Investment

» SteveT - Happy ETF Hunting!

By Kathy Yakal

EXCHANGE-TRADED FUNDS (ETFS), baskets of securities that trade like stocks, continue to enjoy a healthy degree of popularity among individual investors. Why? "People like the visibility of trading -- they see pricing all day, instead of once at the end of the trading day," says Anne Kritzmire, a managing director at Nuveen Investments, sponsors of ETF Connect.

Closed-end funds are hot, too, says Kritzmire, but for a different reason. "If you're going to be living on your income investments, closed-end funds are important -- they are built for income, and give you actively managed strategies that help keep that income stream consistent," she says.

So that more investors might explore their options in these patches of fundland, we were pleased to see new navigating tools to ease the way. In fact, ETF Connect (www.etfconnect.com1), our favorite site for info on exchange-traded funds, just got a facelift designed to give users better ways to sort and aggregate funds. With the Fund Search feature, you can screen for index ETFs, closed-end ETFs, and auction-rate preferreds via filters for asset class, fund sponsor and fund type.

The 800-plus funds available are listed by sponsor. Each is represented by a terrific one-page overview that lays out price, fund basics, performance history and other facts. Performance is also broken out in a separate table. Daily pricing earns a separate page, and site tools include a portfolio tracker and charting. Those new to this type of investment will find their questions answered in a very effective educational section.

Another top-notch site, ETF Digest (www.etfdigest.com2) has also undergone major changes. The new interface makes it look like a real Website, not a flashy ad -- as it did before. While ETF Connect is free, ETF Digest costs $39.95 a month (with one 30-day free trial). It, too, provides lots of helpful commentary. The site may be most worthwhile for serious ETF investors who aren't on a tight budget and want to you follow the 50 ETFs founder Dave Fry covers.

Among new items are several global exchange-traded funds. Some ETFs were dropped, and four new sample portfolios acquaint you with effective sector allocations.

Fry shares his perspective in daily updates, replete with charts, tables and his trading-signal e-mail alerts. Performance data for Fry's trading programs are posted, ranging from a -8.15% to a +898.43% (Goldman Sachs Networking ETF), as of Feb. 23. ETF Digest isn't a research site. It's a trading system with associated fees. if you need hand-holding, check out the free trial.

Better sites for pure research include Yahoo! Finance (finance.yahoo.com/etf3) and Morningstar.com (www.morningstar.com4). The American Stock Exchange (www.amex.com5) also hosts an informative section on the mechanics of ETFs.

Blogs also follow the ETF beat, albeit in a different, less comprehensive way than a site like Yahoo! Finance. Rather than delving (or attempting to delve) into the entire universe of funds, they tend to focus on trends, on external- source coverage, and individual ETF moves.

ETFtrends (www.etftrends.com6), for example, which is piloted by Tom Lydon, a 20-year money manager, recently posited the question when the first small-cap technology ETF would launch. He points out that the largest small-cap growth ETF is the iShares Russell 2000 Growth Index (IWO), and even its technology sector weighting is only 22%. Other posts compare exchange-traded funds and index funds, highlight newly introduced ETFs, and report on their growth in 2005: Assets in December were nearly 31% above those a year earlier.

The Unauthorized Participant (www.unauthorizedparticipant.com7) hasn't posted much since its October launch, but it links to the ETF Reader (www.etf-reader.com8), a great series of educational articles on the basics of ETF investing. Chapters focus on fund families; precious-metal ETFs; fees and taxes; and a glossary. Previous blog posts reported on happenings, such as the arrival of a new low-cost broker suited to ETF trades (TradeKing).

A far more punched-up blog is the Asset Allocator (assetallocator.blogspot.com9). We even ran into activity on weekends and holidays. By the blogmaster's own admission (he's an investment manager for a wealth management firm in the Kansas City area), the blog is not a source of original content or investment advice or a place to hang out ("Get a real life if you find yourself reading this too much..."). Rather, it makes its mark by shining a light on financial news and links, posts the blogmaster's opinion , and tries to make you laugh.

A daily feature, Allocator SmorgasBoard, recently included newslinks and commentary on Burger King's $400 million IPO, the 30-year mortgage-rate 2006 high, and Ben Bernanke's prediction of a significant economic rebound. On a lighter note, the blogmaster occasionally breaks oddball news, and reports on his daughter's spelling-bee success.

Finally, here's an interesting little blog for readers too exhausted to troll the increasingly ubiquitous financial blogs themselves. Pfblogs.org (www.pfblogs.org10) aggregates notable posts from roughly 200 blogs that follow personal finance, real estate and investing. And it's ad-free. You can read by day, or head straight to the categorized blog contributors that most interest you, like Stop Buying Crap (www.stopbuyingcrap.com11), Frugal for Life (frugalforlife.blogspot.com12), Seeking Alpha (seekingalpha.com13) and the Happy Capitalist (happycapitalist.blogspot.com14).

E-mail comments to editors@barrons.com

URL for this article:
http://online.barrons.com/article/SB1140...

Hyperlinks in this Article:
(1) http://www.etfconnect.com
(2) http://www.etfdigest.com
(3) http://finance.yahoo.com/etf
(4) http://www.morningstar.com
(5) http://www.amex.com
(6) http://www.etftrends.com
(7) http://www.unauthorizedparticipant.com
(8) http://www.etf-reader.com
(9) http://assetallocator.blogspot.com
(10) http://www.pfblogs.org
(11) http://www.stopbuyingcrap.com
(12) http://frugalforlife.blogspot.com
(13) http://seekingalpha.com
(14) http://happycapitalist.blogspot.com

-- posted by SteveT

» Normxxx - A fund worth more than its parts

A fund worth more than its parts

By Harry Domash | 2 March 2006

Closed-end funds can offer a steady stream of income, often at a discount. But researching these critters can be tricky.

Last year, Central Securities (CET)-- an entity I bet you've never heard of-- paid out dividends totaling $2 a share. Shareholders who bought the stock at the beginning of 2005 enjoyed a 9% dividend yield and a total return of 13%, more than double the S&P 500’s 6% gain. Last year's returns weren’t exceptional. Over the past 15 years, Central’s shareholders have enjoyed a 17.5% average annual return, compared to 11.5% for the S&P.

Central Securities isn’t a corporation in the usual sense. It’s a closed-end investment management company, more commonly known as a closed-end fund. closed-end funds are similar to conventional (open-end) mutual funds in that they invest in dozens of stocks or bonds, affording their shareholders the advantages of diversification plus professional management.

They differ, though, in that their prices are determined by supply and demand rather than the underlying prices of all the stocks they own. The price of an open-ended fund is always the total value of its holdings divided by the number of shares (called net asset value, or NAV). The price of a closed-end fund might be more or less, depending on how many buyers there are for the shares that day.

So a fund like Central Securities, throwing off a fat dividend every year, can sometimes be bought for less than the sum of its parts-- impossible with a traditional open-end fund. That makes it, and others like it, prime prospects for baby boomers looking for income and wanting to buy it cheap.

closed-end funds work differently. At its launch, a closed-end fund sells a fixed number of shares in an initial public offering. After that, barring another offering, the fund doesn’t buy or sell shares. New buyers must purchase shares from existing shareholders. Conversely, shareholders must find a buyer when they want to sell.

closed-end fund managers have advantages over their open-end-fund counterparts. They have a fixed amount of capital to invest, and since they don’t have to worry about redeeming shares, they can keep 100% of their capital invested. For the same reason, they can invest in situations requiring long-term commitment.

This stability seems to lend itself particularly well to funds focused on paying dividends. In fact, most closed-end funds are high-dividend payers. With retiring baby boomers increasingly searching for yield, these funds are likely to attract more attention.

Here are three features common in closed-end funds that you need to know about.

No. 1: What's the discount?

Since share prices are subject to supply and demand forces, closed-end funds rarely trade at their net asset value. In other words, the share price doesn't equal the value of the stock holdings in the fund. When they’re new, closed-end funds typically trade at a premium to NAV. However, after a few months, most trade at a discount. A fund’s premium or discount to NAV depends on its popularity with investors. Funds that trade at high premiums, say 20%, are usually investing in hot areas, such as China or other developing countries, or are expected to grow their dividends faster than other funds.

Some experts advise avoiding all funds trading at a premium. However, some funds consistently trade at premiums, while others habitually trade at a significant discount, say 15%. Each fund generally trades within a reasonably well-defined range. So it’s important to see where a fund is currently trading compared to its historical range.

All else being equal, give preference to funds trading at greater-than-typical discounts. You’ll enjoy the capital appreciation if the fund reverts to its usual range. Even if it doesn’t, you should benefit from the higher yields resulting from getting income-generating assets at a discount.

In some instances, shareholders have pressured closed-end funds trading at perpetual discounts to convert to an open-end structure. When that happens, the discount disappears and shareholders can sell at the NAV.

You can see a fund’s premium/discount trading history on sites such as Morningstar or ETF Connect.

No. 2: Leverage

Many closed-end funds employ leverage, meaning they borrow funds to increase returns. For example, say they borrow money at a 4% short-term rate and invest it in a longer-term asset returning 8%. In that example, the fund is making 4% on the borrowed funds.

Using leverage can be problematic in an environment such as we’re currently experiencing, in which the difference between short-- and long-term rates is shrinking. However, many funds employ strategies that help them mitigate the risk of losing a lot of money on a leveraged bet.

You can usually see a fund's leverage ratio on its own Web site, or on the Morningstar or ETF Connect sites. Some investors shy away from funds employing leverage. However, since many managers now employ sophisticated interest rate hedging strategies, leverage doesn't necessarily imply added risk. Nevertheless, to be on the safe side, risk-averse investors should avoid leveraged funds.

No. 3: A payout problem

To avoid paying excise taxes, closed-end funds must distribute 98% of their earned income and realized capital gains to shareholders. That requirement results in volatile payout levels since capital gains fluctuate from quarter to quarter.

Some funds have instituted a managed distribution policy to smooth out their dividends. These funds distribute a fixed percentage of net assets, say 9% annually, independent of actual income and capital gains. If a fund pursuing a managed distribution policy doesn’t earn enough income and capital gains to fund its payouts, it dips into its assets to make up the difference. That portion of the dividend is called “return of capital.” Most funds following a managed distribution policy will occasionally dip into assets to fund dividends. However, those that do it consistently are reducing net asset value, which cuts the share value.

How to find a fund

closed-end funds come in three basic flavors: Funds investing in U.S. bonds and other debt instruments; funds investing mostly in U.S. stocks; and funds investing in foreign bonds or stocks.

Bond funds: Bond funds can invest in a variety of debt, including government bonds, mortgages and corporate bonds.

Bond funds are subject to interest-rate risk, meaning that the value of its bonds decrease when interest rates rise. Of course, things can go the other way and bonds will increase in value when interest rates fall. Funds holding shorter-term bonds are usually less sensitive to interest-rate changes than those holding longer-term bonds. Besides interest rate risk, there is also default risk, meaning that borrowers might stop making their payments.

Most closed-end bond funds pay dividends equating to 3% to 9% yields. Of course, the higher the yield, the higher the perceived default risk.

Here’s a link to a screen for finding U.S. bond funds. The screen looks for funds paying estimated yields of at least 6%. However, high estimated yields often result from a sinking share price that reflects concerns that dividends might be cut. To avoid those funds, I required that the fund’s share price must not have dropped more than 1% over the past three, six and 12 months.

If minimizing risk is your top priority, reduce the required dividend yield to 4% and avoid funds paying more than 6%.

U.S. stock funds: Equity funds invest mostly in stocks, although some invest in a mixture of stocks and bonds. closed-end funds assume the same risks as open-end funds-- that their holdings will go down instead of up. To reduce susceptibility to market downswings, as well as to generate additional income, some funds sell call options (options to buy at a specified price) on stocks held in their portfolios. While the call strategy cuts risk, it also limits upside potential in a strong market.

Here’s a link to a screen for identifying foreign bond and stock funds. Except for the fund category, it’s the same as the U.S. equity fund screen. When I ran it, the screen turned up 19 funds.

Warning: Errors abound when you screen based on dividend yields. If a yield looks exceptionally high, it’s probably wrong.

Most errors revolve around the annual dividend calculation. The data used by all screeners that I’ve seen, including MSN’s, multiply the last quarterly dividend by four to compute the annual payout.

But, some funds pay a special December quarter dividend that is much larger than the other three quarterly payouts, distorting the dividend calculation. Further confusing the issue, not all funds pay quarterly dividends. For instance, Central Securities, mentioned earlier, only pays two dividends yearly.

For that, and many other reasons, the funds listed by my sample screens are not buy lists. Rather, they are candidates worth researching. You can usually find the best information about a closed-end fund on its sponsor’s Web site.

See also http://mutualfunds.about.com/od/closeden...

http://www.sms-india.com/mutual-funds/04...

http://www.cefa.com/researcharticles/Mil...

http://view.atdmt.com/TNY/iview/wllseing...

http://www.elitetrader.com/vb/showthread...

______________


The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

» SteveT - Welcoming ETFs Into the Family

By LAWRENCE C. STRAUSS

THIS WEEK, RYDEX INVESTMENTS, a mutual-fund company, will roll out six new exchange-traded funds. That follows the January announcement by Amvescap (ticker: AVZ), whose holdings include the AIM mutual funds, that it will acquire PowerShares Capital Management, which has 36 ETFs with assets of more than $3.5 billion.

The trend toward mutual-fund companies' offering exchange-traded funds seems only likely to grow in coming years. While mutual-fund assets of $9.2 trillion currently dwarf ETF assets of $313 billion, ETFs have been growing at an annual clip of more than 30%, versus about 10% for mutual funds in recent years. Just a handful of fund companies have entered the fray to date, but that could change as ETFs become more popular with investors.

"More brokers/investment advisers are using ETFs in assembling portfolios for clients," Geoffrey Bobroff, a mutual-fund consultant in East Greenwich, R.I., noted in an e-mail. "ETFs and mutual funds are appearing in client accounts alongside each other."

Exchange-traded funds, baskets of stocks typically based on broad indexes or industry sectors, trade like stocks. Unlike mutual funds, which are usually priced once a day, ETFs can be traded throughout the day. Investors also can sell them short.

The U.S. ETF business is dominated by a few big players, notably Barclays Global Investors, which has the fast-growing iShares franchise, and State Street Global Advisors, which launched the popular SPDR ("spider") exchange-traded fund in the mid-1990s. The Vanguard Group has made some inroads with Vanguard Index Participation Equity Receipts, known as VIPERs.

But, with PowerShares off the board, there aren't a lot of acquisition candidates in the U.S. for fund companies looking to get a foothold in the business.

Deborah Fuhr, an ETF analyst for Morgan Stanley, predicts that traditional mutual-fund companies will show a lot more interest if the Securities and Exchange Commission approves actively managed ETFs, which would allow a portfolio manager to select individual securities, rather than rely on an index. Several applications are pending but none have been approved.

Having an actively managed ETF in place, Fuhr says, "changes the dynamics of the business significantly. It's really a question of who launches the first one and what level of success they have."

The appeal of ETFs has grown as investors embrace low-cost index funds as an alternative to actively managed portfolios. "Investors are not satisfied paying higher expense ratios for actively managed funds that underperform the S&P 500," says Robert Hegarty, managing director of securities and investments at TowerGroup, a financial-services research firm based in Needham, Mass.

Still, fund companies face a dilemma: Exchange-traded funds are a fast-growing sector, but their management fees usually are much lower than those of actively managed funds. That gap would narrow considerably if actively managed ETFs are introduced. Also, fund companies that launch ETFs face the possibility that the new offering will cannibalize their actively managed mutual funds.

But as Hegarty says, "It's better to keep those assets in house."

The new Rydex exchange-traded funds are based on the S&P/Citigroup Pure Style Indexes, which slice the Standard & Poor's 500, the S&P MidCap 400 and the S&P SmallCap 600 into value and growth segments. Rydex already has three ETFs, the largest of which is Rydex S&P Equal Weight ETF (RSP). Its assets total about $1.5 billion.

AMERICAN FUNDS Growth Fund of America (AGTHX), the nation's largest mutual fund, with assets of about $138 billion, continues to perform well despite concern that the portfolio has become too unwieldy. The fund, which saw net inflows of $3.5 billion in January -- well ahead of last year's pace -- returned a total 14.2% last year. It beat the S&P 500 by 9.3 percentage points, placing it in the top 7% of its Morningstar peer group.

Alas, the fund is not off to a great start this year; Year to date, it's up 3.79%, about in line with the market. But its long-term returns are strong. Its ten-year annual return is 13.07%, 4.15 percentage points ahead of the benchmark.

That performance is impressive, given that large-capitalization stocks, in which the portfolio has significant holdings, haven't been a good place for investors in recent years.

As of Dec. 31, the fund's top holdings included Google (GOOG), which has sold off recently amid concerns about slower growth; Microsoft (MSFT), which has been flattish, and Lowe's Companies (LOW), which is up slightly this year.

As always, the big question with this fund -- and others in the American Funds stable -- is whether it can continue to produce good results given its swelling asset base. Capital Research and Management, which advises the retail funds, has maintained it can manage the growing portfolio, as multiple management teams run separate pieces of the portfolio.

"WHERE ARE THE CUSTOMERS' YACHTS?" is a hilarious and insightful look at Wall Street life in the 1920s and 1930s. Originally released in 1940, the book, by Fred Schwed Jr., was reissued recently by Wiley. Many of his observations turned out to be prescient.

A professional trader, Schwed "got out of the market after losing a bundle in the 1929 stock-market crash," according to the bio that appears on the book's back cover.

Those losses appear to have sharpened Schwed's eye and pen.

He took a balanced view of investment trusts, as they were called, though he wryly noted, "There are a lot of things that can be said in favor of investment trusts, but they make less interesting reading than the things that can be said against them."

The author disliked the tendency of portfolio managers to buy the fashionable securities of a given era, a bad habit that gets "the buyer in nearer the top than the middle."

He continued: "This also applies to managed investment trusts, to the advice of brokers and investment counselors, and to the efforts of private individuals."

Without realizing it, Schwed was foreshadowing the technology-investment frenzy of the late-1990s and all of the funds that got caught up in it.

E-mail comments to editors@barrons.com

URL for this article:
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-- posted by SteveT

» SteveT - Keeping Costs Down

A SPECIAL QUARTERLY REPORT: ETFs that track popular indexes may be getting too costly, as arbitragers "game" the system.


By ERIN E. ARVEDLUND

GARY GASTINEAU, MANAGING DIRECTOR OF ETF Consultants in Summit, N.J., helped shepherd some of the first exchange-traded funds to Wall Street. Yet, Gastineau, author of Someone Will Make Money On Your Funds -- Why Not You?, published last year by John Wiley & Sons, argues that mutual funds and ETFs that track two of the most popular indexes, the Standard & Poor's 500 and Russell 2000, have grown too costly for investors.

He says that's because Standard & Poor's and Russell Investment Group announce which companies will be added to their respective indexes in advance of their inclusion. And since mutual funds and ETFs based on the indexes must buy the anointed shares, arbitrageurs typically snap up the same stocks, exaggerating price increases in the process.

Gastineau argues that investors should avoid these ETFs and mutual funds. (ETFs trade like stocks, and receive preferential tax treatment relative to mutual funds.) Instead, he says, they should seek funds that mimic so-called silent indexes, such as the MSCI, Dow Jones and FTSE indexes, whose creators don't telegraph changes in index components until the additions and deletions are in effect, thus depriving the arbs of opportunities to "game" the system. In 2003, Vanguard went the silent route, changing the benchmark index for its small-capitalization index funds to Morgan Stanley's MSCI 1750 from the Russell 2000, in part to circumvent the arbs and lower fund-construction costs.

"Indexing originally was designed to improve investor performance by eliminating unnecessary costs associated with active-management decisions and portfolio turnover," Gastineau says. "But it often fails to fulfill that promise because of the costs associated with transparent portfolio-composition changes in overly popular indexes."

By their nature, S&P 500 index funds, and S&P 500 ETFs such as the Standard & Poor's Depositary Receipts 500 Trust (SPY), must hold shares of every company in the S&P 500 index, generally in proportion to the stocks' weighting in the index.

[Gastineau]
Gary Gastineau

Likewise, they must buy stocks joining the S&P, and sell those coming out of the index, in proportion to their prospective weightings. Indeed, fund managers come under sharp criticism if they stray too far from the indexes they're supposed to be tracking.

LET'S CONSIDER GASTINEAU'S argument in light of Friday's addition of Google (ticker: GOOG) to the S&P 500. Shares of the Internet search-engine giant rallied 7%, or more than 23 points, on March 24, the day after S&P disclosed it would add the stock to the S&P 500 on March 31, replacing oil producer Burlington Resources (BR). Gastineau speculated that "index-fund managers adding Google to their S&P 500 funds probably will pay 11% to 12% more for the stock than it cost before it was elevated to the index, [although] Google is no finer as a result of being anointed to the S&P."

He was wrong; based on Friday's closing price of 390 per Google share, the managers paid 14% more.

Index funds were supposed to be a cheap alternative to actively-managed mutual funds -- a more affordable way for Mom-and-Pop investors to gain exposure to the stock market. Mutual funds and ETFs based on the most popular indexes -- the S&P 500 and Russell 2000, to which hundreds of billions of dollars are pegged -- traditionally have had slightly lower nominal expense ratios than index funds tracking less popular indexes. In part, this is because the fee is spread over a larger asset base.

Gastineau cites "strong and growing" evidence, however, that trading costs related to index additions are higher for investors in S&P 500 and Russell 2000 funds and ETFs than for those who invest in less popular funds with higher expense ratios. In short, a lower expense ratio might not mean lower expenses.

In a September 2005 paper entitled "Pre-Announced Index Changes and Losses to Investors in S&P 500 and Russell 2000 Index Funds," three professors estimated that investors in S&P 500 index funds lost between 0.03% and 0.12% annually as a result of arbitrage activity ahead of index changes. The three -- Honghui Chen of the University of Central Florida, Gregory Noronha of Arizona State University West, and Vijay Singal of Virginia Tech -- calculated that investors in Russell-2000-linked funds lost even more -- 1.30% to 1.84% of potential returns -- due to arbitrage trading.

In dollar terms, the combined losses for both indexes range from $1 billion to $2.1 billion a year.

In an e-mail response to Barron's queries, a Russell spokesman said the study "overstates the cost" associated with tracking the Russell 2000. "Brokerage firms are willing to enter into principal trades with passive funds at a price better than the close...so passive funds can earn a return higher than the official index return on 'reconstitution' day, without incurring any commission costs," the Russell representative wrote.

Efforts to reach a Standard & Poor's spokesman were unsuccessful.

Gastineau trumpets funds based on silent and other indexes created by Morgan Stanley Capital International (MSCI), FTSE and Barron's publisher Dow Jones (DJ) as a way to stanch the bleeding. "It makes no sense for an investor to buy a benchmark index fund if a comparable fund is available that uses a different, less popular index," he says.

In practical terms, he recommends investors buy mutual funds and ETFs pegged to indexes such as the Russell 1000, MSCI U.S. Large Cap 300 and MSCI U.S. Small Cap 1750. The StreetTRACKS DJ Wilshire 5000 ETF, designed to track the Dow Jones Wilshire 5000 Composite index, also provides broad market exposure.

Gastineau likes the new FTSE RAFI (Research Affiliates Fundamental Indexes) indexes, as well. Components are ranked and weighted not by market capitalization but by fundamental measures such as sales, cash flow, book value and dividends.

THE COMPETITION AMONG ETF sponsors continues to be fierce. San Francisco-based Barclays Global Investors, a unit of British banking giant Barclays (BCS), claimed 60% of the market as of Feb. 28, with 102 iShares ETFs and $189 billion in fund assets. State Street (STT), sponsor of SPDR ("Spiders") and StreetTracks ETFs, is the industry's No. 2 player, with 25 funds and roughly $85 billion of assets.

Other ETF sponsors include Bank of New York (BK), creator of the popular Nasdaq 100 Trust (QQQQ), Vanguard Group (Vipers) and PowerShares Capital Management (PowerShares), which was recently acquired by Amvescap (AVZ).

State Street recently registered a group of sector-specific ETFs that slice and dice the market into industry groups. Among the planned new offerings are funds that track aerospace and defense; building and construction; computer hardware and software; health-care equipment and services, and outsourcing and information-technology consulting.

A pair of State Street funds currently in registration is slated to follow regional-banking and mortgage-finance indexes developed by the investment bank Keefe, Bruyette & Woods. State Street already manages three financial-sector ETFs tied to KBW benchmarks: StreetTracks KBW Bank (KBE); StreetTracks KBW Capital Markets (KCE) and Street Tracks KBW Insurance (KIE).

GASTINEAU'S WALL STREET CAREER spans roughly 40 years. After graduating from Harvard College and Harvard Business School, he worked for two decades as an analyst and portfolio manager, and in the mid-1990s became an American Stock Exchange executive overseeing new products, such as options on exchange-traded funds. Today he runs his own firm, consulting to institutional investors on exchange-traded funds and managing $11 million of his own and clients' money.

In his $4 million hedge fund, Gastineau buys and sells short, using ETFs. While he won't disclose returns, he says the fund has done well with a relative-value model that compares growth versus value indexes. He buys those that look undervalued, and shorts those that look rich. (A short seller sells a borrowed asset, in the hope of repurchasing it later at a lower price.)

In the first quarter, Gastineau was long small-cap-value-index ETFs, and short large-cap-growth-index ETFs, including Barclays iShares and S&P ETFs. The fund rebalances its holdings every quarter. "If you get the direction correct, you can do very well," says Gastineau, who also invests in individual stocks and index funds. His largest stock position is Fannie Mae (FNM), while fund holdings include Vanguard Total Stock Market Index Fund (VTSMX), Vanguard Small Cap Index Fund Admiral shares (VSMAX) and Fidelity Spartan Total Market Fund (FSTMX).

A committed contrarian, Gastineau urges avoiding the pack. "You don't want to trade what everyone else trades, because then you'll be overpaying," he says. "The result will be substandard performance, especially in an index fund."

Although index-based ETFs ideally are designed to track a specific index, he seeks funds that outperform their benchmarks. "An actively managed fund should have positive tracking error -- that is, beat its index," he says. "A fund based on the S&P 500 or Russell 2000 -- which you shouldn't own anyway -- at the very least should beat its index."

Gastineau also advises avoiding high-turnover funds. In general, he prefers less than 100% annual turnover.

Go for index funds and ETFs with the broadest possible market exposure, such as the Wilshire 5000 or the new S&P Completion Index, he advises. Launched a week ago, the completion index includes more than 4,300 mid-, small- and micro-cap companies. The S&P Total Market Index (TMI), comprised of the S&P 500 and the Completion index, also launched the same day. It includes all common equities listed on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market and the Nasdaq Small Cap.

Gastineau prefers ETFs to mutual funds in part because ETF gains receive more favorable tax treatment. Consider the plight of a long-time investor in Fidelity Magellan (FMAGX), for instance. The fund replaced manager Robert Stansky in October, and the new manager, Harry Lange, subsequently turned over a significant portion of the portfolio, resulting in $30 billion of unrealized capital gains and an enormous distribution to investors. Even at today's lower capital-gains rate, the tax is likely to be substantial for many investors.

"An ETF will be consistently better," Gastineau says.

As ETFs proliferate, investors may find them a better alternative than mutual funds for many reasons. But some ETFs deliver fewer cost savings than promised. Like Gastineau, savvy investors understand the difference.

E-mail comments to editors@barrons.com

URL for this article:
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-- posted by SteveT

» SteveT - Investing, Country-Style

By LAWRENCE C. STRAUSS

ALTHOUGH DIVERSIFICATION IS A KEY selling point of exchange-traded funds, single-country ETFs, many of them very concentrated, have been raking in a lot of cash lately -- and returns that come with bragging rights, too.

Unlike mutual funds, whose net asset values are usually calculated once a day, ETFs trade like stocks throughout the day, and investors can sell them short. ETFs often track an index like the Standard & Poor's 500, or a sector or country. Regional funds are another way to play the four corners of the globe without much stock-picking -- and without the same level of concentration risk that some country funds carry.

If, for example, an investor wants to put money into stocks of companies based in Brazil, South Africa or elsewhere, a single-country ETF is a quick, easy and efficient way to do that. It certainly beats investing directly in a slew of overseas companies, either via American depositary receipts or on local exchanges.

Plenty of retail and institutional investors are catching on. In the 12-month period ended Feb. 28, iShares MSCI Japan Index (ticker: EWJ) had net inflows of $4.1 billion, the third most in the iShares stable. iShares MSCI EAFE Index (EFA), which tracks holdings in developed countries except Canada, topped the list, with nearly $6.4 billion of new cash, followed by iShares MSCI Emerging Markets Index (EEM), another hot area, with a net inflow of $5.2 billion.

Other big sellers over that stretch included iShares MSCI Brazil Index (EWZ), which pulled in $955 million; iShares MSCI South Korea Index (EWY), nearly $890 million; iShares MSCI Germany Index (EWG), $395 million; and iShares MSCI South Africa Index (EZA), $208 million.

Recently, these funds have boasted some shining performances, and U.S. investors have poured money in. Why not? The Brazil iShares fund was up 52.65% last year, for instance.

Investors need to be careful, however: These funds tend to be very concentrated and, as a result, volatile. "It is a risky proposition" for individual investors, says Ram Kolluri, a financial planner who heads Global Investment Management in Princeton, N.J. "You really need to know what you're doing."

As of Feb. 28, the iShares MSCI Austria Index (EWO) had nearly 83% of its assets in the portfolio's largest 10 holdings, according to Morningstar. The largest holding, oil company OMV AG (OMV), accounted for 20% of the fund. Similarly, the top 10 holdings in the iShares Brazil ETF represented nearly 70% of the assets. (The fund was up about 20% in the first quarter, continuing its hot streak.)

Some examples of such funds' volatility: In 2001, the Brazil ETF lost 18.81%. In 2002, it lost another 36.3%. The fund was up 116.50% in 2003, 33.61% in 2004 and 52.65% last year. That's not a smooth ride -- owing in no small part to the fund's concentrated holdings, particularly in energy and commodity names like Petroleo Brasileiro (PBR). Clearly, the recent surge in flows can be attributed at least partly to performance-chasing.

Lance Berg, a spokesman for Barclays Global Investors, which owns the iShares funds, acknowledges the risk: "If you are going to invest in the Austria fund, for example, there are not that many securities in the fund. You need to understand that." Says Gary Gastineau, who runs ETF Consultants in Summit, N.J. : "As long as the disclosure is adequate, which I think it is, I say, 'Let them do it.' " (For more of his views, see Exchange-Traded Funds1.) Berg notes that regional funds, which aren't as concentrated as single-country portfolios, have taken in a lot of money recently; and they can better spread the risk.

Single-country ETFs' concentrations certainly vary. In the iShares MSCI Japan Index, which tracks one of the deeper international markets, the top 10 holdings account for about 25% of assets. But most tend to have a handful of big positions. The top 10 holdings of the iShares MSCI United Kingdom Index (EWU), which tracks a large and liquid market, account for nearly half of its assets.

The reason: MSCI single-country indexes include the top 85% of each industry group by market capitalization, adjusted for free float. The industry groups are then combined to form an index. In many countries, the large-cap names take up a lot of space, leading to a concentration of bigger-cap names.

For investors, it's crucial that these funds are used appropriately -- namely, as a means to fill in around core holdings, not as a way to chase the latest hot stock market. Kolluri uses only the iShares MSCI Japan Index Fund for his clients right now, and recommends that such funds account for only a small part of the overall portfolio, perhaps 4%.

TALK ABOUT A TOUGH quarter. The Internet HOLDRS Trust (HHH), a 13-stock basket including Yahoo! (YHOO), EarthLink (ELNK) and Amazon.com (AMZN), was down 11.1% in 2006's first three months. All of those companies saw their stocks post double-digit losses in the first quarter of '06, contributing to the fund's dismal performance. Ouch.

HEDGE HOGS CERTAINLY LOVE to jazz up their returns by using ETFs as a cheap and liquid way to play the price swings between sectors of stocks. So how's this for a combination: the home builders against the media?

Brian Rauscher, director of portfolio strategy for private bank Brown Brothers Harriman, suggests shorting the home builders by using the Homebuilders SPDR (XHB) and taking a long position in media stocks by buying the PowerShares Dynamic Media Portfolio Fund (PBS).

Rauscher tracks big shifts in the sell side's earnings estimates. The idea: Too much love from analysts precedes troubling runups in share prices, while such signals' absence sometimes anticipates good news. He tallies analyst estimates, netting upward and downward calls. These revision percentages then get compared with the sector's performance and the general performance of the equal-weighted S&P 1500 index.

"Although there has been a downward adjustment in home builders, there's still room to move down," says Rauscher. "Particularly if the Fed decides it really needs to keep tightening." He points to analyst estimates, noting that although they have come down sharply from 2005, they are now merely in balance with the rest of the market -- and subject to further downward revision, in Rausher's view.

The media industry's price-earnings ratio, relative to the equal-weighted S&P 1500's multiple, is as low as it's been in 15 years. To Rauscher, this is a sign of extreme pessimism -- and a solid contrarian indicator.

-- Jack Willoughby

E-mail comments to editors@barrons.com2

URL for this article:
http://online.barrons.com/article/SB1143...

.

-- posted by SteveT

» Normxxx - Small Caps Advant-Hedge?

The Advant—Hedge Of Small Caps?

By ContraryInvestor.com | 2 April 2006

"Since 1999, the [above] ratio has gone nowhere other than “down”; which means this is the 8th year of decline. More generally, the ratio runs in 7 year cycles, so given we are in the 8th year… perhaps the time to consider readjusting one’s portfolio is a wise decision. In fact, we believe the winds of change are forthcoming; it may not be today’s business or next weeks’, but we cannot ignore the developing bullish falling wedge. This, coupled with the oversold 20-week stochastic suggest a trend change; with confirmation coming with a breakout above both trendline and 100-week moving average resistance.

Therefore, the risk/reward dynamic of being long the ratio is rather good bet; certainly this should be on everyone’s trading radar going forward."
— The Rhodes Report

The Advant—Hedge Of Small Caps?...As you know, moving into the new year there were a lot of folks suggesting that large cap stocks would finally overtake their smaller cap brethren in 2006. Even we suggested that a larger cap defensive stance might be appropriate in the new year. In part, the defensive end of the deal (telecom and health care) has been okay so far, but the suggestion of looking to the large caps as a class has not yet been the proper market cap stance. Although moving back toward large cap exposure may indeed still be quite appropriate posturing for "tomorrow" for all we know, it so far hasn’t been the case in 2006. Year to date, investment performance for the headline equity indices is as follows:

As you know, across market history, large cap equity performance relative to small and mid-cap price strength has ebbed and flowed over meaningful periods of time. Half decade stretches of large caps dominating small caps, and vice versa, is far from uncommon. In fact, it’s much more the rule than not. You can see this very clearly in the chart below. At least at the moment, we rest at a multi-decade high in terms of Russell 2000 (small cap) price performance relative to the S&P. And although we see a bit of a near term divergence in terms of the monthly RSI configuration being flat against the upward direction of the relative price trend itself between these two indices, both real price action in the market and longer term price trend in the chart below are not suggesting that change in the outperformance of small and mid caps relative to the larger capitalization issues is ready to reverse immediately. Very quickly, we think the 24 month EMA and RSI indicators will help keep us on the right side of the very big relative moves here, but in no way will they get us in or out at exact tops and bottoms.

Moreover, as you’ll again see below when looking at the S&P on an equal weighted basis, as opposed to its conventionally cap weighted computation; the index does indeed sit at a new all time high. Again, this is clear testimony to the direction and strength of smaller capitalization equity tiers for now.

As we mentioned in a discussion we did late last year focusing on the operational cash flow numbers of many a large cap company, valuations for the bulk of these large cap big boys has contracted quite significantly since the time of the Dow, S&P and NASDAQ equity index peaks in early 2000. And rightfully so given their extended valuations at that time. But in like manner, macro valuations in the small and mid cap space have increased quite significantly over the last half decade-plus. We currently see multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) in small and mid caps pushing top end historical numbers as of late. The bottom line is that any type of valuation chasm between small and large cap issues that may have existed six years ago near the major market equity index peaks has in very good part been erased. Just have a look below. (Please note we are using trailing twelve months earnings in these calculations. Secondly, we're excluding negative earnings from the Russell numbers. If we had not, the P/E multiples would be much higher.)

Moreover, at least historically, small caps have not been a great sector to own when the general level of domestic interest rates is rising and when corporate profits peak on a rate of change basis, as we believe is now in the process of occurring. So why the continued out performance of small caps so far in 2006 if a few macro negatives for the group seems firmly in place? And what can we look for in terms of new ways to watch for potential change, since many of the historical tried and true indicators have not yet kicked in, so to speak?

We think there’s another very meaningful factor of the moment that may indeed be extending the current small cap cycle, or at least keeping the large caps from acting a bit better, despite many of these companies really being global mutual funds in single stock sheep’s clothing, so to speak. And this meaningful factor may be the recent interplay between large institutional money and the hedge fund community. Here’s what we’re thinking. As you’ll remember, whenever we’re analyzing the dynamics of sector weighting change in the S&P 500, we’re always pretty darn skeptical of the major sector weights of the moment in that excessive sector weightings directly show us what has already been bought by the bulk of the investment community. It’s one of the main reasons we have stayed away from the financials over the last few years. Point blank, they are already very widely owned. Well, if one looks across the broad investment landscape both domestically and internationally, it’s really the large institutions that can move the markets meaningfully over longer periods of time. As these institutions (state and local pension, private corporate pension, foundation, etc.) allocate capital into and out of various asset classes, they leave a very wide financial wake in their path. And into this wake are pulled many trend traders, momentum types, proprietary trading desks and lesser (than institutional) girth investors, as well as mom and pop America.

As we headed into the latter part of the 1990’s, we believe it’s very more than fair to say that the very large institutional investors both domestically, and really globally, were more than loaded up with large cap domestic US growth stocks. Why? Because these were the very stocks that had just led a two-decade equity bull market. And, as per the laws of human nature, as a bull market in any asset class reaches its conclusion, the asset class leader is necessarily owned by “everyone”. It has to be. Otherwise, of course, it would not have been the bull market leader in the first place. So, as we look back, the large cap US growth stocks were very heavily weighted in large institutional investment portfolios come early 2000. It’s no wonder the small and mid-cap issues were able to sprint ahead of the large load the big institutions were carrying in large cap stocks six short years ago. But there’s more to the story.

We also know that as the equity markets peaked and institutional pension funds began to fully realize their large cap dominated portfolios were pulling them ever nearer to under funded status by the day as the early 2000’s equity bear market began to unfold, they began to scramble in relative earnest for investment return in absolute terms. And because the large institutions by their very nature are “the crowd”, and tend to act in herds over longer periods of time, they one by one began allocating increasingly important amounts of their investment dollars to “alternatives”. As we all know by now, one of the most popular alternatives over the last half-decade has been the hedge fund product. So here we have large institutions fully loaded with large cap US growth stocks then beginning to increase their funding of alternative/hedge investments. And just where was the money going to come from to fund those alternatives such as the hedge fund complex? You guessed it, from existing large cap investments. Let’s face it, where else?

And if we follow this train of logic a bit, once this money for alternative investing got in the hands of your friendly neighborhood hedge fund, where did it then go? Into Coca-Cola? How about GE? Maybe Microsoft? Not on your life. The hedge money went into high beta vehicles. Emerging market, small cap, mid-cap, emerging market debt, etc. It went directly into the financial asset classes that have led the macro charge so far this decade. The bottom line is that by default, movement of large institutional assets over the last half decade has created the perfect environment for higher risk assets to outperform and for the large cap US stocks to at best lay dead. We need to realize that during the current cycle, relative small versus large cap investment performance has as much to do with the changing structure of institutional portfolios as it does with the fundamental merits of large and small company stocks. When we recently looked at 2006 US equity mutual fund inflow characteristics in one of our subscriber discussions, we mentioned that for the first time in memory, large equity index fund inflows have been negative YTD in 2006 while flows to aggressive funds are up strongly and flows into small cap funds remains solidly positive. Remember, the large institutions leave a huge asset performance wake into which the public is ultimately drawn. We’re watching this very thing occur right now. The public is selling their large cap index oriented mutual funds so far this year. Remember, at least historically, these folks are always wrong at important market inflection points. So as we move ahead, we need to think about how much small cap strength and large cap weakness is actually reflective of company specific business fundamentals, valuations, etc., and how much is attributable to the ongoing continuation of large institutional portfolio rebalancing. In other words, are individual company small cap investment opportunities leading money to the sector, or is the reallocation of institutional investment money simply "creating" small cap out performance while in extended transition? In our minds, the correct answer to that question will have a large bearing on how we allocate our own investment dollars ahead.

As you’ve probably anticipated by now, it's time to look at some numbers and relationships. First, we believe there is an observable pattern between the growth in hedge assets under management over time and the relative performance relationship between large and small cap equity sectors. Below is a combo chart showing the growth in hedge industry assets since 1990. Below in the top portion of the chart is the same Russell 2000 and S&P relative performance chart we showed above.

What we notice is that between 1993 and 1995, money being allocated to the hedge complex grew very slowly. In fact nominal dollar growth over these few years was smaller than some monthly growth in hedge assets we've experienced from time to time over the last few years. And although there was decent hedge investment asset growth during 1996 and 1997, additional money being allocated into hedge vehicles in 1998 literally dried up. As is coincidentally true in the bottom portion of the chart, between year-end 1993 and 1998, Russell 2000 investment performance plummeted relative to the S&P. You remember the old saying which is not to be forgotten - follow the money. When the hedge industry was not receiving meaningful additional funding, so too neither were small cap issues outperforming their large cap amigos.

But we think taking this one step further makes the analysis much more meaningful and gives us something to watch and monitor directly. Below is a chart of hedge assets as a percentage of the total capitalization of US equities. The hedge data is the same used to construct the chart above. The equity market capitalization numbers come directly from the Fed Flow of Funds report. In other words, we have not had the ability to manipulate the form of the graph in any manner. Our whole thesis of the importance of the rate of hedge funding and institutional portfolio allocation comes clear below. You can see that although hedge assets were growing in nominal dollars from 1993-2000 in the chart above, the graph below tells us that hedge assets as a percentage of total equity market capitalization was flat over this same period. We believe this is very important in that perhaps the correct question in trying to get a sense for large versus small cap relative performance near term becomes, is the hedge complex becoming a larger part of an expanding equity market, a smaller part, or simply remaining flat? Quite simply, are hedge assets growing at the margin relative to the total equity market or not?

It is absolutely clear over the entire fifteen-year period in the chart above that when hedge assets were growing faster than total equity market capitalization, small caps were outperforming their large cap brothers in arms. But when that was not the case, the large caps took control of the relative performance game. Although our little implicit suggestion of watching the asset base in the hedge complex and monitoring the dynamics of its growth rate relative to the total equity market is not the sole and singular rationale for large versus small cap relative performance dynamics, we believe it is a very important part of the overall financial market capital flow puzzle. And a piece of the puzzle to which we believe the Street has not given much attention. Again, you can count on us monitoring these dynamics over time, as well as keeping an eye on the character or relative index price chart work.

One last comment for perspective. 2005 estimated investment flows into the hedge sector were below 2003 and 2004 experience. We’re already seeing a rate of change decline. Although we are in no way making a case for the death of the hedge fund industry, so to speak, have a look at the following table of performance numbers brought to us by the wonderful folks at Greenwich-Van Hedge (GV). We have to believe at this point in the game, more than a few plan sponsors are “asking questions” about the performance advantage of alternative investments. Interesting, no? Does money continue to gush into the hedge community with aggregate numbers like this? Or perhaps the more correct question is, do plan sponsors as fiduciaries continue to believe paying 2% (of asset value) and 20% (of annual profits) is a good thing in terms of gaining increasing exposure to alternative investments?

As we have suggested many a time over the recent past, we are absolutely convinced that in the current investment environment getting equity sector allocation correct has been and will continue to be a critical part of the ongoing battle. In conjunction with that, equity capitalization and style (growth versus value, etc.) choices are just as important. It’s part of our job to provide bigger picture perspective within the context of the ongoing guarantee of the financial markets that is change.

______________


The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

» Normxxx - Relative Strength Strategy

Relative Strength as a Strategy

By TheBigPicture (blog) | 26 May 2006

If you have good risk controls, and the ability to deal with lots of volatility, then relative strength has been a good strategy— regardless of market conditions:

"Over the very long term, covering multiple decades and including several major bull/bear cycles, no stock selection strategy beats Relative Strength (RS). This strategy is easy to understand: Buy and hold only the strongest stocks. When a stock slips enough so that it is no longer among the strongest, sell it and replace with whatever is the new strongest.

"The RS strategy has been successful for a very long time. Samuel Eisenstadt, Research Chairman of Value Line Investment Survey, found that the top-ranked stocks by RS beat the Standard & Poor's 500 Index by 4.5 to 1 over a 15-year test period. RS is an important component of Eisenstadt's Value Line Ranking System. In another independent study, Charles D. Kirkpatrick II, CMT, found that the top-ranked RS stocks outperformed the indexes by 4.7 to 1 over a 17-year period. Many other studies have arrived at the same conclusion.

"The RS strategy also worked well with the top 20 and top 30 ETFs, but my testing showed it worked best when concentrating on the top 10. Some ETFs can stay in the top 10 for weeks or months, but we cannot count on many long-term capital gains holdings for a year or more."

Apparently, it works just as well with ETFs:
<img Align="Left" hspace="10" vspace="5" src="http://bigpicture.typepad.com/comments/i...">
Colby's column (see below) gives more details, along with his list of preferred ETFs. But he notes that:

"Because excessive speculation is inevitably followed by a return to reality, chasing RS fell out of favor for a few years after the top in March 2000. But the RS strategy is very much alive and well again since August 2004. Since August 2004, true to typical form, the strongest stocks have suffered large declines in minor market corrections, but they have been very quick to spring back to the top when the correction has run its course."

Source:
Applying the Relative Strength strategy to ETFs
Robert W. Colby, TradingEducation.com
Marketwatch, 4:12 PM ET May 25, 2006
http://www.marketwatch.com/News/Story/St...

______________


The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

-- posted by Normxxx

» Bill_Duffy - Short ETFs coming!

.
ProFunds prepares first leveraged ETFs
Funds designed to provide double, inverse of markets' performance
By John Spence, MarketWatch
Last Update: 12:01 AM ET May 29, 2006

BOSTON (MarketWatch) -- ProFunds Advisors LLC is readying the first leveraged exchange-traded funds that, if approved, would allow bullish investors to double the gains of the U.S. stock market while giving those in the bear camp a way to profit from market declines.
The Bethesda, Md., money manager recently filed an updated prospectus for groundbreaking funds that seek to provide daily returns twice that of bellwether stock indexes including the Standard & Poor's 500 and the S&P MidCap 400.

The planned ProFunds offerings cover three basic approaches. The first is a "bullish" ETF uses leverage to double the market's normal return. For example, if the S&P 500 index rose 2% in a day, the corresponding ProFunds ETF is designed to give investors a 4% return.
Second is a "bearish" strategy that aims to deliver the exact opposite, or inverse, of the market's return. Accordingly, if the index declines 2%, then the inverse ETF aims for a positive 2% return.

Finally, a leveraged "ultra-short" bearish fund seeks to provide twice the opposite of the market's return. So in the case of a 2% market decline, this portfolio would gain 4%.

"There are financial advisers, institutional investors and hedge funds who employ these strategies to hedge market exposure," said Dan Culloton, a fund analyst at investment researcher Morningstar Inc. who follows ETFs.
High-octane ETFs like those proposed by ProFunds have been expected, but some analysts advise treading carefully here because these investments can magnify losses as well as gains. Additionally, many question the need for such offerings since investors can already short ETFs or buy them on margin, since they trade like stocks.

"I appreciate there are sophisticated investors who crave this sort of flexibility, but would caution average investors against using them because they are difficult to use in a long-term portfolio," Culloton said.

Others welcome the leveraged and inverse ETFs as handy tools for aggressive investors seeking to profit from market volatility. Read related story.

Still, investors shouldn't expect these funds to deliver exactly double or the inverse of an index due to trading costs and other fees. And the turnover rate for the ETFs is expected to be greater than 100%, according to the prospectus.

"A high level of portfolio turnover may negatively impact performance by increasing transaction expenses and generating taxable short-term capital gains," the filing said.

Doubling down ProFunds is one of a handful of mutual-fund companies such as Rydex Investments and Direxion Funds (previously known as Potomac Funds) that accommodate active traders.
With the planned ETFs, ProFunds is duplicating strategies employed by some of its existing mutual funds. However, the ETFs would allow investors to trade throughout the day because their net asset values are updated continuously during the session, while traditional mutual funds are priced daily at the market close.
Fees for the new ProFunds ETFs have not yet been determined, according to a regulatory filing. A spokesman for the company declined to comment on the funds during the "quiet period" at the Securities and Exchange Commission.
An SEC spokesman said the agency has opened a comment period on the ETFs, which have not yet been declared effective.
The funds would trade on the American Stock Exchange, according to regulatory documents. The ETFs would use derivative instruments such as futures and options to achieve the leveraged- and inverse index returns.
The Amex has amended its rules to allow trading of the ProFunds ETFs, and funds normally begin trading shortly after the SEC's comment period unless a legitimate objection is raised.
The ETFs would be managed by an investment team headed by Agustin "Gus" Fleites, who joined ProFunds as chief investment officer last year after a sudden departure from ETF heavyweight State Street Global Advisors, a unit of State Street Corp.

Fleites was a key figure at ETF pioneer State Street, and known for his expertise on the complex funds as well as the financial-adviser market. At the time of his ProFunds hiring, industry insiders speculated he was brought on board to help get the leveraged and inverse ETFs through at the SEC, where they had languished in registration for years. See related story.
Said Jim Wiandt, editor of trade publication Journal of Indexes: "It seems as if the longest-stalled ETF in registration at the SEC is about to make it through the regulators and onto the market."

-- posted by Bill_Duffy

» bvd53 - USING ETF'S

Could a person come out ahead using a ultra pro fund (x2) and only investing half as much as they normally would on the equity side of their portfilo and making double profits on the fixed side?

-- posted by bvd53