Can Fixed Income ETFs Recapture Any Mojo?

At the end of August, every imaginable Fixed Income ETF had cracked the top half of the exchange-traded universe in relative strength percentile rank. Here on Thanksgiving Thursday, these same investments from the fixed income world have all dropped into the bottom half. In a “risk-on-risk-off” environment, few may find the change in momentum all that surprising. After all, stocks rocketed throughout the months of September and October; riskier assets have managed to hold onto those gains after three-and-a-half weeks in November. Yet even in November of 2010, where stocks have had their troubles, several different types of Bond ETFs have failed to act as “safe havens.” Consider the following examples:

1. International Bond ETFs and Emerging Market Bond ETFs. Fears of a sovereign nation failing to pay back its creditors have weighed heavily on international treasuries and international corporate bonds. Meanwhile, the US$ has bounced higher against the “euro” as well as emerging market currencies, creating some weakness in emerging bond offerings.

Popular International Bond and Emerging Market Bond ETFs (10/25/10-11/24/10)
						Approx %
SPDR Barclays International Treasury Bond (BWX)						-4.4%
SPDR Barclay International Corporate Credit Bond (IBND)						-4.4%
SPDR DB International Inflation Protected Bond (WIP)						-3.6%
JP Morgan Emerging Market Bond (EMB)						-2.9%
PowerShares Emerging Market Sovereign Debt (PCY)						-2.5%
WisdomTree Emerging Market Local Debt (ELD)						-2.0%
S&P 500 SPDR Trust (SPY)						1.6%

2. Muni Bond ETFs. You’d have to classify the recent mauling of state and national munis as bearish. Investors may be taking their cues from the bond crisis in the European Union. Is California next? Even though a massive wave of defaults inside of diversified baskets is improbable, the time spent waiting for bailouts may surpass shareholder pain thresholds.

Popular State Muni Bond and National Muni Bond ETFs (10/25/10-11/24/10)
						Approx %
SPDR Barclays California Muni (CXA)						-4.9%
Market Vectors High Yield Muni (HYD)						-4.7%
PowerShares Insured New York Muni (PZT)						-4.6%
iShares S&P National Muni (MUB)						-3.9%
SPDR Barclays National Muni (TFI)						-3.5%
Market Vectors AMT Free Intermediate Muni (ITM)						-2.8%
S&P 500 SPDR Trust (SPY)						1.6%

3. High Yield Bond ETFs. In my estimation, high yield is just about where it should be on the relative strength rankings… higher than the rest of the fixed income offerings and a little lower than the S&P 500. Yet that doesn’t change the fact that 7- and 10-year yields have actually climbed since the QE2 announcement, while the long end of the treasury bond yield curve has surged. It follows that high yield bond ETFs are starting to see detractors.

Popular High Yield Bond ETFs (10/25/10-11/24/10)
						Approx %
SPDR Barclays High Yield Bond (JNK)						-1.0%
iShares High Yield Corporate Bond (HYG)						-0.9%
PowerShares High Yield Corporate (PHB)						-0.7%
S&P 500 SPDR Trust (SPY)						1.6%

For the time being, I am committed to diversified high yield. I also believe SPDR Convertible Bond (CWB) remains an attractive alternative to Treasury Bond ETFs.
Nevertheless, the higher intermediate and long-term investment grade yields climb, the greater the threat to credit spreads. The smaller the spread between investment grade and “junk,” the further out on the risk spectrum you may need to go. (That may not be a bad thing… as “aristocratic” dividend payers have phenomenal earnings yields.)

Disclosure I am long SPY, JNK, HYG, PHB, CWB, MUB and PCY.

Diversified Approach to Play Corporate Bond ETFs

As strength of a sustainable economic recovery continues to remain wary, unemployment remains high, and consumer demand grows at a snail’s pace, corporate bonds, and the exchange-traded funds (ETFs) that track them, could pose an opportunity for investors.

A notable play of the corporate bond market is the SPDR Barclays Capital International Corporate Bond ETF (IBND), which tracks the Barclays Capital Global Aggregate ex-USD > $1B: Corporate Bond Index, carries an expense ratio of 0.55%, and gives investors exposure to debt that's denominated in local currencies.

IBND focuses on investment-grade corporate bonds and gives exposure to the following currencies: Euro, Australian Dollar, Canadian Dollar, New Zealand Dollar, British Pound, Japanese Yen, Swiss Franc, Swedish Krona, and the Danish and Norwegian Krone. Although IBND excludes US Dollar-denominated bonds, it does include bonds issued by US companies, which are payable in other currencies. In fact, according to the fund’s prospectus, the US has the largest country weighting at 17.5%, followed by Germany at 16.1% and the United Kingdom at 12.5%.

In regards to sector weightings, IBND is heavily focused on financials, industrials, and utilities, which constitute 46.9%, 39.5%, and 11.6% of its asset base, respectively. Additionally, the underlying index that IBND seeks to track boasts a yield of 3.05%, which can be expected if IBND tracks its underlying index accurately.

Of the holdings in the newly traded ETF, all the bonds in the fund are rated Baa or higher, with nearly half of them carrying a rating of A or better. The average maturity for the bonds is 5.3 years with a modified duration of 4.4 years.

Another notable mention regarding the international bond market is that PowerShares has also filed the necessary paperwork to launch the International Corporate Bond Portfolio (PICB), which will seek to replicate the performance of the S&P International Corporate Bond Index and give exposure to international corporate bonds.

Another way to play corporate bonds is through the Vanguard Short-Term Corporate Bond Index Fund (VCSH). This ETF seeks to replicate the Barclays Capital US 1-5 Year Corporate Index, a benchmark that includes US dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies with maturities between one and five years

The majority of VCSH’s coupon rates lie between 4% and 6% and debt ratings of underlying holdings primarily lie between BBB and AA.

Although an opportunity may prevail in corporate bond ETFs, it's a good idea to have an exit strategy that helps mitigate the risks that they carry.

Disclosure I do not any of the above mentioned etfs I however have been watching IBND for a bit.

ETF to Watch: Treasury Ladder Fund (PLW)

The fixed income ETF space has grown considerably over the past two years, as investors worried about a slowdown in developed markets have bought up bonds despite record low yields. The first 11 months of 2010 saw cash inflows of approximately $100 billion into the ETF industry, and about $29 billion of that total went to bond products. The prices of bonds have skyrocketed in recent months on risk aversion, leading many analysts to worry a bond bubble is forming -- though these fears have somewhat calmed as equities have made a push to end 2010 on a positive note. Recent events have raised new concerns about the fixed income space, as Treasury prices fell and yields spiked to the highest level in quite some time.

From Monday to Wednesday, yields on the 10-year notes surged by 30 basis points, the largest two day run-up since the fall of the Lehman Brothers in 2008. But why the sudden spike in Treasury yields across the board, especially given ongoing worries in Europe? It seems that the general consensus is that the U.S. is not properly dealing with its budget deficit, with President Obama and the Congressional Republicans appear to be close to nearing an end to a tax-compromise deal that aims to jump-start consumer spending and growth, but at the same time increase the already massive deficit with the issuance of more debt.

This was further confirmed by a 10-year T-Bill auction that took place earlier in the week when the debt issuance failed to attract a solid number of investors. "It is extremely revealing of just how poor conditions are when we get one of the weakest 10-year auctions on record, even after the worst two day downdraft in 10-year yields since the turbulent, dark days of September 2008," said strategists at Nomura Securities. Focus will now shift to the long-term side of the market as the Treasury will issue 30-year bonds. Hopefully these notes will be better received than their shorter-term counterparts, but there is a fair amount of skepticism.

The 30-year auction will be closely followed today, putting all funds in the Treasury Bonds ETFdb Category in focus. In addition to dozens of funds honing in on various stretches of the maturity curve, there are a few ETFs that spread exposure throughout the Treasury market, including the PowerShares 1-30 Treasury Ladder Portfolio (NYSE: PLW). This fund follows the Ryan/Mergent 1-30 Year Treasury Laddered Index, which measures the potential returns of the U.S. Treasury yield curve based on approximately 30 equally weighted U.S. Treasury issues with fixed coupons, scheduled to mature in a proportional, annual laddered structure. If today's bond auction attracts a low level of demand, prices may take yet another hit, sending this fund down. But if the auction goes well and the recent sell-offs in Treasuries attract opportunistic buyers, the Treasury bond space could be due for a bounceback on Thursday.

Disclosure I am long PLW shares and have been for quite some time.

U.S. ETFs Leave Emerging Markets in the Dust

As emerging markets grapple with increasing economic and social problems, U.S.-focused exchange traded funds (ETFs) are seizing their moment to charge ahead.

Aside from slowly but surely improving economic numbers, there are other indications that the U.S. economy is getting on stronger footing:

* Economists see China’s decreasing trade surplus as indicative of growing middle class that may be starting to shift from saving toward greater purchases of imported goods from the U.S. and other foreign countries, reports Douglas A. McIntyre for The Atlantic. U.S. exports suffered in the recession, so a turnaround on this front is welcome.

* Meanwhile, the Wall Street Journal recently polled 51 economists about the U.S. GDP projections and reported that the economists “expect gross domestic product will be 3.5% higher in the fourth quarter of 2011 than a year earlier, up from the 3.3% increase they projected in last month’s survey. That would be the largest increase since 2003.”

* Rising consumer and business confidence, along with tax cuts and small gains in employment, could also push the economy into faster growth.

* Federal Reserve Chairman Ben Bernanke recently noted increasing “evidence that a self-sustaining recovery in consumer and business spending may be taking hold,” writes Kevin G. Hall for Miami Herald. “The recent gains in consumer
spending look to have been reasonably broad-based,” adds Bernanke.

There are still some real risks, however: unemployment is high, the real estate market continues to find its footing, inflation is a threat and consumers still aren’t spending at the levels some would like to see.

While there are a number of ways to play a U.S. economic recovery, you can’t deny the classics:

* SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA): The Dow Jones Industrial Average recently closed above 12,000 for the first time since 2008. Though the Dow (and DIA) only own 30 stocks, making it debatable as to how representative it is, it’s still one of the most closely-watched indexes in the world.

* SPDR S&P 500 ETF (NYSEArca: SPY): The S&P 500 and SPY track the 500 largest stocks in the country. It’s considered the best barometer of how the United States economy is doing.

* PowerShares QQQ Trust (NASDAQ: QQQQ): The NASDAQ is known for its large allocation to the technology sector. It also happens to be the top-performing index year-to-date, up nearly 17%.

Disclosure I am Long DIA and SPY shares. 

The Future of Build America Bond ETFs

Build America Bond issuance may surge next month, however, the Republican mid-term election gains could imperil the future of the program and its exchange traded funds (ETFs).
The Republican landslide in U.S. House elections may work against  efforts to extend the Build America Bond program. President Barack Obama’s stimulus has helped pump $158 billion into local public-works projects, so there are many who would like to see this program continue.

There could be a savior to the program coming: The Investing In American Jobs and Closing Tax Loopholes Act — HR 5893 — would extend BABs for two years. Also, the legislation would gradually reduce the subsidy rate for BABs from the current 35% level to 32% for bonds sold in 2011, and 30% for those sold in 2012. BABS come in a range of maturities, from 1-5 years on up to more than 25 years.

The prospect of expiration isn’t stopping new issues. State and local governments are accelerating debt sales to December and will more than quadruple borrowing under the program. Build America Bond issuance may surge next month to $40 billion as borrowers rush to take advantage of the expiration, reports Alexandra Harris for Bloomberg.

If the program does expire, the number of bonds available in the market could be limited and may negatively impact the value of the bonds, so be mindful of this situation if you’re holding these funds. There are two ways to get exposure to Build America Bonds with ETFs:

• PowerShares Build America Bond Portfolio (NYSEArca: BAB): Yields 5.43%
• SPDR Nuveen Barclays Capital Build America Bond (NYSEArca: BABS): Yields 5.7%

Disclosure I am Long BAB and BABS shares.

retirement landscape and things look pretty darn dire

Take a quick survey of the retirement landscape and things look pretty darn dire. According to a survey conducted by Wells Fargo last month, the average American has managed to save a meager 7 percent of the amount they’d like to have in their Golden Years. That fact alone is bad enough. But what’s worse is that I think even their “ideal” amount is WAY too low!

The average “middle class” survey respondent said they would need $300,000 to fund their retirement. Keep in mind, this is how Wells Fargo defined “middle class” …

• Ages 30 to 69: Household income between $40,000 and $100,000 or investable assets of $25,000 and $100,000
• Ages 25 to 29: Household income or investable assets between $25,000 and $100,000

If we take the median of this definition, we get a household making about $70,000 a year and with a nest egg worth $62,000 or so.

Let’s imagine there are two adults in the home, roughly 50 years old each based on this survey.
Even if they’re not carrying any serious debt, they haven’t managed to save anywhere near their targeted amount … so it’s safe to say they’re spending almost all of their annual income as it comes in.

Now, are they likely to slash their expenditures as they continue to age? And is it reasonable for them to expect health care costs, energy prices, and food bills to stay what they are today?

I’d say no to both of those questions. Yet even their magical target of a $300,000 nest egg represents just a bit more than four years of their current expenditures.

No wonder one in every three respondents also said they will have to keep working during their golden years to support themselves! I’m probably preaching to the choir here, and I’m sure you’re in much better shape than the typical American retiree-to-be. At the same time, I think it’s fair to say that there’s no such thing as being TOO prepared or having a nest egg that’s TOO big. Which is why I want to give you …

Four Simple Steps to a Richer Retirement Nest Egg, Whether You’re Already Ahead or Trying to Play Catch-Up

It doesn’t matter what age you are right now … how much you’ve already saved … or how far away from your goals you are right now. You absolutely want to make sure that you’ve got a plan in place, and that you’re sticking to it.  And the following four basic steps are a great starting point for building a better retirement nest egg without sacrificing safety …

Step #1: Before you do anything else, make sure you have a safe, liquid emergency cash fund.
 
Sure, I encourage 401(k) participants to at least contribute enough to get the maximum company match. And yes, I implore people to take maximum advantage of other tax shelters like IRAs, too.
But I don’t think anyone should be retirement rich and cash poor!

It simply doesn’t make sense to plow your money into long-term accounts like 401(k)s and IRAs if there’s a chance you may have to withdraw those same funds in short order in the event of an emergency. Not only will you likely be invested in less liquid investments but you could possibly face additional taxes and penalties, too.

So you absolutely want to make sure you have a solid emergency fund in place before you contribute another penny to your retirement nest egg.

Ideally, it will represent a full years’ worth of your current expenses or income but I would recommend three months as the bare minimum.

And even though you’ll get near-zero returns, I suggest keeping your emergency funds in a plain vanilla savings account, Treasury-only money market fund, or similar cash equivalent.
After all, the goal here is maximum safety and liquidity. You never know when you or a family member might need money due to a job loss, illness or busted water heater!

Once you have your liquid fund in place, of course, it’s time to start investing the rest of your nest egg for maximum income and growth …

Step #2: For your U.S. investments, stick mostly to conservative dividend-paying stocks right now.
I’ve said it before, but it bears repeating: With interest rates still near record lows, most bonds, CDs, and money market funds simply aren’t paying enough to warrant owning them in your long-term investment accounts.

Plus, given the fiscal mess here in this country — at the federal, state and local levels! — there is a substantial risk of further losses for many government bondholders going forward.
So if you want the biggest, safest yields here in the U.S., I continue to think conservative dividend shares represent your best option.

As I’ve pointed out time and again — these types of investments not only kick off stable, growing cash streams … they also offer you the chance for long-term investment gains, too.
And even if you don’t to go about picking individual companies, you can always own a broad swath of solid income stocks through vehicles like the PowerShares Dividend Achievers (NYSE:PFM) exchange-traded fund.

Step #3: Add some foreign dividend shares, too.

It’s no longer enough for us to invest solely in the U.S. — the world is becoming a smaller and smaller place … some economies overseas are expanding at much faster rates than those in the traditional places … and it’s getting more important to diversify your portfolio as much as possible.
This is precisely why I’ve been recommending select foreign dividend stocks even for my own father’s retirement account!

By holding the U.S.-listed shares of foreign corporations you can quickly and easily access new worlds of growth.

Better yet, because your shares (and dividends) are originally priced in foreign currencies, you have the unique opportunity to profit further whenever the U.S. dollar moves lower relative to the listing company’s home currency.

Again, there are even exchange-traded funds that will give you all-in-one-shot access to these global dividend stocks — including the S&P International Dividend ETF (NYSE:DWX).
And that brings me to a bigger point …

Step #4: Learn all you can about other alternative investments and strategies, too!
It’s important to stay on top of the latest investments that are becoming available … especially if you’re looking for unique new ways to hedge your traditional holdings or for new vehicles to use in the more aggressive part of your portfolio.

Disclosure None

Bond ETFs Are Good…If You Understand Them

If you’ve eyed the current 4.57% yield on the 30-year Treasury bond, you might be tempted to buy. But hold on: chasing yields in your exchange traded funds (ETFs) can hurt you if you’re not careful.
In hopes of getting halfway decent yields, millions of investors have gone far out on the curve. However, bonds and bond ETFs aren’t insured by the Federal Deposit Insurance Corporation (FDIC), so you’re at risk of losing principal when the Federal Reserve raises rates.

Short-term bond ETFs don’t have the most appealing yields – 3-month bonds are 0.12%; 3-year bonds are 1% – but they will be less impacted when rates jump.

Constance Gustke at Bankrate drilled down into a few of the pros and cons when it comes to bond ETFs:

• Pro: They’re liquid – you can buy and sell them anytime markets are open.
• Pro: There are so many options – any type of bond is now available in ETF form, and there’s about to be more soon: BulletShares is launching a suite of BulletShares High Yield Corporate Bond ETFs on Thursday.
• Con: You can lose money. Bonds are considered “safe” relative to other investments, but that doesn’t mean they won’t hurt you.
• Con: There’s risk. It ranges from safe (Treasuries) to super risky (junk bonds). 

Disclosure none

3 Ways to Boost Your Dividend Income

Investors can't get enough of dividend stocks. With their unique combination of capital gain potential and regular income, stocks that pay dividends have never been in greater demand.
One of the most influential groups of investors who have been turning to dividend stocks lately have been those in or near retirement. After all, retirees need their long-held investment portfolios to generate cold hard cash -- cash they can't afford to go without. With more traditional conservative investments, such as bank CDs and Treasury bonds, paying extremely low interest rates lately, retirees have had difficulty making ends meet -- and the temptation to turn to riskier investments like stocks has become increasingly difficult to resist.


The question, though, is how to earn dividend income without exposing yourself to a huge amount of risk. Although dividend ETFs don't eliminate the risk of owning stocks entirely, they do help spread out that risk -- and the different strategies they follow hold some clues that observant investors can follow on their own.

3 trails to dividend cash

You can choose from many different dividend ETFs. But the strategies each fund follows can be vastly different from others, so you need to be sure you know what you're buying before you invest. In general, you can divide the vast bulk of dividend ETFs into three broad categories. One group of ETFs, including the popular iShares Dow Jones Select Dividend ETF (NYSE: DVY), focuses on stocks that pay the highest current yields. Those stocks, which currently include tobacco maker Lorillard (NYSE: LO) and rural telecom CenturyLink (NYSE: CTL), are sometimes solid investments, but they also carry risks. Current dividend yield doesn't speak at all to future growth, and often, the market awards high dividend yields to exactly those stocks it expects to languish in declining industries without much potential.

A second group of ETFs looks beyond dividend yield, choosing stocks with a demonstrated history of rising dividends. SPDR S&P Dividend ETF (NYSE: SDY), for instance, tracks the S&P Dividend Aristocrats, a group of stocks that has made annual increases to dividend payments for at least 25 consecutive years. You'll find some overlap between this ETF and the iShares fund, but you'll also find McGraw-Hill (NYSE: MHP), whose 2.5% yield won't land it on any top-paying lists. Consistent growth, however, arguably makes these stocks more stable than their higher-yielding counterparts. Other similar ETFs, such as Vanguard Dividend Appreciation ETF (NYSE: VIG), use slightly different selection criteria to pick stocks with substantial dividends and historical payout growth.
Finally, some ETFs follow different guidelines to pick stocks. The WisdomTree Large-Cap Dividend ETF (NYSE: DLN) doesn't follow a market-cap or equal-weighted strategy for deciding the size of its respective stock positions; instead, it calculates the amount of cash each company pays in dividends and weights its portfolio accordingly.


Which should you use?

Perhaps the most obvious way to choose from among these ETFs is to look back at how each of them has performed in recent years. A quick look confirms that the high-yield strategy has resulted in a net loss for iShares investors in the past five years, while the SPDR fund has brought annual gains of around 2.6%, just edging out the S&P 500's 2% yearly average gain. The WisdomTree fund hasn't been around that long, but in the past four years, it also falls short of the SPDR's returns.
Past results, though, only tell part of the story. In my opinion, relying on stocks with a long track record of dividend consistency is simply the more conservative way to play. Yet during the financial crisis, long streaks of dividend payments from companies like General Electric and Dow Chemical came to an end, throwing investors for a loop and sending share prices plummeting. Before the crisis, banks had been among the best dividend stocks in the stock market, and so their losses had a disproportionate impact on dividend investors.


Be careful
Dividend stocks deserve a place in the portfolios of retirement savers. But you should never think they're as safe as government-insured CDs. After all, they're stocks, and stocks are risky. But to minimize your risk and try to eke out better returns, the right dividend ETF may serve you well.

 Disclosure I am long CVY,CTL,VIG,SDY and GE shares

Why Stocks Outperform Bonds

Stocks provide greater return potential than bonds, but with greater volatility along the way. You have probably heard that statement so many times that you simply accept it as a given. But have you ever stopped to ask why? Why have stocks historically produced higher returns than bonds? Why are bonds typically less volatile? Understanding the reasons behind these trends could help you become a better investor. Read on to learn more.


A Basic Example

Imagine that you are starting up a business. You are the sole owner and the only employee. It will take $2,000 to start operations and you only have $1,000, so you borrow the other $1,000 from a friend, promising to pay that friend $100 per year for the next 10 years, at which time you will repay the original $1,000 loan amount. The first year, after all expenses have been paid, including your own salary, you find that your business has earned $500. You pay your friend the $100 promised and keep the remaining $400. Your friend has earned 10% (100/1000) on his loan to you, but you have earned 40% (400/1,000) on your investment.

The next year does not go as well and after all expenses have been paid you find that the business has only earned $100. You pay that $100 to your friend, who has again experienced a 10% return. You on, the other hand, are left with a 0% return, although your two-year return is still around 20% per year. And so it goes.

With each year, you have the opportunity to earn more or less than the friend who loaned you funds. If the business becomes wildly successful, your return will be exponentially higher than your friend's; if things fall apart, you may lose everything. The loan is a contractual arrangement, so if you have to close up shop, whatever money may be left goes to your friend before it goes to you. As such, your position involves greater risk, but with the opportunity of greater return. If there was no possibility of greater return, there would be no reason for you to take the greater risk.

Expanding the Basic Example

Bonds are essentially loans, as in the example above. Investors loan funds to companies or governments in exchange for a bond that guarantees a fixed return and a promise of the return of the original loan amount, known as the principal, at some point in the future.

Stocks are, in essence, partial ownership rights in the company that entitle the shareholder to share in the earnings that may occur and accrue. Some of these earnings may be paid out immediately in the form of dividends, while the rest of the earnings will be retained. These retained earnings may be used to build a larger infrastructure, giving the company the ability to generate even greater future earnings. Other retained earnings may be held for future uses like buying back company stock or making strategic acquisitions. Regardless of the use, if the earnings continue to rise, the price of the stock will normally rise as well.

Stocks have historically delivered higher returns than bonds because, as in the simplified example above, there is a greater risk that, if the company fails, all of the stockholders' investment will be lost. On the flip side, however, there is a return to stockholders that could potentially dwarf what they could earn investing in bonds. Stock investors will judge the amount they are willing to pay for a share of stock based on the perceived risk and the expected return potential – a return potential that is driven by earnings growth. Being predominantly rational as a group, they will calibrate their investments in a manner that properly compensates them for the excess risk they are taking.

The Causes of Volatility
If a bond pays a known, fixed rate of return, what causes it to fluctuate in value? Several interrelated factors influence volatility:

Inflation and the Time Value of MoneyThe first factor is expected inflation. The lower/higher the inflation expectation, the lower/higher the return or yield bond buyers will demand. This is because of a concept known as the time value of money. The time value of money revolves around the realization that a dollar in the future will buy less than a dollar today because its value is eroded over time by inflation. To determine the value of that future dollar in today's terms, you have to discount its value back over time at some rate.
Discount Rates and Present Value

To calculate the present value of a particular bond, therefore, you must discount the future payments from the bond, both in the form of interest payments and return of principal. The higher the expected inflation, the higher the discount rate that must be used and thus the lower the present value. In addition, the farther out the payment, the longer the discount rate is applied, resulting in a lower present value. Bond payments may be fixed and known, but the constantly changing interest-rate environment subjects their payment streams to a constantly changing discount rate and thus a constantly fluctuating present value. Because the original payment stream of the bond is fixed, the changing bond price will change its current effective yield. As the bond price falls, the effective yield rises; as the bond price rises, the effective yield falls.

The discount rate used is not just a function of inflation expectations. Any risk that the bond issuer may default (fail to make interest payments or return the principal) will call for an increase in the discount rate applied, which will impact the bond's current value. Discount rates are subjective, meaning different investors will be using different rates depending on their own inflation expectations and their own risk assessment. The present value of the bond is the consensus of all these different calculations.

The return from bonds is typically fixed and known, but what is the return from stocks? In its purest form, the relevant return from stocks is known as free cash flow, but in practice the market tends to focus on reported earnings. These earnings are unknown and variable. They may grow quickly or slowly, not at all, or even shrink or go negative. To calculate the present value, you have to make a best guess as to what those future earnings will be. To make matters more difficult, these earnings do not have a fixed life. They may continue for decades and decades. To this ever-changing expected return flow, you are applying an ever-changing discount rate. Stock prices are more volatile than bond prices because calculating the present value involves two constantly changing factors - the earnings stream and the discount rate.

The Pricing Process Is (Usually) Rational
 Hopefully you now have a better understanding of why stocks and bonds behave the way they do. This knowledge should place you in a better position to make more informed investment decisions. The pricing of all the thousands and thousands of stocks and bonds is essentially rational. Market participants apply their cumulative knowledge and best estimates as to future inflation, future risks and known or unknown income streams to arrive at present-day valuations. These valuations are constantly fluctuating based on continually changing expectations. In hindsight, one can see that emotions, even in the aggregate, can cause these expectations, and thus valuations, to be incorrect. For the most part, however, they are correct based on what is known at any given point in time.

Conclusion
Bonds will always be less volatile on average than stocks because more is known and certain about their income flow. Over time, stocks should generate greater returns than bonds because there are more unknowns. More unknowns imply greater potential risk. If stocks do not return more, then investors have become truly irrational and taken needless risk with their investment dollars.

Commodity ETFs Get No Love From Investors (GLD, IAU, SGOL, SLV, SIVR, PPLT, PALL, BAL, USO, USCI, CORN, WOOD, COPX)

It doesn’t seem like that long ago that exchange-traded commodity products were the darlings of the ETF world. Praised for democratizing an entire asset class (and one capable of delivering non-correlated returns to investors at that), commodity ETFs saw billions of dollars of cash inflows in 2009. Investors rushed to get their hands on everything from copper to tin, and they embraced the transparency and liquidity that the exchange-traded structure had to offer.


Last year was a banner year for commodities, with inflationary pressures, surging demand from emerging markets, and a host of supply issues conspiring to push prices of various resources sharply higher. Corn prices surged, gold repeatedly set new record highs, and a host of other agricultural products–including sugar and soybeans–climbed sharply higher. While 2010 was a stellar year all around for investors–most major asset classes posted nice gains–commodities were clearly the star. Lists of the year’s best performing ETFs included numerous commodity products, and gains of 50% were relatively common.

Considering the white hot performances turned in, 2010 should have been another great year for commodity ETFs–especially given investors’ tendency to chase returns. And a cursory look does indeed show continued strong interest in commodity ETFs; according to data from the National Stock Exchange, long unleveraged commodity products took in close to $11 billion in inflows. But there is more (or actually, less) to that number than meets the eye. Almost all of cash inflows into commodity ETPs in 2010 were attributable to physically-backed precious metals funds:

Category	Inflows
Physical Gold ETFs	$8,064
Physical Silver ETFs	$1,389
Physical Platinum ETF	$689
Physical Palladium ETF	$599
All Other Commodity ETPs	$251
Total 2010 Inflows	$10,992
Source: NSX.com

According to the ETF Screener, there are 74 non-leveraged, non-inverse commodity ETPs. Stripping out the seven physically-backed precious metals products SPDR Gold Shares (NYSE:GLD), iShares Gold Trust (NYSE:IAU), ETFS Physical Swiss Gold Shares (NYSE:SGOL), iShares Silver Trust (NYSE:SLV), ETFS Physical Silver Shares (NYSE:SIVR), ETFS Physical Platinum Shares (NYSE:PPLT), and ETFS Physical Palladium Shares (NYSE:PALL), this group took in only about $250 million last year. January inflows showed a decent bounce back, but the lack of interest still seems a bit strange. Precious metals have obviously been on quite a hot streak, so it shouldn’t be a total surprise that assets have been flowing into these funds at a torrid pace. But gold and silver aren’t the only commodities that have posted eye-popping gains over the last year–yet they account for the lions share of inflows. The iPath Cotton ETN (NYSE:BAL) jumped more than 95% in 2010, yet took in just $17 million of new assets.

War On Contango

It seems likely that the lack of interest in certain commodity ETFs has something to do with the manner in which exposure is achieved–and perhaps not necessarily the underlying resource. The seven precious metals products highlighted above are all physically-backed, meaning that the underlying assets are physical commodities. The majority of commodity ETFs don’t invest directly in natural resources, but rather in futures contracts written on those commodities. And as investors have learned, the returns generated by a futures-based fund can be impacted not only by changes in the spot price of the underlying asset, but by the slope of the futures curve. While futures-based funds often exhibit near-perfect correlation to the spot commodity prices, there can be a significant difference between the return delivered by a futures strategy relative to a hypothetical return on spot prices. For example, the United States Oil Fund (NYSE:USO), which invests in futures contracts on light, sweet crude oil, has lagged behind a hypothetical return on spot crude oil over the last several years:




The potentially adverse impact of contango in the returns of commodity ETFs has been well documented, and it appears that the nuances of futures-based investment strategies have had a material impact on investors interest in commodity products. Exposure to spot commodity prices remains desirable, but that simply isn’t possible for many resources. The high value-to-weight ratio of gold and silver makes construction of a physically-backed fund relatively straightforward. Funds that hold barrels full of crude oil or bushels of wheat would be impossible for logistical reasons, while the costs incurred in offering physically-backed exposure to other commodities would be a deterrent as well.

But that doesn’t mean that there aren’t ways to address the issue of contango in commodity products. It is perhaps no coincidence that two of the most successful commodity products to hit the market recently were designed to tackle the contango issue. The United States Commodity Index Fund (NYSE:USCI) screens 27 potential component commodity futures based on observable price signals, including a filter to select those least likely to be impacted adversely by contango. USCI raked in more than $90 million last year (it debuted in August) and had blown away other broad-based commodity funds from a performance perspective

Another popular commodity ETF has been the Teucrium Corn Fund (NYSE:CORN), a resource-specific product designed to reduce the effects of contango and backwardation. Unlike many commodity ETFs, CORN spreads exposure across multiple maturities, allocating 35% to the second-to-expire CBOT Corn Futures Contract, 30% to the third-to-expire CBOT Corn Futures Contract, and 35% to the CBOT Corn Futures Contract expiring in the December following the expiration month of the third- to-expire contract. That results in a smaller “roll yield” that can potentially deliver returns that correspond more closely to a hypothetical investment in spot corn prices. CORN took in $35 million last year, and that success has prompted Teucrium to roll out a natural gas ETF (NAGS) that approaches exposure in a similar manner. The company also has plans for a crude oil ETF (CRUD) that should begin trading within the next month.

Multiple issuers have filed for approval of physically-backed copper ETFs, and ETF Securities has already introduced three physical metal funds (copper, tin, and nickel) on the London Stock Exchange.

Betting On Commodities–Through Stocks

Another explanation for the tepid interest in commodity ETFs may be the surge in popularity of funds focusing on commodity intensive equities. Because the profitability of companies engaged in the extraction and sale of natural resources depends on the prevailing market price, mining stocks and other companies engaged in various aspects of commodity production can provide a contango-free option for establishing exposure to natural resource prices. The 25 products in the Commodity Producers Equities ETFdb Category took in $2.5 billion in aggregate last year. While funds focusing on gold and silver miners were among the most popular, broad-based funds such as HAP and other sector-specific options such as iShares S&P Global Timber & Forestry Idx (NYSE:WOOD) (timber) and Global X Copper Miners ETF (NYSE:COPX) (copper miners) also attracted significant dollar amounts
.
Innovation Continues

Since the first generation of commodity products burst on to the scene, investors have seemingly become more critical of the manner in which exposure to natural resources in offered. Contango has become a four-letter word to those who have been burned by an upward sloping futures curve, and interest in products that offer exposure through futures contracts has waned considerably. As recent product launches and the growing pipeline show, issuers are constructing the “next generation” of commodity ETFs to avoid the issues that have plagued the current lineup. Here’s to continued innovation in the commodity ETF space, leading to better options for accessing a very attractive asset class.

Disclosure I am  IAU and SLV shares. As Well as the CFD closed end fund.

Bond ETF Revolution? State Street Plans Fundamental Fixed Income Fund

State Street, the Boston-based firm that maintains a broad-based lineup of fixed income ETFs, recently made an interesting SEC filing detailing plans for a new type of bond ETF. The proposed SPDR Barclays Capital Issuer Scored Corporate Bond ETF (CBND) would seek to replicate the performance of the Barclays Capital Issuer Scored Corporate Index, a benchmark that uses fundamental factors to determine underlying holdings.


The majority of fixed income benchmarks that serve as the basis of ETFs are cap weighted, meaning that the larger an eligible debt issue by market value, the larger the weighting within the index. But closer scrutiny on index construction and maintenance methodologies has caused some to rethink the manner in which they achieve fixed income exposure. Last year, PowerShares switched the index linked to its high yield bond ETF (PHB) to the RAFI High Yield Bond Index, a benchmark developed by Research Affiliates. That index uses a “RAFI weight” to determine eligible components and corresponding weightings; RAFI weights take into account four fundamental factors of the issuer, including book value, gross sales, gross dividends, and cash flow. As such, the methodology has a tendency to identify issuers with strong underlying fundamentals, as opposed to simply highlighting the biggest debtors .
.
The proposed fund from State Street has some similarities to the methodology behind PHB, as well as some noticeable differences. As far as the differences, the State Street ETF would focus on investment grade debt; securities eligible for inclusion in the underlying index include publicly issued U.S. dollar denominated corporate issues that are rated investment grade (Baa3/BBB- or higher) by at least two of the three major ratings agencies and have $250 million or more of par amount outstanding. And the fundamental factors used to screen debt are different as well; individual issuers in the index are weighted using three fundamental financial ratios, including return on assets, interest coverage (EBIT/Interest Expense), and current ratio al weighting has become increasingly popular in the equity space, where a handful of products from various issuers are linked to fundamentally-weighted indexes [see ProShares Launches Long/Short RAFI ETF]. But fundamental weighting has been slow to catch on in the fixed income arena; so far, PHB is the only bond ETF to embrace the RAFI methodology.

Corporate Bond Market: Heating Up

Although it seemingly took forever for companies to develop a diversified lineup of bond ETFs, it appears as if many investors are now embracing the exchange-traded structure as a means of achieving fixed income exposure. Currently, there are 21 ETPs in the Corporate Bond ETFdb Category including four that have more than one billion dollars in assets under management (in aggregate, there is well over $25 billion invested in investment grade corporate bonds ETFs, underscoring the increasing importance of this sector in the low interest rate environment).
In addition to broad market funds such as the ultra-popular LQD, more targeted products also exist, including several funds from Guggenheim that target bonds maturing in a specific year. While the space is growing increasingly crowded, there is still plenty of room for growth in the industry, especially given that the corporate bond market is worth well over $30 trillion dollars in total.
No expense ratio details were included in the filing; the average for the Corporate Bonds ETFdb Category is just 0.23%.


Disclosure I am long LQD and PHB shares

Are Preferred Share ETFs Right for You?

For an investor who seeks income streams, there are a variety of avenues when it comes to exchange traded funds (ETFs). One such way is through preferred shares, or better yet, preferred share ETFs.

Why would preferred shares being appealing?

• Right now, several preferred share ETFs are yielding around 8% or more.
• Preferred shares have guaranteed priority over common shares when it comes to dividend payments and a higher claim on the assets of a company in the event of bankruptcy, says Shefali Anand for The Wall Street Journal.
• They provide income and serve to lower portfolio risk, making them especially appealing in turbulent times.

Preferred stock is basically senior equity. In exchange for a limited claim on the company’s assets and future growth, preferred shares are entitled to a dividend preference and fixed rate of dividends. Before any dividends can be paid on the common shares, all dividends owed to the preferred stock classes must be satisfied. Owners of preferred shares also give up their voting rights.

Preferred shares lost a chunk of value since late last year, sending yields up to 20% and 30% in February and March. Now that investors are feeling more optimistic, the yields have come back down.

• iShares S&P U.S. Preferred Stock Index (PFF): up 27.7% year-to-date; 8.83% yield



• PowerShares Preferred (PGX): up 10.3% year-to-date; 9.79% yield

For more stories about ETFs, visit our ETF category.

Disclosure I am long PFF anf PGX shares.

Vanguard registers for seven bond ETFs

Vanguard today filed a registration statement with the Securities and Exchange Commission to offer seven new bond index exchange traded funds in what some industry experts believe to be a direct challenge to iShares, the dominant fixed-income ETF provider.

Three of the ETFs are expected to invest in U.S. Treasuries, three in corporate bonds and one in mortgage-backed securities, according to the filling from The Vanguard Group Inc. of Malvern, Pa.

The ETFs — planned as shares of proposed bond index funds — all come with expected expense ratios of 0.15%.

That is the same expense ratio iShares, a unit of Barclays Global Investors of San Francisco, charges for its comparable U.S. Treasury ETFs, but lower than the 0.20% it charges for comparable ETFs that invest in corporate bonds and the 0.25% it charges for its comparable mortgaged-backed ETF.

It appears as if Vanguard’s goal is to wrest “control of the exchange-traded bond fund market from Barclays’ iShares group,” Daniel Wiener, the Brooklyn, N.Y.-based chairman and chief executive of Adviser Investment Management Inc. of Newton, Mass., which manages more than $1 billion in assets, wrote in an e-mail.

Vanguard, however, has a long way to go before it can best iShares.

Vanguard offers five fixed-income ETFs with more than $8 billion in assets, while iShares offers 27 bond ETFs with total assets of more than $63 billion, according to Morningstar Inc. of Chicago.

But by pricing its bond ETFs lower than iShares – at least with regards to corporate and mortgaged-backed funds — it’s off to a good start, according to industry experts.

“I think cost is going to be at the top of investors’ minds,” he said.

Otherwise, there isn’t anything unique about the proposed Vanguard ETFs.

The proposed funds will be pegged to Barclays Capital indexes, formerly Lehman Capital indexes.

Barclays acquired the indexes, developed by Lehman Brothers Holdings Inc., following the New York investment bank’s Sept. 15 filing for Chapter 11 bankruptcy protection.

Vanguard, however, believes its proposed ETFs will offer investors something different.

For example, comparable iShares ETFs track credit indexes, rather than corporate indexes.

Credit indexes include exposure to bonds issued by “supranationals” —institutions established and controlled by their sovereign government — which tend to be AAA bonds with lower yields, said Rebecca Cohen, a spokeswoman at Vanguard.

For its part, Vanguard said expanding its bond offerings makes sense given the firm’s expertise.

“Vanguard has a quarter-century of experience in bond index management, and expanding our range of funds is a logical extension of our capabilities,” Bill McNabb, president and chief executive of Vanguard, said in a statement. “Financial advisers and institutions want to construct broadly diversified fixed income portfolios, while retaining the ability to emphasize particular sectors or durations. Working in concert, our broad-based bond index funds and these new, more targeted funds can help to achieve this goal.”

But at least one financial adviser speculated there might be another motive for Vanguard.

“ETFs are going to find their way to 401(k) plans perhaps more rapidly than we believe,” William Koehler, chief investment officer of ETF Portfolio Solutions Inc., a Leawood, Kan., firm with $50 million under management.

Barclays launched the “iShares in 401(k)” program in May to help financial advisers use ETFs as investment options within 401(k) retirement plans.

Vanguard may sense that it needs to increase the number of bond ETFs it offers if it wants to market its ETFs in the retirement space, Mr. Koehler said.

Expanding its bond ETF lineup, however, has nothing to do with an attempt by Vanguard to get ETFs into retirement plans, Ms. Cohen said.

In some cases, it wouldn’t be appropriate for retirement plans to use the ETFs, given that institutional shares of the proposed funds are cheaper with an expense ratio of 0.09%, and available to companies and organizations with account balances of $5 million or more, she said.

Disclosure NONE

5 Market Vectors Municpial Bond Etf Announces Monthly Distributions

The Market Vectors ETF Trust announced regular monthly distributions today for five Muni Bond ETFs within the Market Vectors Family of Municipal Bond ETFs.

The following dates apply to today’s distribution declarations:

Ex-Date				Record Date				Payable Date
July 1, 2009				July 6, 2009				July 8, 2009

				Distribution		Distribution Amount
FUND		Ticker		Frequency		Per Share
Market Vectors
Intermediate Municipal Index ETF		ITM		Monthly		$0.0670
Market Vectors
Long Municipal Index ETF		MLN		Monthly		$0.0750
Market Vectors
Short Municipal Index ETF		SMB		Monthly		$0.0340
Market Vectors
High-Yield Municipal Index ETF		HYD		Monthly		$0.1550
Market Vectors
Pre-Refunded Municipal Index ETF		PRB		Monthly		$0.0260

The majority, and possibly all, of this distribution will be paid out of net investment income earned by the Fund. A portion of this distribution may come from net short-term realized capital gains or return of capital.

*Currently, five ETFs (Market Vectors Intermediate Municipal Index ETF, Market Vectors Long Municipal Index ETF, Market Vectors Short Municipal Index ETF, Market Vectors High-Yield Municipal Index ETF and Market Vectors Pre-Refunded Municipal Index ETF) are being offered to the public.

The amount of dividends paid by each fund may vary from time to time. Past amounts of dividends are no guarantee of future dividend payment amounts.

Van Eck does not provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Shareholders or potential shareholders of the Market Vectors ETFs should obtain their own independent tax advice based on their particular circumstances.

For more complete information about the Market Vectors ETFs, contact your investment representative and request a prospectus or visit www.vaneck.com/etf. Please consider a Fund’s objectives, risks and charges and expenses, and read the prospectus carefully before investing. The prospectus contains this and other information about the Fund.

Disclosure I am Long HYD in my Bond/Fixed Income Folio

WisdomTree Dreyfus Emerging Currency Fund(CEW)

ACCESS 11 EMERGING MARKET CURRENCIES IN 1 ETF

The Emerging Currency Fund (CEW) is an actively managed exchange-traded
fund that seeks to provide the investor with a liquid, broad-based exposure
to money market rates and currency movements within emerging market
countries. Although the Fund invests in very short-term instruments, the Fund
is not a money market fund, and it is not the objective to maintain a constant
share price.

Constituent Currencies At Launch

LATIN AMERICA

* Mexican Peso
* Brazilian Real
* Chilean Peso

EUROPE, MIDDLE EAST and AFRICA

* South African Rand
* Polish Zloty
* Israeli Shekel
* Turkish New Lira

ASIA

* Chinese Yuan
* South Korean Won
* Taiwanese Dollar
* Indian Rupee

What investment attributes should this exposure to emerging money
market rates and currency movements offer investors?

Small allocations to broad-based currency baskets generally have provided
diversification benefits when incorporated into traditional core bond and
equity portfolios. Strategically combining currencies into a basket tempers
a substantial portion of the volatility inherent with investments in individual
currencies, while offering low correlations with core holdings in U.S. bonds and
stocks. Additionally, the investor has the potential to be rewarded for assuming
emerging market risk through potentially higher yields than similar maturity
instruments from developed markets.

What is the basic investment approach of the Fund?

The Fund invests in instruments designed to provide exposure to money market
rates in emerging market countries. A basket of 8 to 12 currencies is selected for
the Fund on an annual basis, and the Fund’s assets are invested in equal portions
to achieve exposure to these currencies. The currency exposures are then reset
quarterly to maintain this equal weighting. The Fund utilizes investments in
high-quality U.S. money market investments and forward currency contracts
to achieve a risk-return exposure that is economically similar to money market
instruments denominated in the specified emerging currencies. The Fund thus
combines a relatively passive approach to currency selection and weighting
with active investment selection of the underlying investments.

How are the constituent currencies selected for the Emerging Currency Fund?

Developing a liquid and representative proxy for the emerging markets was the goal in selecting the countries for inclusion in the fund. The management team first assesses the foreign exchange market and separates tradable currencies into three categories: developed, developing/emerging and frontier. With a few exceptions, these classifications will resemble similar classifications in equity and fixed income markets.

Within the developing/emerging classification, currencies are analyzed in terms of liquidity and regional and economic diversification. Several sources are consulted to assess the liquidity of the currencies, and only those currencies deemed to have sufficient liquidity are eligible for inclusion in the basket.

Disclosure I am long CEW in my forex Folio(my only forex play at this time).

Gold, Oil and Monthly Fixed Income? They're All in This CEF (GGN)

My favorite play in the commodities world is no other than the.......That position is the closed-end Gabelli Global Gold, Natural Resources & Income Trust (GGN.)

I have been buying GGN each and every chance I get, at the appropriate entry points in the endless profit machine called the energy cycle, the ADRs of Petroleos Brasileiro SA (PBR), Imperial Oil (IMO -- really a better play on natural gas,) Devon Energy (DVN), and Murphy Oil (MUR) Those, coincidentally, are the largest energy holdings of GGN, along with lesser positions in other old favorites of ours like Chesapeake Energy (CHK), Conoco Phillips (COP), Marathon (MRO), Transocean (RIG) and a whole bunch more. As of the end of March, the fund's most recent quarterly holdings report, those energy and energy service firms comprised 24% of GGN’s portfolio.

Comprising 52% of the remainder are some of our favorites in the metals and mining business. GGN’s largest holdings include Agnico-Eagle (AEM), AngloGold Ashanti (AU), Barrick (ABX), Gold Fields (GFI), Goldcorp (GG), Harmony Gold (HMY), Kinross (KGC), Lihir (LGL), Newmont (NEM), and Yamana (AUY) – as well as lots of others familiar to regular readers.

Add about 10% in T-Bills, 10% in corporate bonds in mining and energy firms, and a smattering of convertibles, and that brings us to nearly 100% of their holdings. But none of that accounts for their outsize dividend payout of 11.92%. That monthly dividend comes from writing calls against many of their positions.

Now if you are an unabashed bull on gold and energy and believe both will move in concert to the upside with nary a pause for breath, you will not want to buy GGN. Many of their written calls will be exercised and the stocks called away before they could participate in such a stampede.

I am reminded of the story you may have heard of the old bull and the young bull walking in the south 40 and sighting a herd of cows grazing in the valley below. “Let’s run on down there and pick one out!” says the young bull. “Son,” says the old bull, “let’s walk on down there and pick them all.”

Fund Info:

The primary investment objective of the Fund is to provide a high level of current income and secondary objective is to seek capital appreciation consistent with the strategy of the fund and the primary objective of the fund. The Fund will attempt to achieve its objectives by investing at least 80% of its assets in equity securities of companies principally engaged in gold and natural resources industries. The Fund may invest at least 25% of its assets in the equity securities of companies principally engaged in the exploration, mining, fabrication, processing and distribution or trading of gold or the financing managing controlling or operating of companies engaged in gold-related activities.

Currently trading at a 8.37% Premium to the nav. With a 12.01% Monthly Dividend. Currently 0.14 cents per month paid since jan 1st of 2007. Expense ration a tad high at 1.69%, but hard to find a paying commodity fund to replace this one with this diversification.

Disclosure I am long GGN shares in my Commodities Folio.

Closed-end funds offer MASSIVE PROFIT opportunities

Investors looking for higher yields in today's low interest rate market might consider closed-end funds, said Marc Rappaport, senior managing director of Alpine Woods Capital Investors LLC, especially those that offer unique strategies that fare better when executed in a closed pool/architecture/framework.

Even though closed-end funds have been around for more than 100 years -- since 1893, according to the Closed-End Fund Association, more than 30 years before the first U.S. mutual fund appeared on the scene -- the average investor is not familiar with them.

Mutual funds are open-end, which means they offer to sell their shares to investors on a continuous basis, and to buy them back, or redeem, when shareholders want to reduce or liquidate their holdings.

Closed-end funds are not offered continuously. They are offered to the public in a manner similar to a stock offering -- through an initial public offering; of course, additional shares can be sold to investors in subsequent offerings. A closed-end fund shareholder cannot present a redemption request to the fund; instead, he has to sell his shares in the market like he would sell a stock.

As a result, the investment manager of a closed-end fund has a distinct advantage over a mutual fund manager.

The closed-end manager works with a fixed pool of capital. In contrast, a mutual fund manager has to react to inflows of cash, when shareholders buy shares, and outflows, when shareholders redeem their shares.

Cash flows can and do affect the manager's decisions over when and what to buy and sell for the portfolio.

"In a time of heightened investor fear, mutual fund redemptions rise and managers are forced to sell portfolio holdings when the managers would rather do just the opposite," Rappaport said.

In contrast, the closed-end fund manager has the advantage of buying and selling based on his convictions, rather than cash flow management. Theoretically, his performance should reflect this management edge.

If you're used to investing in mutual funds, you won't be able to apply the same selection criteria to closed-end funds. There are some major differences.

First, be aware that there are two sets of share prices.

One is net asset value, which is the end-of-day value of all the holdings of the fund, less expenses. Open-end funds and closed-end funds calculate NAV the same way.

The other is market price or market value. Shareholders buy and sell shares of closed-end funds in the stock market throughout the trading day.

Since no one is interposed between the shareholder and the fund -- in contrast to exchange traded mutual funds -- the price at which the closed-end fund trades is set by supply and demand, in the same way that a stock's price is determined. More buyers bid up the price; more sellers drive down the price.

Because of that dynamic, investors buy shares at or below or above net asset value. Remember that net asset value is the underlying value of all the holdings in the fund, representing the value of the fund if it were liquidated or liquidation value.

That means that investors who buy funds at a price below net asset value are buying at a discount.

Now, here's the interesting point for income investors.

If you buy a dividend-paying closed-end fund at a discount from net asset value, your yield will be higher than the fund's yield.

Let me give you an example:

Consider a closed-end fund with a net asset value per share of $10 that you bought for $10 and that the net asset value per share and market price both remained $10 for a year. In real life, the net asset value and market price will fluctuate. Assume that the fund paid a monthly dividend that totaled 30 cents per year for a 3 percent annual dividend yield.

Now assume that you were able to buy the same fund for only $8 a share. You would still receive your 30 cent per share dividend. But your yield would not be 3 percent -- it would be higher, reflecting the lower price you paid for the shares -- in this case, 3.75 percent.

Here's the math: You paid $8 a share for a fund whose net asset value is $10 a share. Your dividend was 30 cents. Thirty cents divided by 8 equals 3.75 percent, which is your annualized distribution yield. The annualized dividend yield reflects the price at which you bought the shares; the yield at net asset value is referred to as the dividend yield.

(Be alert to the fact that some closed-end funds' distributions may also include return of capital, meaning some of YOUR principal may be paid out as part of the distribution -- a subject we'll discuss next week).

On the other hand, if you paid more than net asset value when you bought shares, your annualized distribution yield would be less than 3 percent. If you paid $12 a share, for example, your yield would be only 2.5 percent. Thirty cents divided by 12.

In today's market, you can find funds to buy at discounts as high as 70 percent, turning that same hypothetical 30-cent dividend in my example into a 10 percent yield to the investor -- not to suggest that a prudent investor would buy such as fund solely based on the discount, but you get the idea.

Nonetheless, you can't deny that yield advantages are plentiful for income-conscious investors who buy well-selected closed-end funds at a discount.

Disclosure I am long 10 different Closed End funds

Nuveen Closed-End Funds Declare Monthly Distributions

Distributions Increase for 80 Municipal Closed-End Funds

Nuveen Investments, a leading global provider of investment services to institutions and high-net-worth investors, today announced that 106 Nuveen closed-end funds had declared regular monthly distributions. These funds represent a broad range of tax-exempt, taxable fixed and floating rate income investment strategies for investors seeking to build sophisticated and diversified long-term investment portfolios for cash flow. The funds' monthly distributions are listed below.

Monthly distributions from Nuveen's municipal closed-end funds and portfolios are generally exempt from regular Federal income taxes, and monthly distributions of single-state municipal funds and portfolios are also exempt from state and, in some cases, local income taxes for in-state residents. Unless otherwise stated in the funds' objectives, monthly distributions of the municipal funds and portfolios may be subject to the Federal Alternative Minimum Tax for some shareholders.

Nuveen funds generally seek to pay stable distributions at rates that reflect each fund's past results and projected future performance. During certain periods, each fund may pay distributions at a rate that may be more or less than the amount of net investment income actually earned by the fund during the period. If a fund cumulatively earned more than it has paid in distributions, it holds the excess in reserve as undistributed net investment income (UNII) as part of the fund's net asset value (NAV). Conversely, if a fund has cumulatively paid distributions in excess of its earnings, the excess constitutes negative UNII that is likewise reflected in the fund's NAV. Each fund will, over time, pay all of its net investment income as distributions to shareholders. The funds' positive or negative UNII balances are disclosed from time to time in their periodic shareholder reports, and are also on www.nuveen.com/cef.

JFP, the Nuveen Tax-Advantaged Floating Rate Fund, has implemented a managed distribution policy which permits it to include as part of its monthly distributions supplemental amounts from sources other than net investment income. This fund currently expects that any supplemental amounts would represent anticipated portfolio price appreciation over time once financial market conditions stabilize and prospects begin to improve for the middle market financial companies in which the fund primarily invests. Because the timing and extent of any such recovery is presently difficult to assess in light of continued market volatility and the negative effects on financial companies of the on-going credit crisis, the fund's latest monthly distribution is estimated to contain only net investment income and does not include any supplemental amounts.

Because a managed distribution program permits regular distributions from sources other than net investment income, it is important to understand the components of a managed distribution and the fund's NAV performance relative to its distribution rate. JFP posts information and estimates on www.nuveen.com/cef regarding the sources of distributions and total return performance over various time periods. In addition, at least in any month in which fund distributions include supplemental amounts from sources other than net investment income, the fund will also send this information directly to shareholders. Estimates are for informational purposes only, and the final determination of the source and tax characteristics of all distributions paid in 2009 will be made in early 2010 and reported to shareholders on Form 1099-DIV at that time.

In addition, distributions for certain funds investing in real estate investment trusts (REITs) may later be characterized as capital gains and/or a return of capital, depending on the character of the dividends reported to each fund after year-end by REIT securities held by each fund. The Nuveen preferred securities funds, JTP, JPS and JHP may invest in REITs; a list of funds that are likely to be affected by re-characterization is posted to www.nuveen.com each January, and updated tax characteristics are posted to the web site and mailed to shareholders via form 1099-DIV during the first quarter of the year.

The following dates apply to today's distribution declarations:

Record Date        May 15, 2009
Ex-Dividend Date   May 13, 2009
Payable Date       June 1, 2009

                                        Monthly Tax-Free Distribution Per Share
                                                      Change From
                                       Amount         Previous Month
Ticker  Closed-End Portfolios
NXP     Select Portfolio                $.0570         -
NXQ     Select Portfolio 2              .0555          -
NXR     Select Portfolio 3              .0535          -
NXC     CA Select Portfolio             .0555          -
NXN     NY Select Portfolio             .0510          -
       Closed-End Funds
       Non-Leveraged Funds
NUV     Municipal Value                 .0390          -
NUW     Municipal Value 2               .0750          -
NCA     CA Municipal Value              .0380          -
NNY     NY Municipal Value              .0355          -
NMI     Municipal Income                .0445          -
NIM     Select Maturities               .0350          -
       Leveraged Funds
       National
NPI     Premium Income                  .0680          .0060
NPP     Performance Plus                .0680          .0035
NMA     Advantage                       .0715          .0035
NMO     Market Opportunity              .0690          .0045
NQM     Investment Quality              .0635          .0010
NQI     Insured Quality                 .0625          .0010
NQS     Select Quality                  .0740          .0070
NQU     Quality Income                  .0685          .0035
NIO     Insured Opportunity             .0605          .0015
NPF     Premier                         .0630          .0040
NIF     Premier Insured                 .0635          .0035
NPM     Premium Income 2                .0690          .0055
NPT     Premium Income 4                .0615          .0040
NPX     Insured Premium 2               .0595          .0080
NAD     Dividend Advantage              .0715          .0060
NXZ     Dividend Advantage 2            .0730          -
NZF     Dividend Advantage 3            .0735          .0055
NVG     Insured Dividend Advantage      .0645          .0045
NEA     Insured Tax-Free Advantage      .0620          .0030
NMZ     High Income Opportunity Fund    .0835          -
NMD     High Income Opportunity Fund 2  .0800          -
       California
NCP     Performance Plus                .0655          .0055
NCO     Market Opportunity              .0675          .0060
NQC     Investment Quality              .0685          .0065
NVC     Select Quality                  .0710          .0055
NUC     Quality Income                  .0735          .0080
NPC     Insured Premium Income          .0615          .0010
NCL     Insured Premium Income 2        .0650          .0070
NCU     Premium Income                  .0570          .0015
NAC     Dividend Advantage              .0665          .0035
NVX     Dividend Advantage 2            .0695          .0035
NZH     Dividend Advantage 3            .0675          .0035
NKL     Insured Dividend Advantage      .0695          .0060
NKX     Insured Tax-Free Advantage      .0630          .0040
       Florida
NQF     Investment Quality              .0610          .0020
NUF     Quality Income                  .0550          .0010
NFL  Insured Premium Income         .0575         .0020
NWF  Insured Tax-Free Advantage     .0540         .0010
    New York
NNP  Performance Plus               .0645         .0050
NQN  Investment Quality             .0615         .0055
NVN  Select Quality                 .0595         .0050
NUN  Quality Income                 .0590         .0050
NNF  Insured Premium Income         .0550         .0045
NAN  Dividend Advantage             .0635         .0045
NXK  Dividend Advantage 2           .0645         .0065
NKO  Insured Dividend Advantage     .0620         .0070
NRK  Insured Tax-Free Advantage     .0545         -
    Other State Funds
NAZ  AZ Premium Income              .0540         .0010
NFZ  AZ Dividend Advantage          .0525         -
NKR  AZ Dividend Advantage 2        .0585         -
NXE  AZ Dividend Advantage 3        .0545         -
NTC  CT Premium Income              .0535         .0035
NFC  CT Dividend Advantage          .0570         .0015
NGK  CT Dividend Advantage 2        .0590         .0040
NGO  CT Dividend Advantage 3        .0510         .0010
NPG  GA Premium Income              .0525         .0010
NZX  GA Dividend Advantage          .0560         .0010
NKG  GA Dividend Advantage 2        .0530         -
NMY  MD Premium Income              .0580         .0020
NFM  MD Dividend Advantage          .0600         .0015
NZR  MD Dividend Advantage 2        .0600         .0015
NWI  MD Dividend Advantage 3        .0580         .0045
NMT  MA Premium Income              .0610         .0055
NMB  MA Dividend Advantage          .0600         .0020
NGX  Insured MA Tax-Free Advantage  .0565         .0010
NUM  MI Quality Income              .0585         .0030
NMP  MI Premium Income              .0565         .0035
NZW  MI Dividend Advantage          .0565         .0010
NOM  MO Premium Income              .0545         -
NQJ  NJ Investment Quality          .0600         .0055
NNJ  NJ Premium Income              .0580         .0065
NXJ  NJ Dividend Advantage          .0590         .0040
NUJ  NJ Dividend Advantage 2        .0620         .0045
NNC  NC Premium Income              .0550         .0045
NRB  NC Dividend Advantage          .0620         .0020
NNO  NC Dividend Advantage 2        .0585         .0020
NII  NC Dividend Advantage 3        .0565         .0010
NUO  OH Quality Income              .0645         .0070
NXI  OH Dividend Advantage          .0620         .0050
NBJ  OH Dividend Advantage 2        .0580         .0035
NVJ  OH Dividend Advantage 3        .0635         .0045
NQP  PA Investment Quality          .0630         .0045
NPY  PA Premium Income 2            .0590         .0025
NXM  PA Dividend Advantage          .0610         .0025
NVY  PA Dividend Advantage 2        .0635         .0030
NTX  TX Quality Income              .0620         .0040
NPV  VA Premium Income              .0605         .0050
NGB  VA Dividend Advantage          .0620         .0045
NNB  VA Dividend Advantage 2        .0620         .0025
                                   Monthly Taxable Distribution Per Share
                                                 Change From
       Closed-End Funds:                      Amount  Previous Month
Ticker  Taxable Funds
       Preferred Securities
JTP     Quality Preferred Income Fund          .0520   -
JPS     Quality Preferred Income Fund 2        .0620   -
JHP     Quality Preferred Income Fund 3        .0540   -
       Floating Rate: Corporate Loans
NSL     Senior Income Fund                     .0335   -
JFR     Floating Rate Income Fund              .0410   -
JRO     Floating Rate Income Opportunity Fund  .0500   -
       Floating Rate: Tax Advantaged
JFP     Tax-Advantaged Floating Rate Fund      .0345*  -

* This represents a managed distribution amount. A description of the fund's managed distribution program appears in the text preceding the tables.

Nuveen Investments provides high quality investment services designed to help secure the long-term goals of institutions and high net worth investors as well as the consultants and financial advisors who serve them. Nuveen Investments markets its growing range of specialized investment solutions under the high-quality brands of HydePark, NWQ, Nuveen, Santa Barbara, Symphony, Tradewinds and Winslow Capital. In total, the Company managed $119 billion of assets on December 31, 2008. For more information, please visit the Nuveen Investments website at www.nuveen.com.

Disclosure None