European Large-Caps On Their Way Up To Help ETFs

Although the U.S.dollar is weak, and the credit crunch has tightened the cash flow, European large-caps don't seem to be feeling this.

Exchange traded funds (ETFs) that hold European large-cap stocks include Vanguard European Stock (VGK) and the iShares S&P Europe 350 (IEV), both of which are down year-to-date, but have been ticking back up during the past four weeks.

VGK in the last month has risen 2.1%, but is down 3.1% year-to-date. IEV is up 1.7% in the last month, but down 3.4% year-to-date.

VGK is made up of bigger firms, while IEV is actually five years older. IEV holds 600 companies while VGK holds 348. The ETFs track different indexes, the MSCI Europe Index for IEV and the S&P Europe 350 Index for VGK.

Both ETFs give exposure to large, Western European companies and currencies, reports Joanne Von Alroth for Investor's Business Daily. The large-caps that make up these funds have performed well recently.

But not all is rosy in Europe: the European Union is battling 3% inflation, a credit crisis and high food prices. Some retailers have seen sales fall. But there's optimism, too, since in April both France and the United Kingdom saw their highest monthly benchmark index gains in nearly five years.

Can Actively Managed ETFs Beat the Market?

The actively managed exchange traded fund (ETF) doesn't seem to be turning any heads.

After all, we've heard it all before. First, actively managed mutual funds can be the market. Then, hedge funds can beat the market. And now, ETFs are up to bat.

Ron DeLegge for ETF Guide doesn't sound too impressed, and here is his list of pluses and minuses:

• Pros Active ETFs: ETF product structure is tax efficient; possible lower internal portfolio turnover, compared to an actively managed mutual fund; lower expense ratios than those of mutual funds.
• Cons of Active ETFs: More frequent portfolio disclosure than a mutual fund; higher costs than index ETFs; beating the market over the long run is still an uphill battle; no proven performance track record.

DeLegge says that looking to large-cap companies to beat the market probably won't be successful, as studies have shown that most large-cap fund managers consistently underperform corresponding indexes.

The available actively managed ETFs are:

• Bear Stearns current Yield Fund (YYY)
• PowerShares Active Low Duration Fund (PLK)
• PowerShares Active Mega Cap Fund (PMA)
• PowerShares Active Alpha Q Fund (PQY)
• PowerShares Active Alpha Multi-Cap Fund (PQZ)

Several other providers are waiting their chance to launch their own actively managed funds, including Barclays, State Street, Vanguard and WisdomTree.

More ETFs equal more choices for investors and greater competition between fund providers. Once they're armed with the tools, performance history and knowledge to make a wise decision, investors will ultimately decide if these funds are right for them.

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%

PowerShares Launches Its Actively Managed ETF Line

The long-awaited actively managed exchange traded funds (ETFs) from Invesco PowerShares are here. They're billed as the industry's first three actively managed equity ETFs, and they began trading on the NYSE Arca today.

All of the funds' holdings are to be disclosed daily on the fund's website. They are:

• PowerShares Active Low Duration Fund (PLK): Invests in a portfolio of U.S. government, corporate and agency debt securities. It seeks to outperform the Lehman Brothers 1-3 Year U.S. Treasury Index. The unitary fee will be 0.29%.
• PowerShares Active Mega Cap Fund (PMA): Invests primarily in the equity securities of mega-caps. It seeks to outperform the Russell Top 200 Index. The unitary fee will be 0.75%.
• PowerShares Active AlphaQ Fund (PQY): Invests in a portfolio of about 50 securities listed on the Nasdaq Global Market. It seeks to outperform the Nasdaq 100 Index, and the unitary fee will be 0.75%.
• PowerShares Active Alpha Multi-Cap Fund (PQZ): Invests in about 50 securities selected according to a methodology developed by AER advisors. It seeks to outperform the S&P 500. Its unitary fee will be 0.75%.

The unitary fee is the one fee used to cover expenses incurred in connection with managing the portfolio.

Bear Stearns launched the first actively managed ETF in late March, Bear Stearns Current Yield Fund (YYY).

Small-Caps vs. Large-Caps Are a Tale of David and Goliath This Year

Small-cap value stocks and exchange traded funds (ETFs) have been benefiting from having less to lose than large-caps and so far this year, they've been outpacing them handily.

In the last month, small-cap value ETFs are up 5.4%, while large-cap values are up 3.2%. Mid-caps are up 3.8%.

Trang Ho for Investors Business Daily reports that unlike the large-caps, small-cap ETFs did not own financials, which have been battered in the early part of this year. Small-caps have the best long-term and intermediate prospects, because in a volatile market growth stocks are at a risk to lose value.

Last year, large-caps were the story after a series of strong earnings reports. But as the subprime crisis spread, ETFs that hold them took a beating.

One expert says the ideal companies are those that are undiscovered or unloved, with strong balance sheets and cash flow, consistent management, increasing or stable market share and margin expansion potential. ETFs that hold these types of companies:

• iShares S&P SmallCap 600 Value Index (IJS)
• Vanguard Small Cap Value (VBR)
• PowerShares Dynamic Small Cap Value (PWY)
  

Worldwide Growth Can Build Up Demand for Industrial ETFs

The PowerShares FTSE RAFI Industrials Sector (PRFN) exchange traded fund (ETF) could benefit from optimism in the industrial sector down the line.

How's that? Many of the companies in this fund's top holdings have a global reach, including General Electric (GE), which is far and away the largest holding in the fund at 18%. Another holding, Caterpillar (CAT), is up 10.6% year-to-date and makes up 2.6% of the fund. United Parcel Service (UPS), which is 4.1% of the fund, has an extensive global network. Developing markets in a growth spurt help fuel the demand for the products these companies offer and help offset the damage of a U.S. slowdown, reports Don Dion for Seeking Alpha.

The fund represents a wide range of sectors, including defense and aerospace, machinery makers, transportation and software.

The fund is down 4.6% so far this year, but if the sectors that it represents continue to post gains, this ETF could stage a turnaround. A prolonged recession in the United States, however, could pinch this ETF, while a global slowdown would really hurt. If this fund moves above its trend line (200-day moving average), it could be one to keep an eye on.

Playing the Waiting Game With ETFs

  Some believe we're in a full-blown recession, but no matter what they believe, exchange traded fund (ETF) investors shouldn't panic.

Chris Fichera for Consumer Reports suggests staying put and weathering the storm, while making some tweaks to your portfolio:

• While he does suggest that large-caps are attractive and relatively expensive, it's actually the small- and mid-caps that have been outperforming in the last two weeks. Large-caps are up about 1.7%, mid-caps are up about 2.9% and small-caps are up about 5%. There are a variety of small- and mid-cap funds out there, among them:
  • iShares Russell 2000 Growth Index (IWO)
  • iShares Russell 2000 Value Index (IWN)
  • Vanguard Small Cap Value (VBR)
  • iShares S&P MidCap 400 Value Index (IJJ)
  • PowerShares DWA Technical Leaders (PDP)

• International is still attractive. Europe and Japan are slowing down, but there are still emerging markets out there that are growing rapidly, with still more room to grow. Emerging markets can be volatile, so having an exit strategy here is paramount.
  • iShares MSCI Spain (EWP), up 10.3% since March 10
  • iShares MSCI Malaysia (EWM), up 10.5% since March 10
  • iShares MSCI Mexico (EWW), up 8.3% since March 10

• Go with short- or intermediate-term bonds, as long-term bonds don't have the most attractive yields right now. They would also feel the effects if the Federal Reserve were to cut interest rates further.
  
  • SPDR Lehman Short Term Municipal Bond (SHM)
  • iShares Lehman MBS Bond (MBB)
  • SPDR Lehman Aggregate Bond (LAG)
  • iShares Lehman Intermediate Credit Bond (CIU)
  • iShares Lehman Government/Credit Bond (GBF)
  • Market Vectors-Lehman Brothers AMT-Free Short Municipal Index ETF (SMB)
  • PowerShares Insured National Muni Bond (PZA)

Whatever you do, whether you decide to tweak your portfolio or just sit and wait, stick to your investment plan. Once investors are guided by their emotions is when the real trouble begins.

For disclosure, some of Tom Lydon's clients own shares of EWP.

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.

Basic Materials ETFs Could Spike From Commodities Bull

At the moment, it doesn't appear that raw materials stocks and exchange traded funds (ETFs) are crumbling under the weight of a struggling market and rising oil prices.

Don Dion for Seeking Alpha says that despite the woes in nearly every sector, the PowerShares FTSE RAFI Basic Materials (PRFM) is up slightly in the last month: 1.6%. Fingers are crossed that high commodity prices will keep things strong. Year-to-date, the fund is down 4.9%, so it's got some turning around to do.

PRFM invests in materials such as coal, copper, pulp, paper, gold, seeds, aluminum, raw chemicals and steel. Since most of the stocks tie closely with commodity prices, there is volatility in this ETF. The ETF has a pull from across the board, with metals, seeds and fertilizer stocks benefiting from the commodities boom, while paper and pulp were down because of the slow demand of paper. Metals prices are surging while forest products are down, owing to the housing slump.

PRFM's sector sibling is PowerShares Dynamic Basic Materials (PYZ), which is up 3.6% in the last month. Year-to-date, though, it's down 4.6%. PYZ chooses small- and large-cap stocks that have the ability to outperform. PRFM has no cap size restrictions, but focuses on the largest materials stocks.

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%.

The Second Clear Indexes Student ETF Contest

Clear Indexes is holding their second student contest for best exchange traded fund (ETF) idea.

The Second Clear Next Generation ETF Contest boasts a $5,000 prize and a paid internship, plus the chance to see their index become published. The previous Clear Next Generation ETF contest was held late last year, was limited to three select colleges and was such a success that not only has the prize money grown, the list of colleges has been extended, reports the Centre Daily Times.

The contest is being run by professors, student activity offices and career centers from the following schools: Johns Hopkins University, Wharton School of the University of Pennsylvania, Harvard, Cornell, York, Middlebury College and Pennsylvania State. Any student who attends one of these universities is eligible as long as they have a valid e-mail address.

James Baker, 18, of NYU won the first contest, with the winning idea of a U.S. exporters index based on the growing global economy, capitalizing on the falling U.S. dollar and consisting of large- to mid-cap companies.

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

Some Dividend ETFs Going Down With Financial Sector

Dividend-focused exchange traded funds (ETFs) are experiencing a meltdown of their own.

These types of funds have large plays in high-yielding financial stocks and this is the sector that has been hit hard by the sell-off in banks exposed to the subprime meltdown and credit crunch, reports John Spence for MarketWatch.

The largest dividend-paying ETF is the iShares Dow Jones Select Dividend Index Fund (DVY), which has been one of the industry's greatest success stories, enhanced by dividend tax breaks and low bond yields. DVY tracks an index of the 100 highest dividend-yielding securities listed in the United States.

The fund went down in late January along with the broader market, and hit a 52-week low of $50.85 on Jan. 22 - 33% off its high in May 2007.

These types of ETFs were first brought to the broad market as an alternative to traditional market exposure. What investors are now learning is that these funds have huge sector bets. There may be opportunity in buying low at this point.

Matthew Hougan, editor at Index Universe, points out the need for investors to look behind the funds, as dividend ETFs can be heavily weighted over just a couple sectors. It's sound advice: always know what you own.

The Dow Makes a Rare Component Change, ETFs Will Change Along With It

It doesn't happen often: Dow Jones announced they will be changing the composition of the Dow Jones industrial average, changing the exchange traded funds (ETFs) that track this index.

Two component stocks will be replaced: Bank of America Corp. (BAC) and Chevron Corp. (CVX) will replace Altria Group Inc. (MO) and Honeywell international Inc. (HON), effective as of Feb. 19.

These are the first changes made since April 8, 2004, when 3 stocks out of 30 were replaced.

A lot of thought goes into any changes in the index:

• Altria, formerly known as Philip Morris Cos., had been on the index since Oct. 30, 1985.  Restructuring is taking place at the company, which will ultimately result in a much narrower and smaller company.
• Honeywell is dropped because it's the smallest of the industrials in terms of revenue and earnings.
• Any changes cause a thorough review of all the stocks, and the financials industry was under represented, hence the addition of Bank of America.
• The oil and gas industry is important to the world's economy, as well, and it was felt that another representative was needed to join Exxon Mobil Corp. (XOM).

The "Dow" was created by Charles Dow as a 12-stock index in May 1896, and is the best-known stock market barometer in the world. Today, it holds 30 companies, weighted by their price.

The component changes will change the look of the Diamonds Trust Series 1 (DIA) and Ultra Dow 30 ProShares (DXD). Now is a good time to look at your portfolio and make sure that with these additions, you're still diversified enough.

Are You Doubling Up With ETFs?

When you look at your exchange traded fund (ETF) portfolio, and consider all of the single stocks that you own, are you ever doubling up?

Investing in individual large-caps is great, however, if you also own any part of the S&P 500 through an ETF or mutual fund, you may be too heavily weighted in U.S. large caps. Tim Hanson and Brian Richards for The Motley Fool want to know if that's the kind of asset allocation you intended. Probably not. You could do worse than the S&P 500, of course: it has a roughly 10% historical annual return.

Even within the most conservative game plan, though, there should always be room for small-caps. After all, they're the best-performing stocks on the market. Whether it's 10% or 30%, depending on your risk tolerance, the returns will help you beat the market over the long-term and maximize your savings, especially if you manage to pick the right small-caps.

If you own a broad-based ETF such as the Vanguard Total Stock Market (VTI) and also own stock for, say, Exxon Mobile (XOM), General Electric (GE) or Citigroup (C),you may have unknowingly doubled up on these market mammoths. Make sure to review your portfolio and know what you're holding so that get exposure to different asset classes.

Malaise Shows in Retail ETFs and Sectors

As if the wallets weren't shut tight enough already: retail sales fell even further in January, putting a damper on related exchange traded funds (ETFs).

Anne D'Innocenzio for the Associated Press reports that retailers had their weakest January performance in almost four decades. High gas and food prices, a sagging housing market, growing credit crisis and a weakening job market are all blamed. Consumers appear to mostly be sticking to purchasing necessities, even when it came time to use their gift cards.

And almost no retailing sector was spared the crunch: discounters such as Wal-Mart (WMT), teen retailers and even stores that cater to the affluent set, such as Nordstrom (JWN), all were hurt.

Retail ETFs are likely to show the strain, too. In the last week, the Retail HOLDRs (RTH) is down 1.9%. Among its major holdings are Wal-Mart (18.3%) and Target (TGT, 8.6%)

The SPDR S&P Retail (XRT) is down 1.7% over the last week. Among its holdings are Nordstrom (1.8%) and Limited Brands (LTD, 1.8%).

Claymore 'Acts Responsibly' and Closes 11 ETFs

After three years of billions of dollars flowing into exchange traded funds (ETFs) and hundreds being launched, one ETF provider is showing their accountability and trimming the hedges.

Following a recommendation and approval from their board of directors, Claymore today filed with the SEC to close 11 of their 37 ETFs. I spoke with Christian Magoon, the head of Claymore's ETF Group, who explained that Claymore felt they have a duty to all shareholders and if some ETFs are not widely accepted in the marketplace, it's Claymore's responsibility to act.

The closing funds represent less than 2% of the firm's U.S. ETF assets. View the press release here. The last trading day for the following funds will be February 19:

• Claymore/BIR Leaders 50 (BST)
  
• Claymore/BIR Leaders Mid-Cap Value (BMV)
  
• Claymore/BIR Leaders Small-Cap Core (BES)
  
• Claymore/Robeco Boston Partners Large-Cap Value (CLV)
  
• Claymore/LGA Green (GRN)
  
• Claymore/KLD Sudan Free Large-Cap Core (KSF)
  
• Claymore/Clear Mid-Cap Growth Index (MCG)
  
• Claymore/Zacks Growth & Income Index (CZG)
  
• Claymore/IndexIQ Small-Cap Value (SCV)
  
• Claymore/Robeco Developed World Equity (EEW)
  
• Claymore/Clear Global Vaccine Index (JNR)

Some ETF naysayers may have been waiting for something like this and may jump all over the news as a sign that the ETF industry has been fat, dumb and happy for too long. In reality, this is probably the kind of move that the conventional mutual fund industry should have made years ago.

Boeing Earnings Lift Off Defense ETFs

Wall Street and related exchange traded funds (ETFs) were impressed by the 4% increase in fourth-quarter profits by Boeing Co. (BA).

Delays in the 787 Dreamliner program don't appear to pose a threat to performance. Dave Carpenter for Associated Press reports that the world's second-largest commercial jet maker is continuing to address problems with the first 787's and will slightly reduce 2008 revenue and deliveries estimates.

Boeing shares have taken off to $83.78 in midday trading. Boeing's net income for the last three months of 2007 was $1.03 billion or $1.36 per share, 4 cents higher than Thomson Financial analysts' expectations.

PowerShares Aerospace and Defense (PPA) has Boeing at 5.02% of assets and iShares Dow Jones US Aerospace and Defense (ITA) gives Boeing 8.44% of assets in the basket.

Could Fight Spill Over Onto ETFs?

Could a lawsuit against an entertainment and Internet heavyweight hurt a couple exchange traded funds (ETFs)?

Liberty Media (LCAPA) is suing IAC/InteractiveCorp (IACI) Chairman Barry Diller. The company wants to gain control after Diller proposed breaking IAC into five companies. Liberty Media holds 30% of IAC's shares and 62% of its voting power. The company owns the QVC and Starz channels.

The back-and-forth has been going on since last week, report Sophia Pearson and Oliver Staley for Bloomberg. IAC filed on Jan. 23 that Liberty threatened to block the breakup unless the deal was structured to give it control of the new companies. Liberty volleyed back the next day, accusing IAC of trying to dilute their voting power.

Which way this goes remains to be seen, and it's worth keeping an eye on two ETFs that count Liberty Media as top holdings. PowerShares Dynamic Leisure & Entertainment (PEJ), of which Liberty is 5.8%. It's down 8.6% year to date and 15.8% over the last three months. PowerShares Dynamic Media (PBS) contains Liberty as 5.6% of its holdings. The fund is down 7.6% year to date, and 17.9% in the last three months.

Pay Attention To Earnings-Weighted ETFs

WisdomTree rolled out a family branch of exchange traded funds (ETFs) fundamentally weighted on the basis of trailing earnings. So the more a company earns, the more it's weighted in the index.

Roger Nusbaum for TheStreet reports that these ETFs actually track closer to the makeup of a traditional cap-weighted index than WisdomTree's dividend-weighted ETFs.

WisdomTree Low P/E Fund (EZY) weights stocks with the lowest price-to-earnings ratio most heavily. The ETFs within this family are great for a broad-based portfolio. Over time, sector makeup changes so watch closely. Right now, energy dominates the four funds, with 13%-21% making up the four large-cap funds, such as the Dividend 100 Fund (DTN).

Gauging ETF Liquidity

Ever wonder if your exchange traded funds (ETFs) are liquid enough for your taste?

You can check the liquidity yourself with the bid-ask spread. Although ETFs trade like stocks, trading volume does not give good insight into how easily they trade, because the underlying securities make the difference. Jesse Emspak for Investor's Business Daily reports that liquidity is important when an ETF you want to sell hits a price target or isn't performing at all.

If a stock is thinly traded, it will be harder to sell, and wider spreads indicate that it's harder for issuers to meet demand. This shows that underlying stocks are less liquid. As a rule, small-cap growth stocks are usually less liquid than their large-cap counterparts. Market-makers and traders have your best interests in mind, since the larger the volume of the trade, the more money they make, too.

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.

And the Clear Indexes ETF Creation Winner Is....

Clear Indexes LLC announced the winner of its exchange traded fund (ETF) competition, which took place from October 12-November 26, 2007.

James Baker, 18, an NYU freshman, won the Clear Next Generation ETF Competition. His idea was selected from around 100 entries, and he will receive $4,000, a paid internship at the Wall Street Clear Indexes' office, and the chance to work on publishing the live index.

His winning idea was a U.S. Exporters Index that seeks to benefit from a growing global economy, along with the reduced value of the dollar. It is made up of large-to mid-cap companies that obtain a material portion of their revenue outside the U.S.

All of the winners are acknowledged on the group's Facebook page.

Europe Gives ETFs Air Kisses As They Gain In Popularity

The next big market for exchange traded funds (ETFs) is shaping up to be Europe.

In fact, reports Vito J. Racanelli of Barron's, Europe is showing the strongest growth in the popularity of ETFs. But while there's a lot of investor interest, it hasn't reached the U.S. level just yet.

According to Morgan Stanley, assets in European-listed ETFs jumped 40% -- from $90 billion to $126 billion -- in the first nine months of 2007. Worldwide, assets in ETFs jumped 32%. In the U.S., assets grew by 30%, and they are nearing the $600 billion mark. As of Sept. 30, of the European countries, Germany had the most ETFs at 154. France came in second, with 114.

The ETFs attracting the most interest in Europe are those linked to the Dow Jones Euro STOXX 50, a large-cap index. At the moment, ETFs in Europe are geared toward institutional investors. But as an increasing number of individual investors discover their benefits, their ranks and assets under management can only grow.

Vanguard Plays With Mega-Cap ETFs

You've heard that timing is everything, and if mega-cap stocks continue to perform, Vanguard's three new mega-cap exchange traded funds (ETFs) could be a case of the right ETF at the right time.

The three new ETFs are:

• Vanguard Mega Cap 300 Index Fund (MGC)
• Vanguard Mega Cap 300 Growth Index Fund (MGK)
• Vanguard Mega Cap 300 Value Index Fund (MGV)

The December-born ETFs track 300 of the largest stocks within their MSCI indexes, reports Jesse Emspak of Investor's Business Daily. Expense ratios are at 0.13%. Pay attention, as some mid-cap stocks overlap with large-caps at the top of their market caps. For this reason, the firm launched these ETFs to offer a more purely large-cap play.

Regional Bank ETFs Take a Fall

The bad news continues for financial-related exchange traded funds (ETFs).

The Regional Bank HOLDRs (RKH) hit its lowest point in more than two years on this week, reports Thomson Financial. The drop came after National City said that it's cutting its quarterly dividend to 21 cents, down from 41 cents a share, as well as cutting 900 jobs in the closure of its wholesale mortgage division.

Among the fund's other heavily-weighted holdings are J.P. Morgan Chase & Co. (JPM), Wachovia (WB) and Wells Fargo & Co. (WFC).

Other ETFs that track the regional bank sector are also down, including KBW Bank ETF (KBE) and iShares Dow Jones U.S. Regional Banks (IAT).

Cubes ETF Rebalances, Fund Holders Win

If you've got a piece of the cubes exchange traded funds (ETF), you should be sitting pretty right now. The fund, also known as the PowerShares Nasdaq 100 Trust (QQQQ), has climbed upward since rebalancing on Dec. 14.

Joanna Von Alroth at Investor's Business Daily reports that the fund is up 5% since its annual rebalancing act. It is up 21% year-to-date. The ETF tracks the Nasdaq index, which is made up of the 100 largest and most actively traded non-financial stocks. It's rebalanced every December and inclusion is subject to stringent eligibility requirements including:

• An average daily trading volume of 200,000 shares
• The company must be "seasoned" or listed on a market for at least two years

Once a company is in, it has to continue to work to stay in. Bankruptcy, buyouts and spinoffs can lead to deletion.

New Vanguard Mega Cap ETFs Launch

Vanguard launched three new exchange traded funds (ETFs) on the NYSE Arca. They seek to track three MSCI Indexes and each fund has an expense ratio of 0.13%, reports Aaron Seigel for InvestmentNews.

• Vanguard Mega Cap 300 Index Fund (MGV) tracks the MSCI Large-Cap US 300 Index
• Vanguard Mega Cap 300 Growth Index Fund (MGC) tracks the MSCI US Large-Cap Growth Index
• Vanguard Mega Cap 300 Value Index fund (MGK) tracks the MSCI US Large-Cap Value Index

The firm now has 37 ETFs listed and $1.3 trillion in assets.

Bargain Basement ETFs

Exchange traded funds (ETFs) are popular because they offer diversification, tax efficiency, lower costs and lower expense ratios than most investment tools. ETFs trade on an exchange like a single stock, but beware that too many trades can cut away returns, reports Rich Duprey for The Motley Fool. ETF assets totaled $588 billion as of October 2007.

Duprey lists some of the most cost-effective ETFs around, and all of them have at least a three-year performance track record.:

• Vanguard Total Stock Market (VTI), expense ratio 0.07%; three-year return of 13.98%
• Vanguard Large-Cap (VV), expense ratio 0.07%; three-year return of 13.94%
• SPDRs (SPY), expense ratio 0.08%; three-year return 13.04%
• Vanguard Extended Market Index (VXF), expense ratio 0.08%; three-year return 16.25%
• iShares S&P 500 (IVV), expense ratio 0.09%; three-year return 13.10%
• Vanguard Small-Cap (VB), expense ratio 0.10%; three-year return 14.84%
• Vanguard Value (VTV), expense ratio 0.11%; three-year return 15.49%

ETF Asset Class Reveiw for 2007

Which asset classes and similar exchange traded funds (ETFs) fared well for 2007? Matthew D. McCall for Seeking Alpha gives us his take based on the nine categories of market capitalization and growth versus value. He keeps his research to the domestic markets.

For 2007, growth outperformed value and the mid-caps pulled ahead. With market volatility, and a falling stock market, growth tends to be where investors gravitate. Growth stocks tend to continue their revenue and earning growth.

In the past few years, small-caps have outperformed large-caps, but it looks as though mid-caps outperformed them all this year. McCall calculates that mid-caps returned 11% versus large-caps 6.9% and small-caps 2.7%.

What's in store for 2008? Will large-caps finally make a come-back? Will market volatility continue and growth outperform value? It's not easy to predict what will happen, but keeping an eye on the trends and having an exit and entry strategy in place will certainly help find the areas that are trending upward and get out of those that are trending downward.

ETFs Could Get Their 130/30 Fund Entry Via ProShares

One of the fastest-growing segments of the financial market now has an exchange traded fund (ETF) entry. According to Matthew Hougan at IndexUniverse, ProShares has filed with the Securities and Exchange Commission (SEC) for a "130/30" ETF.

The fund will be constructed by ranking all of the large-cap stocks in the U.S. It will then take a 130% long position in the high-ranked ones, and a 30% short position in the low-ranked ones. The goal in this is to get additional alpha and excess returns while netting 100% exposure to the market.

The fund is still shrouded in a little bit of mystery, though. The prospectus leaves the index name blank, so what index the fund will follow is anyone's guess right now. The prospectus is also mum on expenses and the underlying quantitative strategy.

Dow Theory Flashes A Bear For Diamonds Trust (DIA)

The Dow Theory, one of Wall Street's oldest tools used to decipher the longer-term direction of stock prices, is flashing a warning sign about stocks and exchange traded funds (ETFs). The Dow Theory is a market-trend forecasting system developed in the late 19th century by Wall Street Journal editor Charles Dow. It is close to signaling the main trend of the market is down, or bearish, after a five-year bull run. Adam Shell for USA Today reports that if the Dow industrial average (companies that make goods) and the Dow transportation average (companies that ship goods) both breach significant market levels, a trend change is confirmed.

The transports are trading below their August low, when the first scare of the credit crisis hit. Industrials plunged 4.5% the past three sessions and are hovering at 1.5% above their August low. If industrials close at 12,845.78, below their August low, the bear has officially roared.  But this morning's rebound in the markets is holding off the bear for now. Stay tuned.

A Few Large-cap ETFs for Your Consideration

We've mentioned before that small-cap exchange traded funds (ETFs) have outperformed large caps for the last five years. However, as Gary Gordon for ETF Expert says, this year large-cap stocks have outpaced small-cap competitors. In fact, large-cap growth funds have posted the biggest gains among the major stock-fund categories during the third quarter. This point emphasizes that large-cap ETFs could be a vital piece of any ETF portfolio. When selecting a large-cap ETF, consider some of these major players and their performance year-to-date:

• iShares Russell 1000 Index (IWB) - up 11.5%
• SPDRs (SPY) - up 11.2%
• iShares S&P 100 Index (OEF) - up 11.5%

Will Vanguard's Megacap ETFs Be a "Mega" Hit?

Vanguard's attempt to capture the exchange traded fund (ETF) market continues with the launch of a trio of mega-cap index funds. The trio includes one for the broad market, one for growth and one for value investment styles. The ETFs will have fees of 0.13%. Tracking benchmarks will be calculated by the MSCI Barra, which provides indexes that anchor several existing Vanguard index mutual funds and ETFs, reports John Spence for MarketWatch. The ETFs most likely will not be available until December and are for investors who want to focus on the market's largest stocks.

These new ETFs will have some tough competition as several ETFs already focus on the U.S. market's largest stocks, such as the Rydex Russell Top 50 (XLG) and the iShares S&P 100 Index (OEF). Year-to-date, XLG is up 10.3%, and OEF is up 12.2%.

This year, large-cap stocks have outpaced small-cap competitors, which have led the market for several years. Large-cap growth funds have posted the biggest gains among the major stock-fund categories during the third quarter. With growth and large caps being the winners this year, the timing for the new mega-cap ETFs could be perfect.

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

ETFs Celebrate on Dow's New High

Many exchange traded funds (ETFs) increased today as the Dow Jones industrial average index rose almost 200 points to a new trading high. This is the first time in 2 1/2 months that the Dow was above 14,000 reports Joe Bel Bruno for the Associated Press. Currently, the Dow is up 12.8% year-to-date.

The Dow's jump comes at the beginning of the fourth quarter. Some experts believe it could be a sign that the worst of the subprime and credit problems have ended. In addition, some analysts believe the Federal Reserve might cut interest rates again based on a report that showed that manufacturing grew in September at the slowest pace in six months.

Fueling the Fire: ETF Indexing Debate Gets Hot

People seem to love a good debate, especially when it comes to indexing strategies that exchange traded funds (ETFs) follow. The hot argument lately has been over whether market-cap weightings or fundamentally-based weightings are better for creating indexes. To add fuel to the fire, The Wall Street Journal recently ran an add that says, "Happy Birthday, Cap-Weighting ... here's to a wonderful retirement," implying that the market-cap weighted approach is declining. (Also, the Happy Birthday technically refers to the S&P 500 that just turned 50, explains Matt Hougan for Index Universe.)

However, from what little track records are available on fundamentally-based ETFs, they show that the market-cap weighting approach is currently in the lead. Market-cap weighting tends to favor growth stocks while the fundamental approach tends to favor value. Although value has been up for for several years now, most have been on the decline for the last few months, says Jim Wiandt for Index Universe.

Hougan further supports Wiandt's claim by showing growth is outperforming value by 5.4% year-to-date. Indeed, a look at the Rydex S&P 500 Pure Value (RPV) ETF and the Rydex S&P 500 Pure Growth (RPG) ETF reveals that RPG is above RPV.

An ETF Game of "What If?"

If you could make only one investment, which exchange traded fund (ETF) would it be? Shannon Zimmerman for The Motley Fool likes "to cheat" by picking one investment that holds many other investments (such as mutual funds and ETFs), rather than picking one stock. SPDRs (SPY) is an excellent example, as it is a low-cost ETF that tracks the S&P 500.

If value is more important to you, then iShares Russell 1000 Value (IWD) might work best. Its top holdings include Capital One (COF) and Valero Energy (VLO). Or, if growth is your game, one option is the iShares Russell 1000 Growth (IWF). Its top holdings include Gilead Sciences (GILD) and Genetech (DNA).

Lucky for us, this is just a hypothetical scenario and not reality. Literally hundreds of different ETFs exist, so why not diversify your portfolio with an ETF smorgasbord?

Places to Go When ETFs Plummet with the Market

When the markets and exchange traded funds (ETFs) get shaky, investors have several safety shelters: Health