Vanguard

Vanguard Group Inc. is already the largest U.S. stock and bond mutual fund manager, and now the firm has set out to conquer the ETF industry, one sector at a time. Charles Stein for Bloomberg reports that Vanguard is the third-largest sponsor of ETFs, and has captured more than 30% of the money flowing into the business this year by charging an average fee of 0.15%; the industry average is 0.54%.

Vanguard now has $77 billion in ETFs, after inflows of $17.8 billion this year. The firm’s share of the market rose to 11%, up from 8.5% at the end of last year. (How to choose ETFs).

Their strategy of charging the lowest in fees is garnering the interest of many investors who are educated on the possibility that fees can cut into principal and earnings. (What else is important when selecting ETFs?).

But Vanguard has something else interesting at play: the firm’s founder, John Bogle, has been vocal in his criticism of ETFs. His chief complaint is that they encourage short-term trading. Bogle stepped down as Vanguard’s CEO in 1996.

For more stories about ETFs, visit our ETF 101 category. Among Vanguard’s lineup of funds include:

• Vanguard Emerging Markets ETF (NYSEArca: VWO): up 68.6% year-to-date
  

• Vanguard Europe Pacific ETF (NYSEArca: VEA): up 25.3% year-to-date

• Vanguard REIT Index ETF (NYSEArca: VNQ): up 15.4% year-to-date

Congress voted to extend the tax credit and President Barack Obama signed it into law this morning, according to The Wall Street Journal. (ETFs get a lift from economic report).

An $8,000 line of credit will apply to contracts entered before April 30, 2010, and closed by June 30 for homes up to $800,000. The law will also create a new $6,500 credit for homebuyers who lived in their previous home for at least five consecutive years.

Income limits for eligible buyers are increased to $125,000 for single buyers and $225,000 for couples.

Economists for the National Association of Realtors calculated that the tax credit has contributed $22 billion to the economy and an estimated 2 million people will use the tax credit this year. NAR president Charles McMillan says the government incentive has helped stabilize the housing market, stimulate the economy and create jobs.

Naysayers think prolonging the tax credit will artificially keep home prices high.

The expansion and extension of the tax credit may also be advantageous for homebuilder ETFs as more house hunters jump into the market. (Positive signals for real estate ETFs)

For more information on homebuilders, visit our homebuilders category.

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB): up 18.5% year-to-date

• SPDR S&P Homebuilders (NYSEArca: XHB): up 21.7% year-to-date

• MACROSHS HOUSING UP (NYSEArca: UMM): up 16% since inception

Max Chen contributed to this article.

September pending home sales jumped 6.1% as homebuyers rushed to take advantage of a government tax credit. The $8,000 credit for first-time homebuyers ends at the end of this month. The number of sales of previously owned homes are now at their highest level in more than two years, reports Alan Zibel for the Associated Press. (More stories on the real estate sector).

• iShares Dow Jones U.S. Home Construction (NYSEArca: ITB)

U.S. manufacturing activity grew at its fastest rate in more than three years in October. The surge was unexpected, although some noted that it’s still improving at a modest pace, reports The Wall Street Journal. Construction spending also rose by 0.8%, although Wall Street expected a decline.

• Industrial Select Sector SPDR (NYSEArca: XLI)

CIT filed for bankruptcy this weekend in a last-ditch effort to keep operating. CIT is a lender to nearly a million small- and mid-size businesses. The lender was also a recipient of $2.3 billion in taxpayer bailout money, which will be wiped out in the bankruptcy, The Wall Street Journal notes. (How to harness the financial sector’s recovery).

Ford surprised Wall Street by announcing $1 billion in net income in the third quarter. The automaker has also forecast a “solidly profitable” 2011. Ford hasn’t posted a full-year profit since 2005, report Tom Krisher and Dee-Ann Durbin for the Associated Press.

Investors this week will be looking at various economic indicators for clues to the strength of the U.S. economy. One of the most anticipated reports is the Labor Department’s October employment report, which is due on Friday. The Federal Reserve is also going to comment on Wednesday after a two-day meeting.

New home sales had an unexpected 3.6% drop in September. Waning effects from the government’s tax credit for first-time homebuyers are being blamed for the decline, reports Alan Zibel for the Associated Press. September’s decline was the first since March. SDPR S&P Homebuilders (NYSEArca: XHB) is down more than 3% this morning. For more stories on real estate, visit our real estate category.

The Treasury Department and the GMAC, the former lending arm of General Motors, are in talks for a third round of taxpayer-funded aid. The Treasury mandated that GMAC raise another $11.5 billion after stress tests, but the lender has had to go back to the government for more cash, Reuters reports.

ConocoPhillip’s (NYSE: COP) announced its third-quarter earnings fell 71% from a year ago. The company blames lower gas and oil prices along with poor refining margins, reports Isabel Ordonez for Dow Jones Newswires. Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) are expected to report lower earnings tomorrow and Friday, respectively. Vanguard Energy (NYSEArca: VDE) is down more than 2% this morning; ConocoPhillips is 6.6%; Chevron is 13.1%; and Exxon is 19.5%.

Durable goods orders in September climbed, which is being hailed as a favorable sign for U.S. manufacturing. The 1% jump is the fourth increase in six months, reports Greg Robb for MarketWatch.

For more stories on oil, visit our oil category.

For the third consecutive month, home prices rose in August. The Standard & Poor’s/Case-Shiller index showed the prices rose 1% from July in 20 major cities. Prices are still down 11.4% from a year ago, reports J.W. Elphinstone for the Associated Press.

Consumer confidence fell in October to 47.7, the second-lowest reading since May. Analysts had expected a reading of 53.1. Any reading above 90 indicates the economy is on solid footing; a reading above 100 indicates solid growth, reports Ashley M. Heher for the Associated Press. Fewer jobs, lower salaries and a gloomy business climate are bringing shoppers down and keeping them reluctant to spend. Retail Select Sector SPDR (NYSEArca: XRT) is down nearly 2% this morning. (A holiday ETF?)

BP (NYSE: BP) reported a bigger-than-expected profit in the third quarter, even though lower oil and gas prices put a dent in its earnings. BP met its target by cutting costs by $3 billion. WisdomTree International Energy (NYSEArca: DKA) is up 1.5% this morning; BP is 8.6%.

United States Steel (NYSE: X) posted its third consecutive quarterly loss, thanks to the global economic downturn, which has depressed steel demand. The company did note that production and shipments rose from the second quarter and that a narrower loss in the fourth quarter is expected. Market Vectors Steel (NYSEArca: SLX) is down nearly 2.5% this morning; United States Steel is 5.1%. (Where steel and copper are going).

Positive earnings from the tech sector lifted some spirits:

• Amazon (Nasdaq: AMZN) reported a 69% increase in its third-quarter profit, fueling hopes that the holiday season could be a good one for online retailers, reports Geoffrey A. Fowler for The Wall Street Journal.
• Microsoft (Nasdaq: MSFT) reported that cost-cutting helped deliver forecast-beating profits. The software giant also stated that consumer demand was strengthening.

Technology Select Sector SPDR (NYSEArca: XLK) is up 38.6% year-to-date; Microsoft is 9.9%

Existing home sales shot up 9.4% in September, handily beating estimates. It was also the largest monthly gain in 26 years, reports Alan Zibel for the Associated Press. Much of the increase is being attributed to homebuyers scrambling to purchase a home before the government’s tax credit for first-time homebuyers ends. SPDR Dow Jones REIT (NYSEArca: RWR) is up 17.7% year-to-date. (Visit our real estate category for more stories on the housing market.)

Federal Reserve Chairman Ben Bernanke urgedCongress this morning to push through financial reform. The central bank is also taking its own steps  to fix the wounded system, reports Michael S. Derby for The Wall Street Journal.

Meanwhile, the U.S. Treasury and Federal Reserve have unveiled new rules aimed at capping executive pay. While it doesn’t cap pay levels at any specific institution, it still has broad reach, reports Steven Sloan at Insurance Networking. The Fed that 28 large financial institutions to a review of their policies. (For more on the financial sector, visit our financial category).

Among the economic reports that left Wall Street with mixed feelings include

• In September, wholesale prices made a surprise drop thanks to lower energy costs. The Producer Price Index declined 0.6%, but economists were expecting a flat reading. In the year ending September, the index fell 4.8%, reports the Associated Press.
• Applications for hosing permits fell by the largest amount in five months in September. The applications help gauge future housing activity. Some suspect that the drop came amid concerns that Congress wouldn’t continue its tax credit for first-time homebuyers, reports Martin Crutsinger for the Associated Press. SPDR S&P Homebuilders (NYSEArca: XHB) is down about 1.2% this morning.

Earnings reports this morning were mostly better than expectations despite some losses:

• Caterpillar (NYSE: CAT) announced that its profit declined 53% in the third quarter. But the equipment maker is already looking ahead, saying that it expects its prospects to improve next year as the economy strengthens, reports the Associated Press. There are already signs of growing demand in Asia, and Caterpillar generates 70% of its sales overseas. PowerShares Global Emerging Markets Infrastructure (NYSEArca: PXR) is down about 1.5% this morning.

• Coca-Cola (NYSE: KO) saw its third-quarter profits move high, but sales took a hit from falling consumer purchases of carbonated beverages. The amount of soda shipped grew 2%, but fell 4% in North America.
• Drugmaker Pfizer (NYSE: PFE) reported a profit, thanks to cost-cutting that made up for declining sales. The company intends to keep cutting costs because it has the biggest drug industry deal of the year: a $68 billion acquisition of Wyeth. iShares Dow Jones U.S. Pharmaceuticals (NYSEArca: IHE) is down about 1% this morning.

Oil prices briefly topped $80 a barrel this morning, but retreated as soon as the dollar began to strengthen against the euro. It was the first time in a year that oil topped $80, reports the Associated Press.

The decline in the market should not dissuade any investor from allocating part of their portfolio to real estate, explains Julian Hince for Financial Times.

The benefits of real estate allocation include:

• A stable and steady income stream is possible
• Real estate has a low correlation to equity and fixed-income, giving clear diversification benefits
• Low price volatility is also a plus

Real estate investment trusts (REITs) have been looked at for their liquidity and as an alternative to direct property investment. REITs are publicly traded real estate companies that own, manage and sometimes finance real estate.

A REIT ETF will typically invest in a range of vehicles, offering investors the benefits of instant diversification through one single trade. Investors only need to make one transaction and track one price, but still gain exposure to the entire index at once. This makes them lower maintenance and easy to understand. They make it possible to have small investments in real estate.

For more stories about REITs, visit our REIT category. Among the many REIT ETFs available now:

• First Trust S&P REIT (NYSEArca: FRI): up 19.3% year-to-date
• Vanguard REIT Index ETF (NYSEArca: VNQ): up 20.1% year-to-date
• SPDR Dow Jones REIT (NYSEArca: RWR): up 18.9% year-to-date

China’s stock market is up by more than 60% since last November with a p/e ratio of 24.  This may seem high, but it’s a far cry from the eye popping price/earnings ratio of 70 seen during China’s previous bubble in 2006-2007 and much lower than the nation’s long-term average of 37, reports the Economist.

The volume of property sales has surged by 85% over the past year and the prices of new apartments in Shanghai have risen by nearly 30%.  Additionally, average Chinese home prices are nine times average annual household income.

Is there a real estate bubble? Some believe that prices have been pumped up by imprudent bank lending, which is a red flag. When one looks at the sector in more detail, however, average nationwide house prices have risen by 2% over the past year and in relation to income, average house prices in China have fallen slightly over the past decade.  Prices are rising nowhere near as fast as they did during the previous boom in 2004-07. (Learn how bubbles form and how to avoid them).

In the short-term, it appears that China isn’t in bubble territory.  To keep it out, analysts say, the government needs to deal with excess liquidity and allow the yuan to appreciate.

For more stories on China, visit our China category.

• iShares FTSE/Xinhua 25 Index (NYSEArca: FXI): up 48.3% year-to-date

• SPDR S&P China (NYSEArca: GXC): up 55.4% year-to-date

Kevin Grewal contributed to this article.

This summer, both FINRA and the Securities and Exchange Commission (SEC) weighed in with their thoughts on these controversial funds and ultimately declared that investors should seek the advice of an investment professional who understands how these funds work. The agencies also took care to note that the ETFs need to be more closely monitored than their plain-vanilla brethren. (Read their statement here).

That’s the end of it, right? Not so fast.

Since then, ProShares was hit with a lawsuit regarding the UltraShort Real Estate (NYSEArca: SRS), while Direxion was hit with a suit that focuses on the performance of the Financial Bear 3X Shares (NYSEArca: FAZ). (How leveraged and inverse ETFs work).

There are two issues at play in these suits:

1. Did the providers give proper disclosure about these funds? Yes, they did. Leveraged and inverse ETF providers have taken care to ensure that investors don’t buy these funds without understanding how they operate. This, coupled with the SEC and FINRA warnings, should do much to mitigate any confusion or misunderstanding.

2. The investors filing these suits were “surprised” by how their funds performed. There has been no shortage of education on these funds. Anyone who has done their due diligence would have found a number of sources to use when evaluating them and enough information to determine whether they were worth the risks they entail.

ETF Database put together a good article explaining the issue of compounding. While compounding can work against investors in highly volatile markets, it can work an investor’s favor at other times. Read on to see how.