Latest news, trends and ideas for investing with exchange traded funds | ETF Commentary

Money is flowing into exchange traded funds that specialize in investing in frontier markets according to the WSJ.

In his column, The Final Frontier: Investing in Ghana, Jeff Opdyke writes that investors poured $375 million into frontier funds in the second half of 2009.   Investors are attracted to frontier markets because of faster economic growth, bigger dividends and returns that are far less correlated with other markets.

The frontier market funds highlighted in Opdyke’s piece include the Invesco PowerShares MENA Frontier Countries Portfolio (PMNA) , Van Eck Global’s Market Vectors Vietnam Index ETF (VNM), and Claymore BNY Mellon Frontier Markets ETF (FRN).

With the market in a 3rd consecutive day of decline, investors are putting money into the Vanguard Dividend Appreciation ETF (VIG) according to the WSJ’s “buying on weakness” list which tracks stocks that fell in price but had the largest inflow of money.

VIG’s top holdings include Wells Fargo & Co, IBM and Coca-Cola.  The $1.9 billion fund carries an expense ratio of 0.24% and pays a dividend yield of 2.14%.

Sales growth is back and investors are interested in gaining exposure to this trend according to recent article in Money.

Editor Paul LaMonica writes that the RevenueShares Large Cap ETF (RWL) is tied to an index of large cap stocks that is weighted by revenue instead of the more traditional approach of market-cap weighting.  Top holdings in the fund include WalMart, Exxon Mobil and GE.

Kiplingers‘ Kim Lankford explains how to compare the performance of mutual funds and exchange traded funds with similar investment goals.

In her example, Lankford compares the Price Latin America fund (PRLAX) with the iShares S&P Latin America 40 Index Fund (ILF).  While both funds had similar performance in the five years through 2008, the mutual fund outperformed the ETF in 2009.

Why?  The mutual fund is actively managed and has a smaller concentration of large stocks in the portfolio.  However, Lankford points out that the Price manager has only been on the job for a year and that the fund’s success will depend, in part, on his skill.

As the popularity of exchange traded funds continues to grow, more advisors are offering model ETF portfolios as a service.

Forbes‘ Richard Ferri takes a look at this trend in his recent article The Next Big Thing: Model ETF Portfolios.  Ferri offers his own “Core Four” portfolio solution that includes an all-Vanguard line-up:

Total Stock Market ETF  (VTI )
FTSE All-World ex-US ETF  (VEU )
REIT ETF  (VNQ)
Total Bond Market ETF (BND)

When it comes to liquidity, not all ETFs are created equal.

So says the WSJ’s Eleanor Laise in the article Liquidity Problems Can Be Costly for ETF Investors.  Laise writes that high yield bond, commodity, and specialty ETFs can be especially problematic when it comes to the difference between buying and selling prices or the bid-ask spread.

One example is the Claymore U.S. Capital Markets Bond ETF (UBD) which had an average bid-ask spread of $2.56 in December 2009.  Other examples highlighted by the article include the iShares S&P GSCI Commodity Indexed Trust (GSG) and the PowerShares DB US Dollar Index Bullish Fund (UUP).

When buying index funds that cover smaller slices of the market, watch out for the difference between a fund’s performance and the index that the fund is supposed to track.

The performance-index gap isn’t a problem for ETFs tied to broad-market benchmarks according to Sam Mamudi in the article Not All Index Funds Are Built Alike.  However, exchange traded funds that track more volatile sectors can experience tracking error.

For example, Mamudi points out that the iShares MSCI Emerging Markets Index ETF (EEM) and the Vanguard Emerging Markets ETF (VWO) are both linked to the same benchmark — the MSCI Emerging Markets Index — yet delivered different results in 2009 when the Vanguard fund outperformed the iShares fund.

Turns out that Vanguard has a trading advantage because it pools ETF assets with mutual fund assets.  Another example where Vanguard has an edge – the Vanguard Total Bond Market ETF (BND).

The WSJ’s Riva Froymovich highlights a new trend among investors in the article In Emerging Market Debt, the Riskier the Better.

Since the start of 2010, investors have been moving out of higher rated emerging market bonds and into debt issued by lower rated sovereigns.  The prospect of tightening credit in China and a debt crisis in Greece are two of the trends driving international investors to look for other opportunities.

Froymovich points out that exchange traded funds or ETFs are a popular way to gain exposure to riskier emerging market debt.  For example, the top assets in the PowerShares Emerging Markets Sovereign Debt Portfolio ETF (PCY) include bonds issued by Ukraine, Indonesia, Venezuela, El Salvador and Turkey.

Platinum and palladium prices are climbing higher thanks to the recent introduction of two new ETFs according to a WSJ article by Matt Whittaker and Carolyn Cui.

The ETFS Physical Platinum Shares (PPLT) and ETFS Physical Palladium Shares (PALL) began trading on January 8.  Since that time, both funds have each accumulated 100,000 ounces of the metals commonly used by the automotive industry for catlytic converters.

Thanks in part to the demand created by the new funds, prices for both metals have risen steadily since the beginning of the year.

The WSJ’s John Spence writes that the popular exchange traded funds that focus on financial stocks will be put to the test by this week’s earnings announcements.

The $7 billion Financial Select Sector SPDR Fund (XLF) is expected to be particularly sensitive to the earnings news of large banks due to the fund’s concentrated exposure to Wall Street.

Top holdings for XLF include JP Morgan Chase (11.6%), Bank of America (10.9%) and Wells Fargo (9.7%).  JP Morgan reported earnings last Friday while Bank of America and Wells Fargo are scheduled to report earnings today before the market opens.

Other financial ETFs mentioned in the Spence piece include the Direxion Daily Financial Bear 3x Shares (FAZ) and SPDR KBW Bank ETF (KBE).