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The best way to achieve market returns is to get into a product that traces the market, right?

So I have found two such potential products to trace the ASX 200. The first is an ETF, STW.AX (SPDR 200 Fund) and the second is a CitiFirst Australian Index MINIs on the ASX 200 (eg: XJOKOJ).

My question is, what are the advantages and disadvantages of the Index MINI over the ETF?

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    One is leveraged, the other is not. – littleadv Apr 6 '13 at 6:33
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I think it depends on what your strategy is.

I think if you are looking at a buy and hold strategy the ETF might be a better option.

However, if you were trying to time the mark and had a shorter term view, then the MINI would be better as it allows you to go long when the market is rising and short when the market is falling.

There would generally be a higher risk with the MINI due to the gearing, but this is somewhat minimised due to the in build stop loss, meaning your losses are limited to the stop loss level. The gearing also allows you to free up capital to invest elsewhere.

I think whichever product you use you should educate yourself fully on all the aspects of that product before using it, and have an appropriate strategy for that product. You should never go into any investment with your eyes closed.

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If your goal is to achieve market returns, the appropriate product is the SPDR 200 Fund. This is appropriate if you are investing for weeks, months, or years.

You should think long and hard before using leveraged ETFs, such as the CitiFirst Australian Index MINIs. They are definitely the right tool for some investment strategies, but are generally a poor match for buy-and-hold. Investopedia.com has a great article on leveraged etfs. In summary, you may want to use them to capitalise on daily movements.

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  • Does this product exhibit the same phenomenon as the leveraged ETFs? Namely, that over time, the volatility eats away at the actual return, as returns are daily? – JTP - Apologise to Monica Apr 6 '13 at 14:58
  • @JoeTaxpayer, the MINIs are not an ETF, they are a special type of Warrant, so mirror the underlying security or index. The gearing can vary depending on the series you choose but can be as high as 95%. There are no management fees but there is a small interest charge which gets added on over night (approx. $0.20 for a $10,000 investment due to the gearing). They have a built in stop loss in them, there are calls and puts (so you can go long or short) and market makers ensure their liquidity in the market. – Victor Apr 6 '13 at 21:23
  • @victor - I know. Chris compared them, not I. Specififically, I asked if this product were subject to the same issue as leveraged ETFs. Admittedly, I'm unfamiliar with the MINI, but I do know that ETFs which are leveraged offer a daily 2X, but after a year, the ETF will NOT return 2X what the underlying asset did. – JTP - Apologise to Monica Apr 6 '13 at 22:21
  • @JoeTaxpayer, I think that would be the case with anything geared, as when the market goes down your losses are multiplied (as are gains). As an eg. on the 27 March the ASX200 was 4956, on Friday 5 April is was 4894, a fall of 1.25% (62 points). During that same period the price for XJOQOA went from $3.53 to $2.84, a fall of 19.26% ($0.69). The MINI needs to increase by almost 24% to reach breakeven whilst the index would only have to rise by 1.27%. But in reality the index would only need to increase by 70 odd points for you to be at breakeven on the MINI (due to interest charges overnight). – Victor Apr 6 '13 at 23:05
  • I don't know what 'geared' means. A pure futures contract does not suffer from this. It has other issues, cantango for example. A specific contract while bought on margin is not the same as the leveraged ETF phenomenon that Chris referenced. – JTP - Apologise to Monica Apr 7 '13 at 0:46

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