Dear Professor,

For this end-of-semester edition of the newsletter, we turn our eyes to finance. While finance is an integral facet of the business world, introductory to business students often have trouble grasping financial concepts when they are presented with them for the first time. In order to help them understand some of the key financial terms, we’ve provided links to two very elementary videos that graphically describe key concepts. If you find these videos useful, you may want to explore the other short videos in the Investopia series at http://www.youtube.com/results?search_query=investopedia.com&aq=f. As always, this issue contains abstracts of recent, relevant articles with accompanying critical thinking questions. Of course, we also include a PowerPoint file integrating these elements in an easy to use package. In case you missed any of the previous newsletters, you can find them on the text’s Web site at www.mhhe.com/ub9e. If you have suggestions for future issues, please let us know by forwarding your comments to: SarahSchuessler@mcgraw-hill.com. Remember, we always enjoy hearing from you, so please let us know if there are any topics you would like for us to include in future newsletters. Bill Nickels Jim McHugh Susan McHugh

NEWSLETTER FOR INSTRUCTORS 2010 December

• VIDEOS

• ARTICLE ABSTRACTS

• CHAPTER CHART

• PPT PREVIEW

If you are interested in the textbook please visit: www.mhhe.com/ Go to top of document

Videos Initial Public Offering Explained From Investopedia The video can be seen here: http://www.youtube.com/watch?v=S68uZqc6VD8

This companion to the newsletter’s piece on Asia’s IPO boom explains the term succinctly with a light visual touch.

Questions: 1. How do IPOs help both business owners and individual investors?

As the video highlights, a business owner is able to generate capital to expand the business without going into any significant debt. Individual investors can share in the growth and potential future wealth of an expanding business by purchasing shares in the company at the initial public offering.

2. IPOs trade in the primary market. What does that mean?

Corporations make money only once on their sale of stock, when they sell it in the primary market. After that the stock is traded on the secondary market where stockholders exchange shares of stock among themselves. Corporations receive nothing from sales in the secondary market.

Introduction to Dividend Yields From Investopedia The video can be seen here: http://www.youtube.com/watch?v=uclXFdgPTGA

Focusing this time on dividend yields, Investopedia presents another short, instructive video on a convoluted financial term.

Questions: 1. Why would an investor ever purchase a stock that offers no dividends?

As the video points out, there are many factors to consider when purchasing a stock. Dividends are only one factor. Many investors, for example, purchase shares of growth stocks that offer no dividends because they believe the stock will grow and the stock’s price will go higher.

2. If an investor fails to receive a dividend when it’s due will they be paid at a later date?

Only if the stock they own is a cumulative preferred stock that promises a repayment of any dividends that are not paid when due. Other types of preferred stock dividends or common stock dividends never have to be repaid.

[Note: If you find these videos useful, you may want to explore the other short videos in the Investopia series at http://www.youtube.com/results?search_query=investopedia.com&aq=f.] Go to top of document

Article Abstracts Index Each abstract contains a concise summary of a relevant news article from recent publications, followed by a set of critical-thinking questions and possible answers. For more detail on any of these subjects, we’ve included a hyperlink to the original article at the top of each abstract.

Asian IPOs Overtake the U.S. (Chapter 1, 3, 18, 19)

Google’s Tax Tricks (Chapter 4, 5, 7, 17, 18, Bonus A)

Lining Up For Free Apps (Chapter 13, 14, 16, Bonus B)

Mind-Reading Movies (Chapter 13, 14, Bonus B)

Innovating with Open Books and Shared Profits (Chapter 10, 11, 17)

Ivy League Endowment Difficulties (Chapter 2, 17, 18, 19)

Princeton University vs. Princeton Borough (Chapter 4, 17,

Bonus A)

Responsible Banking with CDFIs (Chapter 6, 18, 20)

Derivatives in Disguise (Chapter 4, 18, 19, 20)

The Dangers of ETFs (Chapter 1, 14, 18, 19) Go to top of document

Asian IPOs Overtake the U.S. Use with Chapters 1, 3, 18 and 19 Michael Tsang and Lee Spears, “Asia Trounces the World in IPOS,” Bloomberg BusinessWeek, November 4, 2010. http://www.businessweek.com/magazine/content/10_46/b4203052848358.htm As American and European entrepreneurs continue to reel from the recession, Asia’s business leaders soldiered on into an unprecedented spurt of economic growth. This year, Asia’s number of initial public offerings decidedly eclipsed any competition. The continent accounted for 66 percent of all money raised globally with $134 billion. The U.S., meanwhile, sunk to its lowest IPO share in history at 11 percent.

In 1999 the numbers told a similar story, only the roles were reversed. The U.S enjoyed a whopping 75 percent share of all IPOs while Asia languished at 12 percent. Times are different now, though, and not just because of the credit crunch. After all, American outsourcing contributed directly to the burgeoning Asian markets that are expanding with capital today. At the top of the heap is America’s economic rival China, which attracted $76 billion in investment this year. Six Chinese companies’ offerings hit the billion-dollar mark, with one IPO for the Agricultural Bank of China selling a world record of $22.1 billion worth of shares. In the U.S., no company raised more than $700 million. While India didn’t attain high numbers like China, the nation is nevertheless on pace to shatter its previous annual IPO record of $8.2 billion. Central to India’s success was the government’s sale of its 10 percent stake in Coal India, raking in a cool $3.4 billion on the deal. For investors, Asia’s appeal lies in its strong growth. Indian and Chinese companies are tapping into relatively untouched markets that could prove to be the most valuable consumer real estate in global business. For the U.S., a portion of its future could be based on the success of these foreign companies since six of the 10 biggest IPOs on U.S. exchanges hail from China or India. Questions: 1. Why are IPOs important to companies?

As explained in Chapter 19 of your textbook, IPOs provide needed capital for businesses to expand. It’s important to also remember that corporations make money only once on their sale of stock that being when it’s sold on the primary market.

2. What does the lag in the number of U.S. IPOs imply? The drop off in IPOs in the United States implies that our advantage in developing innovative companies ready to lead the global market is eroding. It’s a tough pill to swallow since we need future Microsofts and Apples to lead us out of the economic situation we are facing.

Go to Abstract Contents

Google’s Tax Tactics Use with Chapters 4, 5, 7, 17, 18 and Bonus A Jesse Drucker, “The Tax Haven That’s Saving Google Billions,” Bloomberg BusinessWeek, October 21, 2010. Photo courtesy of Thomas Sommeregger. http://www.businessweek.com/magazine/content/10_44/b4201043146825.htm

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Tax havens have long been used by multinationals to skirt the stringent corporate tax laws of their home countries. But for many in and outside the business world, the abundance of tax havens by no means justifies the revenue they deprive deserving states. Unfortunately, not only is tax sheltering common, in most cases it is legal. Google, for instanearned $12.5 billion overseas since 2007, only 2.4 percent of which was taxed. Google’s clever, entirely legal money funneling savedcompany $3.1 billion and boosted last year’s earnings by 26 percent. The system starts in Dublin at Google’s international headquarters. All the money from ad sales outside the U.S. finds its way to Google Ireland, where corporate profits are taxed at 12.5 percent. The company’s ultimate goal is to send its earnings to Bermuda, where there’s no corporate income tax at all. But sending the money directly to the Caribbean would incur a large fee according to Irish law. To circumvent this, the money is sent to Google Netherlands Holdings, a shell company with no employees. Ireland doesn’t tax payments to

companies in other European Union states, ensuring that Google’s money can take advantage of the Netherlands’ lax tax laws. From there, 99.8 percent of the money that hits Holland’s shores goes off to Bermuda. Google also eliminates a portion of its domestic taxes by licensing its search and advertising technology through Google Ireland, even though most of the development is performed in the U.S. In total, tax avoidance from corporations costs the U.S. government as much as $60 billion annually. And though Google is certainly not alone in its tax control techniques, no other tech company has managed to manipulate its overseas tax rate quite as low as the search giant. From a legal standpoint, the company has done no wrong, but some believe Google has violated its famous “Don’t be evil” motto. However, such a statement ignores the popular belief that businesses have an obligation to its shareholders to minimize its taxes and other costs legally. Whether ethically or unethically, Google has certainly accomplished that task. Questions: 1. How is Google able to legally take advantage of such tax breaks?

As noted in Chapter 3 and Bonus Chapter A, there is no global system of laws; laws are different country-by-country. Google is only making use of this diversity of tax laws to enhance its profits and expand stockholder value.

2. Is Google acting ethically in using different tax laws to its benefit? Probably there are a good many points of view among you as there are among your textbook author team. Legally Google is doing nothing wrong and their lawyers and accountants should be applauded. Ethically the shifting of funds is a bit cloudier.

Go to Abstract Contents

Lining Up for Free Apps Use with Chapters 13, 14, 16 and Bonus B Joel Howard, “Your Wait Is Over,” Entrepreneur, November 2010. http://www.entrepreneur.com/article/217451

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In this digital age of free information, it can be a chore to convince consumers, especially young ones, to purchase some products. After all, for every web app or program that isn’already distributed freely, there are about a dozen other ways to obtain it through easy but extralegal means. Nevertheless, information and the ways in which it is transmitted will become no more restrained in five years than they are now. Rather thanreact with higher prices and stringent policies, entrepreneurs muadapt and find ways to integrate the free flow of information into their moneymaking sche For instance, in 2006 Eric Alder and Julien Chabbott graduated from college with an idea for a smartphone app that would provide regular updates on the wait times of lines around town.

The app was to be driven by social media with individual users providing the app with the estimated length of the lines they were standing in. But the pair of young entrepreneurs faced a quandary. Without accurate line times built in, nobody would use the app. And if nobody used the app, there wouldn’t be enough reliable data to formulate accurate lin In order to get the app off the ground, Alder and Chabbott first distributed Line Snob for free on the iPhone marketplace. Then the pair rewarded users who reported wait times with points that could be redeemed for coupons. And rather than rely solely on word of mouth, Line Snob ingratiated itself with popular venues that uploaded data on their own lines and posted fliers about the app around their queues. Once Chabbott and Alder established their user base, they began making money by charging companies a monthly fee for using the app. Line Snob is especially popular in Las Vegas, where hotels use it to announce which buffet or club lines are the shortest. The app remains free for regular users, and the company hopes to unveil soon a new feature that can predict line waits before they occur. Questions: 1. What key entrepreneurial characteristics seemed to drive Alder & Chabbott?

As described in Chapter 6, both entrepreneurs seemed to be self-nurturing and action-oriented. They continued to believe strongly in their product even though it faced many ups-and-downs. They had the burning desire to build their dream into a reality.

2. What’s the major challenge for Line Snob going forward? The flow of information continues to move unrestrained at a fast pace with competition forever on the horizon. Line Snob needs to continuously add new features and services that reach their target customers and tops competitors. No small task for a company in this market.

Go to Abstract Contents

Mind-Reading Movies Use with Chapters 13, 14 and Bonus B Michael White, “Concentrate, and You Too Can Be Spielberg,” Bloomberg BusinessWeek, September 30, 2010. Photo courtesy of Cory Doctorow. http://www.businessweek.com/magazine/content/10_41/b4198039823799.htm For many Americans, even the shortest trip around the World Wide Web can feel like a relentless information assault. Free media sites like YouTube and news aggregators like Reddit generate so much content that it would take a person hours to slog through just one minute’s worth of uploaded material. As a result, the intrepid Internet users of today look to various outlets for control and customizability. RSS feeds allow users to control the content they see, while social networks like Facebook and Twitter let them customize how they receive and transmit that information. As our technological might has grown, consumers have come to expect the same level of control and customizability they find on the Internet to translate to other products as well. Perhaps the best expression of this new consumer desire for product customization is the MindWave headset. The brainwave-reading technology first hit consumer shelves in the form of Mattel’s Mindflex, a toy that allows children to manipulate a small, floating ball with their thoughts. As if that wasn’t futuristic enough, developer NeuroSky combined MindWave technology with movies for a new product that allows the wearer to alter the outcome of a film using their own brainwaves. NeuroSky tested the product with a reedited version of Rocky IV in which users could change the outcome of the movie’s climactic fight. To some, altering the course of a film based solely on cranial impulses is akin to cinematic sacrilege. But like many aging media empires, the film industry is ailing and gimmicks such as 3D and IMAX bring in big crowds. Although NeuroSky’s goal is to produce original films that operate based on the collective thoughts of an audience, movie studios and theaters aren’t equipped for such a radical venture just yet. In the meantime, NeuroSky has teamed up with the London studio Treite to develop a series of alterable short films that consumers can watch at home. Questions: 1. Why would the film industry experiment with product customization?

Like other industries facing multiple challenges to its core product, the film business must be continuously changing to meet customer expectations. Though products such as NeuroSky are still in the introductory stage of its life cycle, market researchers will keep a close watch on such innovations and their impact on the market.

2. How long will a product like NeruoSky be in the introductory stage? This is very difficult to estimate so we will not try to be exact. Suffice it to say that such a product would involve a great deal of expense to film producers, distributors and theatres which means they will want definite and concrete proof the product is technically sound, has firm consumer support, and will pay off to them in the long term before investing enough to push the product beyond the introductory stage.

Go to Abstract Contents

Innovating with Open Books and Shared Profits Use with Chapters 10, 11 and 17 Jody Heymann, “Bootstrapping Profits By Opening the Books,” Bloomberg BusinessWeek, September 23, 2010. http://www.businessweek.com/smallbiz/content/sep2010/sb20100922_650970.htm

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During a recessionary economy, cutting costs becomes the primary focus of most companies. Anything that detracts from a business’ bottom line is excised and nothing that could burden the books is added. But with all their penny-pinching, many managers fail to heed one of the simplest maxims in business: yohave to spend money to make money. In most cases, a little investment in a company’s employees through open accountand profit sharing can go a long way towards improving efficiency and, ultimately, profit m By opening the books to employees and cutting them in on profits, staffers become more motivated to do a good job since they can see how their salary is tied to their performance. Bmost importantly, open-book management spurs innovation in

every level of the company. For instance, at the small packaging business Great Little Box, employees equally split 15 percent of the company’s pretax earnings. Thanks to the staff’s levplaying field, a maintenance worker suggested to upper management that they trim a quarter-of cardboard off some boxes. The employee’s recommendation resulted in thousands of dollars isavings each month for Great Little Box. Also, each employee acts as a sort of mini-manager by keeping tabs on their colleagues’ productivity, since any amount of slacking could result in less money for everybody. A recent study by the Institute for Health and Social Policy at McGill University found comprehensive employee empowerment to be a common thread in successful companies both big and small. In fact, a survey by Inc. magazine revealed that 40 percent of the 500 fastest growing companies in the U.S. use open-book management. Nevertheless, only 1 percent of American companies grant employees’ access to accounting records. And those few that employ profit sharing usually reserve it only for managers. In the end, most companies feel they can’t afford to include their staff in on their already slim profit margins. But as the recession wears on, businesses could find that short-term cost-cutting measures could come back to bite them in the long term. Questions: 1. Why do employees react so favorably to open-book management?

Open-book management says to employees they are valued and a respected part of the organization. The video about New Belgium Brewery that accompanies the textbook shows a strong example of how sharing profits and open accounting build employee trust and innovation.

2. Why do companies restrict employee access to accounting records and profit sharing? While both are excellent motivators that help build employee trust and motivation, many companies could be concerned about financial information being leaked outside the company – especially if that financial information is less than positive.

Go to Abstract Contents

Ivy League Endowment Difficulties Use with Chapters 2, 17, 18 and 19 Michael McDonald, “Paying the Price for Following Yale,” Bloomberg BusinessWeek, September 30, 2010. Photo courtesy of John Terhorst. http://www.businessweek.com/magazine/content/10_41/b4198047665503.htm From countless investment magazines to television personalities like Mad Money’s Jim Cramer, Americans have plenty of places to turn for financial advice. But just because financial “experts” are respected enough to be given a voice in journals or television shows, they aren’t infallible. The business world is a volatile and ever-changing entity that defies the expectations of even the industry’s brightest minds. So when it comes to investing, seeking expert advice is a must, but potential investors also have to be careful not to follow their financial advisors blindly. For instance, from the mid-80s up until the eve of the financial crisis, Yale’s endowment manager David Swensen was the Ivy League’s investment guru. Over the course of more than two decades, Swensen poured billions into real estate, private equity, hedge funds, and other non-traditional assets. Swensen’s clever investing yielded substantial returns, expanding Yale’s endowment at an average annual rate of 16.3 percent in the decade preceding the credit crunch. Dozens of other wealthy universities copied Swensen’s investment strategy, especially Ivy rival Harvard, which boasted a $36.6 billion endowment at the end of fiscal 2008. But the other shoe dropped with a resounding thud in October 2008. The stock market meltdown left investment-centric colleges with billions tied up in various failing ventures but with little cash on hand to actually run their schools. As a result, 15 wealthy colleges, Harvard and Yale among them, borrowed $7.2 billion between 2008 and 2009. Harvard now spends $87.5 million a year on interest payments to debtors alone. As a result of Harvard’s 27.3 percent endowment nosedive, university officials cut costs at the student level. School administrators nixed hot breakfasts from student dining halls, reduced shuttle bus service and offered buyouts to professors in an effort to close budget gaps. Questions: 1. What lesson does this story teach us?

It teaches us a lesson that is repeated time and time again. The investment business is a risky venture that can cost investors dearly. If you remember nothing else from Chapters 18 and 19, remember these two words: risk and return. The pursuit of high returns entails high risk. As the Ivy Leagues found out these investment principles spare no one.

2. What other important financial principle comes to mind from the abstract? Hopefully some of you spotted the need for careful cash-flow analysis. Harvard, for example, tied up too much of its money in its endowment that could not be accessed when needed. Luckily it had the reputation and resources to borrow funds for operations. Many businesses that neglect cash flow are not quite as fortunate.

Go to Abstract Contents

Princeton University vs. Princeton Burrough Use with Chapters 4, 17 and Bonus A Moira Herbst, “Princeton and Princeton Face Off Over Taxes,” Bloomberg Businesseek, July 1, 2010. Photo courtesy of Doug Kerr. http://www.businessweek.com/magazine/content/10_28/b4186028429115.htm

unities, if y.

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ake substantial cuts as well, slashing $170 million from its budget and eliminating 43 positions.

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udgeting, managing, and investing just like their counterparts in private sector business.

In the previous abstract, we profiled the rise and fall of Harvard, Yale and other elite schools’ multi-billion dollar endowments. Not to be outdone by its fellow Ivys, Princeton University hitched its wagon to Yale’s Swensen system and, for a time, prospered. Princeton’s endowment peaked at $16.3 billion in June 2008, but soon plummeted by $3.74 billion the year following the start of the financial crisis. To university officials, a 24 percent drop in its investments is a catastrophe. But to Princeton Borough and adjoining Princeton Township where the university is located, $12.5 billion is still a princely sum that could do a great deal of good in their commtaxed properl Like many colleges, Princeton University’s land holdings are tax-exempt. Last year it paid just $8.2 million in property taxes even though it occupies 43 percent of the land in Princeton Borough and 13 percent of Princeton Township. Local government officials esti

that if the university paid its property taxes in full, it could contribute an additional $28 million. That money could go a long way in the cash-strapps University representatives cite that the school is the largest taxpayer in both Princeton Boroughand Township and that it voluntarily paid $1.2 million to the community in lieu of other taxes. Princeton also employs 5,300 people and generates more than $1 billion in economic activity. Still, that $12.5 billion endowment looms large in the minds of many local officials, leading to speculate if Princeton really is an institution of learning or “a hedge fund…promoting an educational arm on the side." But as we saw with Harvard and Yale, Princeton doesn’t actuallhave billions of dollars lying around; that money is tied up in complicated investments. And much like its governing bodies, Princeton has had to m

Questions: ld wealthy universities like Princeton be exempt from local taxes? Obviously this is a very good discussion question that many strongly support on one sideor the other. Our opinion is that Princeton is first and foremost an institution of higher learning. If additional taxes wereother, less affluent, institutions. usiness practices different at private universities than at private sector businesses? Remember as explained in Chapter 1, businesses come in a great many sizes andHospitals, churches, and schools are businesses that use business practices like b

Go to Abstract Contents

ing with CDFIs

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Citi, Goldman Sachs and

o ayments, so CDFIs help businesses with everything from bookkeeping to

Pennsylvania CDFI that has

health food stores across the state.

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ted promptly and assistance can

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ome time to come.

Responsible BankUse with Chapters 6, 18 and 20 Mark Pinsky, “Help for Small Businesses: Loans Are Just the Start,” Bloomberg

usinessWeek, October 21, 2010. Bhttp://www.businessweek.com/smallbiz/content/o A common complaint among small business owners these days is that banks have been too reluctant to lend since the financial meltdown. As a result, somcompanies seek assistance from local sources like community development financial institutions (CDFIs). Originally founded by socially motivated investors and faith based groups, CDFIs provide loans and financial education to small businesses in impoverished areas. And ironically enough, most new capital for CDFIs comes from large commercbanks, with over $1 billion in investment over the

ast year coming from

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pothers. So why fund CDFIs while remaining stingy lending through traditional banks? For one, CDFIsoperate in a far more disciplined fashion than most commercial banks. If borrowers fail to pay back loans, the CDFI itself takes the financial hit, not the investors. To combat delinquency, CDFIs take an active interest in securing their loans, going so far as to knock on a borrower’s door even if a payment is one day late. Most importantly, though, CDFIs offer their clients a wealth of educational services. After all, keeping the borrower’s business alive is a sure way tustain their loan ps

business strategy. Large commercial banks focused on maximizing profit simply can’t afford to tend to their clients so closely. Nor can they match CDFIs’ abilities to substantially impact depressed communities in a positive way. CDFIs are unique in that when the economy contracts, their market expands. And in the wake of a banking crisis coupled with a decades-long exodus of industrial interests, CDFIslike local credit unions and loan and equity funds can be the sole financial lifeline for otherwise isolated communities. All told, CDFIs manage a staggering $30 billion in assets, and their methods are attracting attention from high places. First Lady Michelle Obama, for instance, based

e Obama Administration’s Healthy Food Financing Initiative on athfinanced more than 85 Questions:

t seems to be the winning formula for CDFIs success? Since CDFIs clearly impact distressed communities, they take a very personal interest in their loans and do everything possible to see that a funded business succeeds. Also, by following the client firm closely, progress can be evaluabe provided when needed. e economy improves, will CDFIs be able to survive?

assets and a formidable track record of success,With $30 billion in will be a fixture in small business for s

Go to Abstract Contents

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Derivatives in DisgUse with Chapters 4, 18, 19 and 20 Zeke Faux, “Individual Investors Duped by Derivatives,” Bloomberg BusinessWeSeptember 30, 2010.

m/magazine/content/10_41/b4198043663903.htm Many complicated Wall Street deals contributed to the 2008 financial crisis, but custom derivatives have shouldered much ofthe blame. Bought and traded en masse by the nation’s biggest banks, derivatives like the infamous credit default swap tangled the marketplace, creating a web of debt and losses that was nearlyimpossible to unravel. The Dodd-Frank financial regulation bill attempts to rein in many destructive derivatives, but the bill stoshort of protecting investors at the consumer level. As a resu

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brokers are pushing confusing securities to investors actually derivatives in disguise. For instance, retired beautician Leona Miller bought what shthought were standard bonds on the recommendation of her broker. In reality, she purchased a structured note, a bond combined with a derivative that carries an appealingly low intere

rate but also significant risk. Her structured-note had been bundled with a stake in Merck alowith a put-option that would convert her entire investment into Merck shares should the company’s trading price fall lower than her original purchase price. After the retiree lost 30

rcent of her $20,000 investment, the put-optiopewhose value was dropping by the day. If that explanation sounds confusing, it’s because it is. Nevertheless, securities laws allow the sale of derivatives to individuals as long as they’re bound with bonds. According to one expert, individual investors are incapable of distinguishing the value of structured notes due to their sheer complexity. Most consumers ignore all the red tape and focus instead on the notes’ near 0 percent interest rates. But doing so ignores the inherent risk of convoluted securities with misleading names like S&P 500 Index Linked Callable notes. Despite their ignorance, investors are snatching up structured August.

Questions: ld investors be told of all risks of investments sold by brokers? That certainly seems more than fair to us. As the abstract points out, often investors put their money in products that have hidden features they are completely unaware of or uninformed about. Because of the lack of Congressional action, we could realderivatives debacle. t lesson do investors need to remember from the financial crisis of 2008? Warren Buffett, the textbook’s featured profile in Chapter 19, says he never invests in companies or products that he doesn’t understand. Investors should take heed in what he says and remember if something sounds too good to be true, it probably isn’t. It also

oker uhelps to ask your br qunderstand it, don’t buy it.

Go to Abstract Contents

The Dangers of ETFs Use with Chapters 1, 14, 18 and 19

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o Fs are still about as safe a bet as one can make on Wall Street, their reputation is d by the day thanks to miscalculations and increasingly convoluted bundles of

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e expects their popularity to decrease in the near future. The f ET s is one reason why some analysts are voicing their concerns to

Go to Abstract Contents

J. Alex Tarquinio, “The ew ETF Pitfalls,” SmartMoney, October 10, 2010.

com/investing/etfs/the-new-etf-pitfalls/

It’s no secret that the stock market is an unpredictable entity. Nevertheless, every day savvy investors the world over try to find a way to consistently and safely earn money through clever investing. But on the New York Stock Exchange, nothing is assured and even the safest bets have their dark sides. For instance, exchange-traded funds (ETFs) are bundles of stocks, bonds or other investments that trade like a single stock. Many different companies and funds

mprise an ETF, but normally they all fall unde

http://www.smartmoney

coor commodity, such as oil or gold. In this way, ETFs ideally provide an easy and profitable way to diversify a portfolio. ETFs have been a hot item on the stock market for the past few yearsgrowing at rate of $1.5 billion a week and totaling to an estimated $838 billion overall. But as their popularity grows, Wall Street is increasingly issuing misleading ETFs that contradict the funds’ safereputation. For one, ETFs are closing at an alarming rate, with 140 shutting down since 2008. In the 15 years before then, only 10 had closed. An ETF needs at least $50 million to generate a profit and

any disappear due to a lack of investor interest. Although investorma fund closes, those looking for ETFs as a solid diversification tool instead find themselves saddled with commissions and transfer fees for a new investment. Sometimes ETFs fail to perform the same way as the indices or products they track. For examan ETF called the PowerShares FTSE RAFI Emerging Markets Portfolio rose 67 percent last year. A solid return to be sure, except that the collection of stocks it tracked rose 78 percent. While such tracking errors can occur in some funds from time to time, they’re becoming especially common in ETFs, which differ from their indices by an average of 1.25 percent. Slthough ETa

being pollutesecurities.

ns: t’s the best advice for investors wanting to invest in ETFs? The best advice for investors looking at ETFs is the same for investors looking at pr

ke sure the ETF has solid management and a companies; do your homework. Manoteworthy track record. It’s also advisable to look at Chapter 19 which offer information on choosing the best investment strategy that fits the investor’s needs. TFs look like a fad investment? Hardly! As the abstract states they have been a hot item on the stock market for the past ew years and no onf

expanding number o Fpotential investors.

Article / Chapter Index

f document

1 2 3 4 5 6 7 8Article 9 10 11 12 13 14 15 16 17 18 19 20 A B C D Asian IPOs Overtake the

X X U.S. X X

Google’s Tax Tricks X X X X X X LiningFree Apps

Up for X X X X

Mind Reading Movies X X X Innovating with Open Books and

X X X Shared Profits Ivy League

t EndowmenDifficulties X X X X Princeton University vs. PrincetonBorough

X X X

Responsible Banking withCDFIs

X X X

Derivatives in Disguise

Go to top o

X X X X

The Dangers of ETFs X X X X

discussed in the article abstracts. Each article

ut the article. Possible answers are

ideos, companies,

PowerPoint Preview The PowerPoint slide file that accompanies this newsletter contains approximately 25 lides covering the cutting edge topicss

abstract is supported with two slides:

1. A slide summarizing the major points in the article 2. A slide containing critical thinking questions abo

included in the notes section of the PPT. The slides can be used selectively by dropping them into your existing class PowerPoint. Some of the slides contain hyperlinks to corresponding Web sites for vproducts, or other relevant resources.

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