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

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).

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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).

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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).

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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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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).

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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).

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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.

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Exchange traded funds that track emerging markets indices outperformed the broader market in July according to the WSJ’s Shefali Anand.

 

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Does high economic growth go hand-in-hand with high stock returns?

That’s the question WSJ columnist Jason Zweig is asking in Under the ‘Emerging’ Curtain.

Zweig points out that investors have aggressively embraced the emerging markets this year with over $10 billion pouring into related funds and the iShares MSCI Emerging Markets Index Fund (EEM) becoming the fourth largest exchange traded fund.

However, Zweig also points to recent research that finds stocks in countries with the highest economic growth earn an average annual return of 6% while stocks in slow growth countries return 12% on average. Turns out that high growth countries also tend to have highly valued stocks.

For more information, see Investing in Emerging Markets with Exchange Traded Funds.

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While emerging market ETFs have enjoyed large gains since the beginning of March, investors should note that the majority of new money is going into the most liquid funds.

WSJ reporter Kejal Vyas writes in the column Emerging Markets See Spike in ETFs that exchange traded funds for emerging market stocks have seen net inflows of $3.35 billion since the beginning of last month.

Emerging market ETFs favored by investors include the iShares MSCI Emerging Markets Index Fund (EEM) and the Vanguard ETF Emerging Markets (VWO).

Vyas notes that analysts are questioning the sustainability of the rally because ETFs are very liquid enabling investors to make a quick exit if the market sinks again.

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