State Street Goes Down The International ETF Road

State Street Global Advisors is going down the real estate and mid-cap road on an international scale, with new exchange traded funds (ETFs) that invest overseas.

The new funds, according to Reuters, are:

• SPDR DJ Wilshire Global Real Estate (RWO), based on 240 commercial and residential real estate companies in 23 countries, including the United States.
• SPDR S&P International Mid-Cap (MDD), based on an index of 850 companies whose market caps are between $2 billion and $5 billion. The companies are located in 25 countries, including the United States.

Their global real estate fund will join these other international real estate ETFs:

• SPDR Dow Jones Wilshire Intl Real Estate Index (RWX), down 2.7% year-to-date
• First Trust FTSE EPRA/NAREIT Global Real Estate (FFR), up 0.7% year-to-date
• iShares FTSE EPRA/NAREIT Asia (IFAS), down 7.1% year-to-date
• iShares FTSE EPRA/NAREIT Global RE ex-U.S. (IFGL), down 5.3% year-to-date

The other international mid-cap ETF is the WisdomTree International Mid-Cap Dividend (DIM), which is a dividend-paying fund. Year-to-date, it's down 2.5%.

Being In the Middle Better for ETFs Than Jan Brady

Among the exchange traded funds (ETFs) that focus on a particular company size and investing style, mid-cap growth seems to be leaving the others in the dust lately.

In the last three months, mid-cap growth has risen 10.2%. In the same time period, large-cap growth is up 7.2% and small-cap is up 6.2%. Gary Gordon for ETF Expert reports that one might find it tricky to locate any other size/style ETFs that are above their 200-day moving averages.

Some of these funds have been bolstered by strong performance from their top holdings:

• iShares S&P MidCap 400 Growth Index (IJK): Top holding is Intuitive Surgical, Inc. (ISRG), at 2.5%; up 2.9% in last three months. The fund is up 10.2% in the same time period.
• iShares Morningstar Mid Cap Growth (JKH): Top holding is ISRG at 1.4%; the fund is up 9.1% in the last three months.
• Vanguard MidCap Growth (VOT): up 8.9% in the last three months.
• Rydex MidCap 400 Pure Growth (RFG): Top holding at 2.1% is Encore Acquisition (EAC), which is up 50.3% in the last three months. The fund is up 9.3% in the last three months.
• PowerShares Dynamic Mid Cap Growth Portfolio (PWJ): Top holding at 3.7% is FMC Technologies Inc. (FTI), which is up 29.4% in the last three months. The fund is up 7.1% in the last three months.

Gordon says investors who believes the U.S. market is going to recover in a big way from the current mess may like a mid-cap growth fund. Since all of these are at or above their trend lines (200-day moving average), take a look and see what works best for your portfolio.

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

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

What Do Expense Ratios Have To Do With It?

There are big discrepancies between assets and revenues, as analysts point out, but do expense ratios really matter to investors when it comest to investing with exchange traded funds (ETFs)?

Matthew Hougan for Index Universe shows evidence that investors seem to overlook expenses:

• iShares MSCI Emerging Markets (EEM) has an expense ratio of 0.74%. It currently has $24 billion in assets. Vanguard Emerging Markets (VWO), which is a competing fund, has a 0.30% expense ratio with a strong performance record, but has a smaller $6 billion in assets. 
• Another case in point: Mid Cap SPDR (MDY) tracks the S&P 400 and charges 0.25% in expenses, with $8.2 billion in assets. iShares S&P 400 MidCap (IJH) charges 0.20%, tracks the same index and has $4.4 billion in assets.

This may be a case where the ETFs with the greatest assets in each category are also the first ETFs to hit the market, since this is the case in these examples.

Another clue Hougan cites as evidence that investors might not care much about expense ratios is that, with some exceptions, fund companies generally don't market toward it. Some ETFs are launching today with fees of 0.70% or more.

Do investors know, but just not care? Perhaps. Expense ratios are just one factor in the equation. Spreads, in some cases, can outweigh any advantage a low expense ratio might offer.

It doesn't seem a lack of understanding as far as ETFs go is the problem. A survey we summarized yesterday reported that of the investors who participated, 16% use ETFs. A large portion of these ETF users, 87%, said they understood how fees impacted their returns.  This was quite different compared to all the survey respondents; 88% felt fees for the fund industry overall were unclear.

Which single ETF feature is most important to you among the following? Expense ratio, brand name, past performance or assets under management? Feel free to answer in the comments!

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).

Feeling Bearish or Bullish? There's An ETF For Every Mood

Last week's stock surge has caused a pullback for some of the leveraged and inverse exchange traded funds (ETFs), the same funds that were earning traders so much money.

David Penn for Trading Markets explains that one of the biggest benefits of a leveraged ETF is that traders do not have to use a margin and still get a 2-for-1 bang for their buck.

Another benefit of a leveraged ETF is that traders can bet against a market without having to sell stocks or ETFs short. Inverse ETF trading is much more simple than taking a bearish position on a sector.

ProShares and Rydex are the primary providers of an extensive line of short and leveraged ETFs.

Take a look at these long/short ETFs that are appearing on investors' radar:

• ProShares UltraShort S&P 500 Fund (SDS)
• ProShares UltraShort QQQ Fund (QID)
• ProShares UltraCap Mid-Cap 400 Fund (MZZ)
• Rydex Inverse 2x S&P 500 (RSW)
• ProShares Ultra S&P (SSO)
• Rydex Inverse 2x Russell 2000 (RRZ)

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

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.

Actively Managed Mutual Funds Make ETFs Look Good By Underperforming

Actively managed mutual fund enthusiasts say that a bear market is where active stock picking can beat index funds or exchange traded funds (ETFs).

Jonathan Chevreau for Financial Post takes a look at the Standard & Poor's Indices Versus Active Funds (SPIVA) scorecard, which seems to indicate that it isn't so. 

Only 24.3% of actively managed Canadian equity funds outperformed the S&P/Toronto Stock Exchange (TSX) composite index in 2007, while only 37% of beat the S&P/TSX Canadian Dividend Aristocrats Index. Out of five years, only 10% of actively managed Canadian equity funds beat the TSX, while over 3 years only 13.3% did so.

Canadian small-mid caps did capture some fame with actively managed stock picking coming out ahead. In 2007, 51.8% of Canadian small-mid-cap equity funds did manage to beat the S&P/TSX Completion Index.

In the United States, it isn't much better: actively managed U.S. and international equity funds also performed poorly against the indexes. Over 5 years, only 13.1% of international equity funds beat the index, while 14.9% of U.S. equity mutual funds did so.

Ouch. If you can't beat the market, why don't you just buy the market?

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

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.

Short ETFs Shining Bright

These days, it's all about the short exchange traded fund (ETFs). Scroll through the list of top-performing funds year-to-date on Morningstar and you'll see the proof: the top 33 performing funds so far this year are all variations on the short theme.

The top three among them are:

• UltraShort Semiconductor ProShares (SSG), up 51.6%
• MACROshares Oil Down Tradeable Shares (DCR), up 33.5%
• UltraShort Russell MidCap GR ProShares (SDK), up 31.3%

ETFGuide has noticed the trend, too.

How do these types of funds work? Shorts are inverse funds, designed to move in the opposite direction of their underlying indexes. Ultra short funds move in twice the opposite direction. With those, the potential for losses is magnified right alongside the potential for gains. They should be used with caution.

For these kinds of funds, however, the falling markets have translated into good news. And as the financial news isn't painting a rosy picture for the time being, investors are increasingly turning to these funds to hedge their losses.

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.

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.

The Forgotten "Mid-Cap Category" ETF

Mid-cap exchange traded funds (ETFs) seem to get lost somewhere in between small and large-caps. Mid-cap companies have market caps of $2 billion to $10 billion, and are typically less volatile than small-caps, yet faster-growing than large caps, reports Carl Delfeld for ETFXRAY. Their larger size and predictable earnings can offer more stability than counterparts.

An ETF to access this middle market target is Vanguard Mid-Cap ETF (VO). It tracks the MSCI U.S. Mid-Cap 450 Index and contains both growth and value in a basket of 400 stocks.The ETF weights in financials, consumer discretionary, and information technology sectors, and has an expense ratio of 0.13%. It is up 0.6% year-to-date.

Other mid-cap ETFs and their year-to-date performance include:

• iShares S&P MidCap 400 Index Fund (IJH) up 1.9%
• iShares Russell Midcap Index Fund (IWR) 0.0%
• iShares Morningstar Mid Core Index Fund (JKG) down 2.3%
• SPDR DJ Wilshire Mid Cap ETF (EMM) up 1.6%

The Goldilocks ETF: Mid-cap Growth (IWP)

We talk a lot about large-cap versus small-cap exchange traded funds (ETFs) maybe because it's more interesting to look at the extremes. However, caught in the middle of the large-cap versus small-cap debate are mid caps. The iShares Russell Mid-cap Growth Index (IWP) is one of many mid-cap ETFs available for investors. Currently, IWP is up 11.8% year-to-date.

Companies within IWP aren't too big, but they aren't too small. Some examples include, Hilton Hotels (HLT), Coach (COH) and J.C. Penney (JCP). All of these holdings have had some form of good news that could have attributed to the ETF's performance. Hilton Hotels shareholders approved the company's $20.1 billion sale to The Blackstone Group this week, according to Alex Veiga for the Associated Press. Last week, the president of Coach offered options for 200,000 shares of common stock, according to a Securities and Exchange Commission (SEC) filing. In addition, similar to many other retailers, J.C. Penney's stocks climbed upon news of the interest rate cuts, reports Andria Cheng for MarketWatch.

For full disclosure, some of Tom Lydon's clients own IJK, another mid-cap growth ETF.

ETF Performance Fluctuates for the Month

Amid stormy conditions on the market's rough water, is there any calm where exchange traded funds (ETFs) can fare well?

Aaron Pressman for Business Week shows us what is staying afloat for the month among a sea of change. Ultrashort Russell MidCap Value ProShares Fund (SJL) has gained almost 30% over the past month. For more conservative investors, treasury bond funds have been a relief. iShares Lehman 7-10 Year Treasury Fund (IEF)  is up about 3%, along with the CurrencyShares Japanese Yen Trust (FXY), which is up 4.4%

Having a diversified portfolio can help protect a portfolio in volatile times. But having an exit strategy is also important, as one can get out of a holding when it starts to sink and switch to cash. Diversification within a portfolio and an exit strategy are essential during all market conditions.

Mid-Cap ETFs: A Fair Comparison?

Within mid-cap exchange traded funds (ETFs) you can find core, growth, value, leveraged, market-cap and fundamentally weighted. But how do they compare against one another?

Investor's Business Daily reports that in comparing 25 mid-cap ETFs, a case can be made for leveraged funds and fundamental indexing. ProShares mid-cap ETFs came out ahead of other providers including iShares, SPDRs, PowerShares, Vanguard and WisdomTree. Some of the results are:

• ProShares Ultra Mid-Cap 400 (MVV) is up 25% for the year. Before jumping into the ProShares game, beware that leverage funds can amplify losses.
• Second place is the fundamentally weighted PowerShares Dynamic Mid-Cap Growth (PWJ), which is up 19% for the year.
• iShares Russell 2000 (IWM) is up 9%, which is market-cap weighted.
• The fundamentally weighted WisdomTree Mid-Cap Dividend Fund (DON) came in last. It is up 6% for the year.

Looking at these mid-cap ETFs, there is no clear answer as to whether fundamental indexing is better than market-cap indexing. Fundamental indexes don't have a long track record, so more time is needed to give them a fair evaluation. Obviously the leveraged ETF outperformed the others, but if the index it tracks had been down, it would have been the worst performer. No matter what index type you choose, it's important to have an exit strategy.

Market Cap ETFs For Diversification

Market-cap weighted index fund exchange traded funds (ETFs) arguably can be the base of a well-rounded portfolio. The core building blocks of a well-diversified portfolio include small, mid and large-cap stocks, Seeking Alpha reports. Small caps include companies with a value less than $1 billion, mid caps are companies valued at $1 to $5 billion and large caps at more than $5 billion. Weighting by market cap, which is the most traditional indexing form, ensures low cost and low turnover in the funds. Portfolios that use these ETFs tend to follow the more common indexes that track the U.S. stock market's performance.

Long-term investors might want to use large, mid and small cap ETFs or a single, total market ETF. Using large, mid and small cap ETFs helps balance your portfolio, but it also gives you more ETFs to manage. When selecting ETFs for your portfolio, know the stock holdings. Sometimes ETFs may have similar holdings and you don't want stocks within them to overlap. Market-cap weighted index fund ETFs offer low costs and tax efficiency. For a list of some large, mid and small cap U.S. ETFs, see the Seeking Alpha article.

A New Mid-Cap Index for an ETF

Zacks Investment Research launched a new mid-cap core index that can be used for exchange traded funds (ETFs). The press release states that over years of academic research and practical experience Zacks has found stocks with little short selling tend to outperform the market.  They created the Zacks Mid Cap Core Index to outperform passive benchmarks and aim to target stocks with potential to outperform the Russell MidCap Index, and other benchmark indices on a risk-adjusted basis.

The index constituents include all U.S. equities and domestic ADRs that have a market cap of $2 billion through $11 billion. The index is based on short interest and will identify companies with superior risk/return profiles using multi-factor proprietary selection rules. The index is adjusted quarterly for timely stock selections.  The question now is when will the ETF follow?

ETFs Can Help the Tax Bill

Tax season is under way and for those investors with investments in exchange traded funds (ETFs), capital gains tax is one less worry. While it is too late for those who delayed on ETF investments, there is always a new year.  Although most ETFs are touted for their tax efficiency, it's important to pay attention to each one.  Many of the newer ETFs are more specialized and not all ETFs are the same.  Marc Hogan of BusinessWeek looks at five funds that are top-rated for consistent returns and tax efficiency and could help diversify a portfolio.

1. iShares MSCI Austria Index (EWO) 5-year return of 36% and over that time lost 0.4% to tax costs;
2. iShares Russell 2000 Value Index (IWN) 5-year return of 13% and over that time lost 0.5% to tax costs;
3. Vanguard Small Cap Value Index (VBR) 3-year return of 14% and over that time lost 0.5% to tax costs;
4. iShares Russell Mid Cap Value Index (IWS) 5-year return of 15% and over that time lost 0.7% to tax costs;
5. Vanguard Value Index (VTV) 3-year return of 13% and over that time lost 0.5% to tax costs.

Mid-cap Stocks Good For ETFs

Mid-cap exchange traded funds (ETFs) didn't perform as well as large- and small-cap ETFs in 2006.  ETF Guide ponders, "Could this be the year that mid-caps outperform?"  Last year, the sector was up about 9% (large- and small-caps were up 14%) and so far this year it is up 6%.  Large- and small-cap are not performing as well.  There are a variety of mid-cap ETFs available for investors to choose, including, but not limited to:

• Mid-Cap SPDRs (MDY)
• iShares Russell Mid-Cap Value (IWS)
• iShares S&P Mid-Cap 400 Growth (IJK)