The Big Picture for the Week of April 17, 2011

Yesterday I read what seems like the 700th positive article on the Canadian banks. I have had clients in this space for a little over six years with Scotiabank (BNS). On a relative basis the Canadian banks are much healthier (not risk free) than the US banks.

This reminded me of an idea I had a few years ago that I think I called exchange traded baskets. These would be narrower than ETFs. Someone interested in Canada and who knew about the banks could choose the Canadian Bank Exchange Traded Basket which might only have four or five holdings.

There are countless other niches where ETBs could be created. In looking at some of the segments discussed here in the past ETBs could be created for Australian banks, Chinese toll roads, Chinese coal stocks, Norwegian fisheries, Singaporean banks, Scandinavian banks, various segments in farming and the list could be endless in terms of spaces where there might not be enough names for an ETF.

Something like this could easily be created right now by an investment bank for the right type of institutional client. Such things, if they do exist now are obviously not exchange traded and so not accessible by individual investors or many RIAs for that matter.

The idea would require plenty of work on the part of the end user in terms of research but obviously they would avoid single stock risk and also provide access. It would be very difficult to buy a Malaysian plantation stock through a US brokerage even if it does trade ordinary shares on the US pinksheets.

There are countless mutual fund-regulations that would have to be overcome and really these would need to be a different product like maybe a UIT but that could be traded on an exchange somehow or maybe this could be part of the ETN space but if individuals are allowed to take the risk of buying an individual stock then I have to think that they could be allowed to take the risk of buying a basket of five stocks.

The slight bigger concept here is that if the idea of correctly selecting narrow segments for portfolio construction will be a key element to "success" for the next ten years (compared to buying domestic index funds in the 1980s and 1990s) then I would hope the investment industry would offer as many different types of tools as possible for those willing and able to put the proper time in. In that context these can make plenty of sense and be worked in along with individual stocks, ETFs and even traditional mutual funds.

In thinking one sector at a time, it would be perfectly valid to build the energy sector with some broad ETF, an oil sands ETB with six names in it and an MLP to add a little yield.

Occasionally people on the product-creation side of the industry read this blog so perhaps today's post can create a dialogue.

If you are a baseball fan then you understand both pictures.