Why? For the same reason there aren’t nearly enough investors making options plays. Because they don’t understand them.

It’s a shame. Understanding these securities could be integral to your financial freedom. Today, we’ll explain how REITs work and show you the best REIT ETFs to watch.

What is a REIT?

A REIT is similar to an ETF or a mutual fund in that it pools investor money. Whereas a traditional fund is likely buying stocks or bonds, a REIT uses that money to invest in different real estate properties and assets.

The idea behind any investment is that the security will gain value over time. Just as real estate tends to grow more valuable over the years, so will a REIT. The REIT also collects rent from its tenants and that rent is distributed to investors in the form of a dividend. You can think of a REIT as a big landlord.

One advantage to investing in REIT ETFs is that they provide the kind of income you might receive investing in real estate plus the liquidity of securities like stocks and bonds. This is especially true when you pool the investment trusts together into an exchange-traded fund.

Another benefit is that REIT shareholders get real estate exposure without the headaches that come with being a landlord. REITs usually manage larger complexes like apartment buildings, warehouses, housing developments and hotels.

It is important to note that the risk profile for investing in a REIT is a bit different than direct real estate investment. On the one hand, the returns tend to be lower than if you actually purchased a building. Management and fund fees cut into returns. But on the other hand, you take on less risk.

Now that we understand what a REIT is, let’s take a look at the ETFs in particular. 

What is a REIT ETF?

While a REIT is a company that owns and operates real estate to produce income, a REIT ETF invests in REITs and other securities, and passively tracks indexes for the larger real estate market. An ETF helps protect investors even more from the downside risk of purchasing a real estate asset directly or even just one REIT. A REIT ETF is instant diversity.

Things to Research Before You Invest

• Assets Held – The old investment saying “buy what you know” comes into play here. You need to know what you’re buying. This means that you need to understand the underlying assets.
  
  The individual holdings of a particular ETF may include both REITs and REIT stocks. REIT stocks are equities that meet all of the requirements needed to be classed as a REIT.

• Fees – You know that feeling you get when you buy a concert ticket and Ticketmaster hits you with what feels like a billion additional fees above the face value price? Trust me, it’s not any more fun when it comes to investing in an ETF.
  
  Now, the good news is that many REITS tend to charge lower asset management fees than, say, mutual funds. Nevertheless, you have to be careful as this doesn’t hold in every instance.
  
  The best way to understand whether or not you are being ripped off by management fees is to compare a few similar REIT ETFs and look at the fee schedules. If one fund seems exorbitantly high, it probably is.
  .
• Management – I’ve always found when looking at stocks that a company is only as good as its management team. Lousy management can bring down a firm.
  
  Its similar with funds. If the fund manager is no good, you aren’t going to earn strong returns and may even lose significant money.
  
  Not all fund managers are created equal. They run the gamut from famous, large companies with sterling reputations to little-known companies that may vary in quality.

Because of these factors, and others, an individual REIT’s performance can vary widely. A REIT ETF will minimize that volatility by providing broader exposure. Investors should consider including the funds for a well-diversified portfolio. Here are the top four REIT ETFs to watch in 2020:

Best 4 REIT ETFs to Watch Right Now

No. 4: iShares Residential Real Estate Capped ETF (NYSE: REZ)

• Assets Under Management: $501 million
• Expense Ratio: 0.48%
• 5 Year Total Return (Cumulative): 9.12%

iShares is a giant in the ETF space, and we’ve featured two of its REIT ETFs here. The iShares Residential Real Estate Capped ETF is a smaller ETF, managing just $500 million in assets. But, as opposed to the more generalized REIT ETFs managed by Schwab and Vanguard, this is a specialized fund.

The iShares Residential Real Estate Capped ETF lets investors narrow their focus on the residential real estate market. This REIT has exposure to apartment buildings, multifamily properties, senior living communities and assisted living facilities. By specializing in residential real estate, investors avoid the risks specific to commercial real estate. The fund’s top holdings include Welltower (NYSE: WELL) (9% of holdings), Public Storage (NYSE: PSA) (8% of holdings), and Equity Residential (NYSE: EQR) (8% of holdings).

No. 3: Schwab U.S. REIT ETF (NYSE: SCHH)

• Assets Under Management: $6.1 billion
• Expense Ratio: 0.07%
• 5 Year Average Annual Total Return: 6.28%

The Schwab U.S. REIT ETF tracks some of the country’s biggest REITs. It holds REITs specializing in industrial properties, shopping malls, healthcare properties, self-storage facilities, residential homes and office buildings. The fund also holds about 115 stocks, which is fewer than the Vanguard Real Estate Index Fund ETF Shares’ 200 stocks.

This a straightforward fund. It is low-cost with a 0.07% expense ratio, which means bigger returns for investors. It is dedicated to REIT stocks and nothing else. There are no mortgage REITs to be found here. Like the iShares Residential, it has large stakes in Welltower, Public Storage and Equity Residential, along with significant holdings of companies like Prologis (NYSE: PLD) (8%) and Simon Property Group (NYSE: SPG).

No. 2: iShares Mortgage Real Estate Capped ETF (CBOE: REM)

• Assets Under Management: $1.47 billion
• Expense Ratio: 0.48%
• 5 Year Average Annual Total Return: 9.08%

The other three ETFs listed here own equity REITs. But the iShares Mortgage Real Estate Capped ETF, as its name suggests, owns primarily mortgage REITs. These work by buying mortgages and becoming the financier for real estate projects. They generate income by earning interest on those investments.

Mortgage ETFs tend to have very high dividend yields. In fact, dividends make up a huge portion of the iShares Mortgage Real Estate Capped ETF’s returns. This fund, and all mortgage REIT ETFs, are susceptible to volatility because of their dependency on interest rates. Mortgage REITs need to borrow money, so when the fed lowers interest rates, these funds will perform better.

The share point is currently down about 1 1/2 points from its past year high of $45.62. 

No. 1: Vanguard Real Estate Index Fund ETF Shares (NYSE: VNQ)

• Assets Under Management: $70.12 billion
• Expense Ratio: 0.12%
• 5 Year Total Average Annual Return: 7.16%

The Vanguard Real Estate Index Fund ETF Shares is simply the biggest and best REIT ETF on the market. Although the fund was beating the S&P 500 through November, it’s experienced a drop-off of late. Over the past year, it has grown by about 18.5%, compared with 26% for the broader market.

The Vanguard Real Estate Index Fund ETF Shares holds 185 different REIT stocks as of November 30. Retail, residential, healthcare and office REITs also make up a significant portion of the fund’s holdings.

Its holdings include some of the biggest players in the REIT industry like American Tower Corp. (NYSE: AMT), Simon Property Group (NYSE: SPG) and Equinix (Nasdaq: EQIX). Even more diversity comes from holdings such as hotel and resort REITS, industrial REITs, and even real estate operating companies.

Action Plan

All in all, REIT ETFs offer investors an easy way to get in on the lucrative world of real estate investing. And these are four of the best REIT ETFs in the business to watch as we go further into 2020. For more valuable information on ETF investing, check out our ETF investing page.

The post Best 4 REIT ETFs to Watch in 2020 appeared first on Investment U.

Why You Need Personal Financial Planning

Plans hold you accountable, which can improve your financial wellness. Moreover, having a plan can give your life structure and meaning, something anyone can benefit from.

And according to a survey from CNBC, 75% of Americans are winging it when it comes to their financial planning. If that doesn’t worry you, it should. Are you one of them?

By creating a personal financial plan, you are making an investment in yourself and your future. And you don’t need to consult an expensive certified financial planner either. In fact, you probably shouldn’t. If you diligently follow these seven steps, you can create your own custom personal financial plan in no time.

The 7 Steps to Personal Financial Planning 

1. Write down your goals
2. Establish your net worth
3. Create an emergency fund
4. Determine a realistic budget
5. Eliminate toxic debt
6. Utilize tax breaks
7. Start investing.

1. Write Down Your Goals

Personal financial planning is a lot like solving a puzzle. The pieces of the puzzle represent expenses, purchases, debts, investments and other aspects of your financial situation. The picture on the box represents your goals.

To solve a puzzle, you need the pieces to fit together precisely. 

When it comes to personal financial planning, that’s the mindset you need to have. That’s why it helps to use the acronym S.M.A.R.T. I’ve explained S.M.A.R.T. goals more extensively in an article about wealth creation, but let’s briefly break them down here:

S.M.A.R.T. Goals for Personal Financial Planning

• S stands for Specific. The more specific your goals are, the more likely you are to achieve them. Don’t just say, “I want to be wealthier” or “I want to pay off my mortgage.” Say, “I need to increase my mortgage payments by x dollars per year to pay off my debt fully in five years.”
  .
• M stands for Measurable. A measurable goal has a clear definition of success. You either solve the puzzle or you don’t. There is no in between. So whether you are trying to cut your expenses down by $1,000 per month or you want to find $5,000 in additional investment money next year, make sure you can numerically measure your progress.
  .
• A stands for Agreed upon. When you include a partner or family member in your personal financial planning, you are more likely to stick to your goals. It creates a sense of accountability for you. It also gets buy-in from them. Both factors will help you in your personal financial quest.
  .
• R stands for Realistic. If your goals aren’t realistic, then you’re setting yourself up for failure. The difference between a realistic and an unrealistic goal could be a small change. For example, if paying off your mortgage in the next 10 years is impossible, then make it 15 years. Be honest with yourself.
  .
• T stands for Time frame. By setting a goal with a time frame you add a sense of urgency. Deadlines motivate people to use their time efficiently and effectively.

2. Establish Your Net Worth 

Personal financial planning is creating a road map to success. So you have to know where you are in order to get to where you want to go.

First make a list of all your assets – this includes the money in your bank account, money put to work in an investment portfolio, real estate and personal property. Even cars. Every asset counts when calculating your net worth.

Then make a list of your debts – this includes your mortgage, credit card balances and loans.

Subtract your debts from your assets and you have your net worth. If this is a positive number, then you’re in a better position than many Americans. If it is a negative number, don’t worry. That is not uncommon. It just means you have your work cut out for you and that you can’t take your personal financial planning lightly.

3. Create an Emergency Fund

Once you’ve established your net worth, it’s time to set aside some money for life’s many unexpected expenses. You don’t want a medical bill or a car repair to wipe out all of the financial planning you’ve done so far.

According to a survey from Bankrate, nearly 1 in 4 Americans don’t have any emergency savings. Not having an emergency fund is dangerous. When unplanned expenses like car troubles, home maintenance or hospital bills come up, you don’t want to have to go into debt.

Typically, an ideal emergency fund will cover three to six months’ worth of living expenses. Financial experts generally suggest you put away 20% of your paycheck every month toward a savings account.

Ideally, you’d be able to take another small percentage of your paycheck and put it toward this separate emergency fund. You don’t want to have to dip into your savings account, or worse, go into debt over an unplanned issue.

4. Determine a Realistic Budget

A realistic budget is crucial to personal financial planning. The de facto rule for budgeting is the 50/20/30 rule. Senator Elizabeth Warren (I know, I know, believe me) popularized it in her book “All Your Worth: The Ultimate Lifetime Money Plan.” Here’s the breakdown:

Needs

Half of your income should go toward your mortgage, rent, car payments, groceries, insurance, health care and other necessary expenses.

Savings

Twenty percent of your income should go toward your savings. Building your savings is the crux of your personal finances.

Wants

The remaining 30% of your income can be allocated toward all other nonessential items. This includes tickets to the movies, new clothing, tech gadgets and all other items that aren’t absolutely vital.

5. Manage and Eliminate Debt

Not all debt is bad debt. Some debt can work in your favor. Mortgages, for example. If you are able to pay off your mortgage on time it can boost your credit score. High-interest debt, like credit card debt, is what you need to avoid. 

When you have high-interest debt, the best thing you can do is to pay it off as quickly as possible. To manage your high-interest debt try following the 28/36 rule. Put up to 28% of your pretax income toward housing expenses, and avoid putting more than 36% of your income toward all other debt.

Mortgage lenders often use this rule to assess someone’s ability to pay off the mortgage. If you can abide by the 28/36 rule you are in a good position to be approved for a mortgage and other lines of credit.

6. Utilize Tax Breaks

The tax code is not only remarkably complicated, but it’s also always changing.

For example, the Tax Cuts and Jobs Act of 2017 changed the number of deductions, lowered tax rates and expanded credits for 2018 and beyond. That act altered the tax situations of many Americans.

To make sure you’re prepared for the new year’s tax season, check in with the IRS’s tax reform page. You can review your withholdings, estimated taxes and any tax credits that you may have qualified for this year. Also, taking advantage of tax-sheltered accounts like IRAs and 401(k)s can help you avoid Uncle Sam for a little longer.

To get the most in-depth perspective on your tax situation, checking in with an accountant is generally a smart decision.

7. Start Investing to Build Your Wealth through Personal Financial Planning

The point of personal financial planning is to build wealth and maybe even achieve financial independence. Another aspect of personal financial planning is avoiding losses. And when you’ve worked so hard to budget and save, the last thing you want to do is lose money in the market.

One investing strategy that has lower risk but provides steady income: investing in high-quality dividend stocks. Dividend companies usually pay their shareholders quarterly. So investors who build up a portfolio of dividend stocks can collect a steady income.

Our Chief Income Strategist, Marc Lichtenfeld, always provides great insight into the world of dividend investing. Click on his name to see some of his excellent work on dividends and income investing.

Final Thoughts on Personal Financial Planning

You don’t need a certified financial planner to start planning your finances. You have all the tools to do so your own. Investment U is one great resource you can use to start accomplishing your personal financial goals today. 

Increasing your financial know-how is crucial to effective at personal financial planning. To learn more about managing your money, as well as some fantastic investing ideas, sign up for our free e-letter below.

The post Personal Financial Planning: The 7 Step Guide appeared first on Investment U.

The first indication that Robinhood would go public came when it brought on longtime Amazon executive Jason Warnick to be its CFO. That was a year ago, and today Robinhood remains a private company.

However, Robinhood has not been opaque about its plans for an initial public offering. One of the company’s co-CEOs, Baiju Bhatt, said last year that an IPO is “something we think is very much in the future. Being a public company closely aligns with our mission.”

So, what exactly is Robinhood’s mission?

Robinhood’s Mission

When Warnick was introduced as the company’s first CFO, he echoed Robinhood’s mission in a public statement. He said he looked “forward to advancing our mission to democratize America’s financial system.”

The rest of the Robinhood mission statement reads, “We believe that everyone should have access to the financial markets, so we’ve built Robinhood from the ground up to make investing friendly, approachable and understandable for newcomers and experts alike.”

By offering zero-fee stock trading, Robinhood lowers the barrier to entry for investors. And since its founding in 2012, the company has successfully pulled in new users.

Robinhood is used by investors of all ages, but it is immensely popular with the younger crowd.  It is essentially a one-stop shop for millennial investors. And the platform is growing like wildfire.

In February of 2018, Robinhood had 3 million users. In May of that year, that number grew to 4 million. Then in August, it was 5 million. By October 2018, the platform had 6 million users.

That was one year ago, and there aren’t any updated user metrics available to the public. The Robinhood user base is likely much larger now. And a Robinhood IPO could push the company into the spotlight and attract even more users.

Robinhood’s Newer Features

Options Trading

In 2017, the platform incorporated options trading capabilities. This was yet another blow to trading services like Charles Schwab (NYSE: SCHW), E-Trade (Nasdaq: ETFC) and TD Ameritrade (Nasdaq: AMTD), as Robinhood offers these tools at a much lower price than these traditional brokerages. Robinhood’s option trading feature is very straightforward with few bells and whistles. Nonetheless, it is another tool Robinhood has to rope in investors.

Cryptocurrency Trading

A year ago, it seemed that Robinhood wouldn’t venture into cryptocurrency trading.

“I wouldn’t say that we’re anticipating a massive shift from stocks to cryptocurrencies,” Vladimir Tenev, Robinhood’s co-founder, stated last October.

It seems Tenev realized the benefits of breaking into the emerging crypto market. Three months after he made that statement, Robinhood launched its cryptocurrency trading service. As with its options and stock trading services, it is commission-free.

“Now it’s become more and more clear [that bitcoin is an] investing asset,” Tenev remarked. Crypto is not only an asset, but also an exceedingly popular one. Robinhood had 1 million users on the cryptocurrency trading feature within five days of its launch.

Will Robinhood IPO in 2019?

As we mentioned earlier, last year a Robinhood IPO seemed imminent. A year later, Robinhood remains a private company.

Plus, the company recently finished another late-stage funding round. The Series E round raised $323 million based on the company’s $7.6 billion valuation.

So, the question remains: Will Robinhood IPO this year?

It’s difficult to say. Certainly, hiring Jason Warnick as the company’s CFO suggested that a public offering was on the horizon. But the funding round suggests that a Robinhood IPO could be months down the road.

Will the Robinhood IPO Be a Good Investment?

If and when Robinhood does IPO, it may not even be an investment worth considering. As we’ve seen with the many tech IPOs in 2019, these companies tend to be overvalued. Robinhood does indeed offer a great service, as does Uber. But that didn’t stop Uber’s stock from underperforming. The same fate could await Robinhood.

Plus, much of the money made in startup investing is made pre-IPO. Institutional investors can buy millions of dollars’ worth of shares at a reduced price. By the time the company goes public, the share price is often inflated.

However, Robinhood does have a solid business model and offers an innovative technology.

It is a disrupter to traditional trading services, much like Netflix was a disrupter to the video rental business. It worked out pretty well for Netflix, why shouldn’t Robinhood find success?

Time can only tell. Until Robinhood IPOs, retail investors can only continue to watch from the sidelines.

Action Plan 

IPO investing can be risky. You may hit a home run or strike out completely. With IPO ETFs, you can maximize your exposure to burgeoning companies while minimizing the risk. It’s another great ETF investing opportunity.

There are so many investment opportunities out there it can be hard to keep track of them all. Sign up for our free e-letter below for timely and concise investing news!

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Wealth creation can seem like a tall order. When it’s hard enough to pay the bills, growing your nest egg can feel daunting. But plenty of people build their fortunes from humble beginnings.

Take John D. Rockefeller for example.

He got his first job as an assistant bookkeeper making only $16 a month. Today, he is recognized as the most successful business tycoon in American history. You might not become the next Rockefeller, but you can take the right steps to build your wealth. You just need the right plan, and you need to stick to it.

Wealth creation boils down to these four essentials:

• Stick to your goals
• Eliminate debt
• Increase income
• Start saving.

By following these steps to wealth creation, you can begin the path toward financial freedom.

1. Stick to your S.M.A.R.T Goals for Wealth Creation

The steps to wealth creation can be difficult. But setting goals will help you keep your eye on the prize. The acronym S.M.A.R.T is helpful. Let’s break it down letter by letter:

S stands for specific. The more specific the goal, the more likely you are to achieve it. These are three important questions to ask yourself: What are my goals? Why do I want to achieve them? Who are the people involved in my goal? To succeed in wealth creation, you must address the specifics. There are several great budgeting apps to help you set specific goals.

M stands for measurable. A measurable goal has a clear definition of success or, in other words, a target. You either hit the target or you don’t, there is no in between. Rather than saying “I want to be rich!” try setting a fixed number you can strive for.

A stands for agreed upon. By including other people in your goals, you may be more likely to achieve them. For example, if you are married and planning your retirement, your spouse is included in those plans. Agreeing upon goals with other people holds you accountable. Accountability is vital to keeping with your goal of wealth creation.

R stands for realistic. It is great to dream big, but it is better to set realistic goals. If you set a goal that is unrealistic, it becomes easier to give up on it. But if you set an achievable goal, you are more likely to find ways to make it happen. The difference between a realistic and an unrealistic financial goal could be a simple tweak. For example, saving $10,000 is realistic, but you might need two years instead of one to achieve that goal.

T stands for time frame. By setting a goal with a time frame you add a sense of urgency. Deadlines motivate people to be more intelligent with their time. Time management is a crucial aspect to achieving your goal of wealth creation.

2. Eliminate Debt

Taking on debt reduces your ability to build a nest egg. In a perfect world, you should steer clear of all debt. But some expenses, like education and medical bills, are necessary. Here are a few strategies that can help you eliminate your debt…

1. Stop the bleeding. If you pay most of your income to creditors, then the first step toward recovery is to stop adding debt. Some people find that the best way to stop adding debt is by using cash only. That way you cannot spend more than you own.
2. Create a new budget. After you’ve put the credit cards away, it is time to reconsider how you are spending the money you have. The 50-20-30 rule of budgeting is a great guide. Put 50% of your income toward fixed expenses like mortgages, rent and car payments. Put 20% into savings. And put 30% toward all other living expenses. That 30% zone is where you have to be honest with yourself about what you really need.
3. Climb down the debt ladder. With your new budget, it is time to start paying off debt. You have to decide whether you’d like to apply the payments evenly across all your accounts, or pay off the account with the highest interest rate. If you choose to pay off one account with high interest rates, make sure you can also make the minimum payments on your other accounts. Once you pay off the account with the highest interest rate, start paying off the next account. Eventually you will pay off all of your debt.

3. Increase Income

The most obvious step to wealth creation is increasing your income. There are two forms of income: active and passive. Active income is income you receive from performing a service. Anybody who has a job receives active income. Passive income is income received from enterprises in which a person is not actively involved. Passive income could be earnings from a rental property, dividend stocks or money in accounts accumulating interest. Wealth creation requires a hybrid of active and passive income. Or, as Warren Buffett famously said, “If you don’t find a way to make money while you sleep, you will work until you die.”

Active Income

You can increase your active income by earning a raise. In order to increase your income, you must increase your value as an employee. What are you offering the company? As your value goes up, so does your pay. Follow these rules to increase your value and increase your active income…

1. Meet expectations. Before you start trying to add a new skill, make sure you are doing what is expected of you. Talk to your manager to ensure that you are on the right track. You might discover work expectations you were not aware of.
2. Find areas to excel in. Determine a list of areas in which you could improve and focus your efforts there. Be sure to consult with your manager, because if you are going to put more effort into something you want to choose the right area.

Passive Income

There are so many different ways to accumulate passive income. But some are better than others. For example, a savings account accumulates interest at such a low percentage rate that the returns are negligible. The best way to increase your passive income is through the stock market.

1. Investing is the biggest key to building your wealth. You can grow your wealth exponentially by investing in the stock market. Many people find investing to be intimidating. As a result, only 54% of Americans own stocks. Don’t let unfamiliarity prevent you from making money in the market. Get educated about investing here, and start building your wealth today.
2. Dividend stocks offer a steady stream of passive income. Most companies pay out a share of their earnings to their shareholders. Those payouts are called dividends, and they can provide you with a steady income. Most dividend companies pay their shareholders quarterly. So if you space out your dividend payment dates you can meet your expenses throughout the year.
3. Owning real estate is one of the oldest forms of passive income. The real estate market always experiences ups and downs, but for the most part real estate is a great way to generate long-term returns. Once you have reliable tenants you can expect a steady income stream.

4. Start Saving

You will only make so much money in your life. That is why you need to make the most of every dollar. Brigham Young is noted for saying “If you wish to get rich, save what you get. A fool can earn money; but it takes a wise man to save and dispose of it to his own advantage.” It is important to save what you earn, but how you save is even more important. To maximize your saving efficiency, follow these easy steps:

Establish your short-term and long-term savings goals. As mentioned earlier in the article, goal setting is vital to wealth creation. Even more important is sticking to your goals. That is what separates the person who dreams and the person who achieves. Aim to save at least 15% of your pretax income every year.

Take full advantage of employer matches to your retirement plan. Most employers offer 401k matching programs. It is vital that you take full advantage of these programs and put as much toward your retirement plan as is financially responsible.

Supercharge your savings with tax-advantaged accounts. Tax-advantaged accounts refer to any type of account or plan that is either tax-deferred or tax-exempt. For example, IRAs and 401ks are tax-deferred accounts, while Roth IRAs are tax-exempt.

Conclusion

These four steps to wealth creation will apply to many of the big financial decisions in life. Sticking to your goals, eliminating debt and adding more income will help you become financially independent in the long run. But those everyday purchases add up too. The smaller purchases are equally as important as the big ones when it comes to wealth creation. Start by only making purchases of necessity, not desire. Stop going to Starbucks and Chipotle. Make your own coffee, prepare your own dinner.

Now you have the keys to wealth creation! It’s time to unlock your path toward financial freedom.

If you want to learn more steps to wealth creation, sign up for our free e-letter below! It’s packed with valuable financial insight.

Read Next: What is Wealth Creation?

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What Are Bonds?

Our economy runs on debt. And bonds are an important piece of the debt structure. They allow governments to function and companies to grow. Without bonds, large organizations vital to the economy would collapse.

Bonds are loans made to large organizations. And when you buy a bond you are entering into a contract. The contract is between the borrower (government entity or company) and the lender (investors like you). Bonds are usually used by government entities and companies to finance operations. Before we dive into the different types of bonds, let’s review some important characteristics of bonds.

Characteristics of Bonds

These terms are vital to understanding how bonds work.

• Face value is the amount of money the bond will be worth at maturity. In other words, it’s the contractual amount being repaid to the lender.
• The maturity date is the date on which the bond contract ends. On that date the borrower or issuer must pay the lender the face value of the bond.
• The coupon rate is the interest paid by the bond. Most bonds pay out their coupons on a semiannual basis. As an example, a 2% coupon rate on a $1,000 bond means that the bondholder will receive $20 (2% of $1,000).
• The yield to maturity is the estimated rate of return that an investor can expect from a bond. The value assumes that you hold the bond until maturity. Yield to maturity is also referred to as the redemption yield.

What are the Different Types?

There are several different types of bonds. The type of bond depends on who is issuing them, the length of time until maturity, the interest rate and the risk. Today we’ll explain the three most common types of bonds.

Government or Treasury Bonds

Government bonds are issued by the U.S. Treasury and are usually just called Treasurys. They are the highest quality bonds available because there is little risk associated with them. They are issued by the U.S. Treasury through the Bureau of Public Debt. So unless the government collapses, you can count on getting your money back. Another great advantage to Treasurys is that the interest earned is exempt from state taxes.

Types of Treasurys

• Treasury bills are short term bonds. They mature in less than one year. They are sold at a discount from their face value and therefore don’t pay interest before maturity.
• Treasury notes earn a fixed interest rate every six months. They have maturities ranging from one to ten years. The 10-year Treasury note is the most popular debt instrument in the world.
• Treasury bonds have maturities ranging from 10 to 30 years. They also have a coupon payment every six months.
• Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds. That means the principal value of the bond is adjusted according to the Consumer Price Index. They typically have maturities ranging from five to 20 years.

Municipal Bonds

Municipal bonds are issued by state and local governments to fund important operations. These include the construction of highways, schools, sewer systems and countless other public projects.

In many cases, municipal bonds are exempt from federal income taxes. And in some cases they are even exempt from state and local taxes for people who live in the municipality where the bond was issued. Municipal bonds can offer competitive rates, but they are riskier than Treasurys because local governments can go bankrupt.

Corporate Bonds

Corporations frequently issue bonds to fund expansions or large investments. Corporate bonds are riskier than government bonds because corporations are more likely to default on their debt. However, corporate bonds generally have higher yields.

The value and the risk of the bond largely depends on the financial health and credit reputation of the company issuing the bond. Junk bonds, those issued by companies with poor credit ratings, are the highest paying corporate bonds, but they are also the riskiest.

How They Work

Bonds are just loans. Ordinary citizens take out loans all the time. Without them people wouldn’t be able to afford a home, a car or an education. Businesses need to borrow money to finance new operations and grow. Often, they need more money than a bank is comfortable loaning them. So, they issue bonds.

When you buy a bond, you are simply lending money to an organization. Whether it’s a private company or a government entity. In return, the organization promises to make interest payments for the length of the bond. The interest rate, or coupon rate, is normally higher with long-term bonds. If the current interest rate is higher on short-term bonds, the yield curve is inverted. And it doesn’t happen often.

As we’ve mentioned before, the interest payments are usually made on a semiannual basis. When the bond reaches maturity, the issuer repays the principal, or the original amount of the loan.

Compared to investing in stocks, bonds are very straightforward. The risk depends on how reputable the bond issuer is. Fortunately, Treasurys are very safe. Corporate bonds are also relatively safe depending on the company.

Action Plan

Bond investing should be a part of any smart investor’s strategy. It provides diversification while hedging against some volatility in the stock market. With bonds, you can determine the level of risk you want to expose yourself to. Which is harder to do in the stock market. Plus, you can “Make a Killing… With Bonds.”

We hope this article helped you understand bonds. For more educational pieces like this, check out our financial literacy section. It is packed with valuable information that every investor should be armed with.

The post What Are Bonds and How Do They Work? appeared first on Investment U.

Money market accounts…

• Pay higher interest rates.
• Require higher minimum balances.
• Limit the number of withdrawals you can make.

Money market accounts, sometimes called money market deposit accounts, should not be confused with money market funds. A money market fund is an investment product that invests in cash or cash-equivalent securities. Money market accounts are a savings vehicle, not an investment vehicle.

When to Use a Money Market Account?

As we’ve established, a money market account is an effective savings vehicle. But it serves a different purpose than your run-of-the-mill savings account. Money market accounts are ideal for when you need to set aside a large amount of money.

Some of the most common uses for money market accounts include:

• Emergency savings.
• Saving for a large purchase, such as a car or a house.
• Holding money when you’re unsure about which stocks to invest in.

How Do They Work?

A money market account works a lot like a standard savings account.

When you open a money market account you can make unlimited deposits. In most cases those deposits can be made by check, through a mobile banking app or in person.

Withdrawals, however, are a bit more complicated.

Like with most savings accounts you are limited to six withdrawals per month. This is a federal rule known as Regulation D. Reg D is the government’s way of ensuring that banks have the reserves on hand. Plus, it is a way to encourage Americans to use their accounts as they were intended: to save money. Your bank or credit union could charge you a fee for exceeding six withdrawals.

For most money market accounts there is a workaround for Reg D. Withdrawals made in person, by ATM, by mail, or by telephone with a check mailed to the depositor don’t count towards your limit.

What are the Advantages and Disadvantages?

The biggest advantage of money market accounts is their high interest rates. Rates range from 1.8% to 2.2%. This allows you to generate income passively and safely. You won’t earn as much as you would with dividend stocks, but it is 100% risk-free.

The biggest disadvantage of money market accounts is that they require a high minimum balance and they limit withdraws. Minimum balances can be anywhere from $2,500 to $25,000. Plus, as discussed earlier, you have a limit of six withdrawals per month.

So, the best time to use a money market account is when you have a large amount of cash that you don’t need access to immediately.

How Safe are Money Market Accounts?

In short, money market accounts are very safe. Why?

• Money market accounts are deposit accounts, not investments. Investments can involve unforeseen gains and losses. A money market account, on the other hand, has a predetermined interest rate. In other words, there’s no risk of losing money.
• Money market accounts are typically insured. If the account is through a bank it is insured by the Federal Deposit Insurance Corp (FDIC). If the account is through a credit union it is insured by the National Credit Union Administration (NCUA). The FDIC and NCUA insurances cover accounts up to $250,000 per depositor, per institution. With the backing of these reputable insurance administrations, you can trust that your money is safe.

Are They Taxed?

The funds that you deposit into your money market account won’t be taxed. However, the interest you receive from those funds is taxable if it exceeds $10.

Your bank will send you a form from the IRS called a 1099-INT. The form will show your name, address and the amount of interest income you earned. Even if you don’t receive a 1099-INT from the bank, you still might be on the hook for tax payment.

Is a Money Market Account Better than a CD?

Money market accounts are often compared to CDs (certificates of deposits). Both money market accounts and CDs allow you to earn interest on your money. A CD is different from a money market account in that it is a timed deposit account. In other words, you put your money into the account with the understanding that you won’t be able to reach it for an allotted period. CDs usually range from three months to five years. After you open an account and make the initial deposit, you cannot make any additional deposits or withdrawals. The whole objective of a CD is to lock your money away and allow it to earn interest.

When deciding between a money market accounts and a CD, it all comes down to what you need. If you need to access your funds, then a money market account works best. If you need to fight the temptation to withdraw your money so it can earn interest, then a CD would suit you.

Conclusion

A money market account is a great saving vehicle. If you want to open a money market account, make sure you search for one with a competitive interest rate.

The post What is a Money Market Account? appeared first on Investment U.

As long as the U.S. remains dependent on fossil fuels, pipeline stocks could be a great investment.

Midstream pipelines connect upstream companies (the extractors of crude oil and natural gas) and downstream companies (the refiners and processors). Upstream and downstream companies usually own and maintain a smaller pipeline infrastructure. Usually, the biggest pipeline stocks are the midstream companies.

Pipelines are some of the most valuable pieces of fossil fuel infrastructure. The best pipeline companies generate billions of dollars each year. With that in mind, here are the top four pipeline stocks to watch.

Pipeline Stock to Watch No. 4: Enbridge

Enbridge (NYSE: ENB) is a Canadian-based company that operates the largest energy infrastructure in North America. Just this year, Enbridge will transport one-quarter of all North American crude oil, and its natural gas pipelines will transport 18% of all the gas consumed by the U.S. Enbridge is well-diversified because it provides infrastructure for oil, gas and oil sands transportation.

Enbridge has been paying a dividend for 64 consecutive years. Over the past 20 years, the dividend has an average compound annual growth rate of 12%. Clearly, Enbridge has been successful in the past. But can it guarantee success in the future?

Enbridge’s recent barrage of investments signals yes. The biggest way Enbridge is planning for the future is by investing in liquefied natural gas (LNG) infrastructure. U.S. energy companies alone are on track to invest $200 billion into LNG-related infrastructure.

Enbridge is taking its first steps in that direction by investing in the Rio Grande LNG project and by buying some of Royal Dutch Shell’s (NYSE: RDS.A) LNG output. Baring a merger from two other pipeline infrastructure powerhouses, Enbridge should dominate the market for years to come.

Pipeline Stock to Watch No. 3: Kinder Morgan

While Enbridge has the largest general energy infrastructure in North America, Kinder Morgan (NYSE: KMI) leads the continent with its natural gas pipeline operation. With pipelines connecting every major supply basin, the company transports 40% of all the natural gas consumed in the U.S.

Kinder Morgan dominates the transportation of refined petroleum and carbon dioxide products. The company also helps export crude oil and NGL through shipping tankers.

This market dominance shines through in Kinder Morgan’s steady, high-yielding dividend. The annualized dividend has increased over the years from $0.25 in 1998 to $1 in 2019.

And Kinder Morgan won’t have a problem securing new contracts in the future. So far this year, the company has put $5.7 billion into new expansion projects. Of those projects, roughly 80% of them were natural gas-related.

The United States is starting to lean heavily on natural gas, and Kinder Morgan will play a pivotal role in that transition.

Pipeline Stock to Watch No. 2: Energy Transfer

The biggest player in the midstream platform space is Energy Transfer (NYSE: ETP-E). The company has more than 86,000 miles of pipeline transporting natural gas, crude oil and NGLs throughout the U.S. Energy Transfer’s pipelines extend to processing, storage and export facilities.

Energy Transfer earns its revenue by the volume of product flowing through its pipelines. The company’s infrastructure carries this oil and gas from extraction to delivery. The company is involved at every stage of the process.

The company has grown over the years. It began focusing on natural gas markets but has since expanded into other areas of midstream infrastructure. And just this week, Energy Transfer finalized its deal to acquire SemGroup for $5 billion. The acquisition suggests that Energy Transfer is financially healthy, and experts believe the stock is currently undervalued.

Pipeline Stock to Watch No. 1: Williams Companies

Williams Companies (NYSE: WMB) is dedicated to natural gas infrastructure. So far this year, the company has handled 30% of America’s natural gas output. Much of that 30% is through the 1,800-mile Transco system. It’s the largest interstate gas pipeline by volume. Transco stretches from South Texas all the way to New York City. It provides gas to major hubs all along the East Coast.

Williams Companies has invested a lot of time and money to increase the capacity of the Transco pipeline system. In 2009, the system was capable of handling 8.5 billion cubic feet per day (Bcf/d) of gas, but by 2018 it was capable of 16.7 Bcf/d. The company hopes to have the capacity for 18.9 Bcf/d by 2022.

Williams Companies also has pipeline infrastructure in the Marcellus and Utica shale regions. Those regions are exporting a significant portion of the country’s natural gas, and when Williams Companies boost its presence in these areas, profit will follow.

Action Plan

The demand for pipelines is increasing rapidly. Keep an eye on these top four pipelines stocks. In the meantime, check out our article “Natural Gas Investing – An Investor’s Guide” to better understand the natural gas landscape. Also, keep an eye out on other investment opportunities like the “The Top 4 Natural Gas Stocks to Watch in 2019.“

The post The Top 4 Pipeline Stocks to Watch appeared first on Investment U.

There are plenty of reasons to invest in airline ETFs. The airline industry is relatively undervalued, and with more people flying than ever before, the potential for growth is huge.

Roughly 44,000 flights take off every day in the U.S. And last year, U.S. airports serviced around 1 billion passengers. Internationally, that number is closer to 4 billion. With fares becoming more affordable, airlines are serving more passengers and posting bigger profits

The International Air Transport Association estimates the airline industry will net $35.5 billion in profit this year. They also project the number of passengers will increase to 8.2 billion by 2037.

Airline ETFs are a great way to gain exposure to the growth of the airline industry. Plus, you aren’t vulnerable to the losses of any particular airline stock. On the whole, the airline industry has been tremendously profitable. In fact, it has been profitable for 10 straight years. And the airline industry should continue that profitable trend.

Any investor would be wise to track the airline industry. And with airline ETFs you can maximize your exposure and minimize your risk. Specifically, these are the top 3 airline ETFs to watch in 2019:

Airline ETF to Watch No. 3: iShares Transportation Average ETF (BATS: IYT)

• Issuer: iShares
• Net Assets: $517 million
• YTD Performance: +14.81%
• Expense Ratio: 0.43%
• Price: $182

The iShares Transportation Average ETF tracks the Dow Jones Transportation Average index, and a few other transportation stocks selected by the Dow Jones Average Committee. That means it has exposure to the railroad, freight, trucking and marine sectors in addition to the airline sector. The airline sector makes up about 18% of the ETF.

The iShares Transportation Average ETF includes some of the best airline stocks around: Southwest Airlines (NYSE: LUV), Alaska Air Group (NYSE: ALK), United Airlines (Nasdaq: UAL), Delta Air Lines (NYSE: DAL), American Airlines (Nasdaq: AAL) and JetBlue Airways (Nasdaq: JBLU).

Since its inception in 2003 this ETF has outperformed the benchmark by 10%. With a low expense ratio and a large range of assets, the iShares Transportation Average ETF is a solid airline ETF.

Airline ETF to Watch No. 2: U.S. Global Jets ETF (NYSE: JETS)

• Issuer: U.S. Global Investors
• Net Assets: $51 million
• YTD Performance: +2.62%
• Expense Ratio: 0.6%
• Price: $28

The U.S. Global Jets ETF is the only ETF that exclusively tracks airlines stocks. It’s a newer fund having only been on the market since April 30, 2015. This is the fund for you if you want to narrow your focus on airline companies like Delta or United. This ETF consists largely of airline company stocks, but also tracks aircraft manufacturers, terminal services and airports.

Delta Air Lines makes up the largest percentage of the fund at nearly 13%. Its other top holdings include: United Airlines, Southwest Airlines, American Airlines, Allegiant Travel (Nasdaq: ALGT), Alaska Air (NYSE: ALK), JetBlue Airways, Spirit Airlines (NYSE: SAVE) and General Dynamics (NYSE: GD).

Since its inception in 2015 the U.S. Global Jets ETF has returned 5.4%. For investors seeking airline exposure, it’s the pure play airline ETF you’ve been looking for.

Airline ETF to Watch No. 1: SPDR S&P Transportation ETF (NYSE: XTN)

• Issuer: State Street SPDR
• Net Assets: $133 million
• YTD Performance: +5%
• Expense Ratio: 0.35%
• Price: $59

The SPDR S&P Transportation ETF tracks the S&P Transportation Select Industry Index. The stocks included in this index are U.S. transportation companies picked from the broader S&P Total Market Index. The fund is weighted heavily – about 34% – in trucking stocks. But at 24%, airline stocks make up a significant portion of the fund.

This ETF keeps roughly 80% of its assets in companies from the S&P Transportation Select Industry Index. The other 20% is allocated towards non-transportation assets to help diversify the fund’s holdings. But generally, the SPDR S&P Transportation ETF’s returns should correspond to the return performance of the S&P Transportation Select Industry Index.

Since its inception in 2011 this has returned 12%. The SPDR S&P Transportation ETF is an airline ETF with low volatility and solid growth prospects.

Action Plan

ETF investing is a good strategy in general. When you start to research ETFs, you will notice there is an ETF for everything. But if you’re looking for additional securities in the travel sector, we suggest signing up for our Profit Trends e-letter below.

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