All ETF Daily News Articles

Understanding Triple Leveraged ETFs

3xMuch has been written about the math behind leveraged ETFs and mutual funds, yet most investors fail to realize the true impact. As a result, many of these products have been ridiculed for failing to meet user expectations. Contrary to popular belief, leveraged and inverse products that reset their exposure level every day are not new. Rydex introduced the concept with the launch of Rydex Nova (RYNVX) in 1993 and Rydex Ursa (RYURX) in 1994 (note: Ursa has since been renamed Rydex Inverse S&P 500 Strategy). However, as more and more leverage is applied in these products, the adverse impacts appear to grow exponentially. Direxion introduced 3x ETFs in late 2008, and now we have five months of data to look at. For this example, I have chosen two inversely related leveraged funds: Direxion Financial Bull 3x Shares (FAS) and Direxion Financial Bear 3x Shares (FAZ). The chart below illustrates the returns for the five-month period from 11/6/2008 through 4/6/2009 for the following four scenarios:
  1. Green Line: Buy and hold FAS = -86.3%
  2. Red Line: Buy and hold FAZ = -76.9%
  3. Yellow Line: Buy and hold equal amounts of FAS and FAZ with no rebalancing (what some might consider a perfect hedge) = -81.6%
  4. Cyan Line: Buy equal amounts of FAS and FAZ and rebalance every day (a lot of work) = -25.0% (not counting transaction fees and slippage)
click to enlarge
Chart and data by www.FastTrack.net
Even if you go to the trouble of rebalancing every single day the market is open, you are still fighting a headwind of 25% for a five-month period. Most people would consider that impossible to overcome on any kind of continuing basis. I’ve said it before and I’ll say it again: Leveraged ETFs can be great short-term trading instruments, but make sure you understand the longer-term impact before holding any of them for more than a few days. All the ETF sponsors of leveraged and inverse products provide warnings and educational material. Here are links to such information for DirexionShares, ProShares, and RydexShares. Source:  Ron Rowland www.seekingalpha.com
NYSE:FAS April 8, 2009 7:58am

401kDIRECT and Mid Atlantic Trust launch new ETF program

401k401kDIRECT, a provider of retirement plan administrative services, has partnered with Mid Atlantic Trust Company to launch a new program that gives advisors and plan sponsors access to exchange traded funds. The ETFs will be available for 401k, 457 and 403b plans on the 401kDIRECT platform by means of the Mid Atlantic ETFxChange Program. The exchange traded fund (ETF) program offered through 401kDIRECT and Mid Atlantic Trust Company is expected to eliminate many of the administrative challenges that ETFs once brought to daily recordkeepers, creating a cost effective ETF program for daily valued retirement plans. Mid Atlantic Trust Company is an independent provider of trust and custody solutions for retirement plans. The program aims towards providing low fixed trading costs, ability to trade like mutual funds, providing virtually unlimited daily trading and ability to be offered alone or with traditional mutual funds. David Wade, president of 401kDIRECT, said: "We are excited to bring this program to our clients. Our Advisors and TPAs will now be able to take advantage of the benefits of ETFs and construct diverse investment portfolios using ETFs, Mutual Funds, CIFs or any combination of these investment vehicles. They will be able to build a portfolio that best meets the needs of their clients, and most importantly, will be able to do so in a low fixed cost environment." Source: insurance-business-review.com
NYSE:GLD April 7, 2009 9:43pm

SEC Meets Wednesday to Discuss the Uptick Rule

As you may know Jon Najarian has been calling for a restoration of the uptick rule. Well, an important supporter may have just joined his ranks.

In his Congressional testimony Federal Reserve Chairman Ben Bernanke suggested had the uptick rule been in effect it might have had some benefit in preventing the current financial crisis.

As you might know, the uptick rule, which only allowed short sales when the last sale price was higher than the previous price, was repealed by the SEC in 2007 because the agency found that changes in trading strategies rendered it ineffective.

According to Investopedia, “By entering a short sale order with a price above the current bid, a short seller ensures that his or her order is filled on an uptick.”

And over the week-end the New York Times reported that new SEC Chief Mary Schaprio is considering reviving the uptick rule.

The Fast Money traders have mixed thoughts on the move, but overall they don’t think it will do much. Following are their comments.

“I think the uptick rule is just another way to legislate shiny happy people,” bristles Jeff Macke.

“Considering we trade on decimals now I think the uptick rule is a waste of time,” adds Karen Finerman.

“Oh come on,” counters Zach Karabell. “You have to have some regulatory framework or you'd have everyone in a mosh pit of trading and there would be no order to any of it.”

"If you make the margins a nickle or a dime wide, the uptick rules makes sense," adds Dylan Ratigan. "Without that it makes no sense."

Source: cnbc.com

ETF BASIC NEWS April 7, 2009 4:26pm

Index Funds, Where Are We Now? (SPY, AFK, EFA)

portfolioStaying on top of up to the minute news like President Obama’s trip to the G-20 conference or Madonna’s pending adoption of a child from Malawi can distract investors from taking a breather to look back in time in order to get a better direction of where their investments may be headed in the future. Let’s take a look at how a couple of major indexes and index funds have performed since the beginning of the year to determine if your portfolio has the right balance of risk and return.

Focus

ETF

Year to Date

U.S. Dollar PowerShares DB US Dollar Index Bullish (NYSE:UUP)

2.7%

U.S. Equity SPDRS S&P 500 Index (NYSE:SPY)

-7.4%

Technology PowerShares QQQ (Nasdaq:QQQQ)

8.5%

Europe, Australia-Asia iShares MSCI EAFE Index (NYSE:EFA)

-11.5%

Energy United States Oil (NYSE:USO)

-8.7%

Precious Metals iShares Comex Gold Trust (NYSE:IAU)

-1.5%

Fixed Income iShares Barclays 7-10 Year Treasury (NYSE:IEF)

-4.0%

Frontier Markets Market Vectors Africa ETF (NYSE:AFK)

-3.2%

As of market close, April 6, 2009.
When will the correction begin? Everyone wants to know when the economic situation will improve, but the truth is no one knows for certain. The U.S. is ending its first full quarter with President Obama and his administration in office. The call to repair the ailing U.S. economy has been met with the passage of a stimulus package. Time and the ability of businesses to serve existing and push forward into new markets will help drive the eventual economic recovery.  The S&P 500 index, as tracked by the SPDRS S&P 500 Index (NYSE:SPY) fund, has continued to fall downward over the last year; however, this fund did start to rise in recent months as investors moved in to take advantage of low indexes in early March when the Dow Jones Industrial Average fell below 7,000 and the S&P500 went below 700. (For a complete guide, check out our Index Investing Tutorial.) Pullbacks and Producers Gold futures prices, followed by the iShares Comex Gold Trust (NYSE:IAU) fund, have continued to trade just under $900/oz. IAU hit as high as $91.44 on April 1, and since then has dropped about 6% to close April 6 at $85.37. The U.S. dollar index, followed by the PowerShares DB US Dollar Index Bullish (NYSE:UUP) fund, was also up for the year nearly 4% until April, but has seen a slight drop in the last three trading sessions. Investors have sought out these two investments as protectors against the uncertainty in the markets.  Technology has jumped since the beginning of the year as top PowerShares QQQQ (Nasdaq:QQQQ) fund holdings like Apple (Nasdaq:AAPL), Qualcomm (Nasdaq:QCOM) and Google (Nasdaq:GOOG) all continued to trade in positive territory through April 6. Frontier Markets It’s interesting to note the performance of Frontier markets covered by funds like Market Vectors Africa ETF (NYSE:AFK) in comparison to traditional international investments covered by the iShares MSCI EAFE Index (NYSE:EFA) fund. Frontier markets include areas like South Africa, Nigeria and Morocco. Government corruption, hyperinflation and human rights abuses are a part of the story for the emerging economies of the African continent, but it is not the entire picture. Investors with a high-risk tolerance and an extended time horizon may consider doing more research in this region. Final Thoughts The point of this index fund exercise is a reminder to investors to constantly focus on maintaining a diversified portfolio of investments. In addition, investors should also adopt an investment process for rebalancing their holdings by selling a percentage of winning investments and reinvesting those earnings in whatever you deem important or back into the other investments in your portfolio lagging others. (Find out whether these funds can really deliver low-risk returns, read Enhanced Index Funds - Shiny Paper Or Sparkling Gift?) Source:  By Gregory S. Davis   www.investopedia.com
ETF BASIC NEWS April 7, 2009 3:19pm

Soros “Very Concerned” About Rising Global Unrest, But Sees Positive Signs In Russia

george-sorosThere are always tensions somewhere in the world but the global economic crisis has billionaire financier George Soros "very concerned" about the potential for rising social unrest. "You have a collapse of the financial system that impinges on the life of ordinary people in a very big way," Soros says. "There's terrible human suffering and a lack of understanding why and where it comes from. It creates anger. People want to hit out." Signs of this anger and potential unrest were evident at the G20 meeting last week, as well as current protests against Ukraine's ruling party and attacks against the Gypsy population in Soros' native Hungary. Then there's Pakistan's internal battle against radical Islam, which Soros calls "probably the most dangerous situation" in the world. Pakistan needs "substantial financial assistance because American aide has done nothing for the people," says the author and philanthropist. Furthermore, President Obama needs to use the "utmost discretion" in approving military action against terrorists inside Pakistan because of the risk of civilian casualties, he adds. "Very often an economic crisis reinforces internal political divisions," Soros says. "It could lead to governments losing control." In his most recent book, The Crash of 2008 and What It Means, Soros warned the economic crisis could make Russia's Vladimir Putin "more repressive at home and more aggressive abroad." "But I'm pleased to observe, as of now, that hasn't happened," he said in our extensive interview this week. "In fact, more critical voices in Russia than before so far haven't been silenced by force. Maybe there is a chance of attitudes a change of maybe even a change in government slowly developing. " The outcome of the ongoing (second) trial of former Russian oil tycoon Mikhail Khodorkovsky - who was sentenced to prison in 2005 on charges of tax evasion and fraud - will be an "important test" for Russia, Soros says. The charges against Khodorkovsky are widely viewed as being politically motivated and designed to help Putin consolidate his grip on Russia's natural resources. "If he were found not guilty [that] would be very important sign there is change in the wind," Soros says. Source:  Aaron Task  www.techticker.com
ETF BASIC NEWS April 7, 2009 2:43pm

Could The VIX Be More Than A Volatilty Indicator?

vixVolatility has been measured for the past 20 years by the VIX, and it goes up when stocks and exchange traded funds (ETFs) drop and vice versa. So the million dollar question is why does the VIX move in the opposite direction of the markets?  The answer is options. Generally, when the market tumbles, speculators, hedgers and investors buy options for several different reasons.  As more buyers come into the market, there is upward pressure on option prices, states Mark Wolfinger of Minyanville.  The VIX generally increases during these times. The opposite is also true.  When the markets are rallying and gaining ground, there is no urgency to hedge and panic is absent, therefore bringing the trading volume in calls down.  This doesn’t mean that no one is buying calls, some are, but most are selling options, sending the VIX down. These are general rules and lately we have seen from divergence from the norm.  There have been bullish periods were the VIX increased and bearish periods were the VIX decreased.  As for right now, the VIX is around 43, which means that there is a 68% chance that the realized market volatility will be less than 43 and a 32% chance it will be higher than 43 30 days from now. The aforementioned is exactly what the VIX is supposed to represent: An estimate of future volatility in the options market.  Only time will tell if it more than just a measure of volatility and is a measure of fear in investors, as well. Kevin Grewal contributed to this article. Source: www.etftrends.com
ETF BASIC NEWS April 7, 2009 8:34am

Gold Rises For First Time in Four Days

gold2April 7 (Bloomberg) -- Gold rose for the first time in four days in London after a drop to the lowest price in 10 weeks lured buyers, and as a decline in equities increased the metal’s appeal as an alternative investment. Silver also gained. Bullion slipped 6.3 percent the past three days on speculation government efforts would revive the global economy, curbing demand for gold as a haven. The MSCI World Index of shares fell a second day as the euro-region economy contracted more than estimated. “We fell too much yesterday,” and some investors and physical buyers may be taking advantage of lower prices, Bernard Sin, head of currency and metals trading at Swiss refiner MKS Finance SA, said by telephone from Geneva. “We fell as much as 3 percent yesterday and a lot of people were hurt.” Gold for immediate delivery gained as much as $11.50, or 1.3 percent, to $880.40 an ounce, and traded at $879.75 by 10:47 a.m. in London. June futures added 0.9 percent to $881 an ounce in electronic trading on the New York Mercantile Exchange’s Comex division. The metal rose to $879.25 in the morning “fixing” in London, used by some mining companies to sell production, from $870.25 at yesterday’s afternoon fixing. Bullion, trading 15 percent below the record $1,032.70 set in March 2008, has fallen 4.6 percent the past month while the MSCI Index has climbed 22 percent. Europe’s recession deepened more than estimated in the fourth quarter, the European Union’s statistics office said today. Gross domestic product in the euro region declined 1.6 percent from the previous three months, the most in at least 13 years. A worsening economy has pushed exchange-traded fund holdings to records this year. Inflation Concern Investment in the SPDR Gold Trust, the biggest ETF backed by bullion, was unchanged at 1,127.37 metric tons yesterday, after declining on April 3 for the first time since March 23. Bullion may climb back above $900 an ounce shortly should prices hold around $880, according to Pradeep Unni, an analyst at Richcomm Global Services DMCC in Dubai. Gains above $900 would be “supported by the inflationary concerns due to the large bailout funds that have been pumped into various economies across the world,” he said in a report today. “This, in addition to investment demand, could prevent gold from an aggressive selloff.” Among other metals for immediate delivery in London, silver rose 1 percent to $12.2563 an ounce. Platinum climbed 1.3 percent to $1,160 an ounce, and palladium was unchanged at $223.50 an ounce. Source: Bloomberg.com Author: Nicholas Larkin
NYSE:GLD April 7, 2009 8:14am

Gold up in Japanese Markets Tuesday

gold1 TOKYO (Reuters) - Gold prices edged up above $870 per ounce on Tuesday as technical charts suggested a sell-off, partly driven by a quick shift of investor money from the precious metal to riskier assets such as stocks, had been overdone.  FUNDAMENTALS  * Gold was at $871.40 an ounce at 0007 GMT, up 0.3 percent from New York's notional close of $868.80. Gold touched a low of $864.30 on Monday, the lowest since Jan. 23, as some investors unwound safe-haven positions, others sold as the dollar strengthened and some also unloaded gold along with other commodities including oil and base metals.  * The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings stood at 1,127.37 tonnes as of April 6, unchanged from April 3 and just below a record 1,127.44 tonnes. Source: Reuters
ETF BASIC NEWS April 6, 2009 10:06pm

How ETFs Have Dodged The Bullet And Prospered

etf-news1Despite the market crash and credit crisis of 2008, exchange traded funds (ETFs) have seen prosperity and made unconventional headway. The prosperity of the ETF industry has come at the expense of mutual funds. In 2008, there were 160 new ETFs launched as compared to a measly 21 new mutual funds.  Additionally, net inflow into U.S. equity ETFs were a positive $120.8 billion versus $162.4 billion net outflow for U.S. equity mutual funds. In March, the National Stock Exchange reports that more than $8 billion in net inflows went into ETFs. This reverses February’s anomaly, which saw $5.8 billion in net outflows, reports Murray Coleman for Index Universe. Additionally, there were 752 ETFs with $484.6 billion in assets by month’s end. ETNs also gained $4.6 billion in assets. Additionally, Joshua Lipton of Forbes reports the following numbers, statistics and facts on ETFs:
  • There are 737 ETFs that are offered to investors and range from everything as going short on gold to taking long positions on Malaysia
  • Over the past three years, ETF assets have skyrocketed 77%, while non ETF mutual fund assets climbed a mere 9%
  • ETFs account for 40% of all index fund market share, and this number is expected to increase in the near future
  • Most mutual fund providers are offering a vast array of ETF products.  Vanguard offers 39 different ETFs and holds $45 billion in ETF assets and Fidelity just recently broke into the ETF world
  • 2008 was the year the actively managed ETF was launched, building an empire of 13 actively managed ETFs and $240 million in assets
So why have ETFs become so popular?  The answer is fairly simple, investors and money managers have educated themselves on their benefits, which include tax efficiency, transparency, low costs, intraday trading, diversification and exposure to just about any sector or market. Additionally, the rise of ETFs will help accelerate the purging of assets from the mutual fund universe. In a market turnaround, look for ETFs to get more than their fair share of the assets. Kevin Grewal contributed to this article. Source: Tom Lydon www.etftrends.com
ETF BASIC NEWS April 6, 2009 8:18pm

Market Not Feeling Supportive

smileGreetings from the last day of my 30s, where, yes, everything is about me and my birthday. Nothing like a 4-handle birthday to make a guy more self absorbed than the Brawny Paper Towel man. It’s not for me to say whether that marks any sort of change from my normal view of the world. Here’s what I’m watching, when not mulling the idea of being half-way to 80:
  • With all due respect -- and remember, I said with all due respect -- Mike Mayo didn’t have a whole heck of a lot to do with today’s sell-off in banks. We’ve had a one-month equity feeding frenzy which started in banks and topped with a 350-point gap into Obama Mania last week. This was a pullback waiting for an excuse. If you’ve been playing the banks of fundamentals for the last year, with endlessly changing rules and still opaque balance sheets, you’ve been walking blind without a cane, sport.
  • So, having come into today with what felt like “way too much cash” as a percentage of my portfolio, today I’ve purchased: Apple (AAPL), Wells Fargo (WFC) and as an homage to the hair-bands of my youth, my favorite exotic dancer of an equity, the SDS 2x S&P500 Inverse ETF (SDS). Lower, higher and lower, for those who like to keep track of wins and loses at home. 
  •  So, Sun (JAVA) thought it had negotiating power with IBM (IBM), eh? Sun was trading $250 in 2000, back when it was SUNW. One wonders if JAVA shares board members with Take Two (TTWO), which has never been heard from again since turning down Electronic Arts (ERTS) mid-20s bid.
  • The Apple buy was a rebuilding move in the position. As mentioned many times previously, my prevailing strategy has been “selling rips and buying dips.” This is day one of the first dip we’ve had in a month.
  • Goldman Sachs (GS), another sold-down-to-the-bone long, is pummeling me today and nearing an uptrend line. As is the case with the whole market, where 25% gains in one month don’t really offer much in the way of “support,” Goldman moving 50% since March 9 doesn’t give a lot of footholds as we go lower. If and when the Company that Rules the Earth gets to $110, I’ll start rebuilding in earnest with a stop very near below that level (105-99). Tight stops and discipline; it’s my personal survival plan, and I’ve changed it not a bit in months.
  • Speaking of which, I was ruing having any Mosaic (MOS) on my books at all this morning. Frankly, it’s not trading too poorly and, at the size I’m playing it (recall we took a short-lived ag addition off the table by selling Potash (POT) entirely last week), I’d rather add to the name at $42 - $40.
  • Until midnight, I’m considering myself to be in my mid-30s. When full-bore middle age crazy hits in 11-odd hours, I’ll slightly modify my stance and buy a flesh-colored Maybach with light green racing stripes. And a motorcycle. I’ll also start wearing a toupee and taking more HgH than Sly Stallone. Beyond that, hey, age is just a number.
Source:  Jeff Macke www.minyanville.com
ETF BASIC NEWS April 6, 2009 2:53pm

ETF Securities Suggests A Sponsor Consordium

europeETF Securities is spearheading an idea to gather groups of financial institutions to sponsor ETF's collectively where as current ETFs are generally sponsored by one single institution. The danger of the current system is what may happen to the ETF should the financial institution fail. (That could never happen right?) See the below from reuters:
LONDON, April 6 (Reuters) - ETF Securities is launching a consortium of ETF issuers to boost liquidity and transparency in the market and help reduce risks, it said on Monday. ETF Securities said more than 15 global banks and financial institutions worldwide had shown "a strong desire" in joining the consortium. Previously all ETF issuers have been owned and run by single institutions.  "Under the current ETF issuance model, if the sponsoring/issuing financial institution fails, it is highly likely that their respective ETFs would be greatly disrupted and potentially liquidated," ETF Securities said in a press release.  "The current ETF issuance model by single financial institutions could be strengthened by diversifying index replication across a consortium of the strongest financial players and concentrating liquidity within a single platform." ETF Securities said members of the exchange would be able to participate in trading, market making, index replication, management fees and the equity value of the consortium and will be able to issue selected white label products. "From an investor's point of view we believe that there is a danger that every bank has an ETF Issuance business," said Hector McNeil, Managing Partner, at ETF Securities. "Currently there are over 10 different Eurostoxx50 ETFs. We don't need another 10. ETF Exchange will negate the need for banks to adopt this strategy." He said the consortium should be complete within the next few months. (Reporting by Rebekah Curtis; editing by James Jukwey)
ETF BASIC NEWS April 6, 2009 12:57pm

ETF Securities USA LLC Files For Platinum And Palladium-Backed ETFs

platinum2A unit of London's ETF Securities has filed with the Securities and Exchange Commission to register platinum and palladium trusts in the United States, according to a notice on the SEC's website. According to the website, ETF Securities USA LLC made an S-1 filing -- which companies use to register their securities with the SEC -- on behalf of the ETFS Platinum Trust and ETFS Palladium Trust on April 2. ETF Securities declined to comment. The company currently operates a range of exchange-traded commodities in Europe and Asia. If the filing results in a listing, the products will be the first platinum and palladium-backed ETFs in the United States. ETFs issue securities backed by physical stocks of commodities, and have formed a major component of demand for precious metals especially in recent months. Analysts say they fear strong ETF demand for platinum and palladium could cut supply for industrial users. "This is an audacious move by ETF Securities and one that could have a major impact on platinum and palladium prices, both in the near term (if investors anticipate approval of these products) and in the longer term if the ETFs squeeze physical metal availability," said UBS in a note on Monday. Source: reuters Click on the following link for the actual S-1 filing: http://www.sec.gov/Archives/edgar/data/1459862/000093041309001805/c57140_s1.htm
ETF BASIC NEWS April 6, 2009 11:31am

Vanguard VSS Small Cap ETF Begins Trading

vanguard3 VALLEY FORGE, Pa.--(BUSINESS WIRE)--Vanguard FTSE All-World ex-US Small-Cap ETF, which seeks to track the performance of the FTSE Global Small Cap ex US Index, has begun trading on the NYSE Arca exchange under the ticker symbol VSS. The launch brings the number of Vanguard’s ETFs to 39, with aggregate assets topping $44 billion. VSS holds approximately 2,100 securities and has an expense ratio of 0.38%, making it lower-cost and more broadly diversified than the other small-cap international-focused ETFs available today.* It is the only international small-cap ETF in the marketplace to cover both developed and emerging international markets (Source: Lipper Inc., February 27, 2009). “Many advisors are committed to providing international exposure within their clients’ portfolios, but until now a low-cost index option with developed and emerging market small-cap exposure was not available,” said Martha Papariello, principal, Vanguard Financial Advisor Services. “VSS serves as the ideal complement to Vanguard FTSE All-World ex-US ETF [VEU], which was introduced in March 2007 and holds mid- and large-cap securities.” With a historically low correlation to U.S. small-cap securities, international small-cap ETFs can further diversify a portfolio containing only domestic and international large- or mid-cap stocks. VSS provides advisors with a low-cost option for customizing and diversifying their clients’ international portfolios. Financial advisors seeking more information about Vanguard's ETFs and low-cost mutual funds can visit https://advisors.vanguard.com. The site features analytic tools and practice-management programs to help advisors better meet the changing needs of their clients. About Vanguard Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies and a leading provider of company-sponsored retirement plan services. Vanguard manages $1 trillion in U.S. mutual fund assets, including nearly $490 billion in retirement assets. Vanguard offers more than 150 funds to U.S. investors and more than 50 additional funds in non-U.S. markets. *Sources: Lipper Inc. and Vanguard, February 28, 2009. The expense ratio for Vanguard FTSE All-World ex-US Small-Cap ETF is estimated at 0.38%, far below the 0.64% average expense ratio for international small-cap ETFs. FTSE All-World ex-US Small-Cap ETF has approximately 70% more holdings than the nearest competitor ETF—2,100 holdings versus 647. All asset figures are as of March 31, 2009, unless otherwise noted.
ETF BASIC NEWS April 6, 2009 10:30am

Reasons not to invest in WisdomTree’s DHS ETF

dividend1Dividend-paying stocks are compelling to investors for many reasons. Not only do they tend to be less volatile as a group and provide a real cash return right away, but they can also reflect management's long-range visibility on profits and show its commitment to partnering with shareholders. Back in 2006, WisdomTree Investments presented its concept of weighting some of its equity ETFs not by each company's market value (as was the traditional indexing approach popularized by Vanguard), but rather by total dividends paid. WisdomTree's rationale made some sense -- at least in theory. Indeed, it supported this theory by back-testing the strategy from 1964 to 2005 and found that not only did the portfolios exhibit lower volatility, but that "four of the six WisdomTree Domestic Dividend Indexes generated greater price appreciation than the S&P 500 Index, even without the reinvestment of dividends." The problem was, this dividend-weighted theory rested on one enormous assumption: that the dividend-paying environment would continue to behave roughly the same way it had for that 41-year testing period. Oops As we're all now well aware, the dividend landscape has dramatically changed. The past 15 months have been the worst stretch for dividend investors in modern history. Sixty-two S&P 500 companies slashed their payouts some $40.6 billion in 2008 alone. Another $41.8 billion in dividend cuts -- a record -- already came in the first 90 days of 2009, including cuts from traditional stalwarts like Capital One Financial (NYSE: COF) and State Street (NYSE: STT). Standard and Poor's expects S&P 500 dividends to decline some 23% this year -- the worst decline since 1938. Needless to say, these massive dividend cuts have adversely affected WisdomTree's dividend-weighted strategy. As of Feb. 28, none of the six domestic dividend ETFs had outperformed the S&P 500 since their respective inception dates. In fact, the worst-performing WisdomTree domestic dividend ETF has been the High-Yielding Equity Index (DHS) -- or as it was recently and curiously renamed, the Equity Income Index. Whatever name it goes by, this dividend-weighted ETF is down 48% since inception in 2006, much worse than the 29% lost by the S&P over the same period. The wide underperformance of the ETF is largely a result of its dividend-weighted design, which is to "reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share." In other words, if company A is expected to pay $500 in cash dividends next year, it should have a larger weight in the index than company B, which is expected to pay $250. Handcuffed Under normal circumstances, that sounds like a nice way to generate extra dividend income and stack your bets behind strong companies. This year, though, has been anything but normal. It's been the higher-yielding stocks whose dividends have been under the most pressure. Adding insult to injury, the ETF only rebalances once annually, rendering it effectively helpless in a rapidly changing dividend environment. As dividend-dependent investors flocked out of stocks that dramatically cut their payouts, this ETF has had to sit and grin it out. All 10 of these stocks remain in the ETF's top 15 holdings to this day, despite the massive dividend cuts. A better way For investors seeking to benefit from the advantages of dividend-paying stocks, the WisdomTree Equity Income ETF is one investment to avoid. With dividends being slashed left and right in this market, selectivity is essential and mechanical strategies like this one are left at a major disadvantage. Among other things, savvy dividend investors will want to look for companies with solid balance sheets, a history of increasing dividend payouts, and plenty of free cash flow to cover the payments. Source: www.msnbc.msn.com By Todd Wenning
ETF BASIC NEWS April 5, 2009 12:44pm

One World, One Currency?

currency Zhou Xiaochuan of the People’s Bank of China recently proposed the creation of a new international reserve currency. Xiaochuan argues:
The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run.
The bold letters were added by me. I find this statement profound. Zhou proposes a super-sovereign reserve currency managed by a global organization which could both create and control global liquidity. Zhou writes:
When a country’s currency is no longer used as the yardstick for global trade and as a benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
My interpretation is that Zhou (China) supports a global institution to manage the “one world currency”, and that international trade would be conducted in this currency. Commodities like oil and gold would be priced in the world currency. At the same time, each individual nation (or zone, as in Europe) would keep and maintain there existing currency and manage fiscal and monetary policy within their borders in order to keep their currency’s relationship with the one world currency at an optimal ratio reflecting existing economic conditions in that country. China is obviously concerned to find themselves the biggest holder of US Treasuries. China also holds the world’s biggest foreign exchange reserves. Watching the US Federal Reserve, the US banking system, and the near (actual?) fraudulent rating of sub-prime debt as “AAA” by the rating’s agencies Fitch, Moody’s, and S&P which is the root of the current crisis, who can blame China for trying to figure out a way to insure their US investments? As they watch Congress enact bailout packages for the ultra-rich who don’t need the bailouts, at the expense of the US middle-class tax-payers who DO need the bailouts, the Chinese must have lost all confidence in US policymakers’ ability to think logically and act in an economically prudent fashion. The Chinese know the result of continued massive US deficit spending will be a devaluation of the huge pile of US Treasuries they sit atop. They would probably begin a massive move out of US dollar denominated assets now if they thought they could do so without harming themselves. So, what better way to do so than to create a global currency, establish equilibrium, and then move out of the US dollar in a controlled and more leisurely pace? With the US dollar being the world’s reserve currency, such a move is not currently possible as the spotlight is too bright. However, with a global currency and separate exchange rates in Euros, Yen, Renminbi, and yes, US dollars, to the world currency, the Chinese investment in US dollars would be better insulated. They could also buy oil and gold in the world currency, whereas now these two commodities are traded (pegged) to the US dollar. Don’t expect the central bankers around the world to support such a world monetary authority in public. The timing is bad too - a world in financial crisis is probably not the time for such a fundamental change. Geithner and Bernanke have apparently flatly rejected the notion. Note that Geithner first appeared open to the idea, but when the US dollar weakened appreciably, he made a “clarification” of his position. Was such a slip intentional?
ETF BASIC NEWS April 5, 2009 6:28am

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