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

Emerging market investors have over $50 billion invested in just two exchange traded funds.

According to John Spence in the WSJ column BlackRock, Vanguard Battle for ETF Assets, the iShares MSCI Emerging Markets Index Fund (EEM) and the Vanguard Emerging Markets ETF (VWO) were the fourth and fifth largest U.S. listed ETFs at the end of March with $36 billion and $24 billion of assets respectively.

Spence compares the two funds by expense ratio, weekly trading volume and tracking approach.

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Smart Money columnist James Stewart writes that he has been taking profits on his oil positions but remains bullish on Brazil.

Stewart has exposure to Brazil through the iShares MSCI Brazil Index Fund (EWZ).  The fund’s largest holding is Petrobras, a firm with enormous oil producing potential.

The Brazil ETF’s second largest holding is Vale, a metals and mining company.  The two top holdings make up over 38% of the fund’s portfolio.

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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.

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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).

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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%.

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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.

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International funds were the best performers in 2009 according to the WSJ’s Sam Mamudi.

Emerging markets, including China, Brazil and Russia, were up 72% after tumbling 55% in 2008 according to the article.  The top international ETF was the iShares MSCI Emerging Markets Index Fund (EEM) was up 68% through December 29.

Mamudi points out that the big question for 2010 is whether emerging markets and international funds can continue to rise.

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In his recent Smart Money article, “120 New ETFS Debut So Far in 2008“, Rob Wherry takes a look at four categories of ETF funds that have debuted in the first half of 2008.

According to Lipper, approximately 120 new ETFs and ETNs hit the market during the first six months of 2008. The new offerings spanned a wide range of investing strategies including commodities, currencies, and emerging markets. There are also many more funds currently in the SEC registration process.

The industry also experienced liquidations as funds sponsored by Claymore, XTF, Adelante, and MacroShares closed their doors.

Wherry also discusses actively managed funds in the article. He has found that many financial advisors are taking a “wait-and-see attitude” towards actively managed funds. According to Wherry, not many advisors have poured money into [actively managed] funds.

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Morningstar’s Jeffrey Ptak published his list of 2007’s worst new ETFs. The list includes:

Emerging Markets

• SPDR S&P China (GXC)
• First Trust ISE Chindia (FNI)

Real Estate

• Adelante Shares Real Estate
• iShares FTSE NAREIT Funds (RTL)

Commodities

• Claymore Clear Global Timber (CUT)

Ptak cites timing and declines since the launch of the ETFs as qualifiers.

Do you agree with his picks?

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