogleheads can be very sage, besides, more heads are better than one!

Bogleheads in general are nice, civil netizens. However, Bogleheads eschew high-frequency trading, market timing, securities selection, penny stock investing, alternative investments, and narrow-concentration investments. You can discuss such “forbidden” topics on the forum itself but if you insist that such investment techniques are good strategies, be prepared to be flamed or at least receive a heated argument from fellow forumers. Bogleheads follow a very orthodox investment strategy as favored by academics, if you don’t like the philosophy or have different opinions, you can always join an alternative investment forum with an ideology that meshes with yours.

While there are all kinds of Bogleheads on this forum given the open nature of the Internet, there are certain demographic traits of Boglehead forumers which I observed. Bogleheads in general are talented (plenty of Mensans), financially well off (plenty of millionaires), frugal, white and American. There are also quite a number of finance professionals such as financial advisors lurking around on the forum. You’ll come to know of them as you read more. I have learned a lot from these people and considering the forum and the advices are free, I’m especially grateful. While I can’t be considered as rich by developed-countries standard, I’m on my way to a comfortable retirement. So, kudos to the Bogleheads!

Most of the topics posted on the forum are finance related. However, Bogleheads do have a life outside investing and they frequently post many eclectic topics of various nature on the forum. The moderators do not seem to mind them and I find them to be a refreshing respite from all the financial matters. The topics can be legal, computer related or relating to household enhancements.

Over the years, the forum has done a great job educating the public on saving and investing. Some of the more talented members have further taken the task at hand and written not one but two investment books – “The Bogleheads’ Guide to Retirement Planning” and “The Bogleheads’ Guide to Investing”. They are great books per se but they tend to be a little on the American-centric side. Besides these 2 books, there are many other good books that gel while with the Bogleheads philosophy. You can read the recommendations on the wiki here:

http://www.bogleheads.org/wiki/Books:_Recommendations_and_Reviews

So, come on board the forum and set yourself financially free!

Downloading Stock Prices into Excel Spreadsheet

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With the advent of fast and affordable computing power on the one hand and the availability of powerful, feature-complete spreadsheet on the other hand, financial calculation and modeling have increasingly been performed on Microsoft Excel, the industry-leading spreadsheet of choice.

Investors and investment professionals alike now massage investment-related information on Excel. A function of Excel is to download stock information. There are chiefly 2 ways to download stock/ETF/mutual fund prices into your spreadsheet. One way is via MSN MoneyCentral database connection. The other is through Yahoo! Finance Excel macro.

You can view the MSN MoneyCentral way through this hyperlink.

However, the MSN MoneyCentral approach might not be suitable for some people as it doesn’t list a number of foreign stocks outside USA. For example, Singapore stocks are not included by MSN MoneyCentral. Fortunately, Yahoo! Finance has most of such data and thus the Yahoo! Finance Excel macro is my preferred tool to download stock quotes. You can download the sample Excel spreadsheet here.

The spreadsheet contains sample macros and stock tickers which you can modify to suit your needs. You’ve to remember to enable macros in Excel in order for it to work. As the data source is from Yahoo! Finance, you’ve to check with Yahoo! Finance for the stock ticker information, it might differ from MSN MoneyCentral. For advance users, the Yahoo! Finance Excel macro is the preferred way as Excel macro in infinitely customisable.

You can browse the author’s documentation page at this link.

If you want to download historical quotes, you can download a sample Excel macro spreadsheet for viewing here.  As always, remember to enable the macros.  This particular macro uses Yahoo! Finance symbols and data.

Optimising WordPress for Scalable Performance

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There’re several popular blogging software packages on the Internet.  Examples of blogging software are Blogger (hosted by Google), WordPress and Moveable Type.  Out of all the blogging software available, WordPress is perhaps the most quintessential platform of them all. If you’ve a domain name and a web hosting account, most likely you would install WordPress if you do choose to blog. It’s now a robust, bug-free and feature-rich tool which boasts millions of users around the world. For some, the WordPress used is hosted by wordpress.com which reduces the need to configure the software for optimum performance on the part of the users. However, this article is not targeted at this group of users; this article is about optimising WordPress for DIY users with our own installations.

While WordPress is a great piece of work per se, the default installation has a huge weakness, i.e. it’s not scalable to a large number of concurrent users.  Even if you are a small-time blogger, you still have to cater to the small chance that your blog might just suddenly get popular.  Consider this scenario, what if your tiny space on the web should of all likelihood have its URL appear on the front page of The Straits Times or a popular web site such as Digg or Slashdot. Hundreds and possibly thousands of netizen could concurrently land on your web site simultaneously slamming on your WordPress engine hard and fast. Although WordPress is widely installed, the default setup couldn’t withstand such load. Your web site might crash and become inaccessible. The crux of it is, your blog fails to load just when it’s most need and read. If hosted on a shared web host, it could bring down other web sites as well. Depending on the circumstances and the policy of the web hosting company, the company might request you the webmaster to leave or perhaps buy a more powerful hosting package.

The culprit of the matter is that WordPress dynamically generates its pages. Every time someone loads a page from your website, WordPress has to regenerate the page by fetching the contents from the database. While this approach has its merits, it’s computationally expensive. In contrast to WordPress, 2 other less popular software packages – Blogger and Moveable Type create static pages, i.e. the pages are prepared in advance during creation and are served as is without much calculation. It’s of no coincidence that popular websites such as barackobama.com and britneyspears.com would choose software such as Moveable Type.

However, all is not lost, I would like to recommend 2 approaches, one hardware-, one software-based solutions to enhance the scalability of WordPress. With proper setup, WordPress can be as fast and scalable as Blogger or Moveable Type.

When it comes to hardware, I’m not recommending moving from shared hosting to an expensive VPS (virtual private server) or dedicated hosting although that is certainly possible. The main hinderer of this approach is cost – you pay something for nothing. Most of the time, your blog sits idle on an expensive machine doing nothing much. This is not a viable approach unless you already own a popular WordPress blog. There’s no point providing capacity for perhaps the most remote spike in traffic.

A better approach is to use a shared web host that is scalable and can expand its capacity in an elastic way to accommodate sudden increase in volume. Alas, time has changed and technology has improved – cloud computing has come to the rescue of WordPress bloggers and other compute bound applications. In cloud computing, clusters of servers are load balanced and work together to form a logical unit to serve your web sites. That way, your shared hosting account together with other hosting accounts live on aggregate a much larger computing unit spread across many computers. If there is a sudden increase in demand of computation power, the increase will be spread over many servers instead of overloading a single PC.

As of this writing, there are several cloud-computing shared web hosts. 2 of American web hosts are http://godaddy.com and http://mediatemple.net . These hosting solutions offer scalable hosting with only a slight premium on cost. If you prefer something closer home (I mean Singapore), there’s http://hostsg.com .

Besides the hardware solution, there’s the software way. The software-based approach is to use WordPress caching. A WordPress cache will store static files on disk that is derived from the web pages and then serve future page requests from the static files on the disk. This makes the system much faster and more responsive to the users. From the user perspective, there’s no change in the feature of the WordPress blog other than a speed improvement. The blog still behaves like it’s dynamic – new posts and comments still get updated as and when they’re posted to the website.

Currently, to enable WordPress caching, you need to install a plugin that does just that. 2 popular plugins are WP Super Cache and W3 Total Cache. With proper configuration, the plugins should increase your website’s capacity several times. A share-hosting account with caching properly configured should perform just as well as a dedicated machine with no caching. Installation is pretty simple and straightforward. Just follow the installation guide gotten from the web and you’re done with it.

The 2 broad approaches toward optimising WordPress are ways to improve the scalability by an order of magnitude. Although you might find other means to improve performance of your blog, these tend to be incremental. Do attempt the 2 approaches if you have a WordPress blog!