Happy 5th Anniversary To The Equally-Weighted ETF

Happy Anniversary to the equal-weight exchange traded fund (ETF) strategy, which marked the beginning five years ago.

The Rydex S&P Equal Weight (RSP) started the trend on May 2, 2003, and has since opened the opportunity for ETFs to track an index measuring company weightings by factors other than market capitalization. Its five-year annualized returns is 13.4%.

David Hoffman of Investment News reports that at the end of 2007, there were at least 67 ETFs that tracked alternative indexes, by Morningstar's count. The five-year anniversary of the equally weighted ETF from Rydex opens debate, where some claim this is a form of active management. Rydex is still working on an equal-weight ETF lineup of 10 funds.

Another fund of the equal weight strategy is the First Trust Nasdaq 100 Equal Weight Index (QQEW).

Since the advent of the equal weighting, many advisors are looking at their allocations and coming to the conclusion that it is prudent to use equal-weighted ETFs. Some advisors say it's merely an attempt at building a better mousetrap.

For most advisors, equal-weight ETFs would be an excellent core holding.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Study: When Value Is Ahead, Equal Weight ETFs Do Better

A white paper from Standard & Poor's could have an effect on exchange traded funds (ETFs) that track equal-weighted indexes.

In markets where small-cap value is favored over large-cap growth, equal-weighted indexes outdo traditional cap-weighting, reports Jesse Emspak for Investor's Business Daily. The study was conducted over the last five years.

The paper says the S&P 500 Equal Weight Index's 5-year return was 15.9%, compared to the S&P 500 which returned 12.8%, through the end of 2007.  Over three years, however, the difference isn't as noticeable. Equal weighted gained 8.3% vs. 8.6% for cap-weighted.

An equal-weighted index is exactly what its name implies - each stock in the index is weighted the same. A traditional index is market-cap weighted. In a boom period in one sector, an equal-weighted index won't lift it as much, but a bust won't drag it down so far.

Rydex S&P Equal Weight (RSP) is an ETF that uses the equally weighted method. Year-to-date, it's down 1.6%. The provider has a line of other equal-weight ETFs, as well, that focus on various sectors.

There's also the First Trust Nasdaq 100 Equal Weight Index (QQEW), which is down 4.7% year-to-date.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Fundamentally Weighted Bond ETF Index In The Works

Fundamental indexes tracked by exchange traded funds (ETFs) are nothing new under the sun. Now the father of fundamental weighting is looking to do the same thing for bonds.

Robb Arnott, chairman of Research Affiliates, says cap-weighting magnifies the overvalued stocks' affect on portfolios. Bonds ETFs are currently weighted similarly - by the amount issued - and Arnott wants to move away from that.

Arnott says fundamental indexing works best when there are a wide ranges between the fair value of a company and the stock or bond. Weighting according to this criteria cuts down on the heft of "fad" stocks, Jesse Emspak for Investor's Business Daily says.

When applying the fundamental indexing principles to bonds, the risk that a bond can't be paid back is taken into account. Among the data Arnott's firm is looking at for weighting country bonds is population, gross domestic product, oil consumption and existing government debt. Taking all of this into account gives a truer picture of fair value.

The firm has not filed with the Securities and Exchange Commission (SEC) yet, and preliminary work is still being done.

Nasdaq, Dow and ETFs Close at Three-Month Highs

The exchange traded fund (ETF) that tracks the Nasdaq 100 hit a three-month high in trading yesterday after its 10 most-heavily weighted components moved higher. It doesn't seem like it's going to stick if the midday retreat in the markets holds, though.

The PowerShares QQQ (QQQQ) closed Thursday at their highest price since Jan. 14, reports Tomi Kilgore for Thomson Financial.

Apple (AAPL) gave the index a boost after it posted earnings that exceeded expectations at the close of trading on Wednesday. Apple is the index's most heavily-weighted component, with 10.4% of assets. Qualcomm (QCOM) is the third largest component, with 5.7% of assets. The wireless technologies company also had reported stronger than expected earnings.

For the first time since last year, the Dow Jones industrial average scooched above its trend line, the 200-day moving average. It closed at three-month highs after the dollar strengthened and oil prices fell slightly, reports CNN Money.

The DIAMONDS Trust, Series 1 (DIA) closed at their highest point since Jan. 3.

Is It Stupid to Keep It Simple With ETFs?

The exchange traded fund (ETF) industry is currently brimming with excitement over a couple of new all-world funds.

But can keeping it too simple be a wise strategy? Gary Gordon for ETF Expert doesn't think so.

An obvious pro to an all-world fund is simplicity of it all. Plus, there are fewer fees and fewer numbers to keep track of. This way you avoid higher fees and the increasing complexity of too many ETFs. Plus, with ETFs you get total flexibility and transparency.

On the flip side, there is the fact that just one ETF is not great for a buy-and-hold investor. Portfolios have to be more dynamic than what one fund can offer and equity investors should not stay handcuffed to one type of index.

Penelope Wang for Money Magazine points out that some of the newer and more narrowly focused ETFs may not be actually investing in an index, but using a strategy.  While ETFs are made to track an index, providers may have to optimize the ETF when, for any number of reasons, replication is not possible.

All ETFs may not be right for all investors, but the opportunity and choice is there.  Being an educated investor is also important.  When it comes to your portfolios core, everyone has suggestions. Keep in mind everyone has their own financial goals and strategy to reach them.

Take a look at Money Magazine's:

• Vanguard Total Stock Market (VTI), 30%
• Vanguard FTSE All-World ex-U.S. (VEU), 20%
• Vanguard Total Bond Market (BND), 30%
• Vanguard Real Estate Inv Trust (VNQ), 10%
• iShares Lehman TIPS Bond Fund (TIP), 10%

Gordon would rather see something a bit more diversified, with some exposure to small- and mid-size companies both domestically and globally:

• SPDR S&P 500 Trust (SPY), 15%
• iShares Small Value (IWN), 15%
• Vanguard FTSE All-World excl U.S. (VEU), 15%
• WisdomTree International Small Cap Dividend (DLS), 15%
• Vanguard Total Bond Market (BND), 10%
• SPDR Lehman International Treasury Bond (BWX), 10%
• Dow Jones AIG Total Commodity Index (DJP), 10%
• Vanguard Real Estate Inv Trust (VNQ), 5%
• iShares Lehman TIPS Bond Fund (TIP), 5%

The Dow Theory Does Good For Modern Day ETF Investors

The Dow Theory is one of the most respected trend systems in the investment world, leading exchange traded fund (ETF) investors and others in their market-related decisions.

Charles Dow, founder of the industrial average that bears his name (among other things), created the theory to ascertain when to buy and when to sell. When the industrial and transportation averages make new highs, a buy signal is given; when both make new lows, it is a sell indicator.

John Nyaradi for Seeking Alpha reports that the Dow Trading technical system went negative in November 2007, it sparked debate about whether we had entered a bear market. The Dow Theory proved correct: the market went into a long decline, continuing through the end of the year and into the first quarter of this year.

The Dow Jones Industrial Average has yet to make a new high, with the buy signal a closing at 12,743. Last week saw a rally at intraday 12,790 to close at 12,654.  At Monday's close it was 12,612, proving to be a breath away from a new buy signal.

While ETFs didn't exist in Dow's day, modern day followers of the Dow Theory can certainly use ETFs to go both long and short while following it.

The Newest Members Of PowerShares ETF Family

Exchange traded fund (ETF) provider PowerShares announced two new funds to be listed on NASDAQ. The company states that this will bring the ETF family to more than 110.

The new ETFs are:

• PowerShares NASDAQ NextQ Portfolio (PNXQ)
• PowerShares FTSE NASADQ Small-Cap Portfolio (PQSC)
  

PNXQ is based on the NASDAQ Q-50 Index which tracks the performance of 50 securities that are next in line to replace the securities currently included in the NASDAQ-100 index. PQSC is based on the FTSE NASDAQ Small-Cap index, designed to track the performance of the smallest 10% of companies in the FTSE NASDAQ index universe of listed companies ranked by market capitalization.

India ETFs Might Focus on the Same Country, But That's Where Similarity Ends

Two new exchange traded funds (ETFs) finally give investors the passage to India they had been looking for.

The country has been in the spotlight lately, with its 9% annual GDP growth and strong currency and a presence that demands some attention, reports  Roger Nusbaum for TheStreet.

The newest additions, the  WisdomTree India Earnings (EPI) and PowerShares India Portfolio (PIN) might represent the same market, but they're vastly different. EPI is fundamentally weighted with 150 companies while PIN is market-cap weighted, focusing on 50 companies.

EPI gives 41% to energy and materials, while PIN allocations 37% to the sectors. EPI gives less to telecom, 17%, while PIN gives 26%. PIN's heavier weighting in technology is seen as more of a bet on what India can provide to the world. Did you know that the "brains" of the iPod were invented by an Indian company, who then sold it to Apple (AAPL)?

EPI has had better past performance because of its heavier weighting in resources, but any large commodity correction will hit EPI harder then PIN, Nusbaum says. EPI focuses more on internal growth, which appears to be a better choice.

Earlier this week, iShares announced that it has filed a registration form with the Securities and Exchange Commission (SEC) for yet a third India ETF.

India will add volatility to any portfolio, and whichever fund you choose, make sure it fits in with your investment goals.

New Index Measures Whether Companies Can Deliver - Will An ETF Track It?

Dow Jones Indexes has launched a new series - could an exchange traded fund (ETF) be far behind?

Dow partnered with Transparent Value LLC to deliver the Required Business Performance Index series, which measures the likelihood a company can deliver the performance required to support its current stock price. Proprietary methodology is used to make those calculations.

The first indexes in the series are the Dow Jones RBP Large-Cap 130/30 Indexes, which will use probability metrics to create 130/30 investment strategy indexes based on U.S. large-cap stocks. The indexes are rebalanced quarterly.

Three's Company With India ETFs

First, WisdomTree and PowerShares launched their India exchange traded funds (ETFs). Now iShares wants to join in the party, too. It filed a registration form with the Securities and Exchange Commission (SEC) last week.

iShares will have its work cut out, because the first fund to launch usually benefits from the pent-up investor demand, says Jeffrey Ptak for Morningstar. The WisdomTree India Earnings Fund (EPI), launched in February, was the first India ETF. Right out of the gate, it traded a million shares, reports Mariana Lemann for Ignites, and has since garnered assets of $85.7 million. The PowerShares India Portfolio (PIN) launched last week.

The iShares India will track the S&P India Nifty 50 Index, which tracks the equity performance of the top 50 companies by market cap that trade in the Indian market. Barclays Global Investors will aim for a 95% correlation to the index.

An iShares fund could gain a competitive advantage in pricing: the expense ratio for WisdomTree's fund is 0.88%, while the PowerShares fund is 0.78%. The average expense ratio for the type of fund iShares will create is 0.61%.

Market Volatility Has Unearthed Some ETF Buying Opportunities

Research firm MarketGrader compiles the indexes that underly the Spa Exchange Traded Funds (ETFs).

MarketGrader's latest fundamental research indicates that the U.S. market is largely oversold in the wake of volatility, reports ETF Express.

Buy opportunities exist in particular in the information technology and industrials sectors. MarketGrader 100, and equal-weighted fundamental index, offers investors to a basket of 100 top-rated U.S. equities according to the analysis of attractiveness of the 5,700 U.S. equities using 24 fundamental factors.

High growth characteristics at low price-to-earnings ratios are part of the grading process.

Relative to the S&P 500, the index is overweight in cyclical sectors and underweight in defensive ones, according to Neil Michael, head of quantitative strategies at Spa ETF. He says that the index is well-positioned to take advantage of any economic stimulus package and further interest rate cuts from the Federal Reserve.

PowerShares Launches Its India ETF Today

PowerShares launched its India exchange traded fund (ETF) this morning, and it's trading on the NYSE Arca.

The PowerShares India Portfolio (PIN) will join the WidsomTree India Earnings Fund (EPI) as the two ETFs dedicated to gaining exposure to India, one of the world's fastest-growing emerging markets. PowerShares says it has taken measures to address the country's restrictions on foreign investment.

PIN will hold a basket of 50 Indian stocks that represent the largest companies listed on the two major Indian indexes, the Bombay Stock Exchange and the National Stock Exchange. The fund is allocated primarily in large-cap stocks: 72.2% are large-cap growth and 23.6% are large-cap value. Mid-cap growth is 2%, and mid-cap value makes up 2.3%.

Across the sectors, PIN is most heavily allocated in energy: 25.2%. Financials make up 17.9%, information technology is 14.2% and telecommunication services is 11.4%.

Fundamentally Indexed ETFs Need More Assets

Exchange traded funds (ETFs) based on fundamental indexes are proliferating, but they are having a difficult time garnering assets.

Assets among 69 ETFs based on fundamental indexes totaled just over $7 billion at the end of 2007, the same year most were launched, according to Morningstar. Among all 629 ETFs, assets total more than $600 billion, according to the Investment Company Institute.

Fundamental indexes are those that use some measure other than market capitalization to determine company weightings. The study conducted by Morningstar focused in on three fundamental indexers: PowerShares, Rydex and WisdomTree, reports David Hoffman for Investment News.

Considering that fundamental ETFs haven't been around for long - WisdomTree, the largest such provider launched its first fundamentally based ETF last April - investor reluctance is natural. We have yet to see proof from a performance standpoint that fundamental indexing performs.

New ETFs Take Innovative Approach To S&P

A trio of new exchange traded funds (ETFs) launched on Friday, taking a different twist on the Standard & Poor's benchmarks.

They will use the same stocks as the S&P but the ETF will weight names by revenue rather than market-cap sizes, reports  Murray Coleman for Index Universe. Sean O'Hara, president of RevenueShares Investor Services, says that weighting by revenue was the most efficient way to keep the S&P benchmarks' lineup the same while providing different patterns of return.

Some analysts don't like the price so far: 0.49% in annual fees. O'Hara says that the returns based on back-tested data still would have been better than the S&P 500's average annualized 11.4% between 1991-2007.

The new underlying indexes were created so investors wouldn't fall prey to security selection bias. The new ETFs are:

• RevenueShares Large-Cap Fund (RWL): Aims to take the best of the S&P 500
• RevenueShares Mid-Cap Fund (RWK): Designed to complement the S&P 400
• RevenueShares Small-Cap Fund (RWJ): Replicates S&P 600

All Eyes on Two New India ETFs

Two India-focused exchange traded funds (ETFs) have been locked in a fierce race to the starting line, and one of them finally reached it today.

The WisdomTree India Earnings Fund (EPI) began trading on the NYSE Arca this morning, trading a million shares straight out of the gate. On Monday or Tuesday, PowerShares will follow up with its own India ETF: the PowerShares India Portfolio (PIN).

There's huge demand for an India ETF. For a time, there was the iPath MSCI India Index (INP) investors could use to get exposure. Once India changed up its foreign investing rules, the ETN was pretty much down for the count as no new shares were being issued.

While the two ETFs they might have one country in common, their underlying indexes are constructed very differently.

WisdomTree's fund, as its name implies, is based on an earnings-weighted index of 150 companies. It's made up of companies listed on the Indian National Stock Exchange or the Mumbai Stock Exchange that issue ordinary common shares that are eligible for foreign ownership. Each company has a minimum $200 million market cap, $5 million in earnings in the fiscal year before the screening date and a price-to-earnings ratio (P/E) of at least 2. Each September, the index is rebalanced.

Because of India's restrictions on foreign investment, the index's creators aimed to build a broad index. The dividend payout ratio and dividend yield in the India stock market are among the lowest in the developing world, thus the decision to go by earnings.

The PowerShares fund, on the other hand, used a patent-pending proprietary method to build an index "as investable as possible" while getting around the country's restrictions.

It's made up of 50 of the largest Indian stocks, weighted by "IndusCap," a methodology that specifically addresses the foreign ownership limits. PowerShares believes it will deliver a more accurate representation of the capitalization in each company than market-cap or float-weight.

Who will come out ahead as the top performer? Which index will work best with India's complicated rules regarding foreign investing? Only time will tell on this one.

Investors Growing and Evolving Along With ETF Industry

State Street Global Advisors' Tony Rochte is the head of the firm's exchange traded fund (ETF) distribution. He's got a few thoughts on the current state of the ETF industry.

As ETFs make gains on mutual funds and actively managed ETFs loom, many investors and industry professionals must be wondering where we are now, and where we're all headed.

Rochte sees ETFs as a complement to other investment tools, not a replacement. He also views the 401(k) market as a critical point to the success of the industry. He feels the biggest growth segment for ETFs has been the intermediary or advisor market.

Jesse Emspak for Investors Business Daily reports that Rochte thinks institutions are also continuing to grow their ETF adoption, adding to their proliferation. ETF issuers need to focus more on fixed-income ETFs, as that has so far been an underrepresented area of the market.

Rochte's four caveats for investors?

1. Make sure you understand the sponsor
2. Understand the index that you are buying and what it is based on
3. Make sure when you buy it is with good execution through a brokerage window
4. Do not chase performance; always work with an advisor.

Is The Dow ETF A Diamond In The Rough?

Exchange traded funds (ETFs) tracking the Dow Jones industrial average will experience a sector shift along with lesser valuation. The coming changes to the index will make it even more attractive to bullish analysts who say the 18,500 mark could be reached in three years.

On Feb. 19, Bank of America Corp. (BAC) and Chevron (CVX) joined the Dow, while Altria Group (MO) and Honeywell International Inc. (HON) were out.

John Spence for MarketWatch says that Morningstar analysts boldly predict a 50% rise in the Dow by 2011 (that's 6,000 points) and as of Feb. 12th, the Dow was trading at a hearty 17% discount to the firm's fair-value estimate of 14,000. The predicted jump in the index is not taking into consideration the interest rate shifts, broader economic factors and blue-chip companies that dominate the Dow to lead the market.

You can access the Dow with the Diamonds Trust (DIA), which gives access to the 30-stock, high-quality combination. This ETF is an inexpensive, flexible way to access this type of exposure.

Sector Rotation In A Global ETF Portfolio

  Adapting your investment strategy with exchange traded funds (ETFs) is important when economies around the world are becoming more interrelated.

Doing so will add value and increase the chance of outperforming benchmarks, reports  Carl Delfeld for Index Universe. The wheres of a company is also becoming less important as the industries and sectors which it operates is taking center stage.

The basics of global indexing, says Delfeld, are take the S&P Global 1200, a composite of seven indexes that represent leaders in their respective regions. The market values of the 1200 companies in the indexes represent around 70% of the world's capital markets with a market value of $28 trillion or more. Here is a brief breakdown:

• The S&P 500 covers 75% of U.S. markets.
• The S&P Europe 350 covers 70% of the region's market cap across 17 countries.
• S&P/TOPIX 150 covers 70% of the Japanese market.
• S&P/TSX 60 offers exposure to 60 large-cap, liquid Canadian companies.
• S&P/ASX All Australian 50 is comprised of 50 liquid, domestic-oriented Australian companies.
• S&P Asia 50 covers 50 leading companies in Asia ex-Japan domiciled in Hong Kong, South Korea, Taiwan and Singapore.
• S&P Latin America 40 is a basket of 40 companies from Argentina, Brazil, Chile and Mexico which offers exposure to 70% of the regions' market cap. It is heavily weighted to Brazil and Mexico.

By using a top-down macro analysis of studying market-cap global sector weightings, a global sector rotation method can be useful in a growth portfolio. The weakness is that smaller countries get less weighting, and the traditional market-cap weighting which gives trademark exposure to emerging markets.

New Claymore ETFs Almost Have It All - Literally

If you were looking for a one-stop shop to get access to the U.S. capital markets via exchange traded funds (ETFs), it's here.

Today, Claymore launched a group of Capital Markets ETFs on the American Stock Exchange:

• Capital Markets Index (UEM)
• Claymore U.S. Capital Markets Bond Index (UBD)
• Claymore U.S. Micro-Term Fixed Income (ULQ)

UEM is the first ETF that covers all U.S. investment-grade capital markets. "It's probably the broadest ever launched, as far as we know, in the world," says Christian Magoon, head of the ETF group at Claymore Securities.

Indexing and ETFs Get a Fresh Perspective in Outsider's Report

The indexing and exchange traded fund (ETF) industry recently was privy to the observations of an outside observer.

Adam Sussman, a senior analyst for the TABB Group, wrote an exhaustive report titled "Performance Anxiety: A Buy-Side Study on Benchmarks and the Investment Process." You can buy it for $8,000 - or just read summary here for the bargain price of free.

Heather Bell for Index Universe sorted out the report's 38 pages so you don't have to and highlighted some of its most illuminating findings:

• Index providers could gain more market share by differentiating their indexes with better services and more information.

• Index subscribers want more data accuracy, and they want information on things like dividends, mergers and acquisitions and stock buybacks.

• Index providers can compete in the area of analytics. Sussman cites MSCI's acquisition of Barra, along with S&P's acquisition of CariFI. Having the analytics in-house could be a big selling point for a provider.

• By 2009, nearly 70% of all pension plans will use customized benchmarks.

• Customized benchmarks also will be driven by socially responsible investing, since more restrictions are being placed on pension funds in regard to where they can invest.

The overall conclusion of the report? Benchmarks once were an afterthought, and now they are front and center. Indexing has opened, and will continue to open, new doors.

Two New India ETFs Should Hit This Month

The challenge for PowerShares will be getting around India's rules about foreign stock ownership with its new India-focused exchange traded fund (ETF).

Instead of traditional ETFs, which use derivatives and/or notes that provide indirect exposure, the PowerShares India Portfolio (PIN) will provide direct exposure by owning local equities, PowerShares says. It will get around India's restrictions through a proprietary formula, according to InvestmentWires.

The index is designed to track the performance of the equity markets as a whole with representation in various sectors: information technology, health sciences, financial services, heavy industry and consumer products. It's expected to begin trading in mid- to late February.

There isn't going to be just one India ETF, though: WisdomTree is launching one as well. The WisdomTree India Earnings (EPI) fund is expected to launch early this month. The fund will consist of 150 locally listed companies, reports Index Universe for Seeking Alpha, and only includes companies that were profitable in the previous reported 12 months.

MSCI Growth Driven By ETFs

The Morgan Stanley indexing company provides a range of tools and services for investments such as exchange traded funds (ETFs).

The New York-based company publishes more than 100,000 indexes for its namesake international equity benchmarks, MSCI. Investor's Business Daily reports that fourth-quarter reports had a 200% surge, the best performance in 12 quarters. Revenue grew 25% during the latest period and this is because of ETFs based on their equity indexes.

MSCI notes that revenue from asset-based fees are prone to market volatility.

Will This Be the Year for Designer ETFs?

Last year might be known as one long coming out party for exchange traded funds (ETFs).

And if that's the case, says Murray Coleman for Index Universe, then 2008 is shaping up to be the "Year of the Quant Stock ETF." That's because in the second half of 2007, three prospectuses for active ETFs were filed, and a majority of the 451 ETFs in registration with the Securities and Exchange Commission (SEC) involve some form of quantitative or alternative methodology.

In 2007, Coleman says, the plain vanilla quant funds fared better while the more exotic ones had a rougher time and fell behind the broader market. This year, providers are gearing up to put more quant funds into the marketplace and they've conjured up all kinds of niche index.

It's bound to be an interesting year as quant-ers duke it out with traditionalists, who favor simplicity in their products.

Amex Lists Commodity Index With ETFs To Follow

The American Stock Exchange announced they have launched trading in the Greenhaven Continuous Commodity Index Fund (GCC), as the company enters into the exchange traded fund (ETF) community. GCC tracks the performance of the Continuous Commodity Return Total Return Index, an equal-weighted basket of 17 commodities.

CNN Money says the 17 commodities include corn, wheat, soybeans, live cattle, lean hogs, gold, platinum, silver, copper, coffee, sugar, cotton, orange juice, crude oil, heating oil and natural gas. Reuters America LLC owns and calculates the index.

Investing in Dharma With ETFs

Dow Jones Indexes, together with Dharma Investments have launched the Dow Jones Dharma Indexes to underlie exchange traded funds (ETFs).

They will measure the performance of selected companies according to value systems and principles of Dharmic religions, mostly Hinduism and Buddhism, reports HedgeWeek. Companies that can participate are in compliance with the Dharmic religious traditions. The series also has four country-specific indexes: the United States, United Kingdom, Japan and India.

The ETFs that are created to follow these indexes should be interesting.

New S&P Inverse Index Could Trigger New ETFs

This month, Standard & Poor's introduced the S&P 500 Inverse Index - does this mean exchange traded funds (ETFs) will follow?

The index provides the inverse performance of the widely used stock benchmark, reports Barry Burr for Pensions And Investments. For U.S. investors, the inverse index will serve as a benchmark to measure short positions in equities.

For investors in Europe and Asia, where many legal limits don't allow index shorting not based on an existing shorting index, the index inverse can serve as a basis for creating investment products such as ETFs. The S&P Inverse index return will be priced daily.

Spa Market Grader ETFs Going International

Spa MarketGrader's exchange traded funds (ETFs) are now ready to take on Italy, months after launching their funds on the American Stock Exchange.

Their six U.S. equity-focused Market-Grader ETFs will appear on Milan's Borsa Italiana stock exchange. MarketGraders 40, 100 and 200 ETFs, reports HedgeWeek, are based on core indexes of top-rated North American securities. They also have small-cap, mid-cap and large-cap indexes based on North American companies.

These ETFs are based on fundamentally driven indices created by research firm MarketGrader. All stocks are equally weighted and the indexes are rebalanced quarterly. Twenty-four quantitative filters have been used to construct them.

Fund's Performance May Be a Harbinger of Tough Times for Small Cap ETFs

While two exchange traded funds (ETFs) might follow the same underlying index, discrepancies are still possible.

A case in point is the SPDRs (SPY) vs. the Rydex S&P Equal Weight (RSP). Each fund has the same 500 stocks, but while SPY is weighted according to market cap, with an emphasis on large-caps, RSP is equal weighted and tends to favor the mid- and small-caps.

Arthur B. Hill of ETF Investment Outlook says that by looking at the performance of these two funds, investors can get a sense of the performance of small caps vs. large caps. The fact that the RSP dipped below its November low indicates there may be relative weakness for small-caps as a whole. Over the long-term, small-caps have outperformed large-caps.  It has only been recently that we've seen a shift where small-caps are underperforming large-caps.

Read the disclosure, as Tom Lydon is a board member of Rydex Investments.

Proprietary Index ETFs vs. the Traditional ETFs

In the battle between exchange traded funds (ETFs) based on proprietary index methodology and those based on traditional indexing, the clear winner is...

No one, really.

Andy Mayo of Seeking Alpha breaks it down by taking a look at four proprietary funds (two from PowerShares, two based on Morningstar's index methodology) and four traditional (two apiece from Russell and Vanguard).

For the last six months of 2007, the best performing of those funds was a PowerShares large cap, followed by a Vanguard large growth. The worst performer of the group in that time frame? Also a PowerShares fund.

All eight funds are in negative territory off the market high of October 9, but the large caps outperformed the small caps. However, off the market low of November 26, things have aligned a little more, with the small caps outperforming ever so slightly.

What does all of this mean? Mayo raises some good questions: has the market discounted a coming recession and small caps are poised to surge? Or is it all just a sign that small caps were oversold? And what about the types of indexing? Will we ever see a clear winner?

Mutual Fund Companies Diverge on ETFs

As the mutual fund industry faces a fork in the road -- continue as they have been, or start giving serious consideration to exchange traded funds (ETFs) -- they really only need to look for the answer in one place.

Ten years ago, Gus Sauter, then a managing director of Vanguard Group, sat up and took notice that one of Vanguard's biggest competitors, State Street Global Advisors, was attracting tons of money using ETFs. Rob Wherry of SmartMoney.com says that Sauter decided Vanguard needed to get in on the action. The CEO initially nixed the plan and told Sauter it was the worst idea he had ever heard. Eventually, he was convinced and the rest, as they say, is history.

Vanguard's 37 ETFs have pulled in a cool $41 billion since their launch in 2001. Sure, it's a small portion of the company's $1.3 trillion in assets, but the business is growing more rapidly than Vanguard's more traditional offerings.

The Wall Street Journal surveyed the mutual fund industry and found that fund companies fall into three basic camps with their strategies:

1. The first camp is made up of indexing specialists who view ETFs as a natural extension of their business. Some of these companies see landmines ahead, such as a price war that will bring ETF fees even lower than they already are.
2. The second camp are mutual fund companies that are buying ETF expertise, as Invesco did when it bought PowerShares in 2006.
3. The third camp are companies that are sticking to their guns, remaining confident that their expertise and stock-picking will continue to draw plenty of business.

As the ETF industry moves forward, it will be interesting to see what the different mutual fund companies choose to do and which ones come out on top.

There's More to Timber ETF Than Meets the Eye

Andrew Corn, in his own words, is known as “a bleeding heart, tree-hugging person in real life.” So, the founder and CEO of Clear Asset Management was a bit taken aback when a friend of his daughter’s called and, in a dramatic fashion that is the hallmark of 14-year-olds everywhere, asked him how he could possibly be a part of something called “CUT.”

That is, the Claymore/Clear Global Timber exchange traded fund (ETF). Its underlying index is made up of 27 companies from 11 countries that produce wood and paper products. And it has little to do with lumber and its price.

“The thing I have found is that people look at what we’re doing, and they wanted to take our information and compare it to the spot price of lumber in the Midwest. Why not compare the prices to a banana? There is that little correlation to lumber prices,” Corn says.

Fundamentally Indexed ETFs Get Tested

The debate about fundamental or market-cap weighted indexes and exchange traded funds (ETFs) continues. Roger Nusbaum for TheStreet.com takes a look at two of WisdomTree's ETFs, which are fundamentally weighted either by earnings or dividends. They don't follow the S&P 500, but Nusbaum compares them because the correlation is greater than 0.98.

WisdomTree Total Earnings Fund (EXT) is weighted by earnings, so the more money earned by the company, the larger the weight. This gives the ETF a value bent. This slight tilt can give it a lag, due to the large-cap growth stocks having outperformed by 5% this year.

WisdomTree High-Yielding Equity Fund (DHS) is a broad-based dividend-weighted ETF, and weights heavily to the financial sector. Finance accounts for 35.41% of DHS, with 18.66% for the S&P 500. This has obviously cut into performance due to the current mortgage crisis.

When judging ETFs it is necessary to consider the potential stumbling blocks and understanding what impact it could have. All indexing will lead to high and low points. As an investor you should know what your financial goals are and how an ETF may or may not fit into your portfolio.

S&P 500 Marks Its Golden Anniversary

This year marked the anniversary of the index on which the first exchange traded fund (ETF) was based: the S&P 500. In March 1957, the index that would become the most widely used U.S.-linked index was born and Standard & Poor's has been celebrating all year long. Part of the party was in New York, where they rang the closing bell in March.

David Blitzer, Standard & Poor's chief investment strategist, says that while he knew the index was no doubt valuable, he didn't realize just how much of an impact it truly had until he began putting together a book about its first fifty years. A slew of contributors quickly signed on to lend their voices to the project, including such thought leaders as John Bogle and Jeremy Siegel.

"Consistently, as we went through, this history of the index was the history of everything we knew. I knew the index was pretty significant. It was present in the creation of anything significant," Blitzer said.

His favorite discovery? Learning that it was the first index to have its calculations done by computer during the trading day. "It was not quite real time. It took about an hour. But it was the first time anyone had set up an index and tried to calculate it during the day."

In 1993, the SPDRs (SPY) were launched -- no doubt a nod to the S&P 500 as a major, important player in the world of indexes.

In 1995, Blitzer was appointed to be the chairman of the committee that decides which stocks are added or bumped from the index. As he settled into the role, he asked his predecessor what he could do differently than he had. "Go and tell everyone about [the index]," came the response.

"Thirty-eight years the index was around, yet we had never promoted it in a huge way in the public. That was my charge," Blitzer said. Getting it to become a household name like the Dow Jones industrial average became a goal.

It's safe to say his mission has been accomplished.

Check Out the Big Brain on These ETFs

As exchange traded funds (ETFs) become more commonplace around the world -- the number available globally has surpassed 1,000 -- they need to do more and more to distinguish themselves from the herd. PowerShares founder Bruce Bond thinks he has just the ticket with what he's dubbed "intelligent ETFs," reports Sophia Grene with the Financial Times.

"Intelligent ETFs" aim to pair up the passive style of traditional ETFs with an actively managed concept. Bond has divvied them up into three categories: intelligent index, intelligent exposure and intelligent access ETFs.

Intelligent index ETFs are based on companies with the most convincing growth or value attributes, based on quantitative factors. Intelligent exposure ETFs track FTSE Rafi indexes, which track the market based strictly in economic terms. Intelligent access tracks indexes with a given theme, such as timber or water.

Bond feels the approach could give investors some comfort by combining "the best of both worlds. The efficiency of indexes, and valuation powers of active management."

Using ETFs to Track IPOs

Getting in on an initial public offering (IPO) can be a hit-or-miss proposition -- how do you know what's going to take off and stay taken off vs. what's going to peter out after an initial rush of excitement? What's the next Google and what's the next Krispy Kreme? Joseph Schuster, the creator of the index that U.S. IPOX 100 Index Fund (FPX) exchange traded fund (ETF) tracks, believes he has identified a solution to the problem.

This ETF tracks an index of 100 top IPOs in the U.S., measuring the performance of them by their market cap and rebalancing quarterly. They're added into the index on their seventh day of trading in order, Schuster says, to capitalize on a long-term "buy and hold" perspective. On their 1,000th day, it's time to move on and the once hot new things are bumped out of the index in favor of a new IPO.

"Only a few IPOs are really interesting from an investor's perspective. Ninety percent of them turn out to really be dogs, underperformers. We provide a stable solution to the problem," Schuster says.

The IPOX 100, launched in April 2006, is the first offering to track U.S. IPOs, but there's a whole line of IPO indexes that IPOX-Schuster offers that target IPOs around the world. Later in 2006, Dow Jones launched the Dow Jones STOXX IPO indexes in the European market. They track the performance of European IPOs over three time periods: 3 months, 12 months and 60 months. A key difference between STOXX and IPOX is that STOXX includes IPOs on the day after their initial offering.

While IPOX has more exposure in large-cap IPOs, Schuster believes IPOs ultimately should be seen as a separate asset class because their returns and risks are different than that of the average, everyday stock. "We think the industry makes a mistake in not classifying them separately, and that's what IPOX is all about."

Contango Challenges ETFs, But These Indexes Have Their Dukes Up

Challenges abound with the onslaught of commodity exchange traded funds (ETFs) and exchange traded notes (ETNs). The contango war will rage more fiercely than ever because JP Morgan and BNP Paribas have launched two new indexes that allow investors to invest in commodities nearly three years out on the futures curve. The "negative roll yield" has affected many returns and left investors wondering why their commodity-index based returns don't match the bullishness of the underlying markets.

Brad Zigler for Seeking Alpha explains that the JP Morgan Commodity Curve Index (CCI) will invest 33 futures all along the futures curves instead of the first few months. By spreading across delivery months, index developers are trying to reduce the impact of a negative roll yield. The BNP Paribas Commodity Market Representative Index (CMRI) operates in a manner similar to CCI's, but it will be made up of 25 contracts.

Long-Term Commodity ETF Indexes

JP Morgan and BNP Paribas are launching two new indexes that will allow investors to invest long-term in commodities, so perhaps more exchange traded funds (ETFs) will be in the pipeline. This is the first time that a long-term investment in this asset class will be available; long-term being up to around three years, reports Duncan Kerr for Financial News.

The JP Morgan Commodity Curve Index will provide buyers with investment opportunities along "the curve" giving them the chance to spread the maturity profile. BNP Paribas will launch the Commodity Market Representative Index that provides investors another outlet to access the commodities markets. The commodities sector has been one of the fastest growing areas of fixed-income capital markets in recent years. Investment into commodities indices is forecasted to grow 20% in 2008, reaching close to $120 billion, says S&P forecasts.

FTSE Terror-Free Indexes - ETF to Follow?

Would you invest in an exchange traded fund (ETF) that focused on the "Axis of Evil" terror sponsors? Sudan, Syria, Iran and North Korea have been identified by the U.S. government as sponsors of terror, and pension funds are backing off from companies that have business tied to those areas, reports Heather Bell for Index Universe.

FTSE has reacted to to this trend by entering into an agreement with Conflict Securities Advisory Corp. (CSAG) and agreeing to create indexes that screen out companies tied to these areas. The FTSE/CSAG Terror Free Index Series will launch in 2008. Screened versions of FTSE All World ex-US Index, FTSE All World Developed ex-US Index and the FTSE Emerging Markets Index are planned. The exact number of companies to be excluded is not yet known, but estimates are around 400 in the U.S. and abroad combined. Could we see terror-free ETFs in the future?

My ETF Index Is Better Than Yours

Is it possible to build a better exchange traded fund (ETF) with indexes? WisdomTree is working to do just that, with their ETF family based upon fundamental indexes rather than the traditional market cap-weighted method.

WisdomTree Pacific ex-Japan Total Dividend Fund (DND) uses the MSCI Pacific ex-Japan Index as its benchmark. These two indexes use different guidelines in determining which companies to include. The MSCI is the traditional market cap-weighted method, favoring widely known, high-value companies, explains Saibel Saha for The Motley Fool. The WisdomTree index includes companies only paying regular cash dividends. The focus is on earnings and companies paying hard cash to investors on an annual basis. Mature, slow-growing companies are usually the types that fit the criteria. DND goes after the growth and good business fundamentals.

Since its inception, DND has returned 87%, while the MSCI index returned 79% in the same period.  The WisdomTree ETFs are just over a year old, so whether DND can continue to outperform its benchmark remains to be seen. As for cost and returns, it had a winning first year.

New S&P Select Frontier Index Could Pave the Way for More ETFs

More exchange traded funds (ETFs) could be on the way now that the S&P has launched its new Select Frontier Index. The new index includes 30 of the largest and most liquid components from the broader S&P/IFCG Extended Frontier 150 Index. It has a total market capitalization of $46.93 billion, and individual components must have market capitalizations of at least $100 million; their weights are capped at 10% of the index. Components must also meet certain liquidity requirements. The weight of individual countries is capped at 30% of the index, and no country can be represented by more than five companies, says Heather Bell for Index Universe. The countries included in the new S&P Select Frontier Index and their weightings are:

• Pakistan - 29.0%
• United Arab Emirates - 23.1%
• Jordan - 13.2%
• Vietnam - 11.5%
• Panama - 7.7%
• Kazakhstan - 7.1%
• Colombia - 6.2%
• Bulgaria - 1.1%
• Cambodia - 1.0%

Equally Weighted ETFs

Some exchange traded funds (ETFs) are being rolled out based upon equal weight rather than market capitalization. XShares Advisors recently launched a set of REIT ETFs that are equal weighted, and Rydex also has done so in recent years with the Rydex S&P Equal Weight (RSP).

Market-cap weighting is the traditional method for the S&P 500, and most ETFs are still weighted in this way. Jesse Emspak for Investor's Business Daily says with equal weighting, a 1% rise or fall in one security's price has the same impact on the index's performance as another. This is not the case for market cap-weighted indexes. Because all stocks do not perform the same, re-balancing is needed periodically to put the weightings back in sync. Equal-weighted indexes are likely to outperform when small stocks do better than larger ones. This also seems to work in favor for single sector exposure.

Read the disclosure, as Tom Lydon is a board member of Rydex Investments.

Is a Cubes Jr. ETF on the Way?

Is a "Cubes Jr." exchange traded fund (ETF) in the making?

The Nasdaq Stock Market started a new index yesterday, the Nasdaq Q-50, which is made up of companies poised to enter into the Nasdaq-100 Index. The stocks within the new index are weighed by market capitalization, reports