ETF Expert

ETF Expert: A Golden Hedge Against The Dollar Versus Faith In The Greenback

The U.S. dollar doesn't have a lot of fans. In fact, outside of short-term traders, it's nearly impossible to find an analyst with a positive thing to say about the greenback.

The negative prognosis is not without good reason. When the world's economic output is expanding, currencies of other nations have strengthened against the U.S. dollar. And when the world's economies are sputtering, leaders have questioned the dollar's status as a viable reserve currency.

Yet most investors seemed ill-prepared for one of the only investments that yielded a positive return in 2008; that is, while the S&P 500 dropped -38% in value, PowerShares DB U.S. Dollar Bullish (UUP) garnered 4.2%.

Indeed, the downward trend for the greenback has resumed in 2009. For the time being, PowerShares DB U.S. Dollar Bullish (UUP) is below its shorter-term 50-day moving average as well as its longer-term 200-day moving average.

Yet, by the same token, it's down only -2.5% on the year. That's actually better than U.S. stocks in the S&P 500, currently off about -2.7% as I type.

In complete contrast to the outspoken hatred for the U.S. dollar, there's a hard asset love affair with gold. The yellow metal wins universal praise for its historical ability to fend off inflation and dollar devaluation, while simultaneously earning high marks for pure desirability. About the only thing that gold isn't credited with (so far) is a capacity for curing cancer.

You don't have to look far for fans of gold, often referred to as "gold bugs." Buy gold via SPDR Gold Shares (GLD) because China is rapidly acquiring resources across the commodity board. Buy GLD for its technical strength above moving averages. Buy GLD because worldwide flows into gold funds continue to break records. Buy GLD as a hedge against hyperinflation. And, of course, buy GLD because the U.S. dollar is doomed.

In truth, GLD does appear to be a venerable contender for a portion of a well-diversified portfolio. Yet in a "black swan/perfect storm catastrophe" like the 3 month, systemic breakdown of 2008 (September through November), GLD dropped an astonish -30%. PowerShares DB U.S. Dollar Bullish (UUP) soared 20%.

If economies are going to sputter for a longer period than many had hoped, as many in the G-8 are now suggesting, inflation may take its sweet time before rearing its ugly head. What's more, gold hasn't shown a definitive ability to break the psychological $1000 per ounce value, let alone approach inflation-adjusted highs of $2000 per ounce. And remember, nearly all commodities hit inflation-adjusted highs in July 2008 except for gold.

GLD is indeed a strong hedge against the dollar's UUP. Yet what if you were looking to reduce the risk of owning one versus the other? Could you achieve a better risk-reward outcome by owning both?

Indeed, many portfolio constructionists endeavor to hold assets with a slight negative correlation of -0.40%. That's the 1-year relationship in directionality between PowerShares DB U.S. Dollar Bullish (UUP) and SPDR Gold Shares (GLD). So what if you had actually held both during the course of the bear market than began October, 2007?

Granted, if you held GLD all by itself from bear market inception through the present day, a 22% total return could have been yours. Yet that would not have come without enormous volatility of a top-to-bottom decline of 30%, with little more than faith in the metal during its steep decline.

In contrast, hedging gold's potential volatility with a low-volatility, negatively correlated investment produced a sleep-better-at-night 11% aggregate return. It may not be as crazy as it sounds to hold the beloved gold and the dreaded U.S. dollar together... to reduce overall risk, to hedge against a black swan event and to account for the small possibility that the U.S. dollar actually strengthens.

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.

ETF Expert: The 5 ETFs That Investors Are Buying Right Now

The contrarian in me is skeptical. After all, money is pouring into various commodity and emerging market investments faster than record keepers can calculate.

Top 5 ETF Inflows (in millions) for June 2009
Fund	Ticker	June Inflows	YTD Flows	Net Assets
US Natural Gas	UNG	$1,698	$3,428	$3,708
iShares Barclays TIPS	TIP	$942	$4,959	$14,163
Vanguard Emerging Markets	VWO	$777	$2,278	$9,345
SPDR Retail	XRT	$709	$591	$976
iShares S&P 500	IVV	$642	$2,229	$18,351

Then again, it's hard to be surprised by the interest in natural gas. So many writers, including yours truly, have pointed to a variety of anomalies with respect to natural gas prices. And with $1.5 billion new dollars entering US Nat Gas (UNG) in June alone, a figure that is close to 50% of the fund's total assets, there's a lot of money riding on the idea that "nat gas" has to go higher.

Interestingly enough, though, even with a 24% YTD increase in net assets for Vanguard Emerging Markets (VWO), and an 8% increase in June, some of the emerging market shine may be wearing off. The iShares Emerging Market Fund (EEM) experienced the largest dollar outflow of any ETF, with $1.7 billion leaving EEM. (Note: Percentage-wise, however, it was closer to a 5% exodus.)

The popularity of iShares TIPS (TIP) is fairly predictable. Advisers view it as a straight-forward, asset allocation tool to hedge against inflation and pick up a bit of income.

For the most part, in fact, the fund flows seem to represent a trickling in of sidelined dollars to asset allocation positions. The S&P 500 (IVV), Vanguard Emerging Market (VWO), and TIPS (TIP) all represent the type of core positions a portfolio constructor might utilize.

The outliers are another story. While it may not be difficult to ascertain interest in nat gas via UNG, it's a great deal more challenging to understand June 09 intrigue in Retail (XRT). Nevertheless, I'll take a stab at it.

June inflows for Retail (XRT) jumped $700 million, or 70% of the fund's net assets. March, April and May had seen a rebound in Consumer Confidence going into to June, and expectations for Consumer Confidence in June was that the measure would rise. Moreover, going into the month, Retail (XRT) was one of the year's top performers.

In essence, then, XRT was a momentum play. Unfortunately, as June began to wear on, consumer discretionary stocks were socked much harder than the broader market. Adding insult to injury, recently released Consumer Confidence numbers fell in June. Note: I tend to doubt that July ETF flows will be as robust for Retail XRT as they were this past month.

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.

ETF Expert: Will the ETF Rally Continue? Look at Price Breadth!

Here's what we know about the first half of 2009:

1. Emerging markets and commodities have been on fire
2. Developed market benchmarks are decidedly mixed, with the Dow negative and the Nasdaq positive
3. Most assets have moved sideways since May 4

Yet there are other ways to look at the "genuineness" of the market's '09 goodwill. The folks at ETF Investment Outlook like to look at price breadth, also described as the number of stocks advancing minus the number of stocks declining.

For example, the SPDR S&P 500 Trust (SPY) may have lost 0.5% in a particular day, but that wouldn't tell us how many stocks moved higher or lower. There may have been 300 advancers with 200 decliners, which denotes positive price breadth. 

Of course, one day does not a particular trend make. A more meaningful representation of stock price direction is often arrived at by evaluating price breadth over a period.

For instance, we can use moving averages of advancing stocks and declining stocks in ETFs for 6 months (120 trading days). An advance/decline net % that is higher than the 120-trading day trendline might portend a more vibrant future than an A/D net % that is below the 120-Day SMA.

So let's cut to the chase. Which ETFs have decidedly positive price breadth... and which ETFs have decidedly negative price breadth?

Q1 and Q2 Positive Price Breadth for 2009
				A/D Net % Above 6-Month Average
Market Vectors Steel (SLX)						8.1%
PowerShares Networking (PXQ)						6.3%
PowerShares Energy and Exploration (PXE)						5.4%
iShares Dow Jones Materials (IYM)						4.8%
iShares Goldman Sachs Networking (IGN)						4.6%
				A/D Net % Below 6-Month Average
DJ Real Estate (IYR)						-3.9%
iShares Financial Services (IYG)						-4.7%
Dow Jones Transportation (IYT)						-6.2%
SPDR Homebuilders (XHB)						-6.7%
iShares Dow Jones Regional Banks (IAT)						-8.7%

In a simple statement or two, one might say the following: The majority of stocks in the tech, materials and energy exploration arenas are rising. Meanwhile, the majority of stocks related to home-building, home financing and banking are falling.

Reflecting the dichotomy is the fact that the S&P 500 is truly split down the middle between advancers and decliners. While the index itself may have managed to post a modest gain of 1.8% through 6/30/09, the S&P 500 SPDR Trust (SPY) is at 0% with respect to its 6-month A/D Net %.

Looking back at the tail end of the 2003-2007 bull market, financial stocks, REITs and homebuilders were already feeling the pain. The question at the time was, could the bull market continue in spite of real estate and subprime? The world learned the answer the hard way.... NOPE!

Now we're looking at a situation where most of the advancers come from basic industries a la materials, resources and energy exploration. These were the last to fall in 2008, but they represent the early risers in 2009. In contrast, the strugglers are not leading the way forward... even if they are decidedly better off than they were 3 months ago.

Will the ETF rally continue? It may, in select segments and regions. However, we'll need a more definitive picture about the future of finance and the future of real estate before a broader ETF rally can send the bear back into hibernation.

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.

ETF Expert: The 5 Best Diversifiers For Reducing Emerging Market Risk!

We all know where the growth prospects are. By the same token, if emerging market stock assets are going to take 30% hits on corrections and 50% hits on bear markets, you'd better be a sharp trader to maximize profit.

Yet what about the less active investor who wishes to broaden his/her emerging market horizons? Is he/she relegated to accepting enormous portfolio swings? Or does he/she have to go with the standard financial planning guidance of "only 5%" to emerging growth regions?

Some folks believe that there may be room for middle ground; that is, if you wish to have a more vibrant commitment to the regions with the most upside promise, you might offset that risk with low-correlating and non-correlating investments.

I've written dozens of features on the topic; in particular, as the bear market began developing, I wrote a number of articles on diversification through non-correlating and/or low-correlating ETFs:

September, 2007... "Total Commodity ETN: Low Correlation, High Sleep Factor." 
October, 2007... "Foreign Fixed Income: True Diversification Has Finally Arrived."
November, 2007... "3 ETFs That Will Keep Your Ship Afloat."

More recently, writers and researchers have scoured databases for correlation clues. Last month, for instance, I highlighted an ambitious project at the College of New Jersey that set out to uncover ETFs that show minimal correlations to one another. (Note: I had some concerns with the relevancy of the findings, but the results are still worth a quick perusal.)

Still, one should re-examine correlations and correlation findings every now and again. After all, one key for constructing an ETF portfolio is identifying non-relationships (or weak relationships) between ETF holdings. If the relationships are too highly correlated, you're more or less holding the same stuff.

At present, what are some of the best exchange-traded funds to diversify away from emerging market fund risk? Here are 5 that I've discovered across different data banks:

1. iShares Aggregate Bond Fund (AGG). This one is hardly a shocker. After all, we're talking about the total bond market with a heavy weighting towards the highest-grade intermediate term bonds. If there's any surprise, it may be the average correlation that I discovered at 0.40% to iShares Emerging Markets (EEM). Granted, it's a low correlation... yet it still confirms that bonds and stocks are positively correlated assets.

2. Powershares VRDO Tax-Free Weekly (PVI). There's been no real performance here in 2009. Yet the idea of short-term tax-free munis appeals to quite a few folks. It's unlikely to hurt you, and it's unlikely to help much. At present, it has the potential to deliver a 2% income stream free from federal taxes, potentially helping those who are turned off by negligible/taxable cash holdings. The correlation to EEM is non-existent at roughly 0.05%.

3. iShares Nasdaq Biotechnology (IBB). Bet you didn't see this one coming! Biotech, and general health care, performed better on the downside of the bear market by acting as safe havens. Biotech even bucked the overall market trend for part of 2008. Yet during the enormous bounce-back over the last 3-4 months, biotech and health care haven't been big participants, perhaps due to health care reform concerns. Consequently, IBB has one of the lowest stock correlations to EEM at 0.68%.

4. iShares MBS (Mortgage-Backed Securities) Bond Fund (MBB). So few investors want to dip there foot in these waters. And yet, the price of MBB is positive for 2009 as well as above its long-term 200-day moving average. With 95% of the holdings rated AAA, it carries a fund rating of AAA by S&P. Its current distribution yield is roughly 3.3%. Investors may want to rethink risk by utilizing this as a quote "hedge" against their emerging market holdings. The correlation to EEM is -0.32.

5. SPDR Gold Shares (GLD). Perhaps the idea of using gold as a diversifier is intuitive. Yet this one isn't exactly a slam dunk. Emerging markets tend to be driven by commodity demand, including gold. So it may surprise some to know that EEM and GLD have a .71% correlation. Nevertheless, one probably shouldn't fight history too much. Gold is often referred to as the ultimate diversification tool.

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.   

ETF Expert: Top 5 ETF Performers Relate To China and Commodities

We've basically reached the midway point of 2009. Granted, we can talk about the resurrection of industrial metals, the resilience of emerging regions and/or the miraculous turnaround for financial stocks off of the March lows.

When all is done and said, however, what are the real drivers of asset price appreciation? For the last 6 months, it's all about China.

Metals? Guess what country is buying foreign miners or making deals with them. Emerging market growth? Guess what country drives the surge in basic material oriented countries like Chile, Brazil, Peru and South Africa. Financial stocks stabilizing? Guess what country buys our treasury debt, keeping the U.S. system afloat.

10 weeks ago, I suggested that investors might want to consider buying what China buys. The returns for iShares S&P Global Materials Fund (MXI), Global Alternative Energy ETF (GEX) and the iPath Dow Jones-AIG Nickel Commodity ETN (JJN) have certainly been more vibrant than domestic or foreign market benchmarks.

 

Yet, what were the top 5 ETFs (through 6/28/09)? Here's what my database produced:

Top 5 ETFs For 2009 (through 6/28/09)
					% Gain	% Below 52-Week High
United States Gasoline (UGA)					66%		-52%
Claymore/Alpha Shares Real Estate (TAO)					61%		-6%
Claymore/Alpha Shares China Small Cap (HAO)					59%		-10%
Market Vectors Coal (KOL)					59%		-60%
Market Vectors Russia (RSX)					58%		-62%

The easiest thing that we may take from the list is the "re-boom" or reflation of commodity demand. Coal, gasoline and crude oil are all tremendous calendar year gainers.

Note that I add "crude oil" because Market Vectors Russia (RSX) is so entirely dependent on the direction of crude prices and the demand for the commodity, it may even be a preferred tracking mechanism than United States Oil (USO).

We can also note that, in spite of the calendar year run-up, commodity-intensive ETFs are still "eons" away from claiming a spot atop their prior pinnacles of 2008. For those that think hyperinflation is the next wave... might we be forgetting that the previous commodity boom with crude near $150 was a period of hyperinflation.

Naturally, none of the trends that we are currently seeing in commodity ETF appreciation would be possible without the country that's been on a binge to acquire resources. Yep... China.

Less there's any doubt just how serious China is about acquiring a bevy of resources, consider the stats. Forbes reported that China has increased tons of gold by 75% since 2003. It purchased a record 400,000 tons of copper in April. And when it comes to iron ore... China upped its imports 33% year-over-year.

What do you do with iron, steel and copper. You build stuff. Is it any wonder that Claymore/Alpha Shares Real Estate (TAO) is near the top of the leader-board as well as close to a new 52-week high?

To be fair, actual demand for these commodities may not be as great as the Chinese purchasing suggests. Rather, some reports show that China is simply stockpiling (hoarding) in an effort to help local producers and/or to keep migrant workers busy (as opposed to angrily protesting).

Nevertheless, whatever side of a bear/bull fence you choose to sit upon, your eyes need to look to the Far East. If the China recovery is for real, investors stand a better chance. If China muddles through, the rest of us may be muddling right along with the premier "emerging" nation.

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. 

ETF Expert: The New Peru ETF Is Far Too Materialistic (EPU)

I had high hopes for this one... honest. I really want to believe that I can gain access to a rapidly expanding Latin American economy that has a superb bond rating.

Yet the iShares MSCI All Peru Capped Index Fund (EPU) has a 65% weighting in basic materials. There's little reason to expect that it'll perform much differently than WisdomTree International Materials (DBN) or SPDR S&P International Materials (IRV).

 

Few people have been as openly bullish about basic industry investing during the reflation of the global industrial cycle. (See May 27th's, "Let's Build Stuff!")

Yet that doesn't mean that one's entire portfolio should be comprised of investments that are so strongly correlated to a single theme. I've expressed this concern in numerous columns, including, "Be Wary of Materialism in Your Emerging Market ETF Assets."

As if to show a dramatic difference in the potential performance of Peru (EPU), the iShares folks provided 3-year, back-dated performance of the All Peru Capped Index at 23.5% annualized. The comparisons were made with other titans of emerging market investing such as the 3-year annualized results of the MSCI Brazil Index at just 1.9 and the MSCI Emerging Market at -8.2%.

Clearly, these are dramatic performance discrepancies. In fact, it would seem that the collective strength of the 25 stocks in the Peru Index... albeit, very materialistic... have pulled off something rather unique. Spectacular 3-year returns!

Credit the power of a 20% weighting in gold metal miner, Compania de Minas Buenaventura (BVN). The 100%+ 3-year return is contributing heavily to the 3-year 23.5% annualized AllPeru Capped Index.

Still, one look at the chart, and we can see the risks of a 1/5 weighting in a single stock. In a matter of months, it shed 75% in value.

Bottom line? Over time, the iShares MSCI All Peru Capped Index Fund (EPU) is likely to correlate very highly with other resource-rich countries like South Africa (EZA); EPU is likely to correlate highly with International Materials (DBN) and Global Materials (MXI). Don't make the mistake of believing that you are well-diversified if you've got all of these investments in your portfolio.

Moreover, be sure to use stop-losses with emerging market country funds. There's a lot of ups, downs, bumps and bruises on the way to your pot of gold. Entry and exit points... yes, timing... may be crucial.

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.

ETF Expert: Technically Speaking, Many Sector ETFs Back In A "Downtrend"

Well that didn't last long.

Less than two weeks ago, each of the 10 major sector ETFs of the U.S. economy had climbed above the almighty 200-day moving average. Some folks viewed the activity as confirmation of a new, bull market uptrend.

Of course, when technical data doesn't quite work as anticipated, these analysts have an "easy out." When an upswing is short-lived, it's simply referred to as a "whipsaw." (Nobody seems to say... oooppps, the charts were wrong; rather, we experienced a little "whipsaw.")

In any event, not everything has fallen back below a 200-day trendline. Here's the breakdown:

Above 200-Day Moving Average on 6/22/2009
					% Above
Technology Select SPDR (XLK)					7.74%
Vanguard Telecom					6.27%
SPDR Select Consumer Discretionary (XLY)					2.38%
iShares Dow Jones US Basic Materials (IYM)					0.64%
Below 200-Day Moving Average on 6/22/2009
					% Below
iShares DJ Utilities (XLU)					-1.38%
SPDR Select Consumer Staples (XLP)					-1.99%
SPDR Select Healthcare (XLV)					-2.46%
SPDR Select Industrials (XLI)					-5.90%
iShares DJ Energy (IYE)					-6.05%
SPDR Select Financials (XLF)					-7.95%

The leadership of technology/telecom as well as materials continues; yet, the violent sell-off across all stock asset classes on Monday, 6/22/09 slammed tech and materials the hardest.

In truth, the leaders typically get pummeled the most. Throughout the "b--- rally," tech and materials surged faster and higher than the vast majority of segments.

The only segment to pile on more gains off the March lows? Financials. Yet here they are again... suffering some of thebiggest redemptions.

Let's face it... people don't trust banks/lenders/insurers. And as long as we wait for new financial regulation, short-sellers will use funds like Direxion Financial Bear 3x (FAZ). I pointed out that FAZ grew more than any other fund in May as a percentage of assets. (In other words... this was going to work later or sooner!)

If there are any surprises, I'd have to nominate the Consumer Discretionary (XLY) segment. Granted, I expect consumers in China, Brazil and in other nations to spend more of what they traditionally save. Between government incentives and increasing standards of living, it's almost preordained.

Here in the U.S.A, though? Until and unless real estate gets off the mat, it seems unlikely for Consumer Discretionary (XLY) to stay near the top of the sector leaderboard.

In contrast, energy may take a licking on days like these, but it'll keep on earning. With oil running from the mid-$30s to the mid-$70s without so much as a "wait-a-sec," it's not so surprising that investors are cashing in gains. Yet funds like SPDR Energy (XLE) and iShares DJ Energy (IYE) simply have too many postiives in their favor to be out of the batter's box for too long.

For one thing, a weaker dollar keeps pushing the price of crude higher. Further, OPEC may not admit it, but they're quire comfortable with $100 per barrel oil. And at the present moment, there's little to keep it from happening. Finally, investors are more comfortable with natural resource investing these days, whether its via the commodities themselves (e.g., oil, nat gas, etc.), or the companies that produce, explore, refine and/or transport.

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.

ETF Expert: Just 5 ETFs... And You're Set? Buy-N-Hold Silliness Still Carries On

You'd have thought that the 2000-2002 bear that ravaged portfolios in the first half of the decade would have stifled buy-n-hold, asset allocation advocates. Alas... "simpleton" journalists and "commission-based, keep-your-assets" advisers continued to push the ridiculous notion that you refrain from selling.

Certainly, the 2008-2009 bear that dehumanized investors must have put an end to the silliness, right? After all, assets from stocks to bonds to commodities to real estate demonstrated that buying-n-holding any investment type is far too risky; plainly speaking (writing), there isn't a magical asset allocation percentage that diversifies a portfolio away from life-changing losses.

It's pretty surprising, then, that:
 
(1) Bogle of Vanguard fame,
(2) "defrocked-a-decade-ago" Motley Fool and,
(3) Money Magazine

...have each thrown their respective fishing lines directly into the winds of change. It's surprising because more successful marketing machines began changing their tunes a long time ago. Think Suze Orman... a reformed buy-n-holder.

Bogle, founder of Vanguard, has raged against the ETF machine for nearly 10 years because ETFs seemed to be challenging Vanguard's indexing dominance. Of course, Vanguard was smart enough to develop 40+ ETFs of their own, ignoring the founder's disdain and cementing their place as one of the top financial institutions.

Keep in mind, just because ETFs are tradeable like individual securities, an indexer can still choose to be a passive buy-n-hold, asset allocator. ETFs just make it easier for an investor to buy or sell at a price point that one desires... something Bogle thinks leads investors to make poor "timing" decisions.

(Note: Ask any Vanguard 401k investor how happy they were to have restrictions and penalties for leaving or entering mutual funds. The disincentive, as well as the public pressure to "hang in there," caused millions of people to lose half of their retirement savings! Say "No" to ETFs, Mr. Bogle... really?

The idea that a financial institution knows what's better for the "average" investor such that it restricts trading activity, something that Bogle thinks is a good thing, is intrusive, oppressive and insulting. What happened to freedom of choice? If an ETF investor wishes to hold on, he/she can. If an exchange-traded index fund investor wishes to sell, he/she should have that ability!)

Not everyone is against ETFs anymore. Yet I find it ironic that the kings of foolish buy-n-holding of individual stocks, the Motley Fool, who softened their tone after the 2000-2002 bear market ruined their reputation, are now talking up ETFs.

Here in 2009, they've put forth the "only" ETFs you will ever need:

SPDR Trust (SPY)
Vanguard Small Cap (VB)
iShares MSCI EAFE Index (EFA)
Vanguard Emerging Markets (VWO)
iShares Barclays Aggregate Bond (AGG)

So this covers the investment universe, does it? Any asset allocation for any risk level, the folks at Motley Fool claim.

An "all-in-one" aggregate bond fund that is effectively dependent on intermediate U.S. treasuries flies in the face of scores of important bond and income possibilities. Where to begin? Short, medium, corporate bonds diversify in the way that small cap stocks diversify from large-cap stocks alone. Munis, inflation-protected, foreign bonds, emerging market bonds, and yes... high quality mortgage backed. How can the world of bond investing be minimized to AGG... albeit, an excellent core holding?

Do I even need to go further with the income that's not presented above? I guess there's no need for domestic REITs or foreign REITs. Perhaps we can forget about the buy-write option income approach. Preferreds? Convertibles? Why... they must be a waste, according to Motley Fool "journalist/investors."

As for stocks, I am a big fan of Vanguard Emerging Markets (VWO). Yet to minimize the importance of China and Brazil is ludicrous. And to minimize the criticality of small-cap funds like China Small Cap (HAO) and Brazil Small Cap (BRF) is near-sighted at best. At the very least, you think these folks might have at least served up SPDR International Developed Small Cap (GWX) as having relevance like U.S. small caps do. And do I even need to mention the failure to include commodities?????

Money Magazine is equally shameful, if for no other reason that the advice changes issue by issue. In "ETF Investing Done Right," the writer(s) of this July 2009 piece claim that you need just 5 ETFs to get your diversified mix of 60% stocks, 40% bonds.

Ironic, since late 2007 mixes typically showed 70%-75% stock appropriate for most. By April 2008, it shifted to 50% stock and 50% income. Now it's 60%/40%?

Keep in mind, there's no systematic rebalancing or recommended asset allocation changes taking place in the magazine. Each presentation is offered as a buy-n-hold, leave-it-alone solution for moderate risk tolerance. Pick up the magazine one month, get a "cure-all." Pick it up another month, find something entirely different.

Below is Money's "ETF Investing Done Right" for July 2009:

1. Vanguard Total Stock Market (VTI) 35%
2.Vanguard FTSE All-World excl U.S. (VEU) 20%
3. Vanguard Total Bond Market (BND) 30%
4. Vanguard Real Estate Inv Trust (VNQ) 5%
5. iShares Lehman TIPS Bond Fund (TIP) 10%

I could "tee off" on Money Magazine for its failure to identify two of the most powerful forces in diversification: foreign bonds and commodities. For foreign bonds, one could use the SPDR Lehman International Treasury Bond ETF (BWX) and for commodities, one could employ the services of the Powershares Total Commodity Index (DBC).

Naturally, it doesn't make much sense to get too wound up about weak presentations from has-beens and/or media mainstreamers. As easy as ETFs are to use, an investor needs to take a bit more interest in what he/she does. Buy-n-hold asset allocating is never sensible... and 5 ETFs won't cover your retirement life adequately.

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.

ETF Expert: Agriculture ETF Waits On A "Likely" Disaster

PowerShares DB Agriculture (DBA) is an ETF made up of corn, wheat, sugar and soybean futures. The fund itself has underperformed other commodities, like oil and various metals.

However, DBA has definitive technical support with its price above a 50-day and 200-day moving average. Its 50-day trendline also moved above its 200-day trendline... which technical folks really love to see.

A simplistic assessment on why DBA is a strong investment goes something like this: "People have to eat, don't they." Yet that's the same type of simplicity that led people to bid up California real estate (e.g., "They're not creating any more coastline," etc.). It's also the same type of conformity that led others to stay long in the crude oil collapse ("People still have to drive, don't they?").

What about true supply and demand with respect to agricultural commodities? Consider China. In spite of a global economic slowdown, their soybean imports rose 30% in Q1. China imported 30% more beans in the heart of the meltdown over a far calmer period in Q1 2008?

In truth, the demand comes from government policy. China is stockpiling corn, wheat and soybeans, allowing local Chinese "ag" prices to be kept at higher levels than international prices. Sounds eerily similar to the way the U.S. government has supported American farmers.

Of course, there's another way to look at China's stockpiling rather than seeing it as an abundance of supply. In fact, China has announced that they are building vast numbers of additional storage facilities for grains, which suggests that grain demand is quite vibrant.

Outside of China, soybean stockpiling is quite low. Prices could surge on just about any shock to the supply. Meanwhile, corn and wheat could deal with lower crop yields later this summer, and these products are always susceptible to dampness-related calamities.

Tom Lydon of ETF Trends explained that a particular wheat fungus (Ug99) could potentially wipe out 80% of worldwide wheat. Even a 5%-10% disruption would be a monumental disaster for the world's most popular crop.

Scientists have been feverishly working on a Ug99-resistant variety of wheat. Nevertheless, some believe that current crops are already in harm's way.

Could it really happen... or are fears overblown? They're probably overblown, but that doesn't mean price spikes won't help PowerShares DB Agriculture (DBA) in the near run.

(Note: It's been reported that "Stern Rust" wiped out nearly 10% of U.S. crops on 2 separate occasions in the 1950s, while destroying 5% of U.S. production in 1962.)

In January, I asked, "Are Agriculture ETFs Independent from the Current Financial Crisis?" Data over 1 year suggest that PowerShares DB Agriculture (DBA) has traveled a very similar path to the S&P 500 as well as the MSCI EAFE Index (EFA). (See the chart below.) The correlation between DBA and these benchmarks has been a remarkably high .94 and .96 respectively.

 

So why should we consider PowerShares DB Agriculture (DBA) if it represents "theoretical" diversification, but not practical diversification? Perhaps the "theoretical" will indeed become more practical over time.

Specifically, commodities priced in dollars hedge against a falling dollar... U.S. stocks would not. DBA fights food price inflation when some measures show agriculture commodity storage at historic lows. Plus, worldwide interest via commodity fund inflow appears to have greater momentum that inflows into company stock ETFs.

All the "agflation" folks need now is a major blow to a big time crop for DBA to soar. And yes, it could happen.

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.

ETF Expert: Awful Predictions on Oil, Natural Gas, Emerging Markets... And What You Should Do About It!

In May of 2008, Goldman Sachs' acclaimed oil analyst, Arjun Muti, predicted $200 per barrel oil by the end of the year. He made the prediction just around the time that oil topped out near $150. It ended the year near $45 per barrel.

(Note: I refrained from predicting where oil would go; nevertheless, in "What If The U.S. Dollar Strengthens" on 6/4/2008, I explained why oil could just as easily go to $75 per barrel as it might go higher.)

Blackrock, with its acquisition of Barclay's ETFs, is now the largest asset management firm in the world. This occurred in spite of Chief Investment Officer Bob Doll's bogus outlook for 2008. He forecasted that the U.S. would avoid a recession and that emerging markets would outperform developed markets in 2008.

We certainly didn't avoid a recession. Moreover, due to the global credit crisis, and the flight to the perceived safety of the yen and the U.S. dollar, Vanguard Emerging Markets (VWO) lost more than 50% whereas the S&P 500 SPDR Trust (SPY) lost 38% in 2008. (Those who predicted "decoupling" also failed.)

Do I even need to remind folks about Jim Cramer's "year of natural gas" assertion in 2008? Yikes! And you thought recommending Bear Stearns a week before it fell 90% in value was a bad call.

The point here isn't to punish the prognosticators. Nor should we be punishing ourselves had we listened to them. The point here is to recognize that we can learn from the foolishness of believing in a crystal ball.

The truth is... nobody knows what's going to happen. We gather information, we make informed decisions and... then you sit back to hope for the best? NO!!!

Risk is measured on the downside -- risk being defined as the possibility of loss. So one must actively protect against excessive losses. I prefer the use of trailing stop-loss orders.

For example, let's say that you read a lot about natural gas. And let's say that you believe the commodity is undervalued. Perhaps you even agree with my assertion on 6/8/09 that natural gas, the commodity, should catch up with natural gas companies.

You make an informed decision to buy United States Natural Gas (UNG) on 6/8/09 at a price point of 14. Now you have to consider a trailing percentage stop price, so that you can lock in a large gain, a small gain or a small loss... anything but a large loss. (If you choose a 15% stop-loss, your original stop point would be 11.90.)

There are times when your investment may last for weeks, months or many years. Yet there's no such thing as a "hold-forever" position. Just ask the owners of "senior income funds."

Inevitably, someone asks, "So when do you get back in?" Who says you have to buy the exact same ETF? Maybe you will purchase something entirely different. You simply revisit the possibilities and make yet another informed decision, always recognizing that risk management requires eliminating large losses.

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.