You may think that investing in the wide variety of ETFs available like iShares, HOLDRs, SPDRs and others is all the same, but there are differences which can affect you long term. It may not matter to you if you manage your own money, because you will find out any limitations as you place your order. For example, you can buy any odd number of shares when investing in iShares or SPDRs, but you can’t purchase odd lot shares (less than 100) when using HOLDRs. It has to be a minimum of 100 shares or a multiple thereof. A problem can occur when you are using an investment manager. How? He will usually purchase shares based on a percentage allocation of your portfolio. To start, he will place a block trade to purchase a total number of shares for all of his clients that he wants to be invested in a particular HOLDR ETF. He then allocates as per percentages. For example, from the block trade he decides to allocate 10% of portfolio value to your account. Let’s say that represents 187 shares. No problem there. Let’s assume that you leave this investment manager to continue handling your own investments. One day you decide to sell the 187 shares of the HOLDR ETF. Unfortunately, you will find out that you can’t. To be clear, you can sell 100 shares, but since odd lots are not allowed you will be stuck with the remaining 87 shares. How do you get around this? Be sure to have your investment manager liquidate any HOLDR ETFs in your portfolio before you depart. He will want to do that anyway, because otherwise, he will be stuck with an odd number. It pays to know the rules to avoid any unpleasant surprises.

Tom Lydon from ETF Trends had a blurb about the increased usage of ETFs by RIAs (Registered Investment Advisors). He says that the fastest growing advisor segment are those advisors with affiliations for providing fee-based advice. The trend towards independent fee advice continues to grow exponentially and RIAs are catching on to the ETF advantage. I have written about the fee-based benefits as opposed to dealing with a sales person peddling preferred company products before, so this is no surprise. In my own practice, I have too increasingly used ETF products, but only when appropriate. There are some advisors who have totally dropped no load mutual funds from their menu of investment choices, but I think that is a mistake. There are times when no load funds are better performers, and there are investment areas where you are better of using ETFs. Of course, you can only evaluate that if you actually rank both to see which performs better in a given environment. After all, it’s nothing but performance that will get us to our financial goals and not the vehicle.

Even though ETFs represent “only” indexes for just about every conceivable investment orientation does not mean that they don’t have any muscle to propel your portfolio higher. A quick look at my dbase containing over 1,200 no load funds and some 500 ETFs shows that the 2 top performers (based on my M-Index ranking) are ETFs, namely FXI and PGJ. Disclosure: While we hold small positions in FXI, we have none in PGJ. It’s not secret that FXI has been the top performer last year; however, its tremendous volatility has kept many investors from taking the plunge. How can you participate in that powerhouse investment without taking too much risk? For some of my more aggressive clients, I have taken a 10% position. During the recent market roller coaster, FXI lost 6% on some days and gained 5% on others. On balance, the week we purchased it turned out OK with a 5.25% gain. Here is a plan you can follow if you are aggressive and attracted to the long term prospects of China via an investment in FXI. Ease into the market via a 5% position and, if it goes your way, add another 5%. The crucial part is to have an exit strategy in case this investment goes against you. I recommend a 10% trailing sell stop on your positions. What’s the risk? If you invested 10% into FXI and got stopped out with a 10% loss, the total effect on your portfolio would be a negative 1%. If, however, FXI moves higher, as in the above example, and gives you an immediate 5% gain, you will have cut your risk in half. If your risk tolerance is above average, this may very well add some desirable firepower to your portfolio.

With the flood of ETFS being brought to the market, there was bound to be a new product following along as a new alternative to ETFs to confuse investors even more. Such an animal did arrive and it is called Exchange Traded Notes, or ETNs for short. I’ve been hard pressed to find information on it, but Kiplinger had an article called “Exchange-Traded Notes: The Next Big Thing?” According to them, here’s the difference between ETFs and ETNs: “Both ETNs and ETFs act like low-cost index funds. Their differences are under the hood. An ETF consists of a portfolio of securities (or sometimes a cache of gold or silver bullion), and owning a share gives you claim to a small portion of that portfolio. With ETNs, however, there is no portfolio. You get what is, in essence, a bond issued by the ETN's creator, Barclays. The ETN promises to repay the amount of your investment plus (or minus) the return of the index that the ETN tracks, less a management fee.” The benefit to some seems to be in the way distributions are handled: “ETNs don't pay cash distributions. Instead, the value of dividends, interest and investment gains is lumped into the funds' total return. So you won't face any taxes until you sell your shares. And even then, any gains on shares held more than a year should be taxed at 15%, according to a legal opinion Barclays obtained.” So, if you are looking for monthly income, this would not be a good choice. The bottom-line is that this product is new and needs to prove itself over time. At this point, I don’t have an opinion either way, but simply wanted you to be aware that ETNs exist.

To no surprise, Vanguard’s latest ETF offering has arrived and started trading a couple of weeks ago. It’s called the Vanguard Europe Pacific ETF (VEA) and it has 1,134 holdings and a low expense ratio of 0.15%. This is quiet a contrast to the average ETF expense ratio of 0.42%. This new ETF tracks an index of stock performance in 21 countries in Europe, Asia and the Far East. It will be tracking the EAFE index and competing with EFA, the second largest ETF (0.35% expense ratio) in the world. If performance turns out to be similar, then Vanguard will most likely have the edge with its low fees. However, before adding this new fund to my dbase, I want to see close to a year’s worth of price data to be able judge and compare its performance and to establish a trend. While there are a variety of duplicate ETFs in various orientations on the market, I welcome that as it increases competition for lower expense ratios, which will benefit the investing public. As a result, ETF assets have risen dramatically. Sooner or later, many of the bloated and underperforming mutual fund companies may get the hint and finally wake up to the fact that, if they don’t start competing seriously, the interest in their products my continue to wane.

In a previous post I mentioned the obvious disconnect that occurred earlier this year between domestic REITs and those that invest in the global arena. The WSJ just featured an article called “Foreign Real Estate Funds Boom,” which analyses several REITs covering a variety of countries. Most of them are well known, however, foreign funds are not the cheapest when it comes to annual operating expenses. However, my contention has always been that cost is relative to performance. If you had owned EGLRX for example with an over 40% return over the past year, the expense ratio would not have mattered. Nevertheless, many investors prefer a low cost solution along with great performance. As has been the case, ETFs have come to the rescue over the past 5 years. The new kid on the block for international REITs is a Wisdom Tree International Fund (DRW), which focuses on Australia and some Asian countries. It’s only been around a short while, but for that period it has closely tracked the above mentioned EGLRX. I will add DRW to the StatSheet (sector section and master List) starting with this week’s issue. While there is not enough data available to clearly identify its long-term trend, having it included already gives us the opportunity to monitor it and see how the momentum figures develop over the next few months. If you believe that the performance of foreign REITs is to continue, you can invest in this new ETF now, but it is essential that you use my recommended sell stop discipline, just in case the market turns against you. I have currently no investments in these funds.

It’s no secret that new ETFs are being brought to the market as fast as sponsors can obtain regulatory approvals. I have touched on this before that having all these investment choices available does not mean you should jump on the band wagon and buy any new offering. MarketWatch had a piece on the pitfalls and potential problems when investing in markets that are thinly traded. For one, if an ETF has trouble attracting enough inventors, you can be sure that the expense ratio will be higher. Additionally, the bid-ask spread may widen to a point where liquidating a position may turn a profit into a loss. I for one will stick to using only well traded ETFs with heavy volume so that liquidating a large position won’t be a problem when the markets head back south eventually.

Last week’s 4.5% market correction pulled the rug out from under most assets. Based on my ETF Master list, which contains 497 ETFs representing just about every sector imaginable, I was curious to see which assets held up best and with ones suffered the most. While obviously all bear market funds/ETFs had an up week, it is too early to get exposure to that area since the long term trend lines of the Trend Tracking Indexes (TTIs) are still in bullish territory. Bucking the pullback last week (not counting bear funds) were the following: TF (Country fund): +3.42% FXY (Currency): +1.98% USO (Oil): +1.60% IEF (Bond): +1.41% The only equity ETF to stay even was DIA (Large Value: +0.00%), all others went negative. The honors for worst performance of the week goes to IIH (Technology), which dropped an amazing -11.69%. That was closely followed by XME (Metals & Mining) with a loss of -10.99%. My point is that very few areas survived last week’s pull back. There is no sense in trying to make adjustments to your portfolio at this time, since in the current corrective environment last week’s winners can easily be next week’s losers. Stick to holding your positions subject to your sell stop rules and make adjustments into better performing sectors at a later time once the markets have calmed down and the direction of the trend becomes clearer. Right now the markets are in no man’s land, and it’s anybody’s guess as to whether we are heading further south into bear territory or whether a turn around to greener pastures is imminent. This is the time to be patient and avoid making irrational decisions.

The short answer is no. I am not an economist, but I have always believed that having little or no debt as an individual (or as a country for that matter) is certainly more desirable than drowning in payments. While there is a period in everyone’s life where debt is necessary, the ultimate goal for most investors is to eventually become debt free. Apparently not everyone agrees. Much to my surprise I found Ken Fisher, CEO of Fisher Investments, heavily promoting the use of debt as a good thing in his article titled “Learning to love debt.” While it makes for interesting reading, there isn’t much I can agree with, especially since he makes no distinction between debt for investment (growth of business) and consumer debt (reckless spending). Some of his comments about the economic benefits when a heroin addict borrows money might even make your hair stand up. I far more enjoyed the article analysis/rebuttal by Michael Shedlock, who writes on global economic trends. His points are succinct and well thought out. He even went through the trouble of calling Fisher Investments to find out how Ken uses debt and leverage himself. Turns out he doesn’t use it at all! Huh? Apparently, Ken doesn’t eat what he cooks. There goes the credibility. Oh well…

I’ve touched on this before, but it’s worth repeating. With the onslaught on new ETFs coming on the market, it’s important that you don’t jump in before you get all of the facts. I generally make it a habit not to invest in any ETF, or mutual fund for that matter, if there is not at least some 9 months of price data available. This will allow me to track the trend and also observe the daily volume. A recent article in the WSJ called “Before you drive that hot ETF…” details other points for you to consider: 1. Expenses 2. Trading Costs 3. Confusing choices 4. Aberrations from tracking an Index 5. Performance histories 6. Hedge Funds and high rollers While not all points are critical, it pays to read the story to make sure that you are aware of some of the pitfalls you may have been unaware of.