Investment

» axolotl - NEW CLAYMORE/ ZACHS ETFs

......The symbols are XRO CVY EEB NFO STH. The XRO is an idea that I have been interested in for years, but I do not have much confidence in Zachs ability to pull it off. XRO is sector selection - go with the hot sectors and pick a group of the leadinmg stocks in the sector. Also, WisdomTree ETFs has an index plus ETF which Bogle does not believe will succeed and he says Siegel is demented to believe in it. It favors the idvidend paying stocks in the SP500.

-- posted by axolotl

» SteveT - The Newest Kids in Town

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Sizing Up Exchange-Traded Notes

By TOM SULLIVAN

INVESTORS SEEKING A PASSAGE to India might want to consider a new exchange-traded note that tracks a key stock-market index in that emerging land.

The investment vehicle, called the iPath MSCI India Index Exchange-Traded Note, debuted late last month. Traded on the New York Stock Exchange (ticker: INP), it's based on the Morgan Stanley Capital International India Total Return index, which includes the 68 largest companies, judged by market capitalization, listed on the National Stock Exchange of India. It's off to a strong start, with a total return through last Wednesday of 6.79%, according to Morningstar.

The India ETN is the fourth exchange-traded note introduced by Barclays Capital, and it's the first to be linked to an emerging market. Barclays, the parent of the iShares family of exchange-traded stock-index funds, plans to introduce several additional ETNs this year.

Exchange-traded notes are similar to their cousins, exchanged-traded funds: Both track indexes and both trade on stock exchanges. But ETNs also have bond-like characteristics, because they reflect the risks of their issuer's credit. They are senior unsecured debt securities with 30-year maturities issued by Barclays Bank.

Another key difference from ETFs: The notes version can be tied directly to the prices of commodities. Lately, however, that's been nothing to crow about: The three commodities ETNs have posted losses since they were launched earlier this year. The notes do have a lower expense ratio -- typically 0.75% of assets -- than exchange-traded funds, says Lou Stanasolovich, chief executive officer of Legend Financial Advisors in Pittsburgh, who adds that they also get better tax treatment.

Holders recognize a tax gain or loss only when they sell the notes or when they mature. In contrast, holders of actively traded mutual funds can receive unwanted and taxable capital gains when the portfolio manager decides to sell a stock. So can holders of exchange-traded funds, when components of the index they track change and the ETF must sell and buy shares in order to mirror the underlying index.

Another difference between Barclays exchange-traded securities: Holders of ETFs have an interest in the underlying securities; ETN investors don't.

The first two iPaths, launched in June, are linked to commodities. One is the Dow Jones-AIG Commodity Index Total Return ETN (DJP); the other, the GSCI Total Return Index ETN (GSP). (Dow Jones is the publisher of Barron's.) A third, the Goldman Sachs Crude Oil Total Return Index ETN (OIL), began trading in August.

All the Barclays exchange-traded notes offer a weekly redemption feature for holders of at least 50,000 units, or they may be sold or bought like stocks during trading hours.

They are sold at par at $50 a note. Unlike most bonds, they pay no interest and have no credit rating, though Barclays itself is rated Aa1 by Moody's Investors Service and double-A by Standard & Poor's. The ETNs are essentially a straight bet on an index.

On its Website (www.ipathetn.com1), Barclays warns that exchange-traded notes are riskier than ordinary unsecured debt securities and have no principal protection. Holders, of course, can lose money if the underlying index declines.

For the investor looking for exposure to commodities, the three older iPath ETNs are "transparent, liquid and cost-effective," maintains Philippe El-Asmar, managing director and head of Investor Solutions, Americas, for Barclays Capital.

Sonya Morris, senior mutual-fund analyst at Morningstar, says she's partial to the Dow Jones-AIG Commodity ETN because of "its exposure to a broader basket" of commodities, while the GSCI ETN is heavily weighted toward energy. She recommends that investors have no more than 5% of their portfolios in such instruments, due to their volatility.

She's not a fan of the new MSCI India Total Return Index, which measures both price performance and income from dividend payments from Indian equity securities. "It's a trendy category" and a market that has produced eye-popping returns that are "unsustainable," says Morris, who thinks this ETN might attract short-term investors seeking a quick buck.

Indian stocks have been volatile. They rallied early in 2006, but began to tank in May, dropping 30% before rebounding. The Indian market ended 2006 up about 50% and many now consider it overvalued.

El-Asmar says "there's a lot of interest in emerging markets," especially Brazil, Russia, India and China, and notes that playing the Indian market directly is difficult for foreigners (see Still Growing3).

Future exchange-traded notes could offer exposure to other specific assets, regions or countries.

Legend's Stanasolovich is looking forward to the debut of Barclays ETNs apparently in the works that would track agriculture and industrial metals, both of which enjoyed strong performance last year and that some investors believe will be robust for several years.

"You can take the emphasis off energy" with more diversity, Stanasolovich says, adding that he'd buy three or four ETNs and give them all an equal weighting. "We'd love to have that," he says. "There's no doubt in our minds they will go up over time," he adds.

From inception through Wednesday, the GSCI Total Return Index ETN lost 20%, while the Dow Jones-AIG Commodity Index ETN was down 2.6%, according to data provided by Morningstar.

From its trading inception through Wednesday, the iPath Goldman Sachs Crude Oil Total Return Index was down 24.16, reflecting the gradual pullback in petroleum prices after last spring's huge runup.

Barclays is the leader in exchange-traded funds. Its iShares have a 55% share of the roughly $400 billion market, which has grown from around $30 billion in just the past few years.

In contrast, the amount invested in the much newer exchange-traded notes is just $1 billion, and the total number of these securities outstanding is relatively modest, too. There are 14.6 million ETNs linked to the Dow Jones-AIG Commodity Index iPath, 4.8 million to the GSCI Total Return Index and 1.2 million to oil, according to Barclays.

One thing for investors to keep in mind when considering ETFs or ETNs: Although both offer relatively inexpensive ways to play the overall market, neither can provide the kind of returns that the manager of an actively traded fund can generate if he's in the right market at the right time.

Finding the person with the next hot hand of course is difficult. But, given human nature, there's never a shortage of investors willing to try. So money managers don't have to worry about going the way of the dodo anytime soon.

E-mail comments to editors@barrons.com

URL for this article:
http://online.barrons.com/article/SB1167...

Hyperlinks in this Article:
(1) http://www.ipathetn.com
(2) http://online.barrons.com/article/SB1167...
(3) http://online.barrons.com/article/SB1167...
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-- posted by SteveT

» SteveT - WisdomTree Thinks It Has a Better Idea

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By LAWRENCE C. STRAUSS

U.S. EXCHANGE-TRADED FUNDS HAVE CLOSE TO $400 billion in assets. So the $1.5 billion that WisdomTree, a fledgling venture launched in 2006, has under management in 30 funds is a mere drop in the bucket.

But WisdomTree, based in New York, has more firepower and marketing muscle than most start-up firms. It has launched an aggressive advertising and public-relations campaign, and its management roster features some big names, who are featured prominently in those advertisements.

Its chairman is Michael Steinhardt, a pioneering and extremely successful hedge-fund manager. Its senior investment strategy adviser is Jeremy Siegel, the Wharton professor whose books include Stocks for the Long Run.

Beyond all of that, WisdomTree is trying to position itself as the ETF player with the better mousetrap -- namely using fundamentals, rather than stock-market value, to construct indexes.

WisdomTree has set its sights on the indexing world. "Our goal is to pull money out of cap-weighted products," says Bruce Lavine, the firm's president and chief operating officer.

Until recently, exchange-traded funds tracked indexes, such as the S&P 500, that are weighted by companies' stock-market values. Under that methodology, the stocks with the largest market capitalizations have the biggest weight in an index. WisdomTree, however, has built its indexes on fundamentals, mainly dividends. (It also plans to roll out six funds with weightings based on earnings, a measure that fits with its fundamental approach.)

Siegel says that, for many years, he was a fan of cap-weighted indexing. But that was before the stock market meltdown from 2000 through early 2003. Thereafter, he decided that companies that "return profits to shareholders as a group do well." He cites two main reasons for using dividends as a foundation for an index. First, he says, dividends are "objective;" it's hard for a company's management to manipulate them. Second, he contends, the stocks of dividend-paying companies, on average, slide less in downturns, providing a cushion.

Siegel says that "cap-weighting is not going to disappear." But he disputes the argument that it's the best solution for investors. "That just does not hold water," he says. Since so much of the indexing world, including the influential Vanguard Group, remains committed to the traditional indexing approach, WisdomTree is going against the grain. "You're always battling inertia," says Lavine. "You're always battling being the new kid on the block. But this has gone extremely well, so far."

The company's domestic funds include WisdomTree Total Dividend (ticker: DTD), WisdomTree High-Yielding Equity (DHS), WisdomTree MidCap Dividend (DON) and WisdomTree SmallCap Dividend (DES). Its suite of international funds includes WisdomTree Japan Total Dividend (DXJ) and WisdomTree Europe SmallCap Dividend (DFE).

It's still too early to meaningfully evaluate these funds' performance, given their recent launch.

Sonya Morris, who follows exchange-traded funds for Morningstar, says these funds are likely to appeal to "income-hungry investors." As the boomers approach or reach retirement, that will be attractive.

Still, she cautions, "the jury is still out on what is the right way to index." The WisdomTree funds, she says, "need more time in the real world to prove themselves."

ACTIVELY MANAGED exchange-traded funds are still only on the drawing board. But an academic paper concludes that they would free up managers to pick stocks, instead of managing inflows and outflows.

One of the authors, Scott Gibson, an associate professor of finance at the Mason School of Business at the College of William & Mary in Williamsburg, Va., cites two factors that can hurt a mutual fund's returns. One is maintaining a cash position, presumably for meeting redemptions when investors sell their shares. The other, Gibson says, is "having to engage in portfolio rebalancing to meet liquidity needs."

Sometimes a fund manager has to make "liquidity trades," owing to inflows or outflows. And, frequently it seems, these trades must be made at inopportune times. For example, when cash pours into a fund in a rising market, the manager can increase its cash position only to a certain extent. Then, he must buy stocks, even if he isn't convinced that it's the right moment to do so. Indeed, the paper asserts, "fund managers were unable to beat the market when compelled to invest excess cash from investor inflows."

The paper, whose other authors are Gordon Alexander of the Carlson School of Management at the University of Minnesota and Gjergji Cici of William & Mary, asserts that there are essentially two kinds of transactions for a fund manager. Besides liquidity trades, there are "valuation trades," in which the manager decides to buy or sell a security based on its fundamentals.

Studying domestic stock funds from 1980 to 2003, the authors separated liquidity trades from valuation trades. Their conclusion: When managers made valuation trades, they beat the market, on average. "These guys know what they are doing," says Gibson. "This liquidity trading acts as a drag on performance. You want to free the manager from having to deal with making these liquidity trades."

An actively managed exchange-traded fund would be the ideal vehicle to do that, he says.

The authors found that the performance of funds was especially good when managers bought large amounts of a security while a fund had heavy outflows. In those cases, the funds outpaced the market by nearly three percentage points.

FOR INVESTORS IN international ETFs, the fourth quarter was generally very rewarding. Among the top performers were iShares MSCI South Africa Index (EZA), up 26.83%; iShares MSCI Singapore Index (EWS), up 20.27%; iShares MSCI Brazil Index (EWZ), up 20.49%; iShares MSCI Mexico Index (EWW), up 15.92%, and iShares MSCI Austria Index (EWO), which rose 16.40%.

Laggards included WisdomTree Japan SmallCap Dividend (DFJ), which had a small gain of 0.64%, iShares Dow Jones U.S. Pharmaceuticals (IHE), up 1.51%, and the iShares GSCI Commodity-Index Trust (GSG), which was down 5.09%.

As of Nov. 30, assets in exchange-traded funds totaled $396.7 billion, versus $296 billion at the end of 2005, according to the Investment Company Institute. The total still pales in comparison to the mutual-fund industry's more than $10 trillion. But ETFs are growing at a strong clip. These funds are already popular with financial intermediaries, and they continue to gain fans among individual investors, so 2007 should be another good year for them.

E-mail comments to editors@barrons.com

URL for this article:
http://online.barrons.com/article/SB1167...
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-- posted by SteveT

» somedude3 - WisdomTree Thinks It Has a Better Idea

In response to WisdomTree Thinks It Has a Better Idea posted by SteveT:

Looking to purchase DVY or SDY. Any advantages or disadvantages to either one?

-- posted by somedude3

» pbradford6 - Today's WSJ

-- posted by pbradford6

» pbradford6 - Today's WSJ

Because of recent market volatility, ETFs have been selling at a wide discount to their underlying value. It would be nice to know that your ETF always fairly reflected the value of its index but it DOESN'T. If you are caught in the down draft and want to liquefy a particular ETF you might find that it is value much less than the index itself. Bummer. Bogle has spoken despairingly about EFFs. He still prefers mutual funds. Here is the article:

SHORTING OUT
Fast-Money Crowd Embraces ETFs,
Adding Risk for Individual Investors
By TOM LAURICELLA and DIYA GULLAPALLI
March 17, 2007

Exchange-traded funds are a simple way for small investors to take a stake in broad market segments like China or precious metals. Brokers often tout them as an affordable alternative to traditional mutual funds.

But buyer beware: The funds also are heavily used by the fast-money crowd such as hedge funds and big Wall Street traders. Combined with the effects of a 24-hour market and the unusual inner workings of ETFs, that trading can distort prices on days such as Feb. 27 and March 13 when the market swooned. Some investors who sold amid the turmoil got significantly less for their ETF shares than the underlying assets were worth.
• The Situation: On days of volatile trading, the share price of an ETF can wander away from the price of the assets it's supposedly tracking.

• The Background: Exchange-traded funds track markets like index funds, but allow more trading strategies.

• The Cost: ETF investors who sell during turmoil can get significantly less than the assets are worth.

Mutual funds known as index funds and ETFs both generally attempt to track the performance of broad indexes such as the S&P 500 in the U.S. (Some track narrower slices of the market: See related article.) Decades ago, an investor seeking to match those indexes would have had to purchase shares in each of the companies separately. Today, they can own shares in an index fund or an ETF.

An ETF has some advantages: Unlike index funds, whose prices are set once a day, an ETF can be traded during the day. As with regular shares, traders can buy options on an ETF or borrow ETF shares and sell them in a bet that they will fall in price.

Thanks to these features, ETFs have turned into a powerful tool for Wall Street pros. On many days, two of the three most actively traded issues on the New York Stock Exchange and other U.S. markets aren't regular stocks, they're ETFs. The largest ETF manager, Barclays Global Investors, estimates that 80% of trading in its funds is carried out by big investors like hedge funds, investment pools that cater to the wealthy. Even Vanguard Group -- the mutual-fund giant that built its reputation by serving individual investors -- has started marketing its own ETFs directly to hedge funds.

The waves caused by these traders emerged starkly on Feb. 27. First, stock prices tumbled in China. U.S. markets, opening after China closed, picked up on the trend and also fell sharply. This succession of events caused uncertainty about the proper price for U.S.-traded ETFs that track Asian markets. "The bottom line is, nobody knows where Taiwan is going to open" the next day, says Michael Crinieri, head of ETF trading at Goldman Sachs Group Inc.

One ETF managed by Barclays Global Investors that tracks the Chinese stock market closed the U.S. day on Feb. 27 down 9.9% even though the index it was tracking had fallen just 2.1% during Chinese trading hours. That index fell another 3.1% the next day in China. Although ETFs are often advertised as an easy way for investors to jump in and out of the market, those who sold during the U.S. day would have lost far more than the actual index they thought they were mirroring.

To be sure, there's a flip side: Those who bought during the U.S. day got a bargain price. Still, the basic problem remains. ETF prices came unglued from the stocks and markets they are designed to track.

The problem can occur even without time-zone complications -- perhaps because of a frenzy among those trading the ETFs, or because the prices of the underlying assets aren't as up-to-date as ETF prices. On Feb. 27, the share price for a precious-metals fund offered by Powershares Capital Management, ended the day 3.3% below the actual value of the fund's holdings.

ETFs have taken off in the past five years during a period of relative calm in global markets. Their popularity has soared among individual investors, and some are starting to show up in 401(k) retirement plans.

Industry executives argue ETFs are a good idea on the whole because they provide traders large and small with strategies previously unavailable to them. The added flexibility could help the market adjust more quickly in stressful times and mitigate another 1987-style crash, proponents say.

Patrick O'Connor, head of portfolio management for Barclays' iShares line of ETFs, says it's pointless to expect an ETF to precisely track an overseas market that isn't trading because of a time-zone difference. An ETF delivers its real value during seesawing markets, he says, by serving as a "price discovery vehicle" -- a way to discover the best collective guess of investors about where those markets will move the next day.

If the guess turns out to be wrong, that's the way it goes, says Mr. O'Connor. "We all wish we could have a crystal ball," he says. So long as markets calm down, any big discrepancies are quickly cleared away in a day or two.

On Feb. 27, ETFs continued trading normally during the market's gyrations and their prices swung to reflect the ebb and flow of investor sentiment, Mr. O'Connor notes. "I understand how investors can be confused" by temporary price disparities, he says, but "ETFs and iShares worked exactly as designed."

That's news to Scot Stark, a financial planner in Freeland, Md., who frequently uses ETFs for clients. He says he sold shares in the China iShares ETF for six of his 35 clients on Feb. 27.

The ETF had gone up more than 50% since he bought it for them in late June, and by 2 p.m. that day Mr. Stark was ready to exit. "That day was the day we happened to eliminate our position," says Mr. Stark. But "we hadn't noticed differences nor had we been informed of any pricing discrepancies," he says. "It is actually very surprising."

The extent of the price distortions in February was also a surprise to Dan Culloton, a Morningstar Inc. analyst who follows ETFs. It should be "a wakeup call to investors," he says.

"So far in the great ETF boom, what largely has been talked about is their flexibility, efficiency and ability to track their market," he says. But on volatile days in the market, he now believes, investors need to be extremely careful about using ETFs for short-term trading, regardless of the sales pitch.

There are about 430 ETFs in the U.S., holding about $430 billion in assets. While that's tiny compared to roughly 8,100 traditional mutual funds, which hold some $10.5 trillion in assets, ETF assets are growing much more quickly.

Many of the newest ETFs are targeted mainly at professional investors. Vanguard is famous as a pioneer of the S&P 500 index fund, which is popular among mom-and-pop investors. But Vanguard now offers ETFs as well, and last year started marketing them directly to hedge funds.

Vanguard executive Martha Papariello says the company is trying to expand to new audiences. While an index fund may be good for individual investors, ETFs are useful for sophisticated investors using fast-trading strategies "that nobody would have looked to traditional index funds to meet," she says.

Unlike ETFs, traditional mutual funds can't be sold short, the strategy of selling borrowed shares in hopes of profiting by buying them back later at a lower price. Also, most mutual-fund companies penalize rapid trading.

By shorting an ETF, traders can easily make big bets against a market sector such as energy or biotechnology companies or an entire foreign market, from Germany to Malaysia.

A mutual fund is priced just once a day based on the value of the underlying holdings. The Vanguard index fund tracking the S&P 500, for example, is priced in late afternoon New York time and reflects the closing prices of the 500 stocks in the index. All buy and sell orders from the previous 24 hours are settled at that daily price.

By contrast, an ETF's share price is determined by buyers and sellers in the market and may diverge from the value of the fund's holdings.

When an investor puts in an order to buy or sell an ETF through a broker, the money doesn't go directly to the fund company. Small orders are typically carried out through a stock exchange. Large trades go to traders called market makers, who are authorized to create or redeem shares of the fund from scratch in the market. That's an unusual power: Market makers in regular stocks can't create or eliminate a share of, say, General Electric, but they can if it's a share of an ETF.

Powerful players such as big brokerages on Wall Street try to profit from pricing gaps. Goldman Sachs has a team of five traders -- sitting amid the bustle of Goldman's massive trading room, 50 stories above New York Harbor -- who specialize in taking advantage of discrepancies as they quote prices to clients. If Goldman creates ETF shares to sell to a big hedge fund, it will attempt to sell the shares at a slight markup to the price at which it thinks it can purchase the underlying assets.

It can't go too far, of course. As Goldman's Mr. Crinieri notes, other market makers would step in to offer a better deal. Any big spread is likely to be narrowed quickly amid the bustle of buying and selling. The exception: when markets are fast-moving and volatile. Then it can be hard for market participants to immediately grasp what the "correct" price is.

Feb. 27 was one of those exceptional days when trading was heavy and ETFs got considerably out of whack with their underlying assets. Between 2 p.m. and 4 p.m., more shares of the iShares emerging-markets fund changed hands than usually trade in an entire day. Driving the activity was "really short-term traders like hedge funds," says veteran fund manager Mark Mobius of Franklin Templeton Investments.

A hefty portion of the activity was short-selling. On the China iShares fund, the equivalent of three months of typical short-selling activity was compressed into one day.

Staffers at Matthews Asian Funds, a mutual-fund company in San Francisco, say they were glued to their computers by the drama in the China iShares fund. Usually, the fund's managers focus on the long term, not hour-by-hour movements, says Matthews fund manager Mark Headley. "We're not into the trading minutiae" unless "we see something this big," he says, calling ETFs a "global phenomenon."

By the end of the day, ETF traders were betting that stock prices would take another big hit when overseas markets reopened. The iShares emerging-markets fund lost 8.1% even though index it tracks had fallen only 3.1% in its most recent close.

As a result, an investor selling $10,000 of the Barclay's iShares emerging-markets ETF would have received $500 less than if the fund had tracked its index directly. The value of the underlying portfolio, updated to reflect movements for those shares traded during U.S. daytime hours, would also have been $360 greater than the investor received for his ETF. Conversely, investors buying the ETF at the right moment would have picked up a bargain.

There were disparities even for ETFs consisting exclusively of U.S.-traded stocks. The Russell 2000 Index of small-company shares fell 3.75% that day, but the iShares Russell 2000 Index ETF that tracks the index fell 4.7%, in large part because like other ETFs it trades for 15 minutes longer than regular stocks. Funds tracking gold and oil similarly diverged from their indexes.

In all that day, 89 of the 421 ETFs tracked by Morningstar fell short of their portfolio value by more than 1%. (Plus or minus 0.5% is generally considered normal.) And 60 of those fell short by more than 2%.

The iShares Malaysia ETF -- one of the most actively traded ETFs, despite the relatively small market -- closed 5.98% below its value on Feb. 27. The iShares ETFs tracking countries like Singapore, Hong Kong, South Korea, and Taiwan all closed 5% to 6% below their portfolio values.

Ultimately, it turned out that the big traders were wrong. While overseas markets continued to lose ground, it wasn't the expected bloodbath reflected in ETF pricing.

Traders were so far off on the Barclays iShares China fund that even though the underlying index fell 3.1% on Feb. 28, the price of the China iShares ETF actually rose 4.3% in U.S. trading that day as traders reversed their overly pessimistic pricing. It was the same story for the emerging-markets iShares, where the index fell but the fund gained 2.5%.

Significant ETF price discrepancies also occurred last Tuesday, when the Dow dropped 243 points, or almost 2%. That day, 45 ETFs closed at 1% or more above their portfolio values. An additional seven closed below by more than 0.5%.

-- posted by pbradford6

» codfish - ILF

My favorite ETF, the ILF (Latin America) is at an all time high. Cramer lists as one of his "rules" that Latin America is always a trade.
Time to ring the register on a bit of this one.
Boooooyah!!

-- posted by codfish