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

The outlook for biotech stocks got a boost from Standard & Poor’s Equity Research team which recently upgraded its outlook for the industry to positive from neutral.

S&P recently upgraded Gilead Sciences (GILD), Celgene (CELG), and Vertex (VRTX).  Three ETFs that hold at least one of these stocks include iShares Dow Jones U.S. Healthcare (IYH), Health Care Select Sector SPDR (XLV), and Vanguard Health Care (VHT).

Is active investing skill or just more risk taking?  That’s the question New York money manager Gregg Fisher asks in the Forbes article How to Profit When Efficient Markets Are Driven By Inefficient People.

Fisher takes a look at momentum investing as a key investment factor and suggests that most investors could benefit from tilting a portion of their portfolio to this approach.  The benchmarks used in Fisher’s study include the Russell 2000 Growth Index (IWO) for small cap and the Russell 1000 Growth Index (IWF) for large cap.

A model portfolio for Sand Hill Advisors uses both mutual funds and ETFs to allocate across asset classes and geographies.

As the investment firm braces for higher interest rates by paring back on fixed-income exposure, the managers retain 4% of the portfolio in the iShares Barclays TIPS Bond Fund (TIP).  For mid-cap exposure, the firm allocates 5% of the portfolio to the iShares S&P MidCap 400 ETF (IJH).

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SmartMoney’s columnist James Stewart is selling his position in the Market Vectors Russia ETF (RSX) according to his column Bracing for Higher Interest Rates.

Stewart recommended the ETF last fall, but now sees the fund failing three of his investment criteria for a rising interest rate environment.

Stewart believes that investors’ current love affair with emerging markets will cool as higher interest rates in the U.S. will mean a stronger dollar.

The WSJ’s John Spence reports that home builder exchange traded funds and bank ETFs are number one and two so far this year.

In the article Home Builders Craft ETF Gains, Spence reports that the home builders are benefiting from surprisingly good earnings reports for the fourth quarter.  Spence notes that the sector is highly volatile and that solid performance doesn’t guarantee future gains.

Top home builder ETFs include the iShares Dow Jones U.S. Home Construction Index Fund (ITB) and the SPDR S&P Homebuilders ETF (XHB).  In terms of 2010 performance,  the SPDR KBW Bank ETF (KBE) is a close second to ITB.

Ian Salisbury is reporting that a new study finds exchange traded funds missed the indexes they follow by a wider margin in 2009.

In the article ETFs Were Wider Off the Mark in 2009, Salisbury writes that the study suggests investors closely monitor how many stocks or bonds an ETF owns relative to its benchmark as a way to avoid funds that may be subject to higher than average tracking error.

Example funds reporting higher tracking error include the iShares MSCI Emerging Markets Index ETF (EEM), SPDR Barclays Capital High Yield Bond ETF (JNK) and the Vanguard Telecom Services ETF (VOX).

Exchange traded funds are gaining popularity with individual investors according to a recent report published by Cogent Research LLC.

In the article ETFs Gain Traction with Small Investors, WSJ reporter Ian Salisbury writes that the reasearch firm found an increasing percentage of small investors holding ETFs in their portfolio.  The funds are more popular among younger, wealthier investors with accounts at discount brokers.

Salisbury highlights an ETF investment made by the Lafayette College Investment Club.  The students have departed from the usual practice of holding individual stocks by investing in the MSCI Brazil Index ETF (EWZ).

Be careful chasing the latest investment fads with exchange traded funds.

That’s the message from Forbes’ David Randall in the article Rearview ETFs.  Randall writes that the ETF industry has launched ten emerging market funds and another eight single emerging country funds since the beginning of last year.  All of this activity took place in a period where emerging market funds returned 80%.

However, investors who are late to the game have been disappointed with emerging market funds declining 5% so far this year.

Randall highlights Global Shares FTSE Emerging Markets Fund (GSR) and Market Vectors Poland ETF (PLND) as examples of the emerging markets trend.  Randall also warns investors to be on the lookout for funds with low trading volume and large bid-ask spreads.  One example, the Global X FTSE Nordic 30 (GXF) which has only $4 million in assets and a recent bid-ask spread of 1.85%.

Fox News commentator Jonathan Hoenig recently recommended taking a bearish position on China with the purchase of UltraShort FTSE/Xinhua China 25 (FXP).

Hoenig’s logic?  The Shanghai Composite (China’s stock index) has closed below its 200-day moving average for the first time since last March, a worrisome sign that the boom in China’s economy could be slowing.

FXP seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the FTSE/Xinhua China 25 Index.