At the end of September, U.S.-listed ETNs held $6.9 billion in assets, compared with the $697 billion held in ETFs, writes Matt Hougan for IndexUniverse. (What are ETNs?)

There are three key advantages they enjoy:

• When ETNs first came to the market, the investment vehicle proved to be popular among investors who were looking for access to difficult-to-target markets, such as commodities and certain foreign markets. Investors flocked to funds such as the iPath MSCI India (NYSEArca: INP) and iPath Dow Jones-UBS Commodity Index ETN (NYSEArca: DJP). There are ETFs that target these areas now, but ETNs still cover certain areas not yet covered by ETFs.

• ETNs promise perfect tracking – an investor receives the full return of the benchmark, minus costs. Commodity ETFs on the other hand do show some tracking errors. Any tracking error in an ETN is borne by the issuer; tracking error in ETFs are borne by the investor.

• ETNs also have the benefit of being treated like a zero-dividend stock for tax purposes. This means that you don’t pay taxes until you sell, and holding a commodity ETN longer than a year only costs an investor 15% long-term capital gains taxes when sold. Futures-based commodity ETFs are treated like futures, which means gains are marked-to-market each year and investors pay taxes on gains at 60%/40% long-term/short-term capital gains tax rate. Be sure to consult your tax professional for advice. (Are you ready for the taxman?)

A deterrent for ETNs investing is that they are unsecured debt notes. The ETN’s value depends on the credit of an issuing bank – if the bank bankrupts, you’re out of luck. Most ETNs, however, offer daily redemptions at net asset value. Potential ETN investors should note that the CFTC’s plans for regulation in the commodities market could force some ETNs to close down, but this remains to be seen. (Differences between ETNs and ETFs)

For more information on ETNs, visit our ETNs category.

Some of the more heavily traded ETNs include:

• iPath DJ AIG Lead TR Sub-Idx ETN (NYSEArca: LD): up 128.9% year-to-date
• iPath DJ AIG Sugar TR Sub-Idx ETN (NYSEArca: SGG): up 57.7% year-to-date
• iPath Dow Jones-AIG Commodity Idx TR ETN (NYSEArca: DJP): up 16.2% year-to-date
• iPath MSCI India Index ETN (NYSEArca: INP): up 82.4% year-to-date
• iPath S&P GSCI Crude Oil Ttl Ret Idx ETN (NYSEArca: OIL): up 16.1% year-to-date

Max Chen contributed to this article.

Van Eck has registered with the Securities and Exchange Commission (SEC) for a new India small-cap ETF, reports Cinthia Murphy for IndexUniverse. The Market Vectors India Small-Cap ETF will seek to reflect the performance of the Market Vectors India Small-Cap Index. Potential investors should note that the fund will invest in the more volatile aspects of an already volatile equities market.

There are currently three ways to gain exposure to India’s economy: WisdomTree India Earnings Fund (NYSEArca: EPI), PowerShares India (NYSEArca: PIN) and iPath MSCI India Index (NYSEArca: INP). PIN and INP have exposure to large-caps; EPI has 20% weighted in mid-caps and the rest of its exposure is in large-caps.

India’s Finance Minister Pranab Mukherjee stated that the economy is recovery, albeit a slow one, according to RTTNews. The Prime Minister is for a rational interest rate policy moving along with fiscal measures to nurture the economy.

The Reserve Bank of India has adopted a soft monetary policy, issuing banking sector funds to aid the economy.

SBI Chairman O P Bhatt expects a 7% expansion in fiscal 2010, while RBI Professional forecasters revised their forecast downward to 6%, according to Outlook India. (Why India is moving up).

On the upside:

• Companies will likely ask banks for working capital loans as the IPO market picks up, which would help revive the economy
• The auto and infrastructure industries are seeing more demand
• Industrial production is up
• Business confidence is on the optimistic side
• Stock markets are strong

On the downside:

• Private consumption demand is slowing
• The first quarter showed a decline in corporate sales
• A weak monsoon season has hurt agricultural output
• Credit growth is low
• Exports have dipped

• PowerShares India (NYSEArca: PIN): up 64.2% year-to-date

• WisdomTree India Earnings (NYSEArca: EPI): up 78.7% year-to-date

Max Chen contributed to this article.

ETFs have morphed into several exotic forms, covering a number of market niches in nearly every way possible. Don Dion for TheStreet explains that these newer “non-traditional” ETFs area newer generation and that they do add some level of risk that more traditional ETFs don’t have:

• Leveraged and Inverse ETFs: These ETFs allow investors to gain or lose two to three times the direction of a particular index. Because these funds reset every day, they are useful only to seasoned traders who understand their risks rather than long-term buy-and-hold investors. Direxion Daily Emerging Markets Bull (EDC) is a newer example of an ETF of this type. Read our special report on leveraged and inverse ETFs here.

• Futures-Based Commodity ETFs: These ETFs seek to track commodities by investing in baskets of futures or swaps. While these ETFs may get investors one step closer to a “pure play” on commodities swap prices, they are prevented by problems such as  contango from fully performing at all times. United States Natural Gas (UNG) is one example of such a fund. It’s been in the hot seat lately because of the accusations that funds of this type are manipulating the markets. The Commodity Futures Trading Commission (CFTC) is currently weighing position limits that could affect most, if not all, of these types of funds.

• Exchange Traded Notes (ETNs): A “cousin” of ETFs, these notes track baskets of debt, secured by the provider, rather than a basket of stocks. An ETN can also be sold short, trade like a single stocks and offer special exposure to currencies or commodities. It’s important to stress that ETNs are backed by the full faith and credit of the issuer, so if the issuer defaults, you become just another creditor. Examples of ETNs include iPath India (INP) and Market Vectors Double Short Euro (DRR).

• ETFs of ETFs: These funds layer on top of other funds, giving investors more bang for their buck. But they can also compound fees and contain products some investors may not want, so look under the hood first before you buy. Many of these ETFs consist of already-existing products that are packaged together into one ETF. Powershares Autonomic Balanced Growth NFA Global Asset Portfolio (PAO) and the IndexIQ Hedge Fund (QAI) are two examples of such funds.

For more stories about these topics, visit our leveraged, ETN or Commodity categories.

The alternative energy industry is readying itself for a brighter future, especially with the Obama administration’s fervent endorsement of the sector.  Globally, more countries are beginning to realize the significance of alternative energy and its benefits to long-term economic goals.

• Claymore/MAC Global Solar Energy (TAN): up 9.1% year-to-date; up 104.5% off its March 9 low

India’s stocks rose after the Congress Party won the elections, and the victory raised hopes of a revival in foreign direct investment and economic growth, along with tax reform and increased spending in infrastructure.

• iPath MSCI India Index ETN (INP): up 54.6% year-to-date; up 102.7% off its March 9 low

Coal, like most other commodities, has been on the rise. China may help boost the price of coal by increasing value-added taxes to coal producers. The Obama administration is expected to put a cap-and-trade program into action, which could ultimately help the coal industry.

• Market Vectors Coal ETF (KOL): up 57.2% year-to-date; up 101.2% off its March 9 low

Regional banks were greatly aided by governmental assistance with programs that allowed banks to unload troubled assets and patch up balance sheets.

• SPDR KBW Regional Banking (KRE): down 35.8% year-to-date; up 95.7% off its March 9 low

Turkey’s economy is also beginning to prosper as a surge in consumer confidence and drop in unemployment rate prompted the Central Bank to ease money lending. The country’s industries are also likely to profit from their close proximity to Middle Eastern oil supplies.

• iShares MSCI Turkey Invest Mkt Index (TUR): up 40.3% year-to-date; up 94.0% off its March 9 low

Max Chen contributed to this article.

When you are constructing your portfolio, it is a good idea to research both products. They both have good diversification aspects and offer benefits that are exclusive to their genre.

S. Wade Hansen for Learning Markets points out the differences between ETFs and ETNs that may help you in the decision-making process. Neither type of investment is inherently good or bad – they both offer benefits. It all depends on what your goals are and what your comfort level happens to be:

• ETFs have the liquidity that comes with a single stock. ETNs are a debt obligation, so credit risk is a concern investors need to be mindful of.
• ETFs offer instant diversification because when you purchase one, you invest in a fund that buys and holds multiple assets. This includes, equities, bonds, and commodities. ETNs are not investments in funds; instead, you are buying debt from the issuer and they are backed by the full faith and credit of the issuer.
  
• ETNs have maturity dates. When you hold an ETN until the maturity date, you receive a one-time payment based on the performance of the underlying asset, index or strategy. If you wish to sell sooner, you can sell on the open market.
• When you buy an ETF, you buy ownership of a basket and its contents, not piecemeal ownership of the individual contents. The savings come from trading costs and initial capital that you would need to invest in single stocks.
• The tax treatment of ETFs and ETNs is different. With ETNs, you are taxed only upon sale. Short-term capital gains rates apply if held for less than one year; long-term capital gains rates apply if held for more than one year. As for ETFs, they could be a little trickier, especially when it comes to commodity ETFs that hold futures and leveraged funds. Doing homework on this is necessary.
  
• Both ETFs and ETNs give access to hard-to-reach markets, such as currencies and certain foreign markets. One example of the benefits of ETNs is the iPath MSCI India ETN (INP), which gave investors the ability to gain exposure to a rapidly growing economy before the India ETFs came along.
  
• ETNs have no tracking error; this can be very attractive to some investors. However, tracking error has not been a terribly big problem with ETFs.

When it comes to ETFs vs. ETNs, it comes down to tax treatment and credit risk. Step back, assess your priorities and what level of risk you’re comfortable with. This will help you make a decision that’s right for you.

For more stories on ETNs, visit our ETN category.

However, recent weeks have seen emerging economies – especially the BRICs – awakening from their slumber and it’s time to consider new opportunities in these areas and how they may benefit us.

The theory of decoupling, which is the ability for an economy to grow on its own without assistance from other countries, has been laid to rest for the time being. The United States depends on these countries for imports and they’re dependent on us to continue to buy the materials they produce.

Now that BRICs have surged above their 200-day moving averages, it’s time to revisit them, see what’s been happening, where they’ve been and where they’re going from here.

ETFs have made it easier and more cost effective than ever for investors to gain exposure to the emerging markets, mostly by eliminating the guesswork of stock picking. Although researching large companies is not a daunting task, getting information about a smaller company in India might yield few results. Enter an emerging-market fund, where the legwork not only has been done for you, but you can invest in dozens of companies in one swoop, spreading your risk around.

Also numerous choices exist among ETFs. You can focus on a single country, such as Brazil, or you can just buy one fund that gives you exposure to all four BRICs.

BRAZIL

Brazil managed to ride out the economic downturn better than most of its other BRIC brethren, thanks to a host of government policies and actions taken as the crisis worsened. Even things generally seen as “bad” by some wound up helping the country in the long run, including:

• The heavy influence of the government in the financial sector.  In fact, retail bank giant Banco de Brasil, the nation’s largest mortgage lender, Caixa Economica , and BNDES, a big development bank that feeds credit to favored companies are all controlled by the government. While the rest of the world is figuring out how to get a handle on banks, Brazil has been doing it all along.
  
• Hugely expensive bank loans, meaning fewer people in debt.
  
• Huge reserve requirements and taxes on funding that push up the price of loans discouraged private banks from taking wild risks and jumping on the bandwagon that some of its peers in Europe and the United States did.
• Public-sector debt is below 40% of GDP, previously a problem in the nation.
• Foreign currency borrowings have been exchanged for the Brazilian real (their currency) dominated ones, so fluctuations in the real will not hinder the government’s balance sheet; Brazil has actually built up a reserve of about $200 billion to defend its currency.
• The economic crisis isn’t pushing up inflation, which has been an ongoing problem in the nation.  This has enabled the central bank to cut interest rates.

Latin American countries have been undergoing large infrastructure programs and they are likely to continue after the global recession has abated. The government’s growth acceleration program will continue into 2010, and it includes $231 billion for social, transport infrastructure and energy projects. In the second quarter of 2008, civil engineering progressed 10% higher than for the same quarter in 2007. A National Plan for Logistics and Transportation will also continue into 2023, including a budget of $79 billion.

A series of other factors that favor the economy include:

• Seasons. The Brazilian Bovespa stock index has a seasonal rhythm and the peaks tend to lie between the end of October and end of May. It is calculated that the average gain per period was around 16.4%.
• Trends. The intermediate trend is up with the MSCI index above its long-term trend line, the 200-day moving average.
• Fundamentals. Brazil is still a major producer of copper, crude oil, gold, silver, iron ore and coal. All of these commodities are still in demand and that demand is on the rise.
• Performance. As of May 27, Brazil’s index, the Bovespa, is up 28.8% year-to-date; the S&P 500 by comparison is up 0.8%.
• Optimism. Brazil’s government has gleefully estimated a 2% growth for GDP this year.

Ways to Play Brazil

• iShares MSCI Brazil (EWZ)
• Market Vectors Brazil Small-Cap (BRF)

RUSSIA

Of all the BRICs, Russia might have the most formidable challenges to overcome. First, Russia has a long and varied history of not “playing nice” with other economies, which has kept this rapidly growing economy from truly being all it can be.

Second, Russia’s economy has been seen as far too dependent on oil. Oil’s record-setting run benefited the economy enormously and left it with vast reserves of cash, but as soon as the bubble burst, Russia found itself without other sectors to lean on in bad times and its reserves are dwindling.

Finance minister Aleksei L. Kudrin has assured that the government is not in desperate need of financing, but is open to holding a road show in allowing foreign investors to get acquainted with Russian finances.

Foreign borrowing is seen as a way to help the economy by determining a benchmark rate for loans to corporations that are borrowing from Western banks.

One question, though: with credit markets so tight, is anyone actually going to loan money to Russia?

Due to its $385 billion in reserves, the world’s third largest reserve fund, Russia’s credit rating is still strong and it could even draw down its reserves without having to borrow from abroad. In 2010, the government may borrow $5 billion to test things out.

Under Secretary for Political Affairs William J. Burns noted in a recent speech that the relationship between Russia and the United States has five major points that need to be addressed:

• Finish a legally binding treaty on the reduction and limitation of strategic offensive arms
• Reduce the threat of nuclear weapon proliferation to unscrupulous regimes or terrorist groups, and safeguard the peaceful use of nuclear technology
• Help resolve conflicts in areas such as Pakistan, Afghanistan and the Middle East, and protect the sovereignty of independent states
• Ease the international financial crisis, expand Russian-American economic ties and include Russia into global economic institutions
• Commit to a way to help lessen or stop the further degradation of the environment

Ways to Play Russia

• Market Vectors Russia (RSX)

INDIA

During the slowdown, India’s construction came to a grinding halt, the luxury art market slowed and even the most educated of its population were having trouble finding employment.

During the boom years, India’s growth was attributed to large inflows of cash and investments, around 39% of GDP in 2008, with more than a third coming in from abroad. In the last 3 months of last year, foreign loan and direct investment plummeted almost a third.

The International Monetary Fund (IMF) has reported that Indian companies are among the world’s most exposed as a result of heavy borrowing. On the other hand, financial corporations in India weren’t weighed down by toxic assets, which wound up insulating them somewhat from the full impact of the global recession.

In the fourth quarter of 2008, the economy grew 5.3%, the slowest rate in five years. The government predicts a 6% growth this year while the IMF projects a 4.5% growth. There will be increased fiscal spending on infrastructure and social programs, and the Central Bank has reduced its benchmark interest rates.

A recent election, however, could reverse the country’s course. The day the Congress Party won the elections, the stock market shot up a whopping 17%. No wonder they were dancing in the streets. The victory raised hopes of a revival in foreign direct investment and economic growth, as well as tax reform and significant infrastructure spending.

Manmohan Singh’s win has given hope to a half a billion Indians that poverty isn’t a way of life.

Ways to Play India

• PowerShares India (PIN)
• WisdomTree India Earnings (EPI)
• iPath MSCI India ETN (INP)
  

CHINA

China’s economy, while still considered “emerging,” is considered one of the world’s economic superpowers. It’s the second largest in the world, and as one of largest buyers of U.S. debt, the relationship we share is a significant one.

Many economists believe that China’s economy will be the fastest-growing one in 2009. While the country suffered in the economic downturn and saw massive job losses, it also forcefully reacted to the downward pressure with $580 billion stimulus spending package that by many accounts is working.

China’s Central Bank also stepped in and prioritized the maintenance of stable economic growth by relaxing monetary policies and ensuring sufficient liquidity. The bank also kept  the yuan stable at a balanced level with a more flexible exchange rate.

In the meantime, China is trying to increase its influence with more overseas aid and loans, and top officials are setting up the country as the world’s next top economic power. There have been talks of a “Beijing Consensus” that might displace the Washington Consensus, which is a set of ten specific economic policy prescriptions that lays out how developing countries should manage their own economies.

While China is growing and powerful, there are still some hindrances to its growth: energy is insufficient to run at fully-installed industrial capacity; the transport system isn’t efficient enough to move mass quantities of critical items such as coal; the communications system isn’t able to meet the needs of a population as large as China’s.

One facet of China’s economy that might pay off in the long run is that consumer spending only makes up 35% of China’s GDP. The culture of thrift in China has caused massive amounts of household savings. But tax cuts and the government’s focus on infrastructure projects aims to help households. There is also a health insurance plan that would be provided to hundreds of millions more people over the next couple of years.

Ways to Play China

• iShares FTSE/Xinhua China 25 (FXI)
• PowerShares Golden Dragon Halter USX China (PGJ)
• SPDR S&P China (GXC)
• Claymore/AlphaShares China Small Cap (HAO)
  

How to Choose the Best ETF for You

If you are hungry for exposure to the BRICs and other emerging markets, ETFs can give it to you in a variety of ways, including two of the most common:

• Target a specific emerging market with a single-country fund, such as any of the ones listed above, which can potentially deliver higher volatility but greater rewards when they do well; or…

• You can choose a region or class of emerging markets with a broad-based fund, which spreads the risk and volatility over several emerging-market countries

As you decide which option works best for you, decide what your comfort level is, what areas are most interesting to you and how much risk you would like to take. It’s also important to watch the trend lines and look for those areas that are moving.

When you’re looking at a broad BRIC fund, it’s important to look at the allocations. None of them have an equal weighting across all four countries. In fact, most of them allocate at least one-third to one country, while the rest of the countries are spread out among the remaining two-thirds.

Ways to Play the BRICs

• iShares MSCI BRIC (BKF): Brazil, 27.4%; China, 23.5%; India, 13.9%; Hong Kong, 12.9% and Russia, 11.9%
• Claymore/BNY BRIC (EEB): Brazil, 52.8%; China, 18.3%; Hong Kong, 15%; India, 9.2% and Russia, 3.6%
• SPDR S&P BRIC 40 (BIK): China, 31.6%; Brazil, 23.9%; Russia, 23.2%; Hong Kong, 13.7% and India 6.2%
• First Trust ISE Chindia (FNI): China, 40.7%; India, 35.6%; Hong Kong, 13.6%

For full disclosure, some of Tom Lydon’s clients own shares of GXC and EEB.

As the U.S. economy slumps further, banks are lending less, leading to consumers spending less, hurting imports and exports, and so on. Weak corporate earnings reports are fueling the fire and concerns that this economic slump might not be quick or short.

Some of the hardest-hit funds and economies these days still have billions in assets still residing in them. While many investors have shifted to the sidelines or to traditional safe-havens, there are still many others hanging on. “I can’t sell now,” is a popular sentiment, and we wonder how many of those assets are from investors in that predicament.

What to do?

If you’re a buy-and-hold investor, if it would make you feel comfortable to sell one-third of your portfolio before suffering further losses, consider it. In our trend-following report, we discuss what to do if you’ve missed your sell point (we use 8% off the recent high or below the 200-day moving average):

What should you do if you missed the 8% drop, and you’re down much further than that? Missing the sell point creates the conundrum above. That’s when I recommend the following:

Sell 1/3 of your equity holdings and focus on the most aggressive positions—those that might be down 20-30% and trading 10-15% below their 200-day moving averages.

If those holdings decline by another 5-7%, consider selling another third.

Keep an eye on the 200-day average of these positions. As the trend lines continue to decline, there will be an excellent buying opportunity in the future when the markets eventually rebound.

Many funds are getting badly beaten up in these markets, including:

• SPDR S&P Emerging Europe (GUR): 68.8% off Dec. 10, 2007, high; $82 million assets
• iShares MSCI Austria (EWO): 66.6% off June 4, 2007, high; $185 million assets
• iShares MSCI Belgium (EWK): 69.6% off July 12, 2007, high; $79 million assets
• iShares MSCI South Korea (EWY): 66.8% off Oct. 31, 2007, high; $1.9 billion assets
• iShares FTSE/Xinhua China 25 (FXI): 66.4% off Oct. 31, 2007, high; $6.1 billion assets
• iShares MSCI Brazil (EWZ): 67.3% off May 20, 2008, high; $5.7 billion assets
• Market Vectors Russia (RSX): 75.8% off May 19, 2008, high; $862 million assets
• iPath MSCI India (INP): 73.4% off Jan. 14, 2008, high; $535 million assets

The ETN offers access to exotic markets that are not completely suited to an exchange traded fund (ETF) or mutual fund. For example, the iPath Dow Jones AIG Cocoa Total Return sub-Index (NIB) can give investors access to a rich part of the commodities market.

One of the best benefits of owning an ETN is that they do not generate capital gains distributions and do not require a K-1 tax form. They are treated as prepaid forward contracts for tax purposes, reports David Hoffman for Investment News.

As of right now, the tax treatments for ETNs is being challenged, but many ETN providers are not swayed. They see the popularity of this debt instrument as a wonderful opportunity for everyone involved. As debt, ETNs are backed by the issuer, so you’re taking the risk that they won’t run into financial trouble. It’s an important thing for investors to be aware of in this climate of heavy losses by financial institutions.

ETNs don’t have to disclose their holdings on a daily basis, either.

As of mid-August, there were 92 ETNs on the market, 66 of which launched just this year. Providers say it’s too early to judge how successful they will be based solely on assets; it wasn’t until recently that they reached for a wider audience.

Other exotic ETNs:

• iPath MSCI India Index ETN (INP)
• E-TRACS UBS Bloomberg CMCI Food ETN (FUD)
• E-TRACS UBS Bloomberg Long Platinum ETN (PTM)
• Market Vectors Renminbi/USD ETN (CNY)
  

The offer is for Oil & Natural Gas Corp. to buy Britain’s Imperial Energy for $2.6 billion in cash, reports Jane Wardell for the Associated Press. The deal will help ONGC meet growing demand for fuel in India’s economy. Currently, about 70% of the country’s fuel needs are imported.

Imperial is an independent oil and gas exploration company with holdings primarily in western Siberia and Kazakhstan. ONGC is India’s largest oil and gas explorer.

India’s GDP growth is expected to slow to 8.1% in the second quarter after tight monetary policy dented demand, reports Reuters. It’s the slowest pace in almost three years.

In the past four years, India’s growth has averaged 8.8%, but rampant inflation has crept in and begun to slow things down. The rate of inflation is now above 12.5% – its highest point in 13 years.

• iPath MSCI India ETN (INP): down 44.5% year-to-date; ONGC is 2.8%
• PowerShares India (PIN): down 22.2% since March 5 inception; ONGC is 7.1%
• WisdomTree India Earnings (EPI): down 27.8% since Feb. 26 inception; ONGC 6.8%

Before the higher interest rates and consumer spending crimp, factory output and activity in mines and utilities in India rose 5.4% from one month earlier, reports Kartik Goyal for Bloomberg. This growth spurt may slow, as the central bank has raised borrowing costs to curb runaway inflation.

Factory output accounts for nearly 25% of India’s $912 billion economy.

As India is the biggest buyer of bullion, the country’s gold imports may raise for the first time in almost a year, as the lower price of gold is set to attract buyers. Purchases may also rise as jewelers restock inventories and the festival season begins later this month, Thomas reports Kutty Abraham for Bloomberg. Buyers who have put off purchases will enjoy and revel in the lower prices of gold.

Meanwhile, cost-cutting in New York in the form of outsourcing is turning out to be India’s gain. Banks are outsourcing data-intensive jobs from higher up the food chain to cities that cost less than New York, Hong Kong and London, reports Heather Timmons for the New York Times.

“Knowledge process outsourcing,” as bank executives call it, is a way to sugarcoat the job losses here in the United States. The jobs gone are those that involved long hours of number crunching, typically done by business school grads. These third-party firms are reporting that they’re seeing a 20% to 40% upswing in business in this year alone. Many of this country’s major banks have hundreds people in India doing research and statistical analysis.

• iPath MSCI India Index ETN (INP): down 37.6% year-to-date; up 18.9% in the last month
• WisdomTree India Earnings (EPI): down 21.1% Feb. 26; up 14.2% in the last month
• PowerShares India (PIN): down 15.1% since March 5 inception; up 13.1% in the last month