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

Money manager Marvin Appel lays out his case for dividend paying ETFs in a recent issue of Investment News.

In the article Reaping high dividend income with ETFs, Appel recommends using ETFs over mutual funds due to lower expenses. He also suggests combining a US focused dividend fund such as the SPDR S&P Dividend ETF (SDY) in combination with an emerging market dividend fund like the WisdomTree Emerging Market High Yielding Equity Fund (DEM).

According to Appel’s analysis, a portfolio of dividend ETFs made up of 80% US and 20% Emerging Markets would have performed better with less risk than portfolios focused 100% on either category.

According to company websites, DEM has a distribution yield of 6.1% and 30 day SEC yield of 10.4%. SDY has a dividend yield of 5.65%.

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Investors in the UK and Europe are moving money out of hedge funds and traditional long only funds and into exchange traded funds.

In the article Evidence emerges of investor flight to ETFs, Financial Times reporter Ruth Sullivan notes that Barclays iShares attracted $25 billion of new assets in Europe in 2008, up more than 200% from 2007.

In 2008, investors favored equity ETFs over fixed income last year, choosing benchmark strategies at lower costs than managed funds. Popular choices included the broad-based blue-chip indices such as the S&P 500 (SPY), FTSE 100 and Dow Jones Euro Stoxx 50 (FEZ).

2009 is seeing more flows into fixed income rather than equities as investors head to short-term government bonds and corporate bond funds.

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The WSJ’s John Spence summarized the 2008 performance of the ETF and ETN market last week.

In the column Few Bright Spots for ETFs and ETNs, Spence points out that, since most ETFs are tied to stocks, we shouldn’t be suprised that ETFs had the same kind of year that stocks did. For example, the SPDR S&P 500 ETF (SPY) lost 37% in 2008.

A bright spot in the ETF market was treasuries. The Vanguard Extended Duration Treasury ETF (EDV), which tracks an index of U.S. Treasury Securities with maturities ranging from 20 to 30 years, gained 55% in 2008.

See the ETF Directory for a complete listing of long term fixed income ETFs.

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Back in December, the Wall Street Journal‘s Tom Lauricella began looking into the impact that leveraged ETFs have on late-day trading volumes.

In the article, Are ETFs Driving Late-Day Turns?, Lauricella details the debate around the relationship between the rising popularity of leveraged ETFs and the large moves in the last hour of trading.

People that say that there is a connection point to large volumes associated with the daily portfolio adjustments made by brokers who deal in leveraged ETFs. Combine that with the large influx of money and new funds into the market and you have a force big enough to move the markets significantly at the end of the day.

The counterview is that the large end-of-day trading is a result of other factors such as the overall deleveraging of the market and the unwillingness of traders and market makers to hold positions overnight.

Lauricella mentions the UltraShort Financials ETF (SKF) and the UltraShort S&P500 ETF (SDS) in the article.

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Before expecting 200% on market returns, do the math on leveraged ETFs.

That’s the message in today’s WSJ article ETF Math Lesson: Leverage Can Produce Unexpected Returns. Reporter Tom Lauricella points out that investors in leveraged ETFs should understand that the funds promise leverage on daily returns, not monthly, quarterly or annual returns.

The performance targets of these funds is reset daily, as a result investors who buy and hold are not likely to see the full 2x or 3x return on the benchmark index that they may have been expecting.

For example, Lauricella points out that the UltraShort S&P500 ProShares (SDS) rose 61% when the S&P 500 was down 38.5% in 2008.

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