The 70s also bring back a less nostalgic activity… waiting on gasoline lines that stretched about a 1/2 mile down Route 22. Well, to be fair, it was my father that was in the driver’s seat. Nevertheless, I had to hear about it!

I bring this up now because Energy ETFs have been the hottest month-over-month investments around. And because the best of the broad-based performers in the space is a sparsely employed equal-weight ETF, Rydex Equal Weight Energy (RYE).

For those that track the differences between equal-weight indexes and market-cap indexes, the news may not be all that shocking. In fact, there is evidence to show that the results often hold up over longer periods of time as well. For instance, take a look at the 1-year returns for broad-based Tech ETFs.

Or Materials ETFs:

Or even the S&P 500:

One of the reasons that equal-weight indexing often outperforms market-cap indexing may be attributable to the nature of quarterly rebalancing. Equal-Weight ETFs like those at the Rydex Fund family rebalance quarterly… so that all components have the same effect on the overall asset’s movement. This has the inherent effect of selling high and buying low (i.e., selling the leaders higher while buying the laggards at lower prices).

In spite of the evidence that equal-weighting may add value, the lower trading volume on Rydex products may make some folks more squeamish. Thin volume can sometimes make it harder to get in or get out a desired price point.

Still, it’d be foolish to look past the Rydex family’s fund line-up. In fact, 5 more equal-weight Rydex vehicles launch on 12/8/2010, including:

Rydex Russell 1000^® Equal Weight ETF (EWRI)
Rydex Russell 2000^® Equal Weight ETF (EWRS)
Rydex Russell Midcap Equal Weight ETF (EWRM)
Rydex MSCI EAFE Equal Weight ETF (EWEF)
Rydex MSCI Emerging Markets Equal Weight ETF (EWEM)

Now, I’m not hear to tell you that these new ETFs will be sure-fire winners. Market volatility may have a lot to say about the success or lack of success going forward. I will tell you that there’s a “compelling and rich” argument to expect Rydex MSCI Emerging Markets Equal Weight ETF(EWEM) to out-hustle iShares MSCI Emerging Markets (EEM) over time; there’s an equally compelling reason to believe that Rydex Russell 2000 Equal Weight ETF (EWRS) may just nip iShares Russell 2000 (IWM) as well.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can review more ETF Expert features here.

November new home sales were no better than they were in April. Does that spell doom for homebuilders or serve up new opportunity?

Congress raised the deficit debt ceiling to $12.4 trillion. Can the U.S. dollar really handle the seemingly endless deficit spending?

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Answer? Nope. The so-called actively managed vehicles are… for the most part… poorly conceived, low-volume losers.

I’m not alone in my beliefs either. None of the existing actively-managed ETFs have sufficient assets under management. Some have already been killed off due to lack of interest. Others appear on Ron Rowland’s ETF DeathWatch.

In truth, actively managed ETFs provide few of the benefits that have made ETFs the investment vehicle of choice. In fact, while they have been trying to capitalize on a surge in ETF popularity, they have failed to capitalize on the benefits of traditional ETF investing.

What makes ETFs so fantastic? Trade-ability, Tax-efficiency, Transparency and Total Expense. (Note: I had to work hard to get another “T” in there for the low expense of passive indexing.)

In what ways do actively managed ETFs benefit investors? On trade-ability, actively managed ETFs lack sufficient volume. The bid-ask spread for funds like PowerShares Active Mega-Cap Fund (PMA) and Grail Large Value (GVT) is often as high as 0.5 -0.75%; that can add as much as 1.5% of extra expense in a round-trip trade.

On tax-efficiency, passively tracking an index means very little buying or selling, except when the index is changed. However, Actively Managed ETFs serve up plenty of trading activity… ergo, they’re not tax-efficient.

Okay, so they’re not tax-efficient anf they’re not very tradeable. They’re at least transparent, right? Isn’t that supposed to be the big difference between actively managed ETFs and Closed-End Funds?

There may be more transparency than a mutual fund that doesn’t open its books until 3 months after trades have been made. Yet where exactly is the open book on ever-changing, actively managed positions? Do you have to go to the fund managers’ web site each and every day to find out what’s happening?

The point of buying an exchange-traded index investment is so that you don’t have to check it every 5 seconds. The transparency of an index means that you know exactly what that index is… and exactly what you’re getting into!

Finally, total expense… where it’s not even close. Forget the hidden cost of bid ask spreads for a moment, and just go the expense ratio. All of the so-called actively managed ETFs cost more than the passively managed alternatives. You’re the one who has to pay for the supposed stock picking prowess. And yet, nothing in performance suggests an ability for risk-adjusted outperformance.

If you’d like to learn more about ETF investing… then tune into “In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

If economic fundamentals were as sound as the media would have you believe, insiders at Toll Brothers wouldn’t be selling shares of their own company. For that matter, conventional mortgage rates wouldn’t be back at 5% and real estate organizations wouldn’t be begging for a continuation of the homebuyer credit.

I’ve pondered the simulateneous rise in gold, U.S. stocks, and U.S. treasury bond prices. I’ve wondered how 3 very different asset classes could move in the same direction for 3+ months… and do so as the U.S. dollar drops to new depths day after day.

And I’ve finally come to a conclusion: This is the return of “a” carry trade.

No, it’s not the infamous yen carry trade, where investors borrowed the Japanese dollar at negligible interest rates to invest in the higher-yielding Australian and New Zealand dollars. This is the U.S. dollar carry trade… and it may be far more dangerous.

In the yen carry trade, you had a stable currency (yen) that yielded nothing and was easy to borrow. You borrowed from one stable G-10 currency and invested in a higher-yielding G-10 currency to capture the income difference… pretty simple; that is, things were going along smoothly until an international credit crisis caused the yen’s rapid appreciation such that investors scrambled to pay back the loans.

Today, however, the U.S. dollar is both cheap, easy to borrow, and “counted on” to fall in value. It’s replaced the yen as a preferred funding source to buy the reasonably stable Australian dollar and/or New Zealand dollar. Not only do you get the income difference, but you’re getting the appreciation of the Aussie dollar versus the U.S. dollar. It’s a double win! (At least that’s the perception!)

And therein lies the danger. Some investors around the world may ratchet up the risk by using leverage to make this investment.

Granted, the prospects for the Aussie dollar look good, as interest rates in Australia are likely to rise in the near future. And the prospects for the U.S. dollar look bad, as U.S. interest rates won’t be rising in the foreseeable future.

Nevertheless, if the U.S. dollar were to suddenly come back into favor, due to any reason (e.g., risk aversion, government intervention, policy change, etc.), investors could rapidly sell off the stocks, currencies and other assets they’ve been buying with borrowed greenbacks.

For now, though, the ETF winners of the U.S. dollar carry trade are:

1. Currency Shares Australia Dollar Trust (FXA)… 22% YTD.

2. WisdomTree New Zealand Dollar (BNZ)… 23% YTD.

3. PowerShares G-10 Currency Harvest Fund (DBV)… the only carry trade fund borrows the 3 lowest yielding currencies and invests in the 3 highest yielding currencies.

4. iShares MSCI Australia Fund (EWA)… the rapid fire ascent of the Aussie dollar is giving an even bigger boost to foreign stocks, as Australian companies earn profits in ever-appreciating Aussie dollars.

5. iShares MSCI All-World Index (ACWI). The entire stock asset class is benefiting from folks borrowing the cheap U.S. dollar around the world and putting that money to work. For now!

If you’d like to learn more about ETF investing… then tune into ”In the Money With Gary Gordon.” You can listen to the show “LIVE”, via podcast or on your iPod.

Yet the only alternative up to that point, the closed-end Chile Fund (CH), had been significantly underperforming iShares Latin America (ILF). And the underperformance wasn't small potatoes.

Between the 3 years 4/1/2004 through 3/31/2007, The Chile Fund (CH) had provided an exceptional aggregate return of 120%. Yet the simple choice of a passive, regional index in the iShares Latin America (ILF) offered 195%. (7,500 basis points is hardly something to sneeze at!)

Indeed, it's hard to justify an actively managed country fund with expenses as high as 2%+, when there's a passive index for the entire region that's outperforming with only 0.5% expense. (Note: The portfolio manager for CH was pretty angry with me for pointing out performance issues and expenses that an investor has to pay; in truth, I had heaped a great deal of praise on "HIS" closed-end fund.)

In spite of iShares Latin America's (ILF) better numbers, I still looked forward to a Chile ETF. And near the start of the bear market in November of 2007, I finally got my wish. Of course, by then, the world was working its way into a vortex.

Here in 2009, however, with expectations that the global industrial cycle is in the process of being "reflated," copper king Chile is back on a lot of people's maps. So I thought I'd take a look at performance issues once more; that is, how would The Chile Fund (CH) compare over the last year against its newer rival, iShares MSCI Chile (ECH).

I suppose the active portfolio manager of CH would, once again, tell me that I am missing a big picture. But you tell me?

iShares MSCI Chile (ECH) was less volatile than CH during the systemic financial breakdown in October 2008.  iShares MSCI Chile (ECH) lost less than CH during the March retrenchment period. What's more, the passive index approach of using the MSCI Chile Index via ECH led to a 1-year loss of approx -4.6%; in contrast, the Chile Fund (CH) lost approx -12%.

Granted, the charts aren't flawless. And, arbitrary calendar periods are… arbitrary calendar periods. But I still can't see why I'd pursue the closed-end country fund when a passive country index exists as an alternative.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "LIVE", via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

By itself, this is not problematic. WisdomTree created a great many fundamental indexes of passive holdings for its ETF line-up.

Yet Index IQ did not develop a passive index that they might rebalance annually, semi-annually or even quarterly. The IQ Hedge Multi-Strategy Tracker ETF (QAI) is tracking alternative investment approaches that are being rebalanced monthly. This is like a mouse developing the mousetrap AND placing the cheese.

Is there a tried-and-true way to know what you're getting? Not really. At best, you may choose to evaluate performance against other "world allocation" mutual funds like First Eagle Global (SGIIX).

Granted, 10 weeks is not enough time to evaluate QAI. And without a doubt, the folks at Index IQ would denounce the comparison to a "world allocation" designation, even if the name fits!

Of course, if you can't measure performance against an independent hedge fund index, and you can't measure performance against world allocation mutual funds, you may not be left with any comparison. In truth, that may be what Index IQ was striving for (i.e., "It's so different, there's nothing else like it!")

So forgive me if I am less than enthusiastic about today's 6/9/09 launch of the IQ Hedge Macro Strategy Tracker ETF (MCRO). This new ETF is supposed to combine hedging strategies of global macro and emerging markets.

The index for MCRO uses ETFs. In essence, you're getting an active fund of existing exchange-traded funds for the expense ratio cost of .75%.

According to the "index," Macro Strategy holds both EEM and VWO, for a 33% total weight in broad emerging market investing. It holds both the iShares 1-3 Treasury (SHY) and iShares Short-Term Treasury (SHV), which are arguably very similar, for a 23% weighting in short-term U.S. treasuries.

IQ Hedge Macro Strategy Tracker ETF (MCRO), for the time being, looks like a decent, actively managed portfolio. You've got your obligatory commodity exposure. You have a bit of the yen carry-trade in there. You even have a "short real estate" play for believers in the "more-property-pain-to-come" camp.

MCRO offers active management in one place, while including commodities, currencies and inverse (short) funds. What it doesn't offer is any peace of mind… since there's simply no way to determine if the monthly rebalancing by Index IQ Managers will lead to good results or poor results in the months and years ahead.

The biggest downside? Some investors may be led into a false sense of security, thinking that the management team knows when to sell. When's the last time a mutual fund manager raised enough cash inside the fund to minimize enough of your losses?

Smart investors don't turn over the responsibility for selling to others. Whether you run with IQ Hedge Macro Strategy Tracker ETF (MCRO) or you don't, maintain your own stop-losses on your holdings.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site

The gravitational pull hasn't let up. Existing home sales sunk at the steepest annual rate on record in the fourth quarter of 2008.

It was difficult to find a silver lining. That said, the pace of year-over-year price declines slowed in key cities like San Diego and Los Angeles. Slower declines could be a prelude to the elusive real estate bottom.

Most believe that a bottom… or confidence in its eventuality… will be necessary to restore confidence in traditional market assets like stocks, bonds, currencies and commodities. For now, however, the only prominent hiding places have been gold, the U.S. dollar and the Chinese yuan.

Still, there are a few less-than-prominent winners in 2009 — winners that have escaped the media spotlight. For example, while the highly traded iShares China 25 Index (FXI) may be down 14% on the year, a closed-end fund that invests directly on the Shanghai and Shenzhen exchanges is actually up 27%. The Morgan Stanley China A Share Fund (CAF) may have sneaked by the paparazzi so far, but with numbers like that, it won't be an ancient Chinese secret for much longer. 

Keep in mind, however, active stock picking in closed-end funds may not outperform traditional indexes over the long term. Morgan Stanley China A Share Fund (CAF) has done so since it began less than 3 years ago, but the China Fund (CHN) has not.

While short equity funds have received most of the media attention, short bond funds have not. Some writers, including myself, have profiled the ProShares UltraShort 20+ Treasury Bond(TBT) Fund. Very few have talked about a less risky alternative, the ProShares UltraShort 7-10 Treasury Fund (PST).

During the heart of the credit crisis in a 10-week, Sept-Oct 2008 period, the flight to treasuries was breathtakingly extreme. While banks are still struggling to raise capital, and while individuals find it harder to get loans, however, large companies have seen commercial paper flow once again. And that has caused people to pull out of longer-term treasuries as they look for better yields.

It follows that shorting treasury bonds has been relatively lucrative in 2009. Stocks and most commodities are still struggling to find footing, but stabilization in the high-grade corporate bond market has come at the expense of treasuries. (And to the benefit of short treasury funds.)

The ProShares UltraShort 7-10 Treasury Fund (PST) is up 4% in 2009. Moreover, it remains above its near-term, 50-day moving average.

Finally, what government debt fund is yielding near 7% AND has a bit of appreciation in 2009? The Powershares Emerging Market Sovereign Debt Fund (PCY) is up 2% sans interest payments.

I would hardly call the fund safe based on what happened in the heat of the credit crisis of Sep-Nov 2008. Up until that point, however, it was a steady income producer and portfolio diversifier. If you think the worst of credit fears have passed, a small allocation might be worthy of consideration.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

In previous posts, I have argued AGAINST using newfangled, actively managed ETFs. For one thing, you lose the tax efficiency and lower costs that come with index ETFs. What's more, index ETFs are more "trade-able." The exceptionally low volume on actively managed ETFs adversely impacts price execution, resulting in an unnecessary hit to overall performance.

Actively managed ETFs do not differ all that significantly from the closed-end funds (CEF) currently available in the marketplace. Some people may want you to believe that there are big differences. They'll point to slightly lower costs. They'll talk about greater transparency on the active ETFs.

Still, closed-end funds still represent diversified baskets of stocks (i.e., fund) that trade like individual securities (i.e., stock). It follows that if we wish to get an idea of how actively managed ETFs will fare against traditional index ETFs, we can make a reasonable comparison to actively managed closed-end funds (CEFs) that are already in existence.

1. China — The China Fund (CHN) versus the iShares FTSE China 25 Index Fund (FXI). The China 25 exchange-traded index fund, FXI, has been around for nearly 4 1/2 years. That may not be a long time horizon, but it is long enough to look at 3 1/2 years of bullish price movement and 1 year of bearish price movement.

Since the index ETF, ticker FXI, began trading on October 4, 2004, it has gained roughly 53% in value. If one chose the actively managed closed-end fund, ticker CHN? The gain was a significantly less robust 18%. (But what's 3,500 basis points between friends, right?)

2. Mexico — The Mexico Fund (MXF) versus the iShares MSCI Mexico Index Fund (EWW).  The index ETF for investing in Mexico, ticker EWW, has been around for a much longer time period. In fact, over the last ten years, EWW has an astonishing gain of 233%!

Surely, we're going to be even more mesmerized by the extraordinary benefits of stock picking skill by the actively managed Mexico Fund (MXF), right? Well, 141% is a superb return over the last decade. Nevertheless, it falls wayyyyyyyyy short of the index ETF, the iShares Mexico Index Fund (EWW).

3. Japan — The Japan Equity Fund (JEQ) versus the iShares MSCI Japan Index Fund (EWJ). Perhaps stock picking in emerging areas like China, Korea, Mexico… perhaps indexing is better for countries where the companies are less well-known. But what happens if you pick a highly developed market like Japan, a country with the 2nd largest economy in the world?

The 10-year return for the iShares MSCI Japan Index Fund (EWJ) was effectively 0%, not unlike the return for major U.S. equity indexes. Still, the active management prowess of the Japan Equity Fund (JEQ) was a lot less sumptuous with a negative return of -35%. Ouch!

In fairness to the closed-end funds that are actively managed, I DID NOT sample 30 or more of them. In that manner, I might have come up with something that is statistically relevant.

That said, there are studies that show index funds outperforming their peers 80%-85% of the time. Why an investor would hope to find the 1 fund out of 5 where stock picking might make the difference is beyond me.

In truth, traditional index ETFs have numerous advantages over most actively managed ETFs as well as actively managed CEFs. Will there be exceptions to the general rule? Sure. Nevertheless, sticking with well-known, widely used, traditional index ETFs will make your life easier… and probably, a whole heck of a lot more profitable.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Last week, I received a fair amount of phone and e-mail contact over what I thought about a TARP-themed ETF. This week, the media are asking for my opinion on the Grail Advisors creation of the Grail American Beacon Large Value ETF and the Grail American Beacon International Equity ETF.

Why all of the buzz over yet another large cap exchange-traded fund? Or for that matter, a broad market international ETF? For the simple reason that they will be actively managed, stock picker investments, not index-tracking funds.

Okay… so that makes the potential newbies much different from the other 700 ETFs in existence. There's only a few other actively-managed ETFs in existence today, such as the PowerShares Active Mega-Cap Fund (PMA) and the PowerShares Active Alpha Multi-Cap Fund (PQY). Yet the institutional managers from Invesco-backed Powershares estimate that they only trade on a monthly basis, whereas the Grail folks maintain that their managers will have complete freedom.

So what do I think about these developments? I am unimpressed… and the reasons that I am unimpressed go back to the heart and soul of why investors should use ETFs in the first place.

Let's review:

1. Transparency: ETFs are better than traditional mutual funds because you know all of the investments that an ETF holds/tracks. The holdings are the same as the indexes themselves. With mutual funds, you get quarterly updates on what a fund manager may be doing, but for the most part, you're investing in the track record of the person/team managing the mutual fund.
 
On transparency, this is the big break-through that Grail American Beacon Large Value ETF and the Grail American Beacon International Equity ETF are supposedly offering over traditional mutual funds. Yet even though Grail Advisors is promising a completely open book, there isn't an established track record for doing so. What's more, many believe that these ETF managers will be operating at  competitive disadvantage to their peer stock pickers.

2. Trade-ability: ETFs are better than traditional mutual funds because ETFs trade like individual stocks. If you want to hold them for the so-called long-term, you can. If you want to manage downside risk by employing stop-losses, you can do that at any price point you want. You can even set a pre-determined buy price that is attractive.

On trade-ability, Grail American Beacon Large Value ETF and the Grail American Beacon International Equity ETFwill have the benefit that all ETFs have. Yet the likely inauguration of these instruments will be met with enough skepticism and low volume, that the bid-ask spread will be wide. In all probability, it will at least be .5%-.75%, much like the PowerShares Active Mega-Cap Fund(PMA) and the PowerShares Active Alpha Multi-Cap Fund (PQY). So an investor will likely lose up to 1.5% in round-trip trading. One needs high volume ETFs to trade at beneficial price points.

3. Tax-Efficiency. Exchange-traded funds are better than traditional mutual funds because most ETFs do not "phantom tax" you with pass-through capital gains distributions. That's because ETFs typically track indexes that aren't changing that frequently. With low turnover, indexing means less taxation.

On tax efficiency, Grail American Beacon Large Value ETF and the Grail American Beacon International Equity ETFpropose to be buying and selling frequently, even more flexible in turnover trading than the current PowerShares products. These new ETFs won't be tax-efficient.

Are we starting to get the picture? These new actively managed ETFs may or may not benefit from their potential transparency, they will hurt the investor who wishes to trade them actively and they probably won't provide a benefit on the tax-efficiency front.

What about things like cost, performance and indexing? Grail American Beacon Large Value ETF and the Grail American Beacon International Equity ETF will cost less than traditional mutual funds at .75%. Most traditional funds clock in at approx 1.3%. And lower costs typically mean better performance.

However, the fact that lower cost ETFs and lower cost mutual funds outperform traditional mutual funds over time is a function of the benefits of indexing. In the domestic large-cap arena, I've seen scores of studies that show that 85% of actively managed mutual funds do not beat their corresponding index. Index ETFs are outperformers because stock picking skill, particularly that which is adjusted for risk, simply does not exist over the long-term.

If 85% of active fund managers can't beat the Russell 100 Value Index Fund (IWD), why on earth would I choose an unproven, low volume, higher expense ratio product like Grail American Beacon?

Some maintain that there's evidence that international stock picking has some merit. Even if I believed that were true… that half of international managers might do as well as the Vanguard MSCI EAFE Index Fund (VEA), Grail American Beacon International would still not win my vote at this stage. For one thing, they are only going toinvest in the ADRs listed on U.S. exchanges. This alone limits and minimizes the field of potential companies that might help an international stock picker outperform.

What's more, Vanguard MSCI EAFE Index Fund (VEA) only costs 0.12 whereas Grail American Beacon International Equity ETF will cost .75%. VEA will be tax-efficient a la indexing, whereas American Beacon International will likely be passing along taxable cap gains. VEA trades millions of shares for solid entry and exit price points, whereas American Beacon International will likely cost 1%-to 1.5% to get in and out.

Need I really say more? Perhaps if there's significant outperformance and significant volume in 3 years, I might take another gander.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.