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

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).

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The WSJ’s John Spence reports that home builder exchange traded funds and bank ETFs are number one and two so far this year.

In the article Home Builders Craft ETF Gains, Spence reports that the home builders are benefiting from surprisingly good earnings reports for the fourth quarter.  Spence notes that the sector is highly volatile and that solid performance doesn’t guarantee future gains.

Top home builder ETFs include the iShares Dow Jones U.S. Home Construction Index Fund (ITB) and the SPDR S&P Homebuilders ETF (XHB).  In terms of 2010 performance,  the SPDR KBW Bank ETF (KBE) is a close second to ITB.

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The WSJ’s John Spence writes that the popular exchange traded funds that focus on financial stocks will be put to the test by this week’s earnings announcements.

The $7 billion Financial Select Sector SPDR Fund (XLF) is expected to be particularly sensitive to the earnings news of large banks due to the fund’s concentrated exposure to Wall Street.

Top holdings for XLF include JP Morgan Chase (11.6%), Bank of America (10.9%) and Wells Fargo (9.7%).  JP Morgan reported earnings last Friday while Bank of America and Wells Fargo are scheduled to report earnings today before the market opens.

Other financial ETFs mentioned in the Spence piece include the Direxion Daily Financial Bear 3x Shares (FAZ) and SPDR KBW Bank ETF (KBE).

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Smart Money’s Jack Hough recently interviewed Rob Arnott, former editor of the Financial Analysts Journal and founder of Reasearch Affiliates, to find out what Rob likes now.

One area where Arnott sees value is financial services etfs. The logic is that bank failures and combinations will make the surviving banks stronger with more market share and pricing power. Financial services ETFs include the Dow Jones U.S. Regional Banks Index Fund (IAT), KBW Regional Banking ETF (KRE), and KBW Bank ETF (KBE).

Arnott’s firm has also developed a series of indexes based on research he has done on dividends and stock performance. Several ETFs have launched using the Research Affiliates Financial Index (RAFI) as a benchmark including the PowerShares FTSE RAFI Consumer Goods Sector Portfolio (PRFG) and the FTSE RAFI US 1000 Portfolio (PRF).

For a complete listing of RAFI-based ETFs, see the ETF Directory or type RAFI in the site search box on ETF MarketPro’s website.

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