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%

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)
  

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.

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.

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.

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?

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

Bidding Farewell to Mutual Funds, Saying Hello to the All-ETF Portfolio

When it comes to exchange traded funds (ETFs), resistance is futile.

On Seeking Alpha, Index Universe's Murray Coleman questions the logic of buying higher-priced versions of the same benchmarks he's been investing in up to this point. While some of the indexing products in his portfolio have dropped in price, the expenses of his ETFs have dropped even further.

And with that, his portfolio is now almost entirely made up of ETFs and has a total expense ratio of .15%.

He seems to have taken a thoughtful, well-researched approach to his portfolio. The portfolio has a total stock market approach, with U.S. small-caps as core ETF exposure. International stocks make up the rest, along with a slight overweight in Asia. He reserves the right to make strategic allocation changes as things change and his stomach churns.

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.

Is The ETF Time REIT?

The subprime mess is in full meltdown mode, so is it time to consider exchange traded funds (ETFs) in the real estate realm? In reality, real estate has been the best-performing category in open-ended mutual funds.

Murray Coleman for IndexUniverse reports that funds investing in real estate, such as real estate investment trusts (REITs), are considered value-type stocks and are on the small-cap spectrum.

Last week, iShares Dow Jones US Real Estate (IYR) and iShares Cohen & Steers Realty Majors (ICF) were at a point in terms of valuations that could be considered attractive investments. They're not at the lowest point, but they are showing potential. Asset managers like REITs because they are good diversifiers for a portfolio.

Also, the Federal Reserve's rate cut is proving to be a good support for REITs. U.S. real estate benchmarks soared after the Jan. 22 three-quarter point rate cut, and the Dow Jones U.S. Real Estate Index soared to double digits.

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.

New ETF Allows China Small-Caps To Shine

Claymore has launched a new exchange traded fund (ETF), the AlphaShares China Small Cap Index ETF (HAO).

The fund seeks results that correspond to the AlphaShares China Small Cap Index and measures the performance of publicly traded mainland-China-based small capitalization companies. 90% of total assets go toward common stock, according to the fund's ETF Overview.

The expense ratio is at 0.70% and top holdings include Beijing Enterprises HOLDI at 2.94% and Chaoda Modern Agriculture at 2.86%.

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.

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?

ETFs Becoming a Household Name

Actor Sam Waterston of "Law and Order", the television show on which he plays a district  attorney, is making a case for exchange traded funds (ETFs) on ads for online broker TD Ameritrade. This is a sign of the times, where ETFs are becoming a mainstream investment tool, and could possibly become a household word, such as cell phone, computer and mutual fund.

The ETF revolution has allowed individual investors to use strategies that were before only available to large institutions, such as shorting or buying on margin, reports CNN Money. The industry has also broadened exposure past stocks and reached out to bonds, currencies and commodities. In 2008, we're likely to see some of these ETF advances:

• The first truly actively managed ETF
• More leveraged and inverse exposure to foreign markets
• "Lifecycle" ETFs break into the 401(k) market
• Providers will continue to push the limits with bonds, international small-caps, and commodities

These are just the beginning of the possibilities. The benchmarks tracked by ETFs are becoming more sophisticated and technology is allowing much more to happen faster.

ETFs Offer Diversification In Many Forms

The exchange traded fund (ETF) market is flooded with hundreds of choices, around 600, so it is time to take a look at what you are investing in. The latest market volatility means watching your exposure and diversification for your portfolio. Jonathan Clements for The Wall Street Journal points out four sectors that can add diversification to a portfolio.

• Foreign real estate - Lower your portfolios risk by adding investments that tend to have a low correlation with U.S. stocks and with their local stock markets. One such ETF is iShares S&P World ex-US Property (WPS).
• International small caps - Foreign small cap companies offer exposure to local markets. These companies tend not to be global so the concentration is more on the local exposure. One such ETF that gives good exposure is iShares MSCI EAFE Small-Cap (SCZ).
• Commodities - Commodity funds are abundant and it is easier than ever to gain exposure to commodities and not just the focused-stocks. PowerShares DB Commodity (DBC) tracks an array of commodities, such as oil and agriculture.
• Foreign Bonds - These funds can offer diversification within a bond portfolio. SPDR Lehman International Treasury Bond (BWX) has a 0.5% expense ratio, and doesn't hedge its currency exposure.

Digging Deeper Into International Small Cap ETFs

International small-cap exchange traded funds (ETFs) are the latest frontier that providers have captured. There are now five choices in this space and ETFs that have the same asset class are not always the same underneath. Matthew Hougan for Index Universe takes us on an expedition, to dig deeper into these small-cap ETFs and discover what is behind the ticker symbols and their index returns.

iShares MSCI EAFE Small-Cap (SCZ) launched last week and has an expense ratio 0.40%. Industrials make up 23.5% of the ETF, followed by financials at 20.7% and consumer discretionary at 16.1%. Top countries represented are Japan at 24.8%, the U.K. at 19.8% and Australia at 8.9%.

iShares FTSE Developed ex-U.S. Small-Cap (IFSM) began trading last month with an expense ratio 0.50%. Top sectors represented in this ETF include industrials at 28.5%, financials at 22.4% and consumer services at 12.9%. The U.K. makes up 24.1% of the ETF, followed by Japan at 15.9% and France with 6.1%.

PowerShares FTSE RAFI Developed ex-U.S. Small-Mid (PDN) hit the market in September with an expense ratio of 0.75%. Consumer discretionary makes up 18.3% of this ETF, while consumer staples is 9.4% and energy is 3.8%. Japan is the top country represented with 34.4%, the U.K. is 11.9% and Hong Kong makes up 7.0%. PDN also includes mid-cap companies.

SPDR S&P International Small-Cap (GWX) launched earlier this year in April and has an expense ratio of 0.60%. GWX consists of industrials at 25.8%, consumer discretionary at 19.4% and financials at 16.9%. Japan is again the top weighted country at 24.0%, followed by the U.K. at 12.0% and Canada at 10.9%.

WisdomTree International Small-Cap Dividend Fund (DLS) was the first to launch in June 2006. It has an expense ratio of 0.58%. The top sectors are industrials at 25.3%, consumer non-cyclical at 18.1% and financials at 17.8%. Japan's weight in DLS is 22.6%, Australia follows with 18.5% and then the U.K. at 18.3%.

This illustrates that there can be many choices within a certain asset class. The conclusion is to dig deep to find out what the differences are and what fits with your portfolio and your financial goals.

Japan's Economy Could Grow - Will The ETFs Follow?

It hasn't been the easiest year for Japan and its exchange traded funds (ETFs). Its largest ETF by trading volume is the iShares MSCI Japan Index (EWJ), and it's down 6.8% year to date. But the Japanese government is predicting that things will pick up some in 2008, according to the Associated Press.

The forecast is that the economy will grow 2% next fiscal year -- although the economy minister said the target could be a challenge to reach if oil prices remain high. If the U.S. economy keeps slowing, it could hurt, too, because Japan is the U.S.'s largest export market.

If Japan's top economic council puts reforms on the fast track, as was reported earlier this week, the country could be primed for a turnaround sooner rather than later.

A few other Japan-related ETFs and their recent performance:

• iShares S&P/TOPIX 150 Index (ITF), down 7.4% year to date
• WisdomTree Japan Total Dividend (DXJ), down 9.2% year to date
• SPDR Russell/Nomura Small Cap Japan (JSC), down 13.1% year to date

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.

3 New Global iShares Debut

Three new iShares exchange traded funds (ETFs) began trading this week on NYSE Arca. The three new funds from Barclays offer exposure to the developing global marketplace, including places such as Japan, Germany, Greece, Hong Kong, Singapore and Spain. The three new ETFs are:

• iShares MSCI EAFE Small-Cap Index Fund (SCZ) Tracks small cap companies from developed countries.
• iShares S&P Global Infrastructure Index Fund (IGF) Is made up of stocks of large infrastructure companies around the world, including utilities, airport services, marine ports and oil storage.
• iShares MSCI Kokusai Index Fund (TOK) This ETF measures equity performance in developed countries, excluding Japan.

ETFs in Market Segments

Asset classes are important to most investors and exchange traded funds (ETFs) are helping progress within specific market segments. Matthew Hougan for Seeking Alpha reports that there are some areas of the market that are worth monitoring.

• Small-Cap International: Correlations between large-cap stocks are tightening all over the world, and will continue to do so. Small-cap international stocks will continue to retain diversification benefits as they are tied to local economies. WisdomTree International Small Cap Dividend Fund (DLS) and the SPDR S&P International Small Cap ETF (GWX) are two ETFs that will give this exposure.
• China: China should continue to be a long-term boom, and global indexes tend to be underweight China thanks to the hegemony of free-float investments. SPDR S&P China ETF (GXC), iShares FTSE/Xinhua China 25 Index (FXI) and PowerShares Golden Dragon Halter (PGJ) can help access this country.
• Japan: One of the best things Japan has in its favor now is its proximity to China. Valuations point to upping exposure to Japan.
• Bond Diversification: New bond ETFs are pouring into the industry, and they should fit into portfolios some how, many are just not sure how yet.
• Thematic Asset Classes: Water, timber, energy efficiency- these are all available for investors through ETFs and the great ideas keep coming. The Claymore Timber ETF(CUT) is the latest.
• Coming down the pike: There is no doubt 2008 will bring lots of interesting ETFs, and the pipeline is full of funds waiting for registration. Stay tuned...

Foreign Small-Cap ETFs Helpful to Avoid Mortgage Mess

Foreign small cap exchange traded funds (ETFs) and stocks are offering investors an option to try and avoid the U.S. mortgage meltdown. Financials represent the largest sector in most small-cap value indexes. The average domestic small-cap value stock mutual fund is losing 5% or more this year. Compare that to its foreign counterpart, foreign small-cap value stock funds which on average has gained 7%-plus this year, reports Murray Coleman for MarketWatch.com.

Foreign banks and financial-service markets are holding up better, however, illiquidity in credit markets and subprime loans are still showing up overseas. WisdomTree International Financial Fund (DRF)  is a good example, it is up 2.7% this year and domestic financial specialty funds are down more than 9% on average.

In the U.S. financials are dragging small-caps down, but the performance lag in foreign funds isn't present. WisdomTree International Small-Cap Dividend Fund (DLS) is up 10.1% year-to-date and SPDR S&P International Small-Cap Fund (GWX) is up 1.4% since its April launch. Vanguard Small-Cap Value ETF (VBR) is down 3.2% year-to-date.

Market and ETF Facts to Consider

There's a lot going on in the markets and exchange traded funds (ETFs).  Matt Hougan for Index Universe looks at 10 interesting market facts and we've added some ETF related information.

1. The U.S. stock market is uneasy. Volatility is the best performing index this year, up 138.7% on the CBOE Volatility Index, compared to a year ago.
2. Technical analysis aside, the Dow Theory says "If the train slows down, the economy soon follows." iShares Dow Jones Transportation Average (IYT) is up 0.4% year-to-date.
3. Utilities are going off, as you may know from those huge checks you write each month. Utilities Select Sector SPDR (XLU) is up 15.7%.
4. Some indexes following Europe aren't as pretty as you may think, even with a strong currency.  Although we find the iShares S&P  Europe 350 Index (IEV) is up 14.7%. Isn't the euro worth more than gold right now?
5. European countries and their markets aren't always in sync. Performance ranges up and down, depending which country you're in. iShares MSCI Germany Index (EWG) is up 32% and iShares MSCI Belgium Index (EWK) is down 0.5%.
6. The China/Japan dichotomy, with such proximity, what gives? iShares MSCI Japan(EWJ) is down 1.3% and iShares MSCI Xinhua/China 25 Index (FXI) is up 66.9%.
7. Understanding contango in commodity investing is important.  It's confusing and has investors angry.
8. One of best domestic sector ETFs is Aerospace & Defense -PowerShares Aerospace and Defense (PPA) is up 24.6%. The worst sector is homebuilding - SPDR S&P Homebuilders (XHB) is down 53.4%.
9. Small-cap growth is doing well, maybe not as well as in recent past, but they are holding their own. iShares S&P SmallCap 600 Growth (IJT) is up 5.4%, compared to the S&P 500 which is up 3.6%.
10. Dividends aren't offering the safe haven thought of through tough markets. iShares Dow Jones Select Dividend Index (DVY) is down 6.0%.

Nasdaq ETF Market Is Grabbing More Attention

Nasdaq stock exchange has listed five new exchange traded funds (ETFs) from Barclays Global Advisors. Although it was initially known as the stock exchange for high-tech companies, Nasdaq is the most liquid U.S. market for ETFs. It captured 37.9% of all U.S. ETF volume in October, another record consecutive month, reports Huliq. These ETFs from BGI are the first new funds to list since the launch of the Nasdaq ETF Market in October. The ETFs are:

• iShares FTSE Developed Small-Cap ex-North America Index Fund (IFSM)
• iShares FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index Fund (IFGL)
• iShares FTSE EPRA/NAREIT Asia Index Fund (IFAS)
• iShares FTSE EPRA/NAREIT North America Index Fund (IFNA)
• iShares FTSE EPRA/NAREIT Europe Index Fund (IFEU)

Nasdaq is a leading index calculator, designer and creator of some of the world's most popular ETFs, including PowerShares QQQ (QQQQ).

ETF Launches Continue at a Rapid Pace

Ho-hum. Another day, another batch of exchange traded funds (ETFs) hit the marketplace, right? Sure, there are lots of ETFs out there now and even more in the pipeline, but as Will McClatchy of ETFzone says, it's not the fault of the providers. They're just doing their best to keep up with demand and ensure that no asset class is being overlooked.

With that, here are the newest offerings from Barclays that can only add value to the ETF marketplace:

• iShares FTSE Developed Small Cap ex-North America (IFSM)
• iShares GTSE EPRA/NAREIT Global Real Estate ex-U.S. (IFGL)
• iShares FTSE EPRA/NAREIT Asia (IFAS)
• iShares FTSE EPRA/NAREIT Europe (IFEU)
• iShares FTSE EPRA/NAREIT North America (IFNA)
• iShares MSCI BRIC (BKF)
  
• iShares MSCI Chile (ECH)
  
• iShares S&P Asia 50 (AIA)
  

ETF Offers a Safe Way to Invest in Small, Foreign Companies

WisdomTree offered another exchange traded fund (ETF) this week for investors to become further diversified with the WisdomTree Emerging Market Small-Cap Dividend Fund (DGS), reports Roger Nusbaum for the Street. It's the first emerging-market small-cap ETF. Nusbaum says that had this ETF been around in the late '90s, it would have outperformed the large-cap MSCI Emerging Markets index since 1999!

The fund is most heavily weighted in Taiwan, with 22.97%. It is heavily tilted toward Asia -- 64% of the fund is devoted to the region. Africa and the Middle East make up 23.24%, Latin America is 7.88% and 4.92% is in Eastern Europe.

Playing Emerging Markets From Any Angle

The emerging markets exchange traded funds (ETFs) and indexes have outperformed domestic markets recently. The MSCI Emerging Markets Index has outperformed the S&P 500 by 134.46% over the past three years. Many investors are divided over whether these markets can continue this trend or if there will be a sharp pullback, reports Carl Delfeld for Forbes. In fact, ProShares launched two new ETFs last week that will allow investors to play emerging markets up or down - ProShares Short MSCI Emerging Markets (EUM) and ProShares UltraShort MSCI Emerging Markets (EEV).

WisdomTree recently launched an ETF that tracks an emerging market small-cap index. It offers pure international exposure to small-cap stocks from 19 emerging market nations.

The idea seems to be that so many investors are interested in emerging market ETFs,  providers are making sure there is an ideal fund for every type of portfolio.

WisdomTree to Launch Emerging-market Small-cap ETF

WisdomTree announced today that it will launch a new small-cap dividend-weighted exchange traded fund (ETF) tomorrow under the ticker symbol (DGS). DGS will trade on the NYSE Arca and will have an expense ratio of 0.63%. The ETF is designed to track the WisdomTree Emerging Markets SmallCap Dividend Index and will be the first ETF to offer pure international exposure to primarily small-cap stocks selected from 19 emerging market nations, including countries in Europe, Asia and Latin America.

Short on Small-cap ETFs

It appears as if investors are nervous about the future of small-cap stocks and the exchange traded funds (ETFs) that carry them. Jesse Emspak for Investor's Business Daily reports that investors shorted small-cap ETFs as high as 114% of assets, as of September 17. This is a 6.6% increase since August, according to data from State Street Global Advisors. ETFs can be sold short easily because they trade throughout the day like stocks. Because they are valued intraday, exchanges release short interest data mid-month. Short interest is a good indication of how much investors are betting an investment will drop in value. Short interest shriveled the most in the finance sector, as those ETFs showed a 55.9% decrease in the short assets held.

VIX Performance Indicates ETFs and Markets are Calm and Happy

While it's been a wild ride for most exchange traded funds (ETFs) this summer, it seems volatility might be calming down as the overall markets have been doing well lately. Last week, the CBOE Market Volatility Index (known as the VIX) closed below its 32-week moving average, says Bernie Schaeffer for Forbes Market Outlook. This same sort of scenario occurred in August 2006. So if history were to repeat itself, the VIX's close below its trend line could mean that stocks have been given the "all clear" sign for the remainder of the year. Also, the VIX generated a positive sign on Oct. 5 when it dropped about 8.3% while the S&P 500 rose by more than 0.85%. Again, if history is any indication, those moves could have bullish implications. What generally happens 20 days after this occurs, the market goes higher 69% of the time, and the average gain in the S&P 500 is 1.65%.   

Another factor that indicates the broad market is doing well was the high performance of the Russell 2000 Index. Small-cap stocks tend to do well in recovering economies. Last week, Russell 2000 Index and the ETF that tracks it, the iShares Russell 2000 Index (IWM), jumped nearly 5% higher. If IWM continues to increase, it could help put small-caps on a serious rally as well as dispel the notion that large-caps are the place to be.   

An ETF Passport

                      Broad-based exchange traded funds (ETFs) could lead you to believe that you own a small piece of the world, but indexes such as the EAFE might have a few too many gaps. The $49 million iShares MSCI EAFE Index ETF (EFA) is the second-largest ETF in the world, and it covers 21 developed nations with Britain, Japan, France and Germany making up 62%. Because the index value is weighted by market capitalization, the larger nations get over-weighted. Countries such as Mexico, Canada and Russia are not even in the index. Lynn O'Shaughnessy for BusinessWeek reports other options are available for investors who want to invest in foreign stocks. Now there are 124 foreign-based ETFs, which is up from about 50 over the past year. Check out four ways to expand a portfolio's global reach:

• Emerging Market ETFs
  Consider the Vanguard Emerging Markets ETF (VWO) or iShares Emerging Markets Index Fund (EEM). These ETFs merge developed and emerging markets, giving investors broad exposure, especially to growing economies.
• Single-country ETFs
  Single country ETFs also offer an easy way to add some foreign exposure to a portfolio. Examples include the iShares MSCI Canada Index (EWC), iShares MSCI Mexico Index (EWW) and iShares MSCI Brazil Index (EWZ).
• Small-caps
  Many investors generally don't associate small-cap stocks with emerging markets, but they are out there. One example is the SPDR S&P International Small Cap (GWX) that has nearly 500 companies that are scattered around the world and have a market capitalization of less than $2 billion.
• Dividend ETFs
  Some international-based ETFs even pay dividends. Some examples include the iShares Dow Jones EPAC Select Dividend Index Fund (IDV) and the WisdomTree International Real Estate Fund (DRW).

For full disclosure, some of Tom Lydon's clients own EEM and EWC.

Big News for Small-cap ETFs?

A look inside small-cap exchange traded funds (ETFs) reveals that the holdings have a wide variety of performance numbers. As hedge funds and ETFs seem to be buying back shares of small companies they had borrowed in hopes of a market fall, they are haphazard moves within the stocks. Some of the main indicator stocks, such as Intel (INTC) and Advanced Micro Devices (AMD), fell recently on warnings of "overcapacity," reports Rob Curran for The Wall Street Journal. While technology holdings were down, some homebuilder companies surprisingly increased. Levitt (LEV) rose 18.2% , and Realty Income Corp (O) was up 2.6%.

For an ETF that focuses on small-caps, consider the iShares Russell 200 Index (IWM). Currently, it's up 7.7% year-to-date.

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?

ETFs: Sorting out the Small Stuff

<