Investing in some of the newer and more exotic ETFs can be expensive according to Forbes.
The article iShares Exotic ETFs points out that some of the newer funds with a narrow focus carry high expense ratios and trade at a larger than average bid-ask spread.
The article recommends sticking with broad-based exchange traded funds that offer diverse exposure and low costs. Top ETFs include:
iShares MSCI Emerging Markets Index (EEM)
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.
The WSJ’s Tennille Tracy reports that options trading picked up this week on several exchange traded funds with investors taking positions that would benefit from higher volatility.
Tracy reports that the most active trading was for options on the SPDR S&P Metals and Mining ETF (XME), a fund that tracks companies in the metals and mining industry. Top holdings include Patriot Coal, Cliffs Natural Resources and Allegheny Technologies.
Other ETFs with active options trading include the SPDR KBW Bank ETF (KBE), iShares MSCI Emerging Markets Index Fund (EEM) and the SPDR S&P Oil and Gas Exploration and Production ETF (XOP).
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).
When buying index funds that cover smaller slices of the market, watch out for the difference between a fund’s performance and the index that the fund is supposed to track.
The performance-index gap isn’t a problem for ETFs tied to broad-market benchmarks according to Sam Mamudi in the article Not All Index Funds Are Built Alike. However, exchange traded funds that track more volatile sectors can experience tracking error.
For example, Mamudi points out that the iShares MSCI Emerging Markets Index ETF (EEM) and the Vanguard Emerging Markets ETF (VWO) are both linked to the same benchmark — the MSCI Emerging Markets Index — yet delivered different results in 2009 when the Vanguard fund outperformed the iShares fund.
Turns out that Vanguard has a trading advantage because it pools ETF assets with mutual fund assets. Another example where Vanguard has an edge – the Vanguard Total Bond Market ETF (BND).
More retirement programs are adopting the use of Exchange Traded Funds according to the WSJ’s Ian Salisbury.
In the article ETFs Make Inroads with 401(k) Investors, Mr. Salisbury writes that three companies that provide 401(k) plans with iShares ETFs to small employers are Ascensus, Plan Administrators and The Newport Group.
The most popular ETFs in the retirement programs are the iShares Barclays TIPS Bond Fund (TIP), iShares MSCI EAFE Index Fund (EFA) and the iShares MSCI Emerging Markets Index Fund (EEM).
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.
2009 was a good year for Bond ETFs. Through November 2009, taxable-bond ETFs had net inflows of $32 billion, the most among major asset classes according to a recent WSJ article by John Spence.
Broad-based bond ETFs such as iShares Barclays Aggregate Bond Fund (AGG) and the Vanguard Total Bond Market ETF (BND) were popular choices among investors.
Emerging market ETFs were also popular choices in 2009. Two favorites among investors — the Vanguard MSCI Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets Index Fund (EEM).
Funds with heavy exposure to emerging markets took sudden hits and then recovered as markets reacted to news about Dubai’s debt problems according to the WSJ’s John Spence.
The iShares MSCI Emerging Markets Index Fund (EEM) lost about 4% on the Friday after Thanksgiving on the news. ETFs with significant exposure to the UAE include Market Vectors Gulf States Index ETF (MES) , PowerShares MENA Frontier Countries Portfolio (PMNA) and WisdomTree Middle East Dividend Fund (GULF).
Key Private Bank’s chief investment strategist, Bruce McCain, likes emerging markets for their high growth potential over the long run.
In the article, Emerging markets offer opportunity, McCain cites a number of financial trends that have made emerging economies the high-growth option for international investing. Outsourcing, a slowing rate of decline in unemployment, narrowing credit spreads and signs of stabilization in China all support the investment case for emerging markets.
McCain notes that broad diversification and specialized expertise are two important tools to help control the risks of investing in the emerging markets. He recommends the iShares MSCI Emerging Markets Index Fund (EEM) for broad diversification and greater control over capital gains.
