Happy Holidays! Many people have the last day of the year off, but not stock and ETF traders. Since 2011 New Year’s Day falls on a Saturday, the NYSE and other exchanges are open for a full day.
This is good news in one way: You have an extra trading session to get rid of some clutter in your portfolio and start the New Year fresh. Today I’m going to name six potential ETF sell candidates. You may be surprised at some of the names below. Read on …
Sell Candidate #1: SPDR S&P 500 (NYSE:SPY)
The time has come to sell the SPDR S&P 500 (NYSE:SPY), the granddaddy of all ETFs, even though it may be the most liquid and heavily-traded security in the world.
Two other ETFs track the same index as SPY: iShares S&P 500 (NYSE:IVV) and Vanguard S&P 500 (NYSE:VOO). Are they any different? Yes, they are. Assuming you want to be in the S&P 500, here are three reasons to avoid SPY.
- At 0.09 percent, SPY’s expense ratio is 50 percent higher than VOO, which charges only 0.06 percent. Vanguard is rarely undersold on fees!
- VOO can be traded commission-free at Vanguard’s brokerage arm, while IVV has no transaction fee for Fidelity customers. Currently no major brokerage firm offers a fee-free trading program for SPY.
- The real kicker is dividend payments. Few investors realize it, but SPY can take more than a month to deliver your quarterly dividend check. IVV and VOO both manage to pay out dividends in a week or less.
If you are a day trader, the liquidity of SPY may outweigh these negatives, but for most investors VOO and IVV are better choices.
Sell Candidate #2: Alerian MLP ETF (NYSE:AMLP)
As I’ve said before, master limited partnerships, or MLPs, are often a great investment. They typically have high dividend yields and have generated significant capital gains the past few years.
So what’s the problem with the Alerian MLP ETF (NYSE:AMLP)?
Well, it is the only ETF on the market that is not a pass-through entity for tax purposes. AMLP is structured as a C corporation, which means it pays 35 percent federal taxes plus various state taxes on all its gains. The roughly 1,000 other ETFs and ETNs pay none.
The result: AMLP significantly underperforms its competition and its benchmark.
The impact of “tax drag” on this fund is staggering …
The sponsor handles it by clipping off about 37 percent of each day’s price move, leaving investors with only 63 percent. Investors may also be slammed with additional taxes when they sell their AMLP shares.
While there is no perfect way to access MLPs with exchange-traded products, the way AMLP does it is unquestionably the worst.
Sell Candidate #3: iShares MSCI EAFE (NYSE:EFA)
If SPY is the granddaddy of all ETFs, then the iShares MSCI EAFE (NYSE:EFA) is certainly the standard-bearer for international investing. Unfortunately, EFA is based on a seriously flawed benchmark …
The MSCI Europe, Australasia and Far East (EAFE) Index is thought to cover the world’s equity markets outside the U.S. In fact, it does nothing of the sort!
For one thing, the EAFE overlooks Canada — the third largest non-U.S. market in the world. Furthermore, the EAFE has zero allocation to emerging markets like China. All told, the EAFE Index and EFA cover less than 70 percent of the non-U.S. markets.
If you want complete international exposure with just one ETF, I think you are better off with Vanguard FTSE All-World ex-U.S. (NYSE:VEU).
Sell Candidate #4: Vanguard Extended Duration Treasury (NYSE:EDV)
In bond terminology “duration” measures a portfolio’s sensitivity to interest rates. The Vanguard Extended Duration Treasury (NYSE:EDV) has an extra-large “extended” duration of 27.8, which means it can lose about 27.8 percent of its value for every 1 percent increase in long-term interest rates. This makes EDV the highest-risk Treasury ETF that does not use leverage.
Of course, this also means EDV stands to gain if long-term rates should go down. But with Ben Bernanke keeping the monetary fire hose on full blast, there isn’t a lot of room for rates to drop. Hence I think the risk of EDV far outweighs the upside potential.
Sell Candidate #5: United States Oil Fund (NYSE:USO)
Despite what its name implies, this fund does not track the price of crude oil. The United States Oil Fund (NYSE:USO) is 100 percent invested in “front month” oil futures and must therefore roll over 100 percent of its assets each and every month. With oil markets currently in contango (i.e. prices are higher as you go out in time), USO loses money every time it rolls the portfolio.
Unfortunately, no other exchange-traded products can accurately track crude oil prices, either.
One alternative to consider is the United States 12-Month Oil Fund (NYSE:USL). This fund keeps one-twelfth of its portfolio in each of the next twelve months of crude oil futures. USL is still affected by the negative roll yield, but only 8.3 percent of the portfolio gets hit each month, not 100 percent as in USO.
Sell Candidate #6: CurrencyShares Euro (NYSE:FXE)
Some of my friends across the pond may not like hearing this, but I am afraid the euro is doomed. It was never a good idea in the first place: Monetary union without political union is just unworkable. Europe is learning this the hard way as Greece, Ireland and other weak links force the healthier economies to pay for bailouts.
Eventually the Europeans will get this all sorted out. My guess is it will end with either a politically unified continent or a return to individual national currencies.
In either case, there is no reason to go out of your way to get exposure to the euro with an ETF like the CurrencyShares Euro (NYSE:FXE).
Only Two Days Left to Sell Your Losers
You’ll notice that the ETFs I’ve named are not obscure. All are very popular, in fact. That doesn’t make them good products or good investments. If you own any of these in a taxable account and you’re sitting on an unrealized loss, you have today and tomorrow to sell and get that loss on your 2010 tax return.
Happy New Year!
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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