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

The Wall Street Journal took another swipe at ProShares and other marketers of leveraged ETFs in the article REIT Moves Rub Executives Wrong Way.

Reporter Anton Troianovski writes that increased trading in REITs has caused an increase in stock price volatility. For example, in 35 out of 61 trading days since September 30– the Dow Jones Equity All REIT Index rose or fell 5% or more. Fifteen of those days saw moves of 10% or greater.

Real estate investment trusts typically see less action due to the long-term nature of real estate development and leasing.

According to Troianovski, REIT executives are blaming trading in leveraged ETFs for the large price swings in REITs. For example, the ProShares Ultra Real Estate (URE) fund and the ProShares UltraShort Real Estate (SRS) fund have both seen the volume levels hit yearly highs in December.

In response to a WSJ article earlier the month, ProShares Chief Executive Michael Sapir said that the idea that leveraged exchange-traded funds cause the end-of-day ups and downs in stock prices is “utter postulation.”

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While most ETFs shield investors from capital gains and the associated tax bill, a few funds were unable to avoid the problem that plagues most mutual funds.

In the article Capital Gains Hit Some ETFs, the Wall Street Journal’s Ian Salisbury reports that the industry’s largest fund manager, Barclays, expects to pay out year-end distributions on just 2 of its 178 funds. State Street will likly distribute gains on only 3 funds and Invesco PowerShares, Vanguard and Wisdomtree also have clean records.

However, a handful of funds from Rydex Investments will pay out large distributions. The Rydex Inverse 2x Select Energy ETF (REC) and the Rydex Inverse 2x S&P Select Sector Technology ETF (RTW) will both pass out gains in excess of 50% of net asset value.

The large distributions are caused by the nature of the funds’ underlying investment vehicles which include futures and swaps contracts.

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New York Times reporter Tara Siegel Bernard provides a primer on ETFs in her article Exchange-Traded Funds: What You Need to Know.

Bernard points out that many people like exchange-traded funds, or E.T.F.’s, for the same reasons they like index funds: they provide easy access to broad spheres of the market, while keeping costs and taxes low.

She recommends the Vanguard Total Stock Market ETF (VTI) and the Total Bond Market ETF (BND) as a prudent way to wade into investing waters with ETFs.

She also points out that investing in any fund with less than $50 million in assets is not advisable.

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With a new administration coming to Washington, a debate has emerged over which class of ETFs will benefit from all of the promised new spending – butter or guns?

SmartMoney’s Paulette Miniter argues for guns in the article Military Contractors May Thrive Under Obama.

Her case? The aerospace and defense sector has actually done better during Democratic administrations, according to a recent Merrill Lynch report. In addition, national security stocks are a good hedge against losses in the broader market in a recession. For example, the sector has beat the S&P 500 index by an average 17% in the past two recessions.

Miniter highlights two ways to gain exposure to the Defense sector with ETFs – the iShares Dow Jones US Aerospace & Defense Fund (ITA) and the PowerShares Aerospace & Defense Portfolio (PPA).

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Smart Money’s Jack Hough screens for stocks paying consistently high dividends in the article 6 Stocks Paying Reliable 6% Yields.

The main stock that Hough profiles is the New York City utility Consolidated Edison (ED). Hough points out that the company has reliably maintained its dividend which now yields 6% due to a decline in share price.

Three ETFs hold at least 3% of the fund in Con Ed including the First Trust Alphadex Utility Fund (FXU), the PowerShares FTSE RAFI Utilities Sector Portfolio (PRFU) and the SPDR S&P Dividend ETF (SDY).

See the Dividend ETF Directory for a complete listing.

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US News New Money columnist Katy Marquardt makes the case for exchange traded funds for investors on a budget in her article ETFs for Beginning Investors.

Marquardt provides three examples of ETFs that she has invested in to gain international exposure for her portfolio.

The ETFs mentioned include Vanguard’s FTSE All-World ex-U.S. ETF (VEU), which specializes in developed countries such as Japan and the United Kingdom. Also mentioned are iShares MSCI EAFE Growth Index Fund (EFG), which buys large, fast-growing foreign companies and Vanguard’s Emerging Markets ETF (VWO).

For more international ETFs, see the special report on Investing in Emerging Markets with Exchange Traded Funds.

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The WSJ’s Tom Lauricella is predicting that Anxious Investors May Turn to Funds Focused on Dividends.

The logic is straightforward. After a terrible year for equities, investors will be gun shy and will only be looking for stocks with solid balance sheets and reliable cash flow paid out as dividends.

Mutual funds that focus on dividend paying stocks are expensive, opaque and tax-inefficient. So dividend ETFs are the answer.

Lauricella suggests considering the iShares Dow Jones Select Dividend Index Fund (DVY). The $3.6 billion fund concentrates in financials (43%), utilities (19%) and consumer goods (12%).

See the Dividend ETF Directory at ETF MarketPro for a complete listing.

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Ian Salisbury reviews the lessons learned from investing with exchange traded funds in the WSJ article The Tricks of the ETF Trade.

Salisbury points out that investors need to look at things like volume, bid-ask spreads, premiums-discounts, indicative intraday value (IIV), limit vs. market orders and trading time of day.

For example, Salisburby notes that amid the bond-market turmoil in October, iShares Lehman Aggregate Bond Fund (AGG), a broad, supposedly liquid ETF that tracks the whole bond market, closed 8.9% below the value of its holdings one day.

Another example is in the case where heavy volume benefits small investors. Comparing State Street’s SPDR S&P 500 ETF (SPY) with the iShares S&P 500 Index Fund (IVV), Salisbury writes that with the SPDR fund, which trades about 435 million shares a day, investors pay a spread of about a penny a share. With the iShares fund, which trades about eight million shares a day, trading costs are closer to two cents.

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