The newly emerged intelligent ETF category has become a compromise between passive and actively managed ETF styles, writes Rich White for Investopedia. Intelligent ETFs have the potential to produce above-average performance at a low cost while offering the benefits and targeted exposures of passive ETFs. [Actively Managed ETFs: The Trend for 2010?]

An intelligent ETF tries to reflect an “intelligent index” – an index that uses quantitative analysis to select and periodically rebalance components. The intelligent ETF concept was pioneered by PowerShares in conjunction with the American Stock Exchange’s intellidex brand indexes.

The PowerShares Dynamic Market (NYSEArca: PWC) provides broad exposure across the whole U.S. stock market by tracking an index of stocks selected through quantitative measures and rebalanced quarterly. The Powershares Dynamic Market Intellidex draws 100 component stocks from 2,000 largest and most liquid U.S. companies listed on exchanges. The stock selection is based on the following:

• “Merit factors” such as fundamentals, valuations, timeliness and risk. The goal is to select stocks that can outperform in the current market.
• Sector screens are applied to insure market-like sector weights.
• Stocks are then chosen in large-cap and mid/small-cap bands to provide broad exposure while avoiding cap-weighted bias.

The advantage of the intelligent index approach over that of mutual funds is that an investor can be fairly sure that the ETF is not straying from the quantitative system through management intervention and management fees/expenses are lower than actively managed funds. Other firms have also contributed to the intelligent ETF genre with their own offerings:

• Claymore Securities has developed a quantitative method to screen companies that hold valuable patents. Claymore/Ocean Tomo Growth (NYSEArca: OTR).
• First Trust Portfolios has their AlphaDEX ETF series that track enhanced indexes created by the S&P by ranking and rebalancing components of the S&P based on growth and value factors. First Trust Utilities AlphaDEX (NYSEArca: FXU). [First Trust Joins the Actively Managed ETF Trend.]
• XShares Advisors with TD Ameritrade and Zacks Investment Research created a “lifecycle” ETF, which reallocate U.S. equity and debt securities as each approach to their target maturity date. TDX Independence In-Target (NYSEArca: TDX). [XShares Advisors New Lifecycle and Real Estate ETFs.]

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

The number of working Americans with virtually no retirement savings or nest egg to fall back on has grown. For three years in a row, the number of U.S .citizens with no retirement savings has grown as the confidence for being capable to save enough for retirement has shriveled. Chavon Sutton for CNN Money has these figures:

• The percentage of workers who said they have less than $10,000 in savings grew to 43% in 2010, from 39% in 2009, according to the Employee Benefit Research Institute. Pension plans and home values are not included. [401(k)s: The Last Hurdle.]
• Workers who said they had less than $1,000 jumped to 27%, from 20% in 2009.
• Confidence in ability to save enough for a comfortable retirement hovered at 16% of respondents, the second lowest point in the 20-year history of the survey.

Many Americans are forced to prolong their working years, as the outlook for the economy is changing and many workers have lost their retirement savings or watched it shrivel. People are facing a huge reality check that the possibility of retirement is getting smaller and some are struggling to make ends meet for today. [How ETFs Are Making Their Way Into Retirement Plans.]

The scary thing is that many people aren’t investing simply because they don’t have a lot of money, creating a vicious cycle. The books say “use bonds” for retirement, but those are paying next to nothing now. Factor in the possibility of a bond bubble fixing to burst and the next few years could ultimately punish retirees or those who are close to becoming one.

One solution is to become long-term oriented. What are your goals? How will you get there? As with any plan to reach a goal, break it down into little bits to make it seem less daunting, and incorporate ETFs into your strategy. By using ETFs with a simple, sound strategy like trend following, you can best position yourself to make your golden years a little more appealing. [How to Follow Trends.]

For more stories about retirement, visit our retirement category.

After the financial crisis, many banks and other financial companies reduced or suspended dividend payments, remarks Alexander Green for Investment U. But according to Howard Silverblatt, senior index analyst at S&P, “the worst is over for dividends. Standard & Poor’s believes that a dividend recovery is under way.” [How to Play the Dividend Comeback.]

While dividends may still be low at this point, Green points out that over time, they rise and sometimes it’s by a lot. [How to Protect Yourself from the Big Deficit.]

Gary Gordon for ETF Expert makes another case for dividends: the markets are showing no definitive signs of a fast revival or another downturn. In that situation, Gordon suggests, you might want to go after cash flows from income ETFs or dividend-yielding ETFs. [4 Ways to Use ETFs.]

For more information on dividend ETFs, visit our dividend category. Among the many dividend ETFs available for the picking (just watch the trend lines) include the ones listed below. You can find the fund’s current yield by clicking on the ticker:

• PowerShares HighYield Dividend Achievers (NYSEArca: PEY)
• WisdomTree SmallCap Dividend (NYSEArca: DES)
• First Trust DJ Global Select Dividend (NYSEArca: FGD)
• WisdomTree Total Dividend (NYSEArca: DTD)
• Claymore/Zacks Dividend Rotation (NYSEArca: IRO)
• iShares Dow Jones Select Dividend Index (NYSEArca: DVY)
• Vanguard Dividend Appreciation ETF (NYSEArca: VIG)

Max Chen contributed to this article.

Assets in ETFs last year surged a whopping 46% from a year earlier and now make up more than 7% of total mutual fund assets, Joe Morris for Ignites reports. The 401(k) market represents a wall that the ETF industry must surmount if it will make more inroads into that market share.

Technically, the barrier to entry has been blown up, but only small players are providing the service. It will be many more years until ETFs play a large role in the mutual fund giants 401(k) programs. That said, anything is possible.  [401(k) plans, ETFs and you.]

The key hurdle for ETFs in 401(k) plans is the trading commission that comes with each trade, which discourages dollar-cost-average investing. That hurdle may be surmountable now that Schwab began offering free trades of its own ETFs. [What does dollar-cost averaging have to do with it?]

Mutual funds are ceding some of their dominance in the active management space to ETFs, as well. As more actively managed ETFs hit the scene, it could further erode mutual funds’ top-dog status. [ETFs poised to gain market share.]

Don’t feel bad for the ETF industry – it’s still growing and Index Universe’s Matt Hougan notes that they’re on pace to increase their market share to 10% this year and double that within a few years, even without the 401(k) market.

For more stories about retirement, visit our retirement category.

Individual retirement Accounts (IRAs) are accounts that investors set up to save for retirement. They come in various forms, including traditional IRAs and Roth IRAs. Karim Rahemtulla for Investment U reports that until this year, you couldn’t qualify for a Roth IRA unless you fell below specific income requirements. The government has now decreed that anyone can have a Roth IRA, regardless of their income level. Furthermore, if you have a traditional IRA, you can switch it over to a Roth – with all future gains and distributions being tax-free.

What are the benefits and consequences of investing in a Roth IRA account?

• Government: The government is angling for a lot of cash with this move. Think about the trillions of dollars sitting in retirement accounts. The lure of collecting taxes early on those trillions makes sense for a government in need. [Thinking about dividend ETFs?]
• Tax Implications: Any money you switch from your regular IRA to a Roth will be taxable – that’s the rub. Taxes will need to be paid at a marginal rate on this capital for the next few years.
• Status Quo: The easiest thing to do is let your traditional, tax-exempt IRA continue to grow and just pay the taxes at the marginal rate upon distribution. The money that you will pay today for the switch-over would likely make up what you’ll pay later in taxes, anyway. Your tax rate may be lower then, too. [What higher tax rates mean.]

We’re not tax professionals, however, so before proceeding, consult with your accountant to determine the best move for you and your future. [Our special report on 401(k) plans.]

For more stories about retirement, visit our retirement category.

Convertible bonds are hybrid investment tools that can be converted into a predetermined amount of a company’s equity at certain times during the bond’s life. They are essentially bonds with a stock option hidden inside, so they offer the downside protection of fixed income securities and the upside potential of equities. (Other opportunities in bond ETFs).

To take the convertible bond market to the next step, ETF provider PowerShares has recently registered a new ETF, the PowerShares Convertible Fund to track the Merrill Lynch All Investment Grade U.S. Convertibles Index. According to Gary Gordon at ETF Expert, this new ETF will be worth watching because it will track smaller companies, which could potentially lead to higher yields. (Why junk bonds are popular).

For more on bond ETFs, visit our bond ETF category.

The SPDR Barclays Capital Convertible Bond (NYSEArca: CWB) is another way to access convertible bonds.  CWB is up about 24% since its April inception and has a yield of 3.1%. For the last six months, CWB has been outperforming the SPDR High Yield Junk Bond Fund (NYSEArca: JNK) and keeping pace with the S&P 500 SPDR Trust (NYSEArca: SPY) over the last six months.

CWB tracks an index of the biggest of the big securities, with market values of $500 million or more. The new PowerShares fund will track companies with a market value at issuance of $50 million, Gordon notes.

When the tax legislation set by the Bush administration expires at the end of next year, capital gains and dividend-tax rates will inevitably be higher no matter what tax-reduction laws Congress enacts in the coming months, comments John Kimelman for Barron’s. Long-term capital-gains tax rates will jump to 20% for high-income investors – it used to be 15% – and dividends will return to ordinary tax rates. (Capital gains and ETFs).

Robert Willens, a respected tax consultant for both wealthy individuals and corporations, has shared his thoughts about lessening the blows of higher-tax rates:

• Willens first suggests practicing “accelerating income,” or to realize income in the years during which it is taxed at its lowest, and cash in capital gains. Corporations really control your dividend-income balance and they might cater to investor needs by providing a new type of “special dividends.” (How dividend ETFs help you in tough times).
• Special dividends issuers will likely be companies that have substantial liquid-asset balances, mature and tend to have insider ownership. Companies that don’t have lots of cash on hand but have the capacity to borrow large sums may also be candidates for paying a special dividend.
• Congress may phase out alternative minimum taxes when capital-gains and dividend-tax rates increase.
• Wealthy investors, those with incomes of $100,000 or more, should start to convert their traditional IRA and other retirement assets into a Roth IRA, which aren’t taxed when withdrawn at retirement. Next year, high-income individuals are allowed to convert a traditional IRA to a Roth. (More on retirement).

For more information on taxes, visit our taxes category.

Max Chen contributed to this article.

The market place already offers fixed-income ETFs, but the industry may start to incorporate managed distribution or an income stream that flows to the investor without having to sell the ETF, writes David Hoffman for InvestmentNews. Experts believe the fund’s structure will help ease investors into retirement. (Do fixed-income ETFs work like they should?)

However, the development of actively managed ETFs still remains unsettled. The Securities and Exchange Commission (SEC) requires ETFs to provide full transparency and this polemical issue has active managers irked.

Proponents of actively managed ETFs say it is only a matter of time before this ETF theme catches on because ETFs, unlike mutual funds, allow investors to pay capital gains taxes on the final sale of the investment. (Don’t count out actively managed ETFs).

Nevertheless, before actively managed ETFs can gain widespread acceptance, this ETF type will have to show that it can add value and it may take “three, four or five years to see what the real end story is with true active ETFs,” says Martha G. Papariello, a principal and head of the financial adviser services unit at The Vanguard Group Inc.

For more information on actively managed funds, visit our actively managed ETF category.

Max Chen contributed to this article.

Yields upwards of 3% are being offered by some well-known names, including Kraft Foods (NYSE: KFT), Clorox (NYSE: CLX), Sara Lee (SLE), Sysco (NYSE: SYY), Johnson & Johnson (NYSE: JNJ) and Verizon (NYSE: VZ).

Finding these names is a matter of doing a little detective work. One clue is “value” stocks. Because they’re generally more stable, they can be a better long-term investment, explains Brett Arends for Yahoo Finance. Defensive industries include food and beverage, health care, personal care, household goods and telecommunications. (Why have dividends outperformed growth shares).

Arends cautions investors to beware dividends that are too high – one in the double digits can be a red flag because it means the market expects the payout to be cut or that the business is being wound down.

Top dividend stocks are appealing to investors who seek something other than bonds, and also yield some extra in come. But why single-stock pick? Instead, you can own a basket of these handsomely yielding companies in one ETF. ETFs will also help spread your risk around, especially if more volatile companies are held within the fund alongside the more stable, defensive ones.

For more stories about dividends, visit our dividend ETF category.

• iShares Dow Jones Select Dividend (NYSEArca: DVY): up 8.5% year-to-date; yields 4.4%

• PowerShares International Dividend Achievers (NYSEArca: PID): up 36.5% year-to-date; yields 2.4%

• WisdomTree Dividend ex-Financials (NYSEArca: DTN): up 21% year-to-date; yields 4.1%

Carlos Sera of Financial Tales defines dollar cost averaging as when one commits to invest a certain dollar amount or percentage of salary to an investment program, usually in a mutual fund or exchange traded fund (ETF), over a consistent period of time.  A good example is a traditional 401(k) plan to which an employee allocates 5% of a monthly paycheck. Sera has several tables illustrating how DCA works. (More on retirement).

Sera likes the dollar cost averaging method because it can encourage someone to invest in the stock market, which in turn gets them on their way to higher lifetime rates of return and a higher standard of living. Another benefit is that when stocks are cheap, you’ll wind up buying more of them; when they’re expensive, you’ll buy less.

As far as whether or not it works,  it enables and encourages many individuals to start saving and building retirement plans. It also positions them to take advantage of bargains in the market. Over time, Sera says, if an investor sticks with it, DCA could produce satisfactory results.

Our own strategy is one of trend following by using the 200-day moving average to determine when you’re in the markets and when you’re out. (How to use the trend following strategy).

Whichever strategy you employ when investing, pick one and stick with it. Bouncing around from one method to the next could wind up being costly to you, and can lead to frustration as you look for a strategy that “works” before giving any of them a chance to do so. Success doesn’t happen overnight!

For more stories on trend following, visit our trend following category.

Kevin Grewal contributed to this article.