Can you turn to U.S. treasuries next year? Even if record-low yields didn’t rise, your return may not even keep up with inflation. It doesn’t look much better for savings accounts either.

Granted, a case can be made for the return OF one’s capital rather than the return ON one’s capital. Then again, financial freedom seekers won’t get near retirement goals by fleeing investment risk entirely.

It follows that conservative-oriented folks need to revisit the risk spectrum — from investment-grade munis to high-yield corporates to master-limited partnerships to dividend-producing equities to real estate investment trusts. In essence, an exchange-traded enthusiast may be able to count on cash flow with less concern for price movement, no matter where Europe takes its debt crisis.

Here, then, is a hypothetical, 8-fund portfolio for 2012. The approximate annual yield can be found at most financial web portals. The anticipated capital appreciation is based upon a variety of price-to-fair-value analyst estimates, including those by Morningstar analysts.

It’s true that capital appreciation estimates based on price-to-fair-value ratios or historical price-to-earnings ratios are notoriously suspect. They could be much higher, much lower or right on the money. On the other hand, we can count on dividend and interest. Even in the systemic financial collapse of 2008, diversified funds absorbed individual “failures” and served up the expected payments.

There is one closed-end fund in the bunch, the Eaton Vance Tax Managed Global Dividend Fund (EXG). And some closed-end funds do have a less-than-glorious history when in comes to maintaining their monthly or quarterly cash payouts. However, this one shouldn’t let anyone down. Its price is 17% below its net asset value, which gives it the cushion to continue paying its yield via covered call option income. Moreover, if stocks stay range-bound rather than bull-market crazed, there would be less chance of the stocks in the fund being ”called” away.

Once more, the portfolio is a hypothetical possibility for those investors who crave less “beta risk” than the S&P 500. It represents an opportunity to pursue a double-digit percentage gain for 2012, with 1/2 the return coming from a reliable income stream.

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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. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

The reality may be even more dismal. Younger guns leap, sprint and pass… so quickly and so effortlessly… my court presence is an exercise is in obsolescence.

What we want to believe (perception) and what is actual (reality) play equally unique roles in the world of market-based securities. For example, when the iShares Silver Trust (SLV) rocketed from $16 to $48 in less than 1 year, there were many who wanted to believe that the 200% surge was entirely attributable to dollar depreciation and increasing global demand. The reality? Silver mania had gotten ahead of itself.

Sure, you can still be a commodity bull like Jim Rogers. Yes, you can estimate silver’s true worth at $70 per ounce. Yet you can’t discard the reality that speculators first pushed silver into the stratosphere… then they ”shorted” the heck out of the dynamic metal. The lesson? Nothing goes vertical indefinitely.

In truth, prior to April, several Inverse ETFs had gone largely unnoticed. More recently, however, a number of “ultra-shorts” have been receiving record inflow; in many instances, the volume of shares trading hands has increased ten-fold.

1. ProShares UltraShort Silver (ZSL). The average volume in February and March was 2,000,000 shares. The average volume today? Closer to 20,000,000… a ten-fold increase. Similarly, net assets under management have swelled from $127M to $336M.

ZSL endeavors to provide daily investment results that correspond to twice the inverse (opposite) of the daily performance of silver bullion. (Review The Day The Commodity ETFs Died for a ZSL “speculation” that led to 80% in one week.)

2. ProShares Ultra-Short DJ UBS Commodity (CMD). Try to wrap this one around your finger. For the last 3 months, the average volume of shares trading had been about 25,000. Today, May 16, 2011, it is north of 1,000,000. The fund’s net assets were a paltry $1.25M on 3/31. According to “Market Data” at WSJ.com, $55.7M entered CMD today.

At least in the short-term, commodity bears are looking to make a killing.  ProShares Ultra-Short DJ UBS Commodity (CMD) seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse of the daily performance of the Dow Jones-UBS Commodity Index.

3. ProShares UltraShort Euro (EUO). With a rapid rise in net assets as well as share trading volume, there’s a perception that the Euro may be incredibly overvalued compared to the greenback. EUO seeks daily investment results, before fees and expenses, that correspond to twice the opposite of the daily performance of the U.S. Dollar price of the Euro.

Indeed, European sovereign debt troubles have been hanging like an albatross over the EMU’s currency. That said, the U.S. is facing its own version of sovereign debt woes. What’s more, Europe is addressing its PIIGS problems with austerity programs today, as well as tightening credit to ward off inflation. The U.S. isn’t. It follows that there’s a perception that the Euro has run-up too far against the greenback, yet the reality may or may not be more weakness for the buck in the near-term.

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It’s not that it was entirely unexpected. Some may have read my commentary one week ago to the day when I offered the following:

“That said, traders should begin to consider a near-term possibility of shorting silver via ProShares UltraShort Silver (ZSL). The historical ratio between silver and gold prices has contracted to 33:1 from 90:1 in about 6 months time.

What’s more, even with the Fed’s policy, markets tend to anticipate change before it happens; that is, in the very near-term, the dollar will get a bit of a bounce and silver will take a bit of beating.”

Had you bought ZSL at the open on Thursday, April 28, and closed the position out at waning moments of Wednesday, May 5, you’d have achieved 80% in one week. Am I bragging? Maybe a little. Yet the truth is, it was only a quick trade on a quick hunch; I avoid this type of speculative activity in the active management of portfolios.

What I have done and what I will do… I reduce exposure via stop-limit loss orders to areas of the market that fall too far from their highs. In other words, I seek to ensure a large-gain, small gain, or small loss on every portfolio holding. Prior to the commodity killing, I took profits on SPDR Oil Services (XES). And today, in some circumstances, I needed to reduce exposure to iPath DJ Total Commodities (DJP), even at a small gain or small loss.

That does not mean I won’t revisit these very investments in the near future. In fact, the long-term prognosis for total commodity investing is very strong. Yet there’s no telling how long the dollar will strengthen or how long the commodity trade itself will unwind. For that reason, I will continue to evaluate an appropriate entry back into commodities based on price movement as well as supply v. demand.

Here’s the May 5 ugliness in table form:

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It’s a battle for the soul of the investing public. Do you believe that strength at classic cyclical organizations (e.g., Intel, Alcoa, etc.) will lead to improvement in hiring, consumption and overall GDP? This would likely be bullish for stock assets. Or do you anticipate that a core unwillingness to lend, hire or consume will be the eventual undoing of corporate profits? This would likely be bearish for equity investing.

In the first 13 1/2 months of the cyclical upturn (3/9/2009-4/23/2010), several Retail ETFs placed near the top of the leaderboard. Yet these same specialized funds fell at an alarming rate during the current corrective phase.

Not surprisingly, a leading leveraged ETF provider took notice of the huge swings in “Retail.” The Direxion Funds Family introduced Bull and Bear leveraged investments that seek 200% of the daily performance, or 200% of the inverse, of the Russell 1000 RGS Retail Index. In other words, you can go “double-the-daily” long or “double-the-daily” short on a sub-segment (e.g., retailers) of consumer discretionary spending.

Judging by the massive redemption of SPDR Retail (XRT) dollars, one should expect particular interest in the new Direxion Daily Retail Bear 2X (RETS). Unless private hiring exceeds expectations throughout the course of 2010’s 2nd half, it stands to reason that retailers may come under some pressure. The ability to bet against them, rather than all consumer companies, may also add to the volatility of the sub-segment.

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So what are hedge funds looking to do if they aren’t trying to make money? Right now, they are far more interested in keeping their powder puffs dry. And that means… they’re still in the process of raising cash levels.

Although I am an institutional money manager whose company is registered with the SEC… and not a hedge fund manager… I have friends in the biz. Many have expressed survival instincts with the ”live to fight another day” mantra.

Block trade money flow at WSJ.com confirms the absence of bull or bear conviction. For example, if enormous bear market conviction existed, one might expect substantial sums of money flowing into ProShares UltraShort S&P 500 (SDS) and ProShares UltraShort Dow 30 (DXD). Yet neither witnessed much in the way of block inflows during Thursday’s 5/27/10 surge higher.

One might argue that this is because SDS is hitting resistance at the 200-Day. One might also explain that short investors are running for cover to take profits. Those are valid arguments.

However, it’s hard to imagine that bearish bets using ultra-short investment tools wouldn’t appeal to the “crises-not-contained” crowd. ProShares UltraShort S&P 500 (SDS) fell 7%, but investors didn’t bite. Direxion Daily 3x Bear Financial (FAZ) dropped 13%, and few wanted a slice of the pie.

On the flip side, if uber-trading “hedgies” were truly buying the bull, wouldn’t one expect to see some money flowing into ProShares Ultra S&P 500 (SSO)? Sitting on a possible trendline break-through, the upside for new YTD highs is greater than 20%… isn’t it? If you believed it… anyway.

Need a bit more proof that big block traders are raising cash? Consider the “Selling on Strength” for the SPDR S&P 500 Trust (SPY), nearly $200 million in block selling. That’s roughly 2.5% of SPY’s assets under management, choosing to go to cash on a day when stock prices soared.

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In truth, it would be easy to parrot world-renowned speakers. Pimco’s El-Arian continues to press the sovereign debt uncertainty button. Other media stars will tell you that it’s all about “jobs.” I am more inclined to discuss the possibility of an unstable dollar, whether it’s rapid-fire appreciation or free-fall depreciation.

Lately, however, I’ve been looking at a different barometer of stock market well-being… although ”different” may not be the most appropriate word; that is, the health of the financial sector in 2010 appears to be a major force for or against equity performance… not unlike its influence in 2008.

Consider the big-time stories that you may be reading. When you learn that formerly troubled names like AIG and Citigroup are surging… when value investors talk about property/casualty insurers as one of the best bargains in town… when regional banks are discussed as a diversified hidden gem… equities across the U.S board seem to rally. In contrast, when conversation about regulatory reform heats up or when you hear that the government is “strongly discouraging” banks from raising dividend payments to shareholders, the entire stock market seems to shudder.

So yes… if you ask me where the ETF risks are, I’m looking at charts like the one above. The volume for SPDR Financials (XLF) near the correction’s bottom in late January/early February appears to indicate buyer conviction and/or capitulation. Yet, as XLF has neared its October peak from 5 months ago, volume has steadily declined. In fact, XLF has not broken through its October pinnacle from 5 months ago.

And there’s more.

Marco Polo XTF reports that Direxion Financial Bull 3x (FAS) has witnessed nearly $770M in monthly outflows; that would represent roughly 2/3 of the total assets under management. Similarly, $500 million has moved into Direxion Financial Bear 3x (FAZ) in monthly inflow, representing as much as 1/3 of its total asset base.

On a year-long basis, I am watching the U.S. dollar. If it remains flat or slightly depreciates in value, I anticipate stock ETFs would have a good year. If it rapidly appreciates or rapidly depreciates, I would worry about equities for 2010.

In the more immediate realm, financial stocks seem to have some sway. SPDR Select Financials (XLF) really needs to set new 52-week highs. What’s more, one would have to hope that the fanatical traders of leveraged financial ETFs have got this one wrong.

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Perhaps ETF investors are being drawn to foreign equities because of the super-sized gains achieved in 2009. Yet that wouldn’t explain the enormous inflow into bond funds.

Or maybe ETF investors are drawn to popular sectors like technology, energy and natural resources because of corporate earnings. Yet that alone wouldn’t explain outflows from the health care or financial segments. (Of course, political risks might explain that.)

Let’s consider the possibility that investors were becoming concerned with overextended stock assets. They bail out on the perceived risk of U.S. financial stocks. They run from U.S. large-caps and U.S. mid-caps. They embrace nearly every aspect of U.S. bonds, from TIPS to high-yield. Traders even ramp up their Short ETF holdings.

How does any of this fund flow activity explain the enormous inflows into diversified emerging markets stock funds, foreign large-cap stock funds, tech and nat resources? Is this a form of decoupling in fund flows, even if the decoupling is not represented in ETF price movement?

Interestingly enough, investors ran from foreign currencies and most commodities as well. This suggests that there is an element of fear about the surprising surge of the U.S. dollar. Yet the possibility that a rising dollar would lower the value of one’s foreign holdings didn’t affect foreign fund inflows.

If you want to be a contrarian (and I’m not suggesting that you should), you might treat the January ETF fund flows as late-to-the-party dollars. More specifically, investors have been balking at most U.S. equities… maybe you might ratchet up your S&P 500 SPDR Trust (SPY) exposure. Investors are piling into Bond ETFs… maybe you should ratchet down your holdings. Investors have gravitated back to the U.S. dollar… you might now consider CurrencyShares Canada (FXC) and CurrencyShares Australia (FXA).

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. If you’d like to subscribe to ETF Risk Alert, click here.

Here’s a quick summation on what the business journalists found:

1. Nearly all consumers in the developed world will see rising prices (a.k.a. inflation), though the erosion of purchasing power will be less than the historical norm. What’s more, since last month, polled economists raised their 2010 inflation expectations on 7 of the 13 developed countries investigated.

Translation? There will be a some inflation… and it will be greater than originally anticipated.

An ETF investor who agrees with the economic consensus might wish to purchase inflation protection in a variety of asset classes. Inflation-protected treasuries via the iShares Barclays TIPS Fund (TIP) will provide income that is adjusted for the Consumer Price Index. (Of course, investors will have to consider the adverse affect of rising interest rates on the potential decline in price on TIP.)

Although many a pundit has been talking up a “bubble” in gold, the precious metal is relished for its inflation-fighting properties as much as its luster. The SPDR Gold Shares (GLD) may be your ticket to ride. Or you may wish to diversify across your metals.

Under a subdued inflationary backdrop, stock assets have a history of rising in price as well. Traditionally, oil and energy stocks fit the task of hedging against inflation. Consider a global energy-themed ETF like iShares Global Energy (IXC).

2. Japan is the only country with a deflationary forecast at -0.8% for 2010. The Bank of Japan is also expected to keep its benchmark interest rate target on hold throughout the year as it battles deflation. Consequently, the yen is expected to drop 7.3% to 98 per dollar from 90.84.

With foreign exchange volatility declining, and the Japanese yen very likely to decline in value versus other currencies, investors will be lured back to the “carry trade.” This is where one sells currencies from countries with lower interest rates to buy higher-yielding ones. Naturally, there’s an ETF for that… PowerShares DB G10 Currency Harvest (DBV).

If the collective view of economists is one that you share, you might look at the possibility of “betting against” the yen. For instance,  ProShares UltraShort Yen (YCS) seeks a return of -200% of the U.S. dollar price of the yen.

BUT ONLY FOR A SINGLE DAY.  Due to the way compounding works, you can’t buy-n-hold YCS for a year and expect to have anything close to 2x the inverse (14.6% return) suggested by the consensus annual yen depreciation. Instead, wait for a trader’s opportunity to buy on weakness as well as a trader’s opportunity to sell on strength.

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. If you’d like to subscribe to ETF Risk Alert, click here.

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.

There may be a reason for that… and that reason may be a direct or indirect advertising/financial arrangement. In fact, one wonders why there isn’t a warning label with, “Caution: Commentators receive compensation from Leveraged ETF provider.”

There’s nothing inherently evil about relationships such as these. It happens in every sector of private or public business. That said, investors should genuinely understand “behind-the-scene” dynamics.

For instance, let’s assume that a Leveraged ETF provider wanted to compensate me through an advertising relationship at my web site(s). Naturally, I would fulfill my obligation to disclose the relationship. What’s more, investors would hear how Leveraged ETFs offer sophisticated traders short-term opportunities. I’d even insist upon explaining pitfalls that occur in leveraged ETF use.

Nevertheless, should I accept a relationship with a leveraged ETF provider, it would clearly become a question of emphasis. What wouldn’t I be emphasizing to readers? Would investors realllllllllllly recognize just how problematic buying-n-holding a leveraged ETF can be?

Here is a concrete example for the public domain… ProShares UltraShort Real Estate (SRS). This ETF seeks daily investment results, before fees and expenses, corresponding to 2x (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate Index. Credit the ProFunds ProShares web site for emphasizing that SRS pursues -200% of the return of the index for a single day.

Still, let’s not get carried away by the appropriate disclosure. As each day goes by, you are less and less likely to achieve the inverse relationship that you believed might be possible. This is primarily due to the way compounding works; that is, it is not mathematically probable for daily tracking to resemble weekly, monthly or annual percentage gains or losses that might be implied.  

Suppose you were shrewd enough to recognize the trouble with real estate investment trusts at the very start of 2008. So you set a course for “Ultrashorting.” With the iShares DJ Real Estate Fund (IYR) losing about -40%… wow, you might expect to be up about 80%!

Sorry, Chuck… ProShares UltraShort Real Estate (SRS) didn’t gain 2x the annual inverse. It didn’t gain 1x the annual inverse. In fact, it didn’t even gain; rather, SRS lost -50%!!!

Congratulations are still in order, though. The folks at ProFunds ProShares would be quick to remind you that you did indeed achieve 2x the inverse of the DAILY performance of the Dow Jones U.S. Real Estate Index. Unfortunately, instead of raking in 80% gains, you lost -50% on your ANNUAL performance review. Half your capital… ouch!

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. If you’d like to subscribe to ETF Risk Alert, click here.

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.

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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