In Bull Markets, Utility ETFs Still Have Benefits

Although the stock market has come back strong, you’ve still got good reason to think about utility exchange traded funds (ETFs) and the benefits they can offer any portfolio.

The electric utilities sector holds many dividend plays that will help cushion a growth portfolio from its occasional dips, writes YCharts for iStockAnalyst. As the the market makes gains, investors pull money out of utilities for riskier plays, which has left many utilities undervalued.

• Utilities are safe, no-surprise plays. These companies used to operate as government-endorsed monopolies that control the whole chain of production through distribution. Now, deregulated electric utilities are competing for customers, and many operate in non-regulated businesses, like trading energy futures or building power plants on speculation. As a result, utilities may cut their dividends since earnings didn’t meet expectations.
• For the investors who are still looking to utilities, a company’s willingness and ability to consistently payout dividends are among the top draws.
• Utility ETFs are experiencing an influx in interest from boomers as they make the transition to fixed-income investments for their retirements, according to the Wall St. Cheat Sheet. Rising energy consumption and a stronger economy also adds strength to the utilities sector.

The Wall St. Cheat Sheet provides a couple of utility ETFs to keep an eye on:

• Utilities Select Sector SPDR Fund (NYSEArca: XLU). XLU is highly liquid and a good way to diversify into U.S. utilities. It also boasts a 4.7% dividend.
• iShares S&P Global Utilities Sector Index Fund (NYSEArca: JXI). JXI is a global utilities play. Though not as liquid, the fund could better be served as a long-term play. It has a respectable 2.95% dividend.
• First Trust NASDAQ Smart Grid Infrastructure (NASDAQ: GRID). GRID provides exposure to the clean-energy utilities plays. It should be noted that the fund does trade at a rather low volume.

If you want to play bullish or bearish sentiment toward the sector, two options for that are:

• ProShares Ultra Utilities Fund (NYSEArca: UPW). UPW is a leveraged 2x daily bull, maximizing the daily moves of the underlying index.
• ProShares UltraShort Utilities Fund (NYSEArca: SDP). SDP is a leveraged 2x daily bear, a good way to play the sector if it falters short- or long-term.

For more information on the utilities sector, visit our utilities category.

Disclosure I am long XLU shares.

Inflation Fears Weigh On ETFs, GLD,UUP,VGK,FXI

Exchange traded funds (ETFs) turned flat on Friday as investors reacted to fresh monetary tightening in China ahead of an eagerly-awaited Group of 20 finance meeting in Paris.

• After high-profile pledges to shake up the world monetary system and address the roots of the financial crisis, France has set seemingly modest goals for the two-day meeting of Group of 20 finance ministers and central bankers that begins Friday, economists said. The technical focus of the meeting, the first since France last month took over the year-long rotating presidencies of both the Group of Eight industrialized nations and the G20 in January, belies rising tensions over the issue of global imbalances and currency issues, economists said. The PowerShares DB U.S. Dollar Index Bullish ETF (NYSEArca: UUP) is flat in early trading.

• European stock markets edged lower Friday, with mining stocks under pressure after further tightening measures from China and bank stocks hit by profit-taking after recent gains. Joshua Raymond, market strategist at City Index, said the sector’s drop accelerated after China raised its reserve-requirement ratio, the second increase this year. “Whenever we’ve seen a move by China in their new tightening regime, there’s generally been a knee-jerk reaction in markets,” Raymond said. The Vanguard European ETF (NYSEArca: VGK) is flat in early trading.

• China ordered its banks Friday to hold back more money as reserves in a new move to curb lending and cool a spike in inflation. Beijing is using a series of repeated, gradual hikes in interest rates and reserve levels to stanch a flood of lending that helped China rebound quickly from the global crisis but now is fueling pressure for prices to rise. Inflation is politically dangerous for China’s communist leaders because it erodes economic gains on which they base their claim to power. Poor families are hit hardest in a society where some spend up to half their incomes on food and millions have seen little benefit from three decades of economic reform. The iShares FTSE/Xinhua China 25 (NYSEArca: FXI) is up modestly at the open.

• It’s a good day for metals. Gold rose and silver moved to a 30-year high, while palladium jumped to the highest price in almost 10 years on demand for precious metals to hedge against declines in other assets because of unrest in the Middle East. Gold bar and coin demand in the Middle East jumped 39% in the fourth quarter from a year earlier, according to World Gold Council figures released yesterday. “If you see violence, you would buy gold expecting that the domestics would buy gold,” said Peter Fertig, owner of Quantitative Commodity Research Ltd. in Hainburg, Germany. The SPDR Gold Shares ETF (NYSEArca: GLD) is trading flat on Friday.

Disclosure NONE. 

5 Areas We’ll Feel Inflation; 5 ETFs to Fight Back

If you’ve been living on the cheap, that could soon change as inflation becomes an increasingly real prospect. Life could get more expensive, but you can use these exchange traded funds (ETFs) to keep it from becoming unbearably so.

When we see inflation, it will hit across the board, but some areas will feel it more than others. According to Economic Policy Journal, those areas are:

1. The Grocery Store: The USDA forecasts a 2% to 3% hike in the cost of all foods in 2011…Expect a big spike in the dairy case and meat counter, where pork alone is forecast to rise between 3% and 4%. [Play Food Price Shock With 4 ETFs.] PowerShares DB Agriculture (NYSEArca: DBA)

2. Gas and Natural Gas: Gas prices are on the rise, and that’s both the kind you use to fuel your car and the kind you use to heat your home in frigid winters. This is one area that could get more expensive even in the absence of inflation. United States Gasoline (NYSEArca: UGA)

3. Health Insurance and Medical Costs: Blue Shield in California said it was going to raise premiums by almost 60% and they’re not the only ones hiking rates big-time. iShares Dow Jones U.S. Healthcare Provider (NYSEArca: IHF)

4. Cotton Clothing: Cotton prices are on the upswing and you may already be feeling it. Cotton is now 80% more expensive than it was at the start of 2010 and many manufacturers are starting to pay it forward. iPath Dow Jones-AIG Cotton Total Return Sub-Index ETN (NYSEArca: BAL)

5. Banking: Checking fees, ATM fees, safety deposit box fees, talking to a teller fees. Some charge you even just to look at checks. Bank stocks, however, don’t look like they’re getting cheaper. SPDR KBW Bank (NYSEArca: KBE)

Disclosure None

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

Bottom Line: Stick With The Juniors In Gold ETFs (GDX, GDXJ, GLD)

In covering the gold sector for my premium subscribers, I have  noticed something lately. The large-caps really suck! Ok, that is harsh  but it is the truth.


In the chart below I show the large-cap indices. What do you see?




The Dow Jones Precious Metals Index hasn’t gone anywhere for five  years, while Gold has m
ore than doubled. The next two the XAU and the  Market Vectors Gold Miners ETF (NYSE:GDX) are trading right at their  2008 peaks. Since then, I quickly calculate that Gold and Silver are  higher by about 33%.

We all know that the Market Vectors Junior Gold Miners ETF  (NYSE:GDXJ) outperformed GDX in 2010. It wasn’t close and even during  this correction GDXJ is holding up better.
Yet, GDXJ is weighted heavily in some companies that are above $1  Billion in market cap. Where is the “junior” in that? I created my own  index of 25 gold stocks, which are equally weighted and range mostly  from $200-$700 million in market cap.

My junior index against the HUI (GDX follows the HUI) is moving  higher after an 8-year breakout. This chart tells us that the juniors  should outperform strongly in 2011 and likely 2012.



We’ve written about this before but it bears hearing again.

Too often we hear about how gold stocks are cheap and how they are  priced for $1000 Gold or $800 Gold. Just because the HUI/Gold or  XAU/Gold ratio is low doesn’t mean the sector is at a bottom. The  reality is that large gold stocks have consistently underperformed Gold  over time. Take a look at this piece from Steve Saville and his chart which goes back to 1960.

Steve attributes the poor performance to rising costs, management  errors, environmental and political factors but most importantly,  depletion. Just to stay in business gold companies have to consistently  find new deposits, mine those deposits and add to reserves. The larger a  company is, the more difficult it is to do these things. A junior  company can grow by building a few small mines. A large-cap needs to  find huge deposits that can become huge mines. It is simply a more  difficult business for the larger sized companies.

It is critical that investors and speculators take note of all these  factors before partaking in the sector. I fear that the new entrants in  the sector will think they are safe by buying Newmont or Barrick. They  may be less volatile, but history argues you are better off holding Gold  or Silver.

Sure the juniors have already had a fantastic run, but our chart  argues that it may be even better in the next few years. As the bull  market rages on, the herd will naturally become more speculative. The  large players have begun to resort to takeovers and acquisitions. This  will continue and further catalyze the junior sector.  Related ETF: SPDR  Gold Shares ETF (NYSE:GLD)

Disclosure I am long IAU and SLV shares.

ETF To Watch: Silver Miners ETF (SIL)

2010 was a kind year to mining companies as the prices for their main outputs soared, outpacing gains for the overall market. However, as the calendar turned to 2011 investors began to quickly abandon their bets on the precious metal industry leading to a huge sell-off in a number of key mining names. This trend was especially pronounced in the the silver market where the white metal led on the upside but also was one of the biggest decliners to start the year.



However, the silver market has managed to balance out over the last few weeks posting strong gains thanks to rising inflation fears as well as geopolitical concerns across much of the Middle East. Thanks to this uncertainty, investors in the sector should be paying especially close attention to one of the key companies in the industry, Pan American Silver Corp (PAAS).

PAAS, the Vancouver, Canada-based silver mining giant was scheduled to report its Q4 results after the bell on Tuesday and it also looks to host a conference call during market hours today to discuss the results. Although results were not disclosed at the time of writing, analysts expect the company to post earnings of 46 cents a share, a 15 cent increase from the year ago period, reflecting the rapid increase in the price of silver since the company reported its Q4 2009 numbers


Thanks to this key earnings report from one of the biggest pure silver miners in the world, we have decided to make the Silver Miners ETF (SIL) today’s ETF to watch. The fund tracks the Solactive Global Silver Miners Index which is designed to reflect the performance of the silver mining industry. It is comprised of common stocks, ADRs and GDRs of selected companies globally that are actively engaged in some aspect of the silver mining industry such as silver mining, refining or exploration.

In addition to its 10% weighting in PAAS, the fund also gives high weightings to Industrias Pensoles SAB, Silver Wheaton, and Fresnillio, three other companies that make up at least 10% of SIL’s total assets. Over the past 52 weeks, SIL has surged by a remarkable 65.7% including a 64% gain over the past half year period. However, the fund has lost close to 10% in 2011 but it has posted a solid February, gaining 8.1% back in just two weeks. Should PAAS deliver with solid results and an optimistic outlook, the February run could easily continue into this week as well. If, however, PAAS is unable to match Street expectations, the Canadian company– as well as the broad silver mining industry– could see a quick return to the January 2011 environment in which precious metal miners were under significant pressure.



 Disclosure I am Long SIL 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.

Build America Bond ETFs May Get a Second Chance

The popular Build America Bonds program may get a second chance at life if President Obama’s budget passes in its current incarnation.

The budget not only calls for the program to be revived, but it wants to make the program permanent. Last year, however, Republicans blocked efforts to extend the program and it could meet with similar resistance this time, says Bloomberg.

Since the program’s end, Build America Bond ETFs got caught up in a selloff and performance suffered. PIMCO Build America Bond Strategy (NYSEArca: BABZ), PowerShares Build America Bond Portfolio (NYSEArca: BAB) and SPDR Nuveen Barclays Capital Build America Bond (NYSEArca: BABS) have all lost between 1.5% and 2% in the last month.
Municipal bond ETFs reacted nicely to the news late last week when another bill to restore the Build America Bonds program was introduced. The iShares S&P National AMT-Free Municipal Bond ETF (NYSEArca: MUB) and the iShares Barclays 20+ Year Treasury Bond ETF (NYSEArca: TLT) were both up last week by 2.3% and 0.7% respectively on the news.

Randall Forsyth for Barrons reports that the bill is the brainchild of Rep. Gerald Connolly, D-Va. His bill proposes to extend the BABs program through 2012 at subsidy rates of 32% in 2011 and 31% in 2012. The ending of the BABs program was a big reason for the large sell-off  in the muni market.

Disclosure I am long BAB, BABS and NBB shares.

Nordic American Tanker Announces Dividend for the 54th Consecutive Quarter Since the Autumn of 1997

Link to the complete 4Q10 dividend report:
http://hugin.info/201/R/1488489/423906.pdf

Nordic American Tanker Shipping Ltd. ("NAT" or "the Company") announced today that the Company has declared a dividend of $0.25 per share for 4Q10, the same dividend as for 4Q09. The dividend policy will continue. The Company has a very strong balance sheet and we shall protect this position.

The Company will pay the dividend of $0.25 per share on or about March 4, 2011 to shareholders of record as of February 24, 2011. After the first three vessels were delivered in the autumn 1997, NAT has always paid a quarterly dividend; including the dividend for 4Q10 the total dividend payment amounts to $41.84 per share.

Including two newbuildings there are now 19 vessels in our fleet of which 15 vessels were trading during 4Q10. At the end of 2011 we expect to have a minimum of 19 vessels trading, representing a substantial increase in earnings and dividend capacity as vessels are being phased in during 2011. The Company remains committed to its strategy of dividend accretive growth and a strong balance sheet. This financial position of NAT is particularly important in a soft market when some tanker companies are experiencing financial difficulties.

Going forward the Company will continue to focus on accretive growth through acquisitions and on keeping the average age of the fleet low. The Company is pursuing a disciplined investment policy. We encourage investors wishing to receive dividends and to have exposure to the tanker sector to assess our model and invest in our Company.

The key points:

• We will continue our dividend payout policy. The Board has declared a dividend of $0.25 per share for 4Q10.
• Earnings per share in 4Q10 were -$0.27 of which $0.05 were related to non-recurring items. Earnings were -$0.10 per share in 4Q09. The operating cash flow was $5.2m in 4Q10 compared with $10.5m in 4Q09. In December 2010, NAT took delivery of the suezmax newbuilding Nordic Vega.
• All our trading vessels are now in the Gemini suezmax cooperative arrangement. We are pleased with this cooperation which ensures efficiency in our commercial operations.
• The Gulf Scandic -- now Nordic Harrier -- was on a long term fixed contract that expired in 3Q10. The vessel was redelivered to us in October 2010 and is now in drydock as it was not in a contractual condition on redelivery. The vessel is expected to commence trading in late March 2011.
• In 4Q10 the total offhire was about 8 days for the trading fleet -- a very satisfactory performance.
• We continue to retain focus on cost efficiency -- both in the administration and onboard the vessels.
• The Company does not engage in any type of derivatives.
• The piracy situation in the Gulf of Aden and in the Indian Ocean is of great concern. The Company is taking protective measures to safeguard crew and assets.
• Towards the end of 2010 there was a certain improvement in the spot market, although modest. However, the market has since then been weak so far in 2011. Going forward, rates may change quickly and unexpectedly. As a matter of policy the Company does not attempt to predict future spot rates.

Dividend Capacity

The Company will continue to keep a strong balance sheet with no or little net debt.
The Company is also in a good position to take advantage of strong shipping markets, which will translate into increased dividend payouts. When the market is down we do not "cut" the dividend, we adjust it, depending upon the general spot market freight level for suezmax tankers.
Below is a chart indicating the annual dividend capacity based on a fleet of 20 vessels and 24 vessels at different spot market rates and today's sharecount.

Link to the graph: http://hugin.info/201/R/1488489/423906.pdf

The above is based on 355 income days per vessel per year. The net debt will be about $7m per vessel with a cash break-even level of $11,300 per day per vessel for a 20 vessel fleet. The graph shows the substantial dividend capacity of NAT.

We see that prices for second hand vessels have softened. Should this development continue, we shall be in a position to acquire further vessels inexpensively compared to historical levels. Such acquisitions would increase the dividend capacity of the Company. It is a prerequisite for any expansion of the fleet that the dividend and earnings capacity per share will increase.

When the freight market is above the cash break-even level, the Company can be expected to pay a dividend. The breakeven rate is the amount of average daily revenues our vessels would need to earn in the spot market in order to cover our vessel operating expenses, voyage expenses, if any, cash general and administrative expenses, interest expense and other financial charges.

The annual spot rates as reported by R.S. Platou Economic Research a.s. show that during the last 11 years up to the end of 2010, 7 years have produced about $40,000 on average per day per vessel or more. This is reflected in the graph later in this report.

The tightened terms of commercial bank financing and higher margins on shipping loans are challenging for debt-laden shipping companies. By having no or little net debt, NAT is better positioned to navigate the financial seas, as we believe this is in the best interests of our shareholders.
Our primary objective is to maximize total return[1] to our shareholders, including maximizing our quarterly cash dividend.

The Company has further acquisitions under evaluation and will work to continue to strengthen its position compared with that of its competitors.

Financial Information

The Board has declared a dividend of $0.25 per share in respect of 4Q10 to shareholders of record as of February 24, 2011 compared with $0.25 per share for 4Q09 and $0.25 share for 3Q10. The average number of shares outstanding for the fourth quarter of 2010 was 46,898,782 -- the same as at the end of 3Q10. The market capitalization of the Company stood at $1.2 billion as of February 11, 2011. It is important to have a sizable market capitalization in order to provide for good liquidity in the share.

The Company's operating cash flow[2] was $5.2m for 4Q10, compared to $10.5m for 4Q09.
We consider our general and administrative costs per day per vessel to be at a low level. We also continue to concentrate on keeping our vessel operating costs low, while always maintaining our commitment to safe vessel operations. We in particular focus on cost synergies of operating a homogenous fleet.

At the time of this report, the Company has no net debt and has a revolving credit facility of $500m of which $75m has been drawn. The credit facility, which matures in September 2013, is not subject to reduction by the lenders and there is no obligation to repay principal during the term of the facility. The Company pays interest only on drawn amounts and a commitment fee for undrawn amounts.
Several publicly traded tanker companies have significant debt, which could make it difficult for them to buy vessels in a weak market.

The table below gives the annual dividend payments as well as quarterly dividend payments for the past 13 years -- the dividends are essentially based on earnings and operating cashflow in the preceeding quarter.

Link to the graph: http://hugin.info/201/R/1488489/423906.pdf


As reported earlier, the Company did not take delivery of a newbuilding (Nordic Galaxy) in August 2010 as it was not in a deliverable condition. This vessel will not join our fleet. We have debited the profit & loss account by a one-time charge of $1.5m related to direct costs of this newbuilding. We will claim this amount from the seller of the vessel as one component in the arbitration process. The parent company (First Olsen Ltd.) of the seller has not repaid an amount under an on demand guarantee that the parent company of the seller has provided in favour of our Company. The guarantee covers a loan our Company has extended to the seller. This amount of $26.8m is included in current assets pending the outcome of the arbitration.

We are entitled to 9% p.a. interest of the outstanding amount pending the outcome of the arbitration. The interest income has not been recognized in the accounts for 2010. We believe that we have a good case. However, if we should lose the Nordic Galaxy arbitration on all claims, the claims in total of the seller of $26.8m translates into approximately $0.60 per share. The outcome of the arbitration will not impact the dividend going forward.

As announced in our 3Q10 report on November 5, 2010, the Company has had no equity incentive plan since the stock options under the 2004 Stock Incentive Plan were exercised in 2009. In 2011 the Board of Directors has decided to establish a new incentive plan involving a maximum of 400,000 restricted shares of which 326,000 shares have been allocated among 23 persons employed in the management of the Company, the Manager and the members of the Board. These allocated shares constitute 0.7% of the outstanding shares of the Company. The vesting period is 4 year "cliff vesting", that is, none of these shares may be sold during the first four years after grant and the shares are forfeited if the grantee leaves the Company before that time. The Board considers this arrangement to be in the best interests of the shareholders and of the Company.

For further details on our financial position for 4Q10, 3Q10, 4Q09 and the twelve months ended December 31, 2010 and 2009, please see later in this release.

Corporate Governance/Conflict of Interests

As advised shareholders, on September 23, 2010 the New York Stock Exchange Commission presented its final report on Corporate Governance. The Commission achieved consensus on 10 core principles. These principles include a) building long-term sustainable growth in shareholder value for the corporation as the board`s fundamental objective, b) the critical role of management in establishing proper corporate governance, c) good corporate governance should be integrated with the company`s business strategy and objectives and d) transparency for corporations and investors, sound disclosure policies and communication beyond disclosure. We believe the principles presented are key elements of good corporate governance and we believe that the Company is in compliance with these principles.

It is very important for NAT to ensure that there is no conflict of interests among shareholders, management, affiliates and related parties. The interests must be aligned. It is intolerable to have conflicts of interest among shareholders, management, affiliates and related parties. We will ensure that there is transparency related to transactions with affiliates and/or related parties.

The Fleet

The Company has a fleet of 19 vessels including 2 newbuildings. By way of comparison, in the autumn of 2004, the Company had three vessels; at the end of 2005 the Company had eight vessels; and at the end of 2006 the Company had 12 vessels. At the end of 2009 we had 15 vessels in operation. At the end of December 31, 2010 we had a fleet of 17 vessels excluding two newbuildings. Please see the fleet list below. We expect that the expansion process will continue and that further vessels will be added to our fleet.

Vessel		Dwt		Employment
Nordic Harrier		151,475		In drydock up to approx. end of March 2011, and then spot.
Nordic Hawk		151,475		Spot
Nordic Hunter		151,400		Spot
Nordic Voyager		149,591		Spot
Nordic Fighter		153,328		Spot
Nordic Freedom		163,455		Spot
Nordic Discovery		153,328		Spot
Nordic Saturn		157,332		Spot
Nordic Jupiter		157,411		Spot
Nordic Cosmos		159,998		Spot
Nordic Moon		159,999		Spot
Nordic Apollo		159,999		Spot
Nordic Sprite		147,188		Spot
Nordic Grace		149,921		Spot
Nordic Mistral		164,236		Spot
Nordic Passat		164,274		Spot
Nordic Vega		163,000		Spot
Nordic Breeze		158,000		Delivery expected in 3Q11
Nordic Zenith		158,000		Delivery expected in 4Q11
Total		2,973,410

The Nordic Harrier (ex Gulf Scandic) was redelivered to the Company in October last year and went directly into drydock for overhaul. The drydock period could last up to end March 2011 after which the vessel will be employed in the Gemini suezmax cooperation. Our company will claim the bareboat charterer to pay for the relevant docking and other costs that are their obligation to cover under the bareboat charter.

Total offhire for 4Q10 was 8 days for our trading fleet. The time out of service for the Nordic Harrier is excluded from the offhire calculation as the ship is expected to commence trading for our account in late March 2011.

World Economy and the Tanker Market
In our quarterly reports to shareholders we have often stressed the significance of the development of the world economy for the tanker industry. The outlook for the world economy is presently uncertain. The tanker markets rates are also affected by newbuildings which enter the markets. As a matter of policy the Company does not attempt to predict future spot rates.

The average daily rate for our spot vessels was $14,400 per day net to us during 4Q10 compared with $17,525 per day for 3Q10. In a low market the vessels may be waiting to get a cargo while in a more robust market environment waiting days are minimized.

Link to the graph: http://hugin.info/201/R/1488489/423906.pdf

The graph above shows the average yearly spot rates since 2000 as reported by R.S. Platou Economic Research a.s. The rates as reported by shipbrokers and by Imarex may vary from the actual rates we achieve in the market, but these rates are in general a good indication of the level of the market.

Strategy going forward
We believe that the operating model of the Company is working to the benefit of our shareholders. Transparency is very important for NAT.

The financial turmoil and depressed shipping markets provide attractive opportunities for expansion.
Our objective is to have a strategy that is flexible for both a strong shipping market and a weak shipping market. If the market is strong, good results and dividends can be expected. If the market is weaker, dividends will be lower. However, if rates remain low, the Company is in a position to buy vessels inexpensively by historical standards, paving the way for even higher dividends when the market strengthens again. In this way, the Company has covered both scenarios.

After an acquisition of vessels or other forms of expansion, the Company should be able pay a higher dividend per share and produce higher earnings per share than had such an acquisition not taken place.

Our full dividend payout policy will continue to enable us to achieve a competitive risk adjusted cash yield over time compared with that of other tanker companies.

Our Company is well positioned. To the best of our ability we shall endeavor to safeguard and further strengthen this position for our shareholders in a deliberate and transparent way.

[1] Total Return is defined as stock price plus dividends, assuming dividends are reinvested in the stock
[2] Operating cash flow is a non-GAAP number. Please see later in this announcement for a reconciliation of operating cash flow to income from vessel operations.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Matters discussed in this press release may constitute forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their business. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.

The Company desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation. The words "believe," "anticipate," "intend," "estimate," "forecast," "project," "plan," "potential," "may," "should," "expect," "pending" and similar expressions identify forward-looking statements.

The forward-looking statements in this press release are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, our management's examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
Important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include the strength of world economies and currencies, general market conditions, including fluctuations in charter rates and vessel values, changes in demand in the tanker market, as a result of changes in OPEC's petroleum production levels and world wide oil consumption and storage, changes in our operating expenses, including bunker prices, drydocking and insurance costs, the market for our vessels, availability of financing and refinancing, changes in governmental rules and regulations or actions taken by regulatory authorities, potential liability from pending or future litigation, general domestic and international political conditions, potential disruption of shipping routes due to accidents or political events, vessels breakdowns and instances of off-hire, failure on the part of a seller to complete a sale to us and other important factors described from time to time in the reports filed by the Company with the Securities and Exchange Commission, including the prospectus and related prospectus supplement, our Annual Report on Form 20-F, and our Reports on Form 6-K.

4Q10 dividend report: http://hugin.info/201/R/1488489/423906.pdf

Disclosure I am Long NAT shares. 

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

Deutsche Tweaks Currency-Hedged ETFs

Deutsche Bank updated papers it originally filed with U.S. regulators in the fall to reflect new tickers and planned fees for five passive international equity ETFs from developed and developing countries alike that share a currency-hedging feature aimed at stabilizing returns.

In the new filing, the company also provided additional detail regarding the composition of the family of MSCI FX Hedge indices that will serve as benchmarks to the various funds.

The derivative-based strategy behind the ETFs is to isolate returns of the underlying equities, while eliminating as much as possible the impact of currency fluctuations on those returns, the filing said. The hedging mechanism designed to offset the exposure to local currencies is achieved through the use of forward currency contracts.

The strategy adds a new wrinkle to what has traditionally been a case of either avoiding emerging market currency risks by choosing dollar-denominated funds or investing in ETFs in foreign currencies to benefit from the weakening dollar.

Deutsche Bank’s strategy comes at a time of heightened uncertainty in the global economy. Central banks of developed economies are all engaged in, or prepared to launch, unprecedented monetary policy experiments aimed at controlling deflationary pressures to reverse the deepest downturn since the 1930s.

The respective tickers, fees and holdings of Deutsche’s five ETFs are:

• DBX MSCI Emerging Markets Currency-Hedged Equity Fund (NYSEArca: DBEM), 0.65 percent. DBEM will invests in some 800 securities in 21 emerging economies that include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey. Holdings have an average market capitalization of $4.9 billion.

• DBX MSCI EAFE Currency-Hedged Equity Fund (NYSEArca: DBEF), 0.35 percent. DBEF will tap into 22 developed nations excluding the U.S. in a portfolio that has almost 1,000 holdings with an average market capitalization of $11.43 billion.

• DBX MSCI Brazil Currency-Hedged Equity Fund (NYSEArca: DBBR), 0.60 percent. DBBR’s portfolio comprises some 81 securities with an average market capitalization of $7.66 billion.

• DBX MSCI Canada Currency-Hedged Equity Fund (NYSEArca: DBCN), 0.50 percent. DBCN includes 100 holdings with an average market capitalization of $13 billion.

• DBX MSCI Japan Currency-Hedged Equity Fund (NYSEArca: DBJP), 0.50 percent. DBJP’s portfolio will consist of some 340 securities with an average market capitalization of $7.2 billion.

Disclosure I do not own any of these funds with no plans to buy any at this time.

Shorting Inflation Protection with TPS New Inverse Etf

ProShares on Thursday (2/10/11) introduced the first ETF to track the inverse performance of TIPS – Treasury Inflation Protected Securities.  ProShares UltraShort TIPS (TPS) seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital U.S. Treasury Inflation Protected Securities Index Series-L.

TPS is designed for investors looking to hedge against a decline in TIPS or potentially benefit from a downturn in the index.  It is not an out-and-out bet on deflation.  Investors that hold TIPS to maturity receive income plus an adjustment to the principal for increases in the CPI.  However, they do not lose capital if the CPI were to decrease during the term of the security.  In other words, TIPS provide inflation protection without a deflation penalty.  By the same token, inverse TIPS are a deflation play only to a limited extent.

The 0.95% expense ratio may be reduced by interest income earned on cash and financial instruments since the fund will get its desired exposure with leveraged swaps while maintaining a large cash position.
Additional information is available in the press release, overview, and prospectus.  Potential investors need to understand the impact of -2x leverage with daily reset that TPS uses.  The ProShares website has an informative piece on The Universal Effects of Compounding and Leveraged Funds.

Disclosure None

Weekend Reading Links - February 13, 2011

For your weekend reading pleasure, the articles listed below contain some of the best dividend and value investing insights found on the web. They were written by various members of the Dividend Investing and Value Network over the past week:

Articles From DIV-Net Members

• Dividends Value presented Building Yield: 15 Consumer Goods Dividend Stocks
• Dividend Growth Investor presented How to select dividend stocks?
• Barel Karsan presented Cash Levels High Or Low?
• Buy Like Buffett presented The Beginners Investing Roundup To Help You Make Money Investing
• The Dividend Guy presented ScotiaBank BNS Dividend Stock Analysis
• The Div Guy presented January Dividend Income Update
• Disciplined Approach to Investing presented Dividend Payers Underperform In January
• Triaging My Way To Financial Success presented DivG Purchases - January 2011
• 40percent 20years presented Screener, better corporate filters, latest reports!
• EPIC INVESTOR presented Why Abbott Looks Cheap
• Value Walk presented EBITDA: Warren Buffett Versus Everyone Else
• The Market Capitalist presented Becoming An Investor - Yes, You Can.
• Dividend Monk presented AGL Resources (AGL) Dividend Stock Analysis
• Wax Inc presented Waldo Thinks Ahead
• Frankly Speaking presented Small Firms Repurchase Strategically
• The Dividend Pig presented February Industry Analysis Announcement
• Dividend Ninja presented Creating Monthly Dividend Income

There are some really good articles here, please take time and read a few of them.

Disclosure None

Sysco Q2 misses Street on rising costs

Food distributor Sysco Corp (SYY - News) said higher costs that squeezed its margins in the second quarter could continue to eat into its profits and may lead to a choppy recovery. Higher raw material costs have pressured companies across sectors, and many of them, including Kellogg Co, the world's largest breakfast cereal company, raised prices to combat rising ingredient costs.
Sysco shares were down more than 6 percent on Monday afternoon on the New York Stock Exchange.

On a call with analysts, the company said a double digit price rise in meat, dairy and seafood -- categories that account for one-third of its sales -- created substantial margin pressures.

"It is unlikely that these pressures are going to subside near term," Morning Star analyst Erin Sherin said, "This is in stark contrast to the 3.5 percent deflation Sysco was experiencing in the year-ago quarter."

Food inflation is a mounting worry globally. A recent study on global food prices by a U.N. agency showed they hit their highest level on record in January, and are set to worsen after a massive snowstorm in the United States and floods in Australia.

Sysco CEO Bill DeLaney said, "Recovery and to some extent, (its) financial results may be somewhat choppy due to the economic challenges that consumers continue to face."

For the second quarter, the company reported a net income of $258.1 million, or 44 cents a share, while analysts were looking at earnings of 47 cents a share, according to Thomson Reuters I/B/E/S.
Shares of the company were down almost $2 at $28.01 on Monday, placing it among the top percentage losers on the New York Stock Exchange.

Disclosure I am Long SYY shares. 

Weekly Dividend Links

Let’s get started!

1. Combining Technicals with Fundamentals @ Frank Voisin.
2. Rethinking the Basic Emergency Fund @ The Dividend Pig.
3. 5 Signs You Need To Take the Yuan Seriously @ Get Money Energy.
4. The Beginners Investing Guide @ Buy Like Buffet.
5. Paying The Bills As a Blogger @ PIN.
6. Your Personal Rate of Inflation @ Oblivious Investor.
7. Non-Buy Follow-Ups @ Barel Karsan.
8. Covidien (COV) Dividend Stock Analysis @ Dividend Monk.
9. 10 Higher Yield Dividend Stocks @ Dividends Value.
10. How Warren Buffett Invests @ Investor Junkie.


Disclosure None

Silver ETFs: Catch ‘Em on the Rebound

For three straight trading days, silver prices have closed above $30 and it’s got some analysts thinking that the metal and silver exchange traded funds (ETFs) could be gearing up to gain big again.
Here’s the case:

• Silver is less than $1 away from its recent nominal highs of $31.2375, reports Tyler Durden for Silver Hedge.
• Mark Thomas for Commodity Online reports that silver is undervalued right now and the physical market is tight, creating a recipe for some possible moves.
• According to CoinNews, the renewed concerns about inflation and a weaker U.S. dollar are still playing on investors need for safer haven investments. With quantitative easing also a huge factor, the precious metals could be in a solid position.

iShares Silver Trust (NYSEArca: SLV) and ETFS Physical Silver (NYSEArca: SIVR) are the two physically-backed silver ETF options and they’ll give you direct exposure to spot prices.

Global X Silver Miners (NYSEArca: SIL) are an option if you’re more into equities, though they don’t offer the same safe-haven benefits. The good thing here, though, is that when prices are high, profit margins tend to be pretty nice, too.

Disclosure I am long SLV shares.

Deere: A Growth Stock Consistently Hiking Its Dividend

Over the past year, we have repeatedly stated how bullish we are of various commodities, especially rare earths, uranium and potash. Some investors believe that many commodities have run their course, and have minimal upside remaining while possessing considerable downside from current highs. Although we disagree with this thinking, we respect the conservative approach and help our clients find ‘de-risked’ plays to participate in bull markets. We believe that conservative investors who believe that the future may not be all roses for the fertilizer industry may find Deere & Company (DE) a suitable alternative.

The company has been around since 1897, back when it was making plows for the family farm. Generations of farmers have used Deere & Company equipment to plow, plant and harvest their fields. John Deere is one of those brands and businesses that Warren Buffett would love as it has a cult following for its equipment in rural America and quality machinery to back the brand up. They have set the bar high, and the barrier to entry keeps many from entering their home market here in the United States.
The stock currently trades just below its 52-week high of 89.97 and sports a price-to-earnings ratio of about 20 on a trailing twelve months basis. This is also a company currently paying a yearly dividend of $1.40 per share, or roughly a 1.6% yield. We expect that the company will raise the dividend twice this year based off of their operating results.

We believe that the company will be able to raise the dividend rates further this year due to strong earnings growth resulting from the bumper harvests these farmers are having in the United States. Here in South Carolina, we noticed fields of cotton not getting harvested on time and watched in amazement as the farmers allowed the crop to deteriorate. As it turns out, these were the farmers who pay others to harvest their crops, and thus do not own their own equipment; sometimes there are co-ops that perform this function as well. We did notice something very exciting driving through cotton country recently; many of these farmers had erected huge metal sheds which made us scratch our heads at the time. Why erect these huge sheds so far from your house to simply park a few old pick-ups beneath? It turns out that all these farmers had purchased brand new John Deere tractors, combines and many accessories. Some of them have easily spent one million plus on all of this.

The same commodity bull market that is fueling the likes of Potash Corporation (POT) of Saskatchewan, Mosaic (MOS) and Agrium (AGU) shares higher is also behind Deere & Company’s rise. As the world awakens to the fact that we need to increase food production in order to feed the growing population, productivity will become key. Many of the world’s breadbaskets already use the most advanced techniques, technologies and equipment, but much of the developing world continues to farm the same way generations before them did.

As China, India, Brazil, South Korea and the other emerging/developing economies of the world establish these large co-ops (at home and abroad) to grow crops for their citizens, Deere & Company should gain huge orders internationally.

Currently, analysts expect Deere to report earnings of $5.45/share for the current year. Estimates for 2012 call for earnings per share of $6.40. If the company can at least match these expectations, investors will have a blue chip stock providing significant upside in the share price because of near 20% profit growth.

Deere & Company possesses a great brand with competent management and a business model that should enable it to assist further generations of farmers in providing for the world. It is truly rare to find a company that can grow both the top and bottom line considerably year-over-year (enough to be considered a growth stock), consistently hike its dividend and provide international exposure to some of the hottest economies while being an American company and thus protecting investors from many of the inherent risks of investing with the unscrupulous managements of foreign entities that exist out there. The safety of an American based and traded company cannot be underestimated in these times; this lets many of our conservative investors sleep at night.

It is our opinion that Deere & Company is both a solid play for conservative investors and a derivative play on food inflation, both in the short-term and long-term. The company’s shares could potentially reach the $120/share range by year-end if the company can continue to perform well on an operating basis while also expanding the P/E. Should the commodity boom continue on the world’s farms, Deere’s shares could take off, potentially allowing shareholders to harvest tremendous gains.

Disclosure: I am long DE shares