I am retired and take educated guesses on all things financial.

October 30, 2007

October 31, 2007: New ETFs...spooky

I have not addressed ETFs for quite a while, being satisfied with the older ones that I have had in my portfolios for quite some time. As we all know, there have been so many ETFs introduced this year - and so many eclectic reasons for launching them - that it has been hard to keep up, let alone understand them. One thing, except for Vanguard, there has been little attempt to hold fees to a minimum. Many ETFs, once all expenses are factored in, cost as much as many mutual funds. Indexing has become way too complex for the average investor to understand - and there is a complex index for just about everything now. Indexes of indexes are not uncommon. What is one to do?

My advice. Pass on ETFs you do not understand. Stock with the vanilla ETFs (Barclay's iShares come to mind) and keep your portfolio balanced, international in scope and filled with investments you truly understand.

For grins, here are some recent ETF additions that have been recently launched:

Proshares introduced the Short(EFZ) and UltraShort(EFU) MSCI EAFE Index. Thus, you can short and double short the international markets as a basket. Proshares will also have an UltraShort China ETF and Japan ETF out in November. Remember that short gives you 100% exposure to a market headed south. UltraShort gives you 200% exposure to a downward market.

My experience has been that the Short and UltraShort funds have whipsawed many investors this year. I had one in my portfolio, and I got rid of it after a modest profit. I just am not comfortable with double downs in securities. I prefer them in blackjack.

Claymore has introduced a Dividend Rotation ETF (IRO) which to me simply churns the portfolio by as much as 50% monthly while also adding a 20 basis point markup to the iShares Dividend ETF. I am not sure how churning stocks and a higher fee will beat a dividend index. The top holdings in this portfolio are risky financials, imo. Too complex for me. And too expensive for a nominal chance at slightly better performance. Pass.

ProShares has filed to introduce forty eight new commodity and currency ETFs. Anyone care to parse through this?

Deutsche Bank presented a novel introduction, the ELEMENTS Wide Moat Focus ETN -exchange traded note (WMW) featuring companies "with sustainable competitive advantages". A Warren Buffett comment now is an ETN. Look up the criteria for this new fund and see if your socks go up and down. I wonder if Warren Buffett will thrown a few hundred million into this ETN? Actually, this ETN looks better on paper than almost all of the other ETFs going into the market recently.

When will enough be enough? In my opinion, never. There will always be individuals (like us, sometimes) who think they are brilliant enough to parse the market and squeeze the last drop of profit from some whacked index.

The KISS formula (keep it simple, stupid) makes a lot more sense to investors than getting caught up in marketing techniques designed to bring an Edsel into your portfolio.

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