Four Things

ETFs

A former colleague of mine sent me the link to this Morningstar article by Dan Colluton. The basic premise expressed is that ETFs may not be all they are cracked up to be because the managers aren't on record for owning shares of their funds. Mr. Colluton believes that this can be useful indicator for how much the managers "really believe in the funds they run."

He goes one to say this does matter because "the interests of managers who are compensated based on how well they run their funds, and who have significant sums of their own money invested in their portfolios, are more aligned with their shareholders."

Wow.

This seems so upside down I don't know where to begin or end. So is he saying iShares Korea (EWY) is the correct investment for anyone involved in managing it? It seems like an awful lot of all ETFs specialize in a sector or a single country.

If you look at the Morningstar ETF Report page you will see the most recent report was on the iShares Global Energy Fund (IXC). It turns out they think most investors should avoid the fund. Right before the report on IXC they did one on the Vanguard Energy ETF (VDE) and what do you know the risks out weigh the rewards. The report right before VDE was on the Utility Sector SPDR (XLU); surely not three for three! Hmm lessee, it says "We'd steer clear of this ETF."

I scrolled down to find a country fund and the most recent report I found (I may have missed one on the list) was from December on PowerShares Halter China Index (PGJ) and you won't believe this "We're wary of being tied to single-country funds due to their volatility, which is of even greater concern in emerging markets. Most would be better off with a diversified emerging-markets fund."

I think I am seeing a pattern here. So Morningstar thinks the funds should be avoided but Morningstar thinks the employees should buy the fund?

The ETF companies picked on the most in the article are iShares and StateStreet. I use more ETFs from iShares than I do from StateStreet but both are index fund providers. The work involved is making sure the math is right (hyperbole). This is not to minimize the importance of the funds or the people that work there but running an index is not about adding value as implied in the article it is about mimicking. You mimic with computers not an investment committee sitting around a big old money table debating sector and style rotation. Further I might suppose that the actual work of implementing and maintaining the fund is done by younger computer science grads.

The people we see interviewed from these companies are usually from marketing and so not really stock market people in the way that someone running an open end fund is a market person. For now, any actively managed ETFs are not really that active, they are stock screens. Here again someone clicks somewhere to rerun the screen then it boils down the software working properly.

I can't believe this was published but that's just me.

Marc Faber

Dr. Faber was on Asian Squawk Box on Wednesday morning for three very long segments. Generally he did not strike me as so bearish, relative to what I usually see him say or read of him in print. He does expect a recession in the US in late 2007 (per the interview) but he thinks the US market could go up to a higher diving board. He would avoid energy, miners and emerging markets for now but I took these more as trading calls. He said that technically the Nasdaq 100 looks to be the best trade in the US right now.

Comment Reply

A reader asked about the proposed PowerShares Dollar Bull ETF and the bear version. The funds will allow you to essentially go long or go short the US dollar index with an ETF. The reader wanted to know if I might prefer these over the single currency ETFs.

The make up of the dollar index is 57% euro, 13% yen, British pound 11%, loonie 9%, Swedish krona 4% and Swissi 3% (all numbers rounded down). Certainly I don't see the need to own FXE and PowerShares dollar bear fund. The starting point here, I think is that for some folks there is no appropriate currency product. That being disclaimed here is the comparison I see. Today you may think that in the financial sector this is a good time to not pick a stock but instead own an ETF. At some point in the future you may shift to thinking a few stocks instead of the ETF are the way to go. Even further down the road some sort of combo of stocks and an ETF is right.
This is not either or. If the funds list they will provide a different tool for a particular market. I can't imagine these could be permanently superior or inferior.

Video

It seemed like the response to the YouTube video post was positive. I will try to stop fidgeting but it is harder than it looks (at least for me) but this is a work in progress so I think they can get better. Shrink Rap's idea about doing it once a week on the weekend is a good one maybe that is what I'll do but we'll see. It is fun and the only hassle was it took a long time to upload. We'll see.