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

The WSJ’s Ian Salisbury recently explored the use of bearish ETFs as a way to hedge risk.

Salisbury noted that the 25 best-performing ETFs in 2008 have all had total returns exceeding 19% and that they try to generate returns that match the inverse of the major benchmarks.

Specific ETFs mentioned include UltraShort Semiconductor ProShares ETF (SSG), +51.6% through Jan. 18 and Ultrashort Financials ProShares ETF (SKF) +29.8% according to Morningstar.

Read more at the WSJ’s website.

One approach investors consider in uncertain market conditions is a covered-call strategy.

The idea is that you write out-of-the-money call options on stocks that you hold to tweak your returns while collecting dividends and waiting for the market to start heading up again.

PowerShares Capital Management recently listed the Powershares S&P 500 BuyWrite Portfolio (PBP) based on the CBOE S&P 500 BuyWrite Index which measures the total rate of return of an S&P 500 covered call strategy.

Learn more about the BuyWrite Portfolio at the PowerShares website.

Vanguard, although late to the ETF scene, has established a solid 3rd place position behind Barclays and State Street.

In their upcoming 2008 Fund Guide, Forbes‘ Michael Maiello recaps the story behind the birth of the ETF industry and why Vanguard is playing catch up.

Check out timber.

According to Zephyr Style/ADVISOR, the timber asset class, as measured by the Dow Jones World Forestry & Paper Index, has had a historically low correlation with other asset classes, which could provide investors a unique diversification tool that may help reduce a portfolio’s overall volatility.

Claymore Securities manages an ETF that focuses on timber – the Claymore/Clear Global Timber Index (CUT) and (Nasdaq: XCUTX).

Learn more about the ETF at Claymore’s website and more about investing in timber at “Why Invest in Timber?”.

Back in October, TD Ameritrade and XShares Advisors launched a series of Target Date ETFs aimed at “Goal-Based” investors.

The basic idea is that an investor can get a combination of investments that rebalance over time with a specific exit date that ranges from 2010 to 2040 depending on the fund.

The companies cite several benefits including:

• Simplicity – all of the benefits of a diversified portfolio available in a single fund.
• Diversity – multiple securities available under one umbrella.
• Low expense ratio – standard commissions apply.
• Buy any number of shares – solutions for all investors, no matter how much is available to invest.
• Auto-allocation and rebalancing – which helps simplify the investing process.

To learn more, visit the TDA Independence ETFs website.

What do you think?

Does a target date ETF meet the needs of you or your clients?

What questions do you have?

Thought you had escaped the annual distribution of capital gains when you moved from funds to ETFs? Think again.

According to Morningstar, last year 95 or 18% of all exchange-traded funds distributed capital gains and 47 of those funds distributed gains in excess of 1% of capital.

Capital gains distributions are painful because they require the investor to pay taxes before selling the investment – 15% for long term gains and 35% for short term gains.

Read more about capital gains distributions and ETFs in Ian Salisbury’s article in the WSJ.

The WSJ’s Rob Wherry put together a nice summary of country-specific ETFs over the weekend. A quick synopsis:

Key Facts:

• There is an ETF for almost every country in Europe, Asia and Latin America
• New funds are emerging for Africa and the Middle East
• There are at least 36 single-country ETFs with a total of $57 billion or 10% of all ETF assets

Advantages:

• Capitalize on international trends
• Potential to deliver outsized returns
• Customize your own version of an international index

Watch-outs:

• Liquidity can be an issue
• Tend to be concentrated in a few large companies or industries
• Potential lack of transparency and geopolitical risk

Read more at www.wsj.com

According to a Dow Jones Newswire report, the Tokyo Stock Exchange and Taipei Stock Exchange have agreed to cross-list Exchange Traded Funds as early as the first half of 2008.

Because the ETFs will be accessible to more investors, the cross listing agreement should increase trading volume and improve liquidity. As noted in an article in Financial-Planning last November, lightly traded ETFs tend to have a higher bid-ask spread which, in turn, work to reduce investor returns.

The Wall Street Journal’s Ian Salisbury highlights a key difference between ETFs and closed-end funds:

“Unlike the stock of index-based exchange-traded funds, or ETFs, shares of closed-end funds frequently change hands at premiums or discounts, prices significantly above or below the value of their underlying assets.”

It seems that investors that paid a premium to buy into IPOs of closed-end funds in 2007 now find themselves in a position of selling at a loss, even if the funds’ assets appreciated.

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?