This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Shares of Apple Inc. (NASDAQ: AAPL) will soon recover from their post-split decline and head back to new all-time highs.

So says Needham analyst Laura Martin. On Wednesday, Martin reiterated her buy rating on Apple’s stock and boosted her price forecast from $112.50 to $140. Her new target represents potential gains for investors of roughly 24% over the stock’s current price near $113.

Martin applauded Apple’s move to bundle its services. On Tuesday, the company unveiled Apple One, which will allow customers to bundle up to six of its services into one reduced-price subscription. Martin believes the bundle will help Apple take share from its stand-alone competitors.

She also sees Apple’s custom-designed chips as another key competitive advantage. She predicts that the gap between Apple and its rivals will widen with each new device it launches, boosting its ability to command higher prices (and, by extension, profits) over time.

Will Apple’s stock price hit $140?  

Martin’s logic is sound. Apple’s custom chips should help to further separate its products from the pack, and its new bundle ought to draw more people into its rapidly expanding services ecosystem. Apple’s revenue and profits, in turn, could rise sharply, driving its share price higher along the way. Thus, seeing its shares hit $140 in the coming year seems not only possible, but likely, and it could happen faster than many investors currently expect.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Brokers upgraded JB Hi-Fi (ASX:JBH) share price and this other ASX stock to “buy” today
• Apple, Amazon, Microsoft are bigger than EVERY unicorn combined
• Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA) among most traded US shares last week
• How the China rift could spur these ASX tech share prices to new records
• Did Apple and Tesla stock splits signal the stock market top?

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Apple. The Motley Fool Australia has recommended Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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On Wednesday Pinnacle Investment Management Group Ltd (ASX: PNI) held the third day of its week-long Pinnacle 2020 Virtual Summit.

On Tuesday, fund managers were sharing their views on the small cap sector (you can read about that here), whereas on Wednesday they turned their attention to global equities.

Yesterday’s event saw presentations from Antipodes Partners CIO, Jacob Mitchell and Hyperion Asset Management Chair, Tim Samway.

Here are key takeaways from the event:

The decarbonisation super cycle.

At the event, Antipodes revealed that it has lifted its exposure to the beneficiaries of European decarbonisation. This is something which Jacob Mitchell believes is a major emerging super cycle.

He explained: “The European Union really has had this investment cycle sitting on the shelf for some time, it’s called the New Green Deal and it’s anchored by the emission trading system that’s been in place for some time. We think it’s the emergence of a virtuous cycle… What the emissions trading scheme encourages is the decarbonisation of the power sector and as the carbon price goes higher and that decarbonisation takes place you are typically generating revenue for Governments.”

This essentially means the government can then take these revenues and subsidise parts of the economy which are not subject to the emissions trading system. This includes transport and the adoption of electric vehicles or the transformation to electric power for heating.

The chief investment officer continued: “This all feeds back into demand for electric power, so we see a major emerging super cycle… If Europe is to deliver on its 2030 targets the demand for electric power will grow some 37%, that is massive. You need to be in companies which are actually doing the upgrade on the grid or providing the materials for the upgrade.”

Mr Mitchell named Siemens, Norsk Hydro, and Électricité de France as companies in the Antipodes portfolio that are positioned to benefit.

Tesla is more than just a car company.

Hyperion Asset Management’s Chair, Tim Samway, discussed its number one holding, Tesla Inc (NASDAQ: TSLA).

Mr Samway believes that many investors don’t understand the full potential of the electric vehicles business.

He commented: “They’re currently producing a run rate of 500,000 vehicles a year, rising to about 3 million a year in no time at all, so the vehicle sales growth story is actually a good story in itself and it’s actually even better when you look at what’s happening to the rest of the car market.”

The fund manager notes that as of June of this year, there had been 28 consecutive months of deterioration in global new car sales. Yet Tesla has substantially increased deliveries and sales during this time.

But that’s only a part of the Tesla story.  

Mr Samway explained: “But we’ve never been interested in just another car company. When they get to a production of 3 million cars a year this results in the addition of tens of thousands of megawatts of battery storage per year sitting in cars in consumer garages. Eraring Power Station on Lake Macquarie is rated at 2900 megawatts and is the largest in Australia… We’re talking about Tesla adding multiple Eraring stations per year in storage to garages.”

“So, with Tesla Autobidder software the storage will be available eventually to the grid as a virtual power plant and can offer service to the energy market such as frequency regulation, grid support, reserve capacity and time shifting,” he added.

Why is this important? This is important as it has the potential to generate incredible revenues for Tesla in the future.

“If you don’t know what frequency regulation is for Tesla, then it’s just a speculative car bet… I suspect most people just don’t understand the revenue Tesla stands to earn from all these services.”

“The substantial opportunity for Tesla is to actually dominate that virtual power plant and energy storage market through a first mover advantage and that’s just missing from most sell-side analysis at the moment,” concluded Hyperion Asset Management’s Chair.

More reading

• Leading fund managers name 4 small cap ASX shares to buy
• Why Tesla (NASDAQ:TSLA) stock jolted higher on Tuesday
• Is value investing dead?
• Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA) among most traded US shares last week
• Why the Tesla (NASDAQ:TSLA) share price zoomed 12.5% higher

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Microsoft Corporation (NASDAQ: MSFT) wants to give shareholders more money.

The software giant’s board of directors approved a 10% increase to its quarterly dividend to $0.56 per share. That equates to an annualized yield of 1.1%, based on Microsoft’s current stock price near $207.

Microsoft is a financial powerhouse. With more than $136 billion in cash and investments and $60 billion in annual operating cash flow, the software giant can easily afford to reward its investors with rapidly growing dividends and bountiful share repurchases, even as it invests heavily in cutting-edge new technologies.

That’s important because it allows shareholders to generate a rising and reliable income stream, without the need to sell stock. And it allows Microsoft to stay at the vanguard of technological change.

Microsoft is a leader in areas such as cloud computing and artificial intelligence. Its Azure cloud infrastructure platform is growing at a torrid rate, to the tune of 47% year-over-year growth in the fourth quarter. Microsoft’s cloud-based Office 365 software is also enjoying robust growth, with revenue rising 19% in Q4. Its artificial intelligence expertise, meanwhile, helps to strengthen its popular cloud platforms and enable a host of new applications. 

With its cloud businesses fueling its expansion, Microsoft should have little trouble boosting its sales and profits in the coming years. The dividend stalwart is projected to grow its earnings by 15% annually over the next five years, which should allow it to continue to deliver double-digital annual payout increases to its investors.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• Brokers upgraded JB Hi-Fi (ASX:JBH) share price and this other ASX stock to “buy” today
• Better buy: Slack Technologies vs Microsoft
• Apple, Amazon, Microsoft are bigger than EVERY unicorn combined
• Magellan (ASX:MFG) reveals best share buys for September
• Tesla (NASDAQ:TSLA) and Nikola (NASDAQ:NKLA) among most traded US shares last week

Joe Tenebruso has no position in any of the stocks mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Next Science Ltd (ASX: NXS) share price has returned from its trading halt and is dropping lower on Thursday.

In morning trade the medical technology company’s shares are down 3% to $1.28.

Why was the Next Science share price in a trading halt?

The Next Science share price was placed into a trading halt on Wednesday after announcing the launch of a $15 million equity raising.

This morning the company revealed that it has received firm commitments for its fully underwritten placement of $8 million to institutional and sophisticated investors.

In fact, the placement was oversubscribed, with strong support from existing and new eligible investors.

In addition to this, the company has received a firm commitment for an additional placement of $2 million to its existing major shareholder, Mr Lang Walker. Though, the completion of this placement is subject to shareholder approval.

These funds will be raised at $1.20 per share, which represents a 9.1% discount to its last close price.

Next Science will now push ahead with its share purchase plan, which aims to raise a further $5 million from retail investors. This will be undertaken at the lower of the placement price or a 2% discount to its five-day volume weighted average price on the closing date.

Why is Next Science raising funds?

The company is raising funds to provide it with working capital to primarily support the commercial launch of its new XPerience Surgical Rinse in the US market in the first half of 2021. This is subject to clearance by the U.S. Food and Drug Administration.

The XPerience Surgical Rinse is a sterile solution in a 500mL Polypropylene bag. The solution is used to irrigate the surgical site as a last wash replacing some of the saline rinses. It remains active for upwards of five hours and is 10 million times more effective at removing MRSA than current options.

Management believes there is a huge unmet need for the product. It notes that there are 110 million surgeries globally each year, with 48 million in the United States and 2.2 million in Australia.

Next Science’s Managing Director, Judith Mitchell, commented: “We are delighted with the strong level of support for the placement and would like to thank our existing shareholders for their continued support and we welcome new shareholders to our register.”

“We are also pleased to provide eligible shareholders with the opportunity to participate in the capital raising via the SPP. With the proceeds of this raise, we will be well placed to capitalise on the significant market opportunity offered by our XPerience Surgical Rinse and the other applications of our Xbio technology,” she concluded.

More reading

• Why the Next Science (ASX:NXS) share price is on watch

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Laybuy Holdings Ltd (ASX: LBY) share price is storming higher on Thursday after the release of an update.

At the time of writing, the buy now pay later provider’s shares are up 5.5% to $1.87.

What did Laybuy announce?

Ahead of its appearance at the Bell Potter Emerging Leaders Conference, Laybuy released an update on its revenue, gross merchant value (GMV), and net transaction margin (NTM) for the months of July and August.

According to the release, the Afterpay Ltd (ASX: APT) rival has continued its strong form over the last couple of months.

Laybuy’s GMV growth in July and August was strong and at the end of the period had reached NZ$520 million on an annualised basis. This was a 161% increase on the prior corresponding period.

This was driven by solid growth in both customer and merchant numbers. At the end of August, Laybuy had 542,000 active customers on its platform. This was up 69,000 or 14.6% since the end of June.

It was a similar story for its merchant numbers, which reached 6,180 by 31 August. This was an increase of 508 or 9% over the two months.

Pleasingly, Laybuy also reported improvements in its bad debts.

The buy now pay later provider’s defaults as a percentage of GMV reduced from 3.4% (for the 3 months to 30 June) down to 3.1% (for the 5 months to 31 August). This led to the company’s NTM continuing its upward trajectory. It recorded a NTM of 1.5% for July and August, up from 0% in FY 2020.

What else did the company reveal?

In addition to its financial metrics, the company provided an update on its merchant pipeline.

It advised: “The pipeline of retailers to be onboarded is significant and continues to develop with a mixture of large “highly recognisable” retail brands and a broad range of SME merchants.”

Shareholders will no doubt be hopeful that this underpins further GMV and customer growth in the coming months.

More reading

• Why AGL Energy (ASX:AGL) and these ASX shares just hit new lows
• Why the Laybuy (ASX:LBY) share price is tanking today
• Laybuy share price soars 47% above IPO on first day of ASX trading
• Another buy now, pay later company is listing on Monday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Expectations were high today going into Snowflake‘s (NYSE: SNOW) initial public offering (IPO). Management had twice increased the price of the offering in the week leading up to its debut.

After initially pricing the stock in a range of $75 to $85 early last week, it was increased to $100 to $110 on Monday in the face of overwhelming demand. Late Tuesday, the price was boosted again to $120, and even that wasn’t enough.

The stock began trading at 12.38 pm EDT today, opening at $245, immediately soaring 104%. It traded as high as $319 in the minutes after opening, before the overwhelming demand and massive volatility caused trading to be temporarily halted. At the close, the shares were up 112.9% to $255.

With 28 million shares being offered, and the underwriters’ option to purchase an additional 4.2 million shares in the event of significant demand, the company raised as much as $3.864 billion, making it the largest software IPO ever.

That’s not all. With more than 277 million shares outstanding, Snowflake is now valued at about $70 billion.

In an unexpected move, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) agreed to make a $250 million investment in the company using a concurrent private placement in conjunction with its IPO. The move was surprising considering the legendary investor’s long track record of avoiding IPOs.

Additionally, Berkshire agreed to purchase another 4,042,043 shares from former Snowflake CEO Bob Muglia in a private, secondary transaction. In all, Buffett spent more than $735 million to acquire 6,125,376 shares of Snowflake today. Not a bad day for the Oracle of Omaha, however, considering the shares are now worth more than $1.5 billion.

salesforce.com (NYSE: CRM) also invested $250 million in Snowflake at its IPO price, more than doubling its money by the end of the day.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

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• 2 Warren Buffett quotes you need to read this week
• Why Warren Buffett regrets buying Berkshire Hathaway

Danny Vena has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Berkshire Hathaway (B shares) and Salesforce.com and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Netflix (NASDAQ: NFLX) and Amazon (NASDAQ: AMZN) have been streaming video before digital shows and movies were cool. There’s now a plethora of online platforms available for content-hungry consumers, but a few years ago it was Amazon’s Prime Video turning heads by winning more trophies than Netflix at the 2015 Emmy Awards presentation.

Amazon is no longer a major threat to Netflix. Amazon does crank out a cult favorite series from time to time, but it’s not the hit factory Netflix has become over the years. However, pitting Netflix against Amazon as investments based solely on where each one stands in the streaming video food chain isn’t fair to the world’s largest online retailer. Amazon is naturally a much larger enterprise – one in which streaming video barely moves the needle. Let’s size up to the middle children of the FAANG stocks family to see which one is the better buy.

Center of attention

Netflix is the top dog in premium streaming video. It isn’t even a close competition, as it was commanding the couches of nearly 193 million paid streaming accounts worldwide by the end of June. When your friends are buzzing about a new show there’s a good chance it’s on Netflix.

Amazon is the much larger overall company. It has delivered $322 billion in revenue over the past four quarters, towering well above Netflix with its nearly $23 billion in trailing top-line results. Amazon is the country’s second-most valuable public company by market cap. We mostly know the company Jeff Bezos built for its online storefront, but between its AWS cloud computing platform and its Whole Foods Market grocery store chain, Amazon is also a force in new tech and old trades. 

Neither stock is cheap by conventional valuation measuring sticks, but they are undisputed growth darlings that have earned their market premiums. I usually wait until the end of these columns to crown the winner, but I’m going to tap Amazon as the better buy here early – and wrap up by explaining my thought process. 

Let’s start with growth. The assumption may be that the more nimble Netflix is growing faster than Amazon, but that’s not the case these days. Revenue climbed 21% higher in Netflix’s latest quarter, but net sales at Amazon during the same three-month period clocked in 40% higher. A popular narrative is that Netflix is the stock to own in the new normal, but it’s actually Amazon that has been able to accelerate its business in the wake of the pandemic. 

Now, let’s talk about moats. Netflix has a stronger moat than naysayers think. It should have nearly 200 million paying customers by the end of this year, and that’s the kind of scale that makes content cheaper to acquire on a per-subscriber basis. It’s also where content creators want to pitch their shows and movies. There are a lot of streaming video services these days, but Netflix continues to dominate.

Amazon also has a great moat. With more than 150 million Amazon Prime members worldwide, it’s the first place people go when they need to buy something online. Brick-and-mortar chains may be beefing up their e-commerce initiatives, but Amazon’s only widening the gap with every passing quarter. 

Both companies are built to thrive in the current climate, and I expect both to beat the market. However, despite owning Netflix personally I have to give the nod to Amazon here. It’s the least likely of the two companies to be disrupted. Amazon also has the more compelling valuation despite offering similar long-term growth potential. Revenue is expected to slow to the high teens in 2021 for both dot-com darlings. They should both be winners, but Amazon is the better buy right now.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

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• Apple, Amazon, Microsoft are bigger than EVERY unicorn combined
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• 3 exotic ASX tech ETFs you might want to add to your portfolio today

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rick Munarriz owns shares of Netflix. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Netflix and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool Australia has recommended Amazon and Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Netwealth Group Ltd (ASX: NWL) share price will be on watch this morning after the investment platform provider announced a strategic investment.

What did Netwealth announce?

Netwealth announced a strategic investment and partnership with specialist fintech data solutions provider, Xeppo.

The company has purchased an initial 25% equity stake in Xeppo, with the option to increase its stake to 50% in the future. While no details have been provided in respect to how much Netwealth is paying for the stake, it advised that it is not material.

According to the release, Xeppo specialises in connecting, matching, and reconciling data from a wide range of sources to support the wealth management, accounting, and mortgage industries. Its technology allows users to better manage client relationships, monitor compliance, and drive new business and revenue opportunities.

Why is Netwealth investing in Xeppo?

Netwealth’s joint managing director, Matt Heine, explained the reasons behind the company’s investment in Xeppo.

He said: “A key element of Netwealth’s strategy is to expand an enrich the data which underpins our current and future technology and which sits at the core of our ‘whole of wealth’ and client portal offering.”

“From our recent research, we found that advice firms on average use between 12 and 15 technology systems in their business, all of which have different data models, significant data discrepancies and often overlap from a features perspective. For example, the Netwealth platform captures customer details as does an advice firm’s CRM, planning software, fact find and client portal.”

The managing director believes that its investment in Xeppo can help solve this problem.

He concluded: “Working closely with Xeppo can solve this challenge and enable systems to better connect and integrate with each other driving business efficiency and great client experiences.”

Finally, in conjunction with this investment, the company advised that it will be expanding its current integrations to support two-way data feeds between accounting and financial planning systems. This includes those offered by Bravura Solutions Ltd (ASX: BVS) and Xero Limited (ASX: XRO).

More reading

• ASX 200 rises 0.8%, Treasury Wine Estate shares turn sour
• Netwealth share price on watch as net profit surges 22%

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of and has recommended Bravura Solutions Ltd. The Motley Fool Australia owns shares of Netwealth. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Are you looking to buy some blue chip ASX shares for your portfolio this week?

If you are, then I think you should look at the ones listed below. I believe all three have the potential to generate solid returns for investors over the next decade.

Here’s why I would buy these ASX blue chip shares today:

Cochlear Limited (ASX: COH)

The first blue chip ASX share to consider buying is Cochlear. It is the global leader in implantable hearing devices. I believe it has very strong growth potential over the 2020s thanks to its exposure to the ageing populations tailwind. I expect this tailwind to lead to solid demand for its hearing products over the next decade and underpin strong earnings growth. This could make the Cochlear share price a long term market beater.

CSL Limited (ASX: CSL)

Another quality blue chip ASX share to consider buying is CSL. It is the biotherapeutics giant behind the world class CSL Behring and Seqirus businesses. Over the last decade CSL has grown its earnings at a consistently solid rate thanks to the strong demand for its therapies. The good news is that I expect more of the same over the next 10 years. Especially given the expected surge in demand for influenza vaccines in the coming years because of the pandemic and the increasing demand for immunoglobulins. Supporting its growth will be its research and development pipeline. This has a number of therapies under development that have the potential to generate billions of dollars in sales.

Goodman Group (ASX: GMG)

A final blue chip ASX share I would buy for the long term is Goodman Group. I think the integrated commercial and industrial property company is well placed for growth thanks to its high quality portfolio of assets. This portfolio comprises strategically located modern, high quality properties in key gateway cities around the world. Management notes that these properties have shortened the distance between businesses and consumers and put its customers ahead of the market. A testament to the quality of these assets are its tenants. Goodman counts the likes of Amazon, DHL, and Walmart among its tenants.

More reading

• 3 retirement myths you can’t afford to believe
• Top brokers name 3 ASX shares to buy today
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• BrainChip (ASX:BRN) and Zip (ASX:Z1P) were among the most traded shares on the ASX last week
• 4 of the best ASX 200 shares to buy in September

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and CSL Ltd. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Investors interested in gaining access to the stock and bond markets currently enjoy a wide variety of possibilities as the universe of exchange-traded funds (ETFs) has grown. For the most part, this growth in low-cost, easy-to-access ETFs has been a boon for investors. However, while gaining access to niche sectors of the market through these products has never been easier, the risk to investors getting burned in some of these funds has increased.

As the popularity of exchange-traded funds has grown, providers have begun to create more intricate securities. In general, ordinary investors should avoid these less-understood funds. Some of these newer, more complex products come with higher risks and are not appropriate for the average investment portfolio.

Understanding the difference between standard and complex funds

Most investors have a strong grasp on how exchange-traded funds operate. In a standard ETF, the value of the security will correlate exactly with the value of an underlying basket of stocks or bonds. The SPDR S&P 500 is a good example of a standard fund.

This is not necessarily the case with more intricate securities. These more complex products go beyond simply imitating an underlying basket of stocks and bonds. An example is the Proshares UltraPro Short S&P 500, which utilizes debt, also known as leverage, in their investments to augment their profits (or losses). The added complexity is what makes an investment like this potentially dangerous.

Another example of this exotic ETF product is the United States Oil Fund (NYSEMKT: USO), which attempts to track the performance of a global oil price index. In this case, the security utilizes futures contracts in order to achieve the performance of the underlying market. However, the value of futures contracts can be affected by many factors that have no correlation to the oil market, such as interest rate levels and time until expiration. It is quite possible that the security’s value could be negatively affected by factors that have nothing to do with movements in the oil market.

In fact, many investors lost money in the USO back in April as front month futures contracts went to zero during upheaval in the oil markets. This was a situation that the oil market (and its investors) had never experienced before.

How investing in these complex securities can go wrong

It is difficult, if not impossible, for ordinary investors to fully understand the underlying risks and how these instruments are going to perform under different market conditions. This is particularly the case in extremely volatile markets like the COVID-19 financial crisis.

An example of this involves long/short funds, such as the ProShares Long Online/Short Stores (NYSEMKT: CLIX). Long/short funds are patterned after an institutional hedge fund strategy that aims to buy stocks that they believe have a strong chance of increasing in value and sell stocks short that they believe should lose in value.

In theory, investors can expect this strategy to do well during periods of volatility, like we just experienced in the COVID-19 crisis. Todd Rosenbluth, head of ETF and mutual-fund research at CFRA said, “This seemed like it was a great environment for long-short strategies as we saw U.S. equities fall into a bear market and subsequently recover much of the losses.” However, that did not happen. As Mr. Rosenbluth points out, “The majority of funds in the category lost money, some substantially.”

Understanding the underlying risks is challenging

Many of these products have been created to track the performance of markets which historically have been the domain of expert institutional investment professionals. These professionals have extensive research staffs and fully understand the risks that they are undertaking. Unfortunately, this is not the case for most ordinary investors.

Global oil markets and long/short strategies are just two examples of this. Case in point, many professional oil traders warned investors to avoid trading oil funds during the market upheaval in April. Those that did not heed this warning lost money.

Exchange traded funds are an amazing innovation that help investors gain quick and inexpensive access to broad market diversification. However, it can be extremely difficult for ordinary investors to fully understand the risks of the more complex securities. If investors do not fully understand the risks and rewards of a particular strategy, it is best not to invest at all.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Investors should avoid getting burned by complex ETFs appeared first on Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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