So is the market experiencing a 1995-like renaissance? Plenty of bullish prognosticators seem to think so. Of course, the recent price activity might cause the perma-bulls a bit of indigestion.

Four consecutive days of closing below the intra-day highs does not exactly constitute a pattern. Yet closing at the low end of an intra-day range and/or witnessing a pickup in CBOE S&P 500 (VIX) Volatility is rarely a positive indication. Then again, each successive VIX spike in 2013 has been weaker than its predecessor.

Will the manufacturing slowdown in China act as a precursor to a more subdued appetite for risk assets? Should a 7% single-day drubbing of Japan’s Nikkei Average be regarded with a bit more trepidation? Is the newfangled “Fed Speak” causing greater uncertainty about the future direction of monetary policy, rather than serving to provide greater clarity?

The fact that the global economy in weakening should come as no surprise to anyone. Other than a willingness by investors to acquire beaten down stocks and bonds in Europe, the region’s recession is deepening. China’s economy may be brighter than that of Europe, yet leaders are unlikely to provide stimulus with the ongoing threat of asset bubbles and inflation.  Meanwhile, the one bright spot for the U.S. (real estate) is entirely dependent on the Fed’s quantitative easing program; most corporations continue to watch revenue (sales) languish.

It follows that the real Bernanke-led Federal Reserve is not going to taper or slow or exit from its dollar printing and subsequent treasury bond purchases. The conversation has, most likely, been orchestrated to cool down market exuberance. Fed officials tried to talk investors out of excessive reliance on higher-yielding assets earlier in May. Since it did not work, they increased the decibel level on the possibility of winding down “emergency” stimulus. (Printing dollars for buying bonds to depress interest rates is still emergency stimulus, isn’t it?)

Don’t get me wrong… I still believe an imminent 5% pullback is likely; I still feel that we will witness an 8%-12% corrective phase in 2013, whereby the Fed will come to the rescue at the height of fear. If adverse consequences (e.g. extreme dollar devaluation, runaway inflation, etc.) are not readily visible, why not inject the economy with more of the rate-lowering drug than $85 billion? Why not $120 billion? Maybe $150 billion smackers per month!

The S&P 500 is a bit more than 2% below its intra-day record. However, a number of rate-sensitive ETFs are reeling from the tapering talk, including GlobalX Super Dividend (SDIV), Cambria Shareholder Yield (SYLD) as well as Claymore Global Timber (CUT). While I still prefer to acquire any ETF at a support level like the 50-day trendline or 5% below the high, I do not believe the Fed will slow or taper its easing whatsoever. If anything, they will raise the stakes… and that favors yield producers as well as real estate-related industries.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.

The media have regularly inquired why I rarely endorse the use of “Active ETFs.”  For one thing, these funds involve more frequent trading, creating a likelihood of adverse tax consequences for the shareholder. There are less tax concerns in an index fund that only rebalances quarterly or annually. What’s more, indexes do not tend to change much, making it easy to understand what one owns. An Active ETF that you bought 5 months earlier may not share much in common with the one that your portfolio holds today. Perhaps most importantly, indexing (via Index ETFs) often outperforms stock picking (via Active ETFs) due to dramatically lower internal expenses.

Nevertheless, there are always exceptions to a general rule. And right now, the Cambria Shareholder Yield ETF (SYLD) is on my radar screen. Here are 3 reasons that I may embrace the recently released Cambria Shareholder Yield ETF (SYLD):

1. Reasonable Expense Ratio. According to WSJ.com, the average ETF expense ratio is 0.44%. Of course, there are many Vanguard ETFs with annual expenses closer to 0.15% and 0.2%, but it won’t always be possible to get the fund that you want that cheaply. Still, when you buy an Index ETF, you will not be paying 1.4% for the privilege of owning a typical mutual fund — a privilege that may carry early redemption penalties or a loaded commission or costly year-end capital gains distributions.

When you look at the Active ETF landscape, unfortunately, many are more expensive than mutual funds are. Expense ratios north of 1.4% in the Active ETF world are not uncommon. Even the Cambria Global Tactical Fund (GTAA) publishes an annual fee of 1.41%. Yet the Cambria Shareholder Yield ETF (SYLD) offers a reasonable annual expense of 0.6%.

2. Dividends Are Wonderful, But Debt Reduction And Share Buybacks Are Spectacular Too. Research that goes back a century often demonstrates the enormous contributions of dividends on a portfolio’s total return. Some studies maintain that as much as half of a stock’s total return comes from dividends over time. Until recently, though, the impact of reducing debt and/or reducing the number of shares outstanding has received less attention.

Co-portfolio manager Mebane Faber has shown in his research that corporations with a desirable combination of debt paydowns, share repurchases and dividends have generated better results for shareholders than companies with high dividend yields alone. From my perspective, the effects of share repurchases are even greater in the era of endless quantitative easing. The Cambria Shareholder Yield ETF (SYLD) may even demonstrate superior staying power than a narrowly focused superstar like PowerShares Buyback Achievers (PKW).

3. Market Cap Flexibility. Research has shown a better risk-reward relationship with a multi-cap value orientation than with a reliance on the Dow alone. Granted, one might argue that not enough is known about ETFs that pull from large, medium and small companies. On the other hand, the Cambria team has picked what I believe to be a sweet spot for a shareholder total return product — stocks with market caps greater than $200 million and several dynamic criteria for inclusion.

The current breakdown for SYLD  is 56% large, 34% mid-cap and 10% small. Even though 44% of the companies represented may be riskier on a traditional risk spectrum, the overall focus on the 100 highest ranking stocks that serve up cash dividends, repurchase corporate shares and repair balance sheets should buffer against speculative selling. In other words, investors may be more likely to hold onto stocks from companies with low debt, fewer outstanding shares and higher dividend yields.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.

In 2013, the new sheriff offers citizens a different kind of “Fed Speak.” Chairman Bernanke has been remarkably straightforward with his plan to print U.S. dollars to buy U.S. sovereign debt. Not unlike his European counterpart’s infamous promise to do whatever it takes to protect the euro, Bernanke’s Fed will purchase government bonds until unemployment reaches 6.5%.

In spite of an infinitely more direct approach, Bernanke has explained that the Fed reserves the right to increase or decrease the pace of bond purchases. More recently, there has even been speculation that the Fed would stop printing money sooner and/or change the unemployment target to 7.0%. It follows that, in the quest to be more transparent, Fed Speak is as maddening as ever. Investors do not know what the Fed will actually do because they themselves reserve the right to change on the fly. (The positive spin for the right to change one’s mind is called, “flexibility.”)

However, realists recognize that the Fed’s extreme policy measures have been more successful at creating an artificial wealth effect than creating jobs or stimulating the economy. The labor force participation rate is bleak, wage growth is non-existent and corporate revenue gains have been anemic. Would home prices be soaring and riskier assets be surging were it not for ultra-low interest rates? Ultra-low rates push people to do things that they normally would not. In fact, if the Fed stopped its quantitative easing program tomorrow, housing would buckle and stocks would collapse.

In essence, Fed Speak may be explicitly communicating that there are a wide variety of possibilities with respect to central bank direction. On the other hand, Fed Speak implicitly communicates that the only option is to continue for years and years and years.

The takeaway for investors? We will see pullbacks, corrections and volatility again… absolutely. Scandals, military action and even buyer fatigue can set major indexes back temporarily. Yet the desperate quest for yield in a zero-interest-rate world coupled with company refinancing of debt and subsequent stock share repurchasing guarantee asset price inflation in the intermediate-term. (The long-term… you’re not going to want to think about it right now!)

Armed with this knowledge, there are a variety of stock ETFs that make sense on a pullback to a 50-day moving average. (Yes, I’d wait for it.) For example, PowerShares Buyback Achievers (PKW) is a savvy ETF for taking advantage of a corporations that repurchase 5% or more of their outstanding shares over the trailing 12 month period. PKW has practically doubled the performance of comparable benchmarks since the 3/09 bull market began.

Another wave that is worthy of consideration is the second coming of dot-com. While the Facebook IPO fiasco may make it seem like Google, Amazon, eBay and Netflix are yesterday businesses, their business models have improved dramatically over time. Many are mature enough to have survived the so-called New Economy, yet they are new enough to offer remarkable growth at fair prices. I prefer First Trust DJ Internet (FDN) over PowerShares NASDAQ Internet Portfolio; the former has a lower allocation to Facebook (FB) and significantly greater trading volume.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.

Today, however, a number of frontier economies have upped their level of sophistication. The Philippines recently benefited from credit agency upgrades to its sovereign debt. Direct investment by foreigners has been bountiful. What’s more, stock investors have pursued the up-n-comer for greater total return potential. Year-over-year, ETF enthusiasts have garnered roughly 53% from a dedication to iShares MSCI Philippines (EPHE).

That said, EPHE seems to be running on fumes. The Relative Strength Factor (RSF) score for this exchange-traded vehicle has stayed in the top 5% of all exchange-traded funds for most of 2013, making it vulnerable to a volatile “risk-off” change of heart. Even in the local equities market where one might track the Philippine Stock Exchange Index (PCOMP), the relative strength data have flashed bright yellow warning lights.

Granted, the iShares MSCI Philippines Fund (EPHE) is hardly the only overbought ETF on a technical basis, nor is it alone in its questionable fundamentals. Yet it is one of a select group of unleveraged ETFs that have risen more than 25% in the calendar year. That fact alone may make it ripe for profit takers and short sellers.

In truth, downside risks have been largely absent in 2013. The fact that many view Thursday’s stock asset stumble as an aberration is reason enough to take a harder look at the year’s fastest price appreciators. How vulnerable are they?

With the S&P 500 shedding 0.5% on the contemplation of the Federal Reserve slowing the pace of monetary stimulus, the biggest losers did tend to come from the year’s highest fliers. The irrepressible WisdomTree Japan Hedged Equity (DXJ) had nearly 46% on the year prior to shedding 1.2% on Thursday. Homebuilders via iShares DJ Home Construction (ITB) had been up roughly 23% year-to-date before suffering a 1.6% decline. The iShares MSCI Philippines Fund (EPHE) gave up 1.9% in the session.

It’s not uncommon for investors to take profits on ETFs that have far exceeded expectations. The bigger question is, how long should you hold onto the extreme winners that have treated you so well? Are you in danger of falling in love, the way some did with dot-com tech companies last decade? If you were one of the early adopters of a high-flying ETF, do you have an approach for making a graceful exit or will you cling to a misguided notion of hold-n-hope? Hopefully, you have an actual plan for managing downside risk.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.

Need proof that everything is a winner? Take a look at a 3-year chart involving the S&P 100. In bullish rallies, one expects the majority of stocks in a major index like the S&P 100 to gain ground in an uptrend. The percentage of S&P 100 stocks that climb above and stay above a long-term 200-day trendline might be 70%, 80%, maybe even 90%.

Eventually, uptrends break down. In the first four months of April, 2011, the percentage of S&P 100 stocks that remained above a 200-day average hovered around 90%. Then the levy broke and the iShares S&P 100 Index Fund (OEF) forfeited 18% from the highs to the lows. In 2012, 90% of S&P 100 stocks remained above a 200-day trendline as well. When the “sell-in-May” crowd exerted their influence, OEF had logged 8% in losses in roughly 6 weeks.

Historically, when 90% of stocks are above key long-term trendlines, one is typically looking at overbought conditions. Yet those conditions can persist for many months. Here in 2013, however, I am witnessing oddities that I have not personally witnessed during my 23 years of experience. Not only have we been hovering around the 90% level for most of 2013, but in the last few weeks, the percentage has climbed even higher. We’re now looking at 96% of stocks in long-term uptrends.

This “96%” goes a long way toward describing Mr. Cramer’s anecdotal observations. Specifically, investors are neither punishing the poor performers nor “cashing in” on the good performers.

Where I differ with Mr. Cramer, and a number of uber-bullish commentators, is the idea that the current market conditions should be embraced. “Buy, buy, buy!” To that I would answer, “Why, why, why?”

I do not know when the markets will decide that 1% revenue growth eventually hinders future earnings. I cannot predict when short-sellers and profit takers will make bearish prognosticators appear brilliant. And I certainly do not know if Europe’s deepening recession or the next Fed statement or the ongoing currency wars will be at the root of the next stock market correction. Nevertheless, pullbacks are as inevitable as a disgruntled relative complaining at a family get-together. It’s going to happen.

I recommend that an ETF enthusiast put together a list of stock ETFs that he/she would like to own, if the prices were 5%, 10% and/or 15% lower. At a 5% discount from current prices, I like investments such as iShares High Dividend Equity (HDV), iShares MSCI Emerging Market Minimum Volatility (EEMV) and GlobalX Super Dividend (SDIV). At a 10% discount from current prices, I might consider broader market assets like iShares Mid Cap Value (IWS), WisdomTree MidCap Dividend (DON) and iShares MSCI Hong Kong (EWH).

And at a 15% discount, when one needs to recognize the genuine possibility of a correction becoming a ferocious bear, I may be keen on those stock ETF assets that held up significantly better under fierce volatility and negativity. In all instances, I will employ stop-limit loss orders to protect against the possibility that losses accelerate.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.

Powerful moves off minor corrections are less typical, if not downright suspicious. Investors in the S&P 500 SPDR Trust (SPY) since mid-November have witnessed a soothing 22% ride to all-time highs in just seven months. In the last quarter century, you could probably count the number of times on your hand when U.S. stocks traveled a similar vertical trajectory for more than a half year without a significant hitch or pullback.

Regardless of the reasonable nature of current valuations, there are plenty of reasons to doubt the slope of the movement. For example, equities have out-shined comparable bonds by nearly 7% over the last 4 weeks – a feat that is particularly flashy for the prior 2 years. Similarly, several high yield bond (a.k.a. “junk”) indexes show a modest 2.6% in additional yield over comparable treasury bond funds; the spread is more reasonable when it is greater than 3% (300 basis points).

It follows that sensible ETF enthusiasts might consider “tweaking” their holdings. Here are 3 moves that would lower portfolio risk, yet maintain a desirable level of reward for that risk:

1. Lower the Average Maturity of Your High Yield Bond ETF. Both iShares High Yield Corporate (HYG) as well as SPDR High Yield Bond (JNK) have been terrific in the modern era of quantitative easing; both of these vehicles hold corporate bonds with average maturities in the sweet spot of the Federal Reserve’s bond-buying program (i.e., 7 years).

On the other hand, the Fed is beginning to hedge its public statements such that… perhaps the central bank will begin to taper the money printing and subsequent bond purchasing. While I don’t believe that this will actually be the case in 2013, it is certainly possible. And if the Fed does begin to taper, one should expect intermediate- and longer-term treasury yields to rise, pressuring comparable high yield corporate bonds.

The answer? Reduce HYG and JNK exposure, downshifting into PIMCO 0-5 Year High Yield (HYS) or SPDR Barclay Short-Term High Yield (SJNK). The annual dividend yields that are paid out monthly are only slightly less than the big brothers, but one would have less concern with respect to significant capital depreciation.

2. Shift Away from an All-Market-Cap Weighted Portfolio. If you have invested in the ever-popular SPDR S&P 400 Mid Cap (MDY), you may have a great deal to crow about over the last 12 months. Owners of MDY have 27% unrealized profits on a year-over-year basis.

However, as the bull market rally has strengthened, a number of savvy individuals have started to shift their attention to funds that track different types of indexes. For instance, WisdomTree Mid Cap Dividend Fund (DON) tracks a fundamentally weighted index that measures the performance of mid-caps of the U.S. dividend paying equities. Dividend stocks tend to hold up better in down markets as well as sideways markets due to the fact that fewer people sell their income producers. What’s more, the relative strength of DON over MDY has increased in recent weeks.

3. Disregard Sector Rotation Hype by Adding to Your Defensive Equity ETFs. It’s as though some analysts are getting cocky about the state of market affairs. While noting that defensive non-cyclical stock sectors (e.g., consumer staples, health care, telecom, etc.) have been the best performers between the year’s inception and April 15, a better-than-anticipated showing by cyclical segments, (e.g., energy, industrials, materials, etc.) in the last month have many declaring that a rotation into economically sensitive sectors is underway.

The problem with the hype is twofold. For one thing, even the best bull markets take breathers. When that happens, the cyclical sectors are almost certain to take a bigger shot to the jaw then staples-heavy funds like WisdomTree Equity Income (DHS) or health-care dominant iShares High Dividend Equity (HDV). Second, the Relative Strength Factor (RSF) scores for various segments across the last 10 weeks demonstrate that traditionally defensive segments have been increasing their momentum scores whereas the economically aggressive sector ETFs have been fading.

To the extent that you’ve been persuaded that now is the time to jump into manufacturing-oriented materials or global-growth oriented energy, rethink the premise. Then consider lightening up your portfolio’s exposure. In contrast, if you require more stocks in your basket, be patient for a pullback on the defensive segments. I like iShares High Dividend Equity (HDV) with its dividend-plentiful pharmaceutical companies and global telecom giants. Personally, I would probably wait for a pullback to the 50-day trendline.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.

So members of the Fed are monitoring excessive risk taking, are they? How can anyone refrain from riotous laughter?

My 80-year old father in Florida never had a need for higher-yielding bonds. In the 20 years between 1988 and 2008, he and his wife were quite content to supplement their pension with an average of 5%-6% interest from CDs. Unfortunately for them, the last of the CDs matured in 2010 and the Fed’s seemingly endless quantitative easing effectively killed the collective yield on CDs, treasuries and investment grade debt. Their only choice to avoid invading principal? Pops had to begin risking IRA dollars in higher-yielding bonds and preferred stock.

Anecdotal evidence notwithstanding, Bernanke and colleagues can monitor yield reaching and superfluous risk taking until the cows come home. Unless they pull the proverbial punch bowl and/or begin slowing their billions in treasury purchases, savers will step up the risk ladder and investors will get even greedier. And let’s face it… someday, the fear of missing out on an “easy money rally” will eventually morph into the fear of losing one’s shirt, shoes and undergarments.

Perhaps Bernanke believes he can talk the markets into a cooling-off period. In that manner, much like his counterpart at the European Central Bank, he might not have to act or change course at all. Indeed, on Friday, 5/10/13, yield-oriented bonds and stocks struggled far more than the S&P 500 at large.

Obviously, Bernanke hopes that an addiction to monetary stimulus will soon transition into a self-sustaining recovery. It follows that he will not will not overplay a hawkish hand. By the same token, his “talking points” need to remain sufficiently dovish to appease market participants; that is, interest rates better stay depressed enough for real estate demand and stock share demand to remain robust.

Keep in mind, iShares 20+ Year Treasury Bond (TLT) is falling and long-term bond yields are climbing again. On its surface, this may benefit “risk-on” stock share acquisition. Nevertheless, the activity is equally capable of causing early-to-the-party equity investors to rethink the impact of rising interest rates. Certainly, the “first-in” folks have a protection plan in place. What about those who came late to the stock market’s jamboree?

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.

Equally intriguing, the last week has witnessed a renewed interest in foreign equities. In spite of a deepening recession in Europe, questions about China’s growth, declining worldwide demand for commodities and little evidence of a self-sustaining global economy, some investors are filling their suitcases with overseas shares.

Valuation “wonks” might describe the phenomenon in simplistic terms; that is, investors obviously recognize that the earnings yields are compelling. The problem with this assertion is the fact that price-to-earnings bargains relative to U.S. stocks have existed for at least two years. More likely, investors love activist central banks and they expect foreign central banks to lower rates and/or devalue currencies.

Back in December, before many folks caught up with the trend, I discussed why a hedged investment in Japanese stocks had enormous potential. (Note: Review December 20 column, “A Foreign Stock ETF For a Rapidly Declining Currency.” Since that time, WisdomTree Japan Hedged Equity (DXJ) has packed on an astronomical 41.5%. Similarly, one should not be surprised when declining foreign currencies help pique desire for foreign equities.

Recently, the European Central Bank (ECB) cut its target rate from 0.5% to 0.25%. The Bank of Australia also lowered its benchmark to 2.75%. New Zealand’s central bank explained that it is actively intervening in its currency markets to reduce the value of the New Zealand dollar. And while Thailand has yet to act to depreciate the “baht,” its central bank is widely expected to cut rates or implement other measures to devalue its currency.

Rate cutting, quantitative easing and obvious efforts to devalue currencies are the primary reason for stock price appreciation in the United States and Japan since the bull’s 3/09 inception. In contrast, less aggressive central bank activity in some countries and regions have hindered interest in the market-based securities of those areas. WisdomTree India Earnings (EPI) has been one of the biggest year-to-date losers due to the country’s trade deficits, inflationary woes and currency appreciation.

There is a reason that many are suddenly smitten with funds like iShares MSCI Pacific (EPP) and iShares MSCI All-Country Asia excl Japan (AAXJ). In essence, it is the signals being sent out of by the central banks and governments of Asia-Pacific sovereign nations. They plan on fighting back.

Countries like South Korea, the Philippines and Thailand rely on exports to fuel their growth. And while more mature countries such as Australia and New Zealand may be less dependent on exports than emerging market counterparts, Australia and New Zealand depend a great deal on exporting natural resources/materials. It follows that, alongside, the massive decline in the Japanese yen, investors should expect a substantial increase in Asia-Pacific central bank intervention to depreciate respective currencies.

Although stock investors may be looking out at the currency landscape and placing trades accordingly, Currency ETFs representing countries in the Asia Pacific region have yet to make dramatic moves. But they will. In fact, some analysts believe that a fallout from these currency wars may be less than 18 months away. Nevertheless, you might want to steer clear from excessive exposure to Asia Pacific currencies where central bankers are determined to knock them down several pegs.

The problem for investors going forward is determining how long to continue investing in the Stock ETFs of depreciating currencies. One can go with WisdomTree Europe Hedged Equity (HEDJ) to protect against the possibility of a rapidly declining euro; one can go with WisdomTree Japan Hedged Equity (DXJ) to protect against a rapidly declining yen. And perhaps one can short CurrencyShares Australia Dollar (FXA) while simultaneously owning iShares MSCI Australia (EWA).

In the end, however, a race to the bottom in the currency wars could wreak havoc on the global financial system. An astute investor better know how and when to exit riskier assets if he/she expects to  be successful over the longer-term.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.

Consider SPDR Barclays Convertible Securities (CWB). This ETF seeks the price and yield performance of the Barclays U.S. Convertible Bond Index > $500M — an index that tracks U.S. convertibles with issue sizes greater than $500 million. With a slight increase in treasury bond yields pressuring income assets over the past few days, sellers have pushed the price of CWB lower. However, on May 7, CWB witnessed $45 million flow into the fund for a 4% increase in assets under management. The trading occurred on nearly 5x the average trading volume.

At present, CWB delivers an approximate annual yield of 3.75%. It has also been adept at capital appreciation in 2013. Year-to-date, CWB’s total return is roughly 8.25%.

Since the November elections, CWB has rocketed higher alongside gains in broader U.S. equities. Technical analysts might be more impressed with the exchange-traded fund’s ability to bounce higher on every minor pullback to a 50-day moving average.

Why would an institution(s) that purchases in large blocks pursue convertible bonds in the first place? After all, the annual yield is not necessarily a steal at 200 basis points above comparable treasuries… at least not with the potential for convertibles to sell off sharply alongside a stock scare. The most likely reason is the pressure that institutional investors face with respect to putting cash to work.

Consider the money manager who has waited patiently all year for stocks to correct a modest 5% — an event that has happened each year in the first 5 calendar months since 1996. Alas, the market has kept on climbing like the Energizer Bunny on his way to the peak of Mount Everest. The institutional money manager may continue to wait with a higher-than-desired cash allocation, or he/she can look for a middle-of-the-road compromise. I believe that a cautious institution determined that if the market keeps rising, CWB will garner some of that upside; if markets sell off, CWB should not experience as much of the downside. Moreover, the monthly payouts of a decent annual yield could work well if the summertime moves sideways. In other words, someone may have made the decision to participate without chasing.

The question that an individual investor may need to ask himself/herself is whether SPDR Barclays Convertible Securities (CWB) is a reasonable compromise for excess money market dollars. Personally, I would be more inclined to wait for a modest pullback to a price point of $42.1 at the 50-day. What’s more, I would be equally cognizant of an exit approach, utilizing a stop-limit loss order near $39.1. When the S&P 500 fell 19.8% from “top-to-bottom” in the summer of 2011, CWB dropped roughly 17.8%; that may be more downside risk than a number of income enthusiasts have in mind.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.

Mega-cap ETFs include assets like Guggenheim Russell Top 50 (XLG) as well as Vanguard Megacap (MGC). Both have performed admirably over the course of the last two years. On the other hand, low volatility funds like PowerShares S&P 500 Low Volatility (SPLV) and iShares Minimum Volatility (USMV) are capturing more in the way of capital appreciation as well as the investing public’s imagination.

It is true that low volatility funds are heavy on non-cyclical economic sectors like utilities, consumer staples and health care. It is also true that the current price-to-earnings (P/E) in the segments are higher than their respective historical norms. Yet this argument ignores a variety of other factors that influence the demand for certain types of assets… from quantitative easing to comparable yield spreads to declining economic growth to technical trends to asset volatility.

Perhaps ironically, Morningstar’s Michael Rawson may have inadvertently thrown a bone to the “low vol” defense. In seeking to bolster Morningstar’s case for Mega-cap ETFs like XLG, the writer expressed that the Russell Top 50 Index was only modestly less volatile than the S&P 500. Its annualized return since 2002 was 3.2% whereas the S&P 500 was 4.9%. Yet here’s where the news gets even more impressive. The S&P 500 Low Volatility Index that SPLV is based upon compounded at 8.6%… and was roughly 1/3 as volatile than the Russell Top 50 Index that XLG tracks.

Before going any further, let’s translate what this means… both financially and emotionally. An investor with $250,000 in the equivalent of the Russell Top 50 Index over the last 11 years experienced enormous price swings on route to $354,000. An investor with $250,000 in the equivalent of the S&P 500 Low Volatility Index over the last 11 years recorded $620,000 with a fraction of the roller-coaster ride that has defined U.S. equities in the current century.

$620,000 versus $354,000? 1/3 the risk? Why is it sensible to push funds like PowerShares S&P 500 Low Volatility (SPLV) and iShares Minimum Volatility (USMV) away from the portfolio table based on historical price-to-earnings (P/E) or price-to-proprietary-fair-value (P/FV) alone?

Granted, the future is not going to be the same as past. Nevertheless, let me add yet another wrinkle… the bond market. If one looked at U.S. treasuries in a similar vacuum as Morningstar’s one-track fundamental stock analysis, one could make a case that iShares 7-10 Year Treasury (IEF) is ripe for bearish losses of -30%. However, globally coordinated quantitative easing by central banks accompanied by a high demand for perceived safety keeps the 10-year from reverting to a mean historical yield of 4.75%.

My point is not to say that bond valuation and stock valuation involve the same process or metrics. Rather, neither asset type is likely to move on “book-wormy” valuation alone. In fact, both non-cyclical heavy stock ETFs like SPLV and USMV as well as treasury bond ETFs like iShares 7-10 Year Treasury (IEF) owe larger-than-life inflows and exceptional price gains to a perception of safety as well as quantitative easing. In other words, valuation “shmowluation!”

By the way, I have nothing against Mega-Cap ETFs whatsoever. I feel that ETFs like Vanguard Mega-Cap (MGC) and Vanguard Mega-Cap Growth (MGK) are worthy of buying on the next 8%-10% pullback.

Nevertheless, for those portfolios that haven’t benefited from equity income stand-outs like WisdomTree Equity Income (DHS) or PowerShares S&P 500 Volatility (SPLV) in the past, your opportunity is coming. A 50-day trendline could serve as an entry point or you could wait for a 5%-6% sell-off.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFExpert .

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.