Why ETF Investors Are Saying ‘Bye’ to Buy-and-Hold

The buy-and-hold strategy that has defined many an investors’ portfolio is being reevaluated as new data comes to light. As the notion is questioned more deeply, it could lead to a permanent shift in the way we invest in stocks and exchange traded funds (ETFs).

The recent market meltdown has shaken many investor’s faith in the long-revered buy-and-hold strategy. Devotees say that in the long-term, markets rise, and if you’re not in all the time, you risk missing gains, says A. Gary Schilling for Yahoo Finance.

One research firm recently found that if you removed the 10 best days for the Dow from 1900-2008, two-thirds of the gains were lost. However, if you subtracted the 10 worst days, the actual gain in the Dow tripled. Schilling says this is in line with his own research on the subject, as well.

He says he shuns the strategy because of the gambler’s paradox: the odds might be in your favor in the long run, but if you reach a bad streak, your money could be gone before you ever even approach the long run. Markets tend to fall a lot faster than they rise.

As a result, investors are taking on an active role, and becoming educated about markets. They are urged to actively trade shares and ETFs, rather than wait on the sidelines too long, or hang on far past the point where they should have let go. No matter what way the market is moving, a trend is always developing.

It is also wise to have a strategy along with watching market trends. This way, when an opportunity strikes, there will be a definite way to approach the market. By using a strategy such as the 200-day moving average, you can be sure to get out before your losses are large, and be able to keep emotions and guesswork out of the equation.

Disclosure None

Do Active ETFs Belong in Your Portfolio? Not In Mine!

Today, the bulk of ETF money is invested in funds that follow traditional indexes. Yet, a wave of new product filings with the Securities and Exchange Commission along with new ETF product launches are fighting for their share of investor’s assets. Do active ETFs belong inside your portfolio?

Of the 744 U.S. listed ETFs, just fifteen funds use full-blown active strategies attempting to beat the market.

This history of active ETFs has been abbreviated, literally. The very first actively managed ETF, the Bear Stearns Currency Yield Fund (YYY), was liquated within months after its March 2008 debut. It had around $50 million of assets but was never able to gain traction.

Let’s analyze three active ETFs and then we'll evaluate factors to consider before investing in these types of funds.

PowerShares Active Alpha Multi-Cap Fund (PQZ)
This active ETF rates the stocks of companies with more than $400 million market cap (about 3,000 stocks) that are traded in the United States. On a weekly basis the fund’s manager generates a master stock list that ranks these stocks, segmented by market cap, based on its proprietary stock-ranking methodology. Stocks are selected based on factors such as strong earnings growth, low valuations and positive money flow. The equity selection universe is defined as the 2,000 largest stocks of companies with varying capitalizations from their master list. The fund then generally selects and purchases approximately 50 stocks.

For the one-year period ending May 30th, PQZ has fallen 46.64 percent compared to a 32.39 percent decline in the Dow Jones US Total Stock Market (TMW).

PowerShares Active AlphaQ Fund (PQY)
PQY rates the stocks of companies with more than $400 million market cap (about 3,000 stocks) that are traded in the United States. On a weekly basis the fund’s manager devises a master stock list that ranks these stocks, segmented by market cap, based on its proprietary stock-ranking methodology. Stocks are selected based on factors such as strong earnings growth, low valuations and positive money flow. The equity selection universe is defined as the 100 largest Nasdaq-listed Global Market Securities from their master stock list. The fund then generally selects and purchases approximately 50 stocks.

For the one-year period ending May 30th, PQY has declined by 32.43 percent while the Nasdaq-100 (QQQQ) has fallen 29.01 percent.

Grail American Beacon Large Cap Value ETF (GVT) Grail Advisors, a San Francisco, CA-based money manager, is the brains behind this active ETF. GVT was launched in May and it holds 122 stocks with Microsoft, Royal Dutch Shell and Chevron among the top three holdings. GVT’s investment strategy is virtually identical to the Grail Large Cap Value Mutual Fund (AAGPX), which has established a respectable 10-year track record.

Brandywine Global Investment Management, Hotchkis and Wiley Capital Management and Metropolitan West Capital Management each share responsibilities in managing the fund. GVT’s annual expense ratio is currently 0.79%.

The Catch 22

Will active ETFs deliver performance returns that beat the market? This question is partially answered by evaluating the performance of mutual fund managers, who in many instances have greater financial freedom and flexibility in the selection of securities they own. Plus too, they aren’t handicapped by daily and weekly portfolio disclosures like active ETF managers.

Over the five-year period ending in 2008, Standard & Poor’s research discovered the majority of active funds in 8 of 9 major stock categories failed to beat corresponding S&P stock indexes. The S&P 500 (SPY) beat 71.9% of active managers while the S&P MidCap 400 (MDY) and S&P SmallCap 600 (IJR) outperformed 79.1% and 85.5% of managers in matching categories. Will putting active management in a different product shell (ETFs) suddenly make beating the major stock and benchmarks a cinch?

Most active ETFs are too new to have any substantial performance history behind them. Yet, active ETFs need money inside of them in order to survive, but without a track record, getting the money is a tough sell. It’s a Catch 22.

Other Considerations
The record of active managers is a wild card, even for money managers with a big name, lots of experience and a decent track record. Speaking about 2008 mutual fund performance, Bob Rodriguez, manager of the FPA Capital Fund (FPPTX) said, “We stunk.”

“The belief that bear markets favor active management is a myth,” stated analysts in the above mentioned S&P report. Careful analysis by S&P also revealed similar results of bear market underperformance by mutual fund managers during the last downturn from 2000 to 2002. Have active funds really earned the investing public’s trust?

Building on a Strong Foundation
To resolve the issue of whether you should own active ETFs or not, consider a very simple, but time-tested strategy that’s worked.

Before you invest any of your serious money in individual stocks, active ETFs or active mutual funds, first start with broadly diversified mix of low-cost index ETFs that follow traditional benchmarks. A well-balanced portfolio should have market exposure, not just to U.S. stocks and bonds, but to international stocks (EFA), emerging market stocks (VWO), foreign real estate (RWX) and commodities (GSG). The superiority of market returns is well-established in both real life results along with academic studies.

After you’ve built the foundation of your portfolio on index funds and index ETFs and you have additional money (play money) you don’t mind risking, consider owning active ETFs and whatever other crazy ideas come to mind. In other words, index your serious money to the market first and do everything else after.

Disclosure I am long, QQQQ,SPY,EFA,VWO, and RWX in my etf folios.

5 Things to Look for In Your ETFs Before Buying

For every up, there is a down. Newton’s Third Law is true both in life and with exchange traded funds (ETFs). Not all ETFs are right for all investors, though. How do you decipher which ones are best for you?

Different ETFs serve different purposes. It depends on your risk tolerance, time horizon, investing style and the overall makeup of your portfolio.

For example, leveraged ETFs are great if you’re looking to hedge a position you hold to avoid having to sell it; they’re not great at all if you’re looking for something you can buy and sit on for a few years. Oil is a good investment if you want to capture the gains the commodity has been making in recent months, but it’s not ideal if you’re looking for something with low volatility.

Matt Krantz for USA Today has a few tips on things to look for to determine the ETFs that are your best fit, while we expand on certain areas a little:

• Broad vs. Narrow. Broadly diversified ETFs are a much better bet than an individual stock. But there are also broad and narrow ETFs – the narrow you get, the more sensitive to market movements your ETF may be. If you want to diversify a little more and keep the risk lower, consider broad funds.
• Annual fees. While expense ratios are low for most ETFs, don’t make the assumption that they’re all dirt cheap. Some of the specialized ETFs carry high fees. Be sure to check and compare before buying to see that you’re not paying more than you had intended.
• Know what you own. ETFs that are invested within an industry or a niche market generally carry more risk than a broad fund. It is up to the investor to do some homework and know what they are putting their money toward and what the risks are.
• How does it work? Some ETFs own stocks of a certain market value or size. Others even use complex bets that the stock market will fall. Buying these highly concentrated ETFs can often be very risky – do a gut check and be sure you understand the risks and construction and are comfortable, as well.
• Liquidity. A general rule is that the larger the assets and the higher the trading volume, the better the liquidity of your ETF.

Disclosure I do own a great deal of etf's and strongly support their use in a balanced portfolio.

Why Preferred Stock ETFs Are Flying PFF my favorite

When the term “preferred stock” comes up, does it conjure images of exclusive shares that only sophisticated investors can purchase? The fact is, anyone can buy preferred stock now – through exchange traded funds (ETFs).

Don Dion for TheStreet says that the preferred ETFs offer access and diversification along with increased liquidity for the preferred shares. Owners of preferred stock have a higher claim on assets and earnings than owners of common stock.

There are several reasons that these shares and ETFs have attracted more attention lately:

• Financial shares have shown marked weakness because of the housing and credit meltdown. Their yields have declined quickly.
• The payouts provided by preferred securities have the payout advantage of bonds and the tax advantage of common dividends.
• Some investors treat their preferred shares as havens. The Jobs and Growth act of 2003 reduced the tax on dividends, making payouts from these funds relatively tax efficient.

My favorite play in preferred Stock etf's is PFF, iShares S&P U.S.Preferred Stock Index Fund which holds Freeport copper, wells fargo, metlife, SCHERING-PLOUGH, ford and citigroup preferred shares to name a few. Expense ratio is .48 basis points, trades around 800,000 shares daily. Pays a Super HEALTHY dividend of 10.48% monthly. Up 12.44% year to date.

Some fund info :

The Fund seeks to track the price and yield performance before fees and expenses of the S&P U.S. Preferred Stock Index. The Index measures the performance of a select group of preferred stocks listed on the NYSE, AMEX or the NASDAQ Stock Market, Inc. The Index includes preferred stocks with a market capitalization over dollar 100 million. The Index may include many different categories of preferred stock such as floating rate preferred stock, fixed rate preferred stock, perpetual preferred stock, convertible preferred stock, trust preferred securities and various other traditional and hybrid issues of preferred stock.


Disclosure I am Long PFF in my Financial folio.

The BULLISH case for Hasbro(HAS) toys, Transformers ring a bell?

I recently researched and added to my consumer goods folio Hasbro(HAS) toys and games company stock. First off lets start with Hasbro owns the the rights to Transformers toys. The new Transformer movie blew out of the box office with overwhelming success. So is this going to hit Hasbro's bottom line you beat ya. There is plenty of time for commercials, for the new toys, then the dvd release then and only after all this comes Christmas. The kids will be driving us parents nuts over the new toys. Every kid will want one in one shape or another.

Which could mean better than expected sales for Hasbro. Currently a member of the S&P500 with a market cap of 3.42 billion, making it a midcap stock. Having annual sales of approx. 3.94 billion. Trading currently right now at $24.29 which is 15.71% from its 52 week low. Making it a excellent entry point. Slated to earn $1.89 per share in earnings this year and $2.11 per share next year. Giving is a P/E of 12.95 currently and a forward P/E of 11.60, not bad if I say so myself.

Currently paying a 3.27% dividend totaling $0.80 cents per share each year. Has $4.22 per share cash on hand. Peg of 1.44 and a Price to sales value of 0.87, leaning towards value. Insiders already own over 10% of the company, Instutions own 87.89% of the 139.84 million outstanding shares. The return on equity (ROE) is a impressive 21.83%. Eps is expected to grow at 95 for the next 5 years and has grown 16.26% over the last 5 years. The dividend payout ratio is 38.70 percent. Recently Raised its dividend in feb of 2008, has paid a quarterly dividend since December of 1996.

I see a target price of apporx $32.00, traded 692,700 shares yesterday. So volume is there. Next earnings report is due out July 20 before the market open. So you could buy now at this decent entry point and dump on the earnings day which I am pretty sure should be better than expected, sure to pick up a couple upgrades sounds like money in the bank to me.

Disclosure I am Long HAS in my consumer goods folio.

Outrageous 401k Fees load Fees Rebalance Fees Seems all I hear is FEES

Everyday in my day to day life I talk markets to anyone and everyone who will listen. Heck I even talk to the toilet, though I don't hear anything except flush the toilet bozo. But the point I am getting at, 401k fees glancing in my 401k company sponsored program through my employer. I was surprised to see I have some pretty decent rates, compared to most.

My work using Principal Financial Group, most of the funds they have for us charge around 1% with a T. Rowe Price Growth stock r fund charging charging 1.69% and a goldman sachs growth fund charging 1.72%. I just about blew a gasket when I checked into this. Sure they are managed funds and deserve to be paid to manage the money. This is blown out the water though.

Then we have transfer restictions when and how often you can move money around. Not to mention the fees for doing a rebalance. I was a novice on my first rebalance and lost almost $500.00 so quess what I will not be rebalance the 401k for quite some time now. I hear people talk about invest 10,000 with this mutal fund and only had to pay a 5% load. They talk like its the normal thing to do. Its like going to walmart seeing a tv you like and want to buy right now, so you pay walmart a $300 fee for having the tv and letting you buy it, plus the cost of the tv too. Wow bless their heart.

If my company wasnt matching my contributions to my 401k I would simply not put anything in such a waste in my eyes. So the questions becomes, Does it seem that your already Shruken 401k retirement account keeps getting eating up by these hidden fees?
Maybe the time is here to switch to an exchange traded fund (ETF) portfolio?

For instance you can purchase the S&P 500 in one etf called SPY which holds all 500 stocks of the S&P500 in one fund. This fund charges are you ready, check this our .10 percent. Yes thats right 1/10th of a percent. Imagaine the differnce in 30 years, that can have on your retirement. Plue etfs can be traded at any time the market is open, can be traded in and out of many times in the same day if ya like. They have a NAV net asset value just like mutual funds. My favorite etf research center is ETF connect.

Dividends are a major part of your retirement portfolio as well. Etfs well a great deal many of them pay quarterly dividends. Some fixed income etfs pay dividends each month, Like LQD 6%, HYG 10.8%, TIPS 4.41%.

Matthew Hougan for Index Universe offers his take on what are truly the best things about investing in ETFs. By process of elimination, he comes to his conclusion that there are two things above all others that ETFs have to offer.

Many claim it is the low fees that attract investors, however, different share classes at Vanguard make Hougan question this. Transparency is also touted, but many funds stick to their indexes with no problems. Excitement could be another reason, but there can not be any excitement without real substance.

The best characteristic an ETF can offer, in Hougan’s opinion, is tax efficiency. As far as straight equities are concerned, ETFs are the best idea for getting maximized tax benefits.

The other amazing thing ETFs provide are easy access to institutional-grade newer asset classes. ETFs are taking on a new investment life, transforming advisors from stock pickers to asset allocation strategists. Between commodities, real estate, currencies and even timber, the investment horizon has just widened. You can buy the entire market for just 0.7%, if you were so inclined.

I agree – ETFs have made it simple for even the Do it yourself investors(like me, you and most reading this ) to play along, not just because of their tax benefits and easy access, but because of their low expenses, transparency and simple, all-day trading. After so many were let down by their mutual funds in the early 2000s, ETFs have made it easy for self-directed investors to have more control.

The moral of this story, you will be better off in the long run if you can keep more of your hard earned money for yourself. The ETF investing train is here and people are getting on right and left are you going to get on and save some off your money or keep tossing it away at those idiotic load fees , undisclosed fees, can we stick ya with this fee, and whatever else fees they can stick you with?

Disclosure I am long SPY,LQD,HYG, and TIPS in my etf folio's.

Compounding Intrest and Dividend Importance Live from the Money Show Video

Here is a most excellent video on dividends and their power in the long run and excellent video worth watching right now. Starring Mark Skousen founder and president of Wealth Strategies.




Clicking the video will take you to the msn video site where the video is located they do not allow embedding of their videos.

Disclosure none

General Mills (GIS) Pumps Up Quartley Dividend by 9% to 0.47 cents per share

General Mills (GIS) is increasing its quarterly dividend by 9.3 percent.

The Minneapolis-based food company said Monday that its board is raising the dividend by 4 cents to 47 cents per share. The new dividend is payable Aug. 3 to shareholders of record as of July 10.

The new annual dividend rate will increase to $1.88 from $1.72.

General Mills Chairman and CEO Ken Powell said the dividend increase is a reflection of the company's robust financial condition and future growth prospects.

Shares of the company fell 13 cents to $55.71 in aftermarket trading, having closed the regular session at $55.84.

Disclosure I am long GIS shares in my Consumer Goods Folio.

Invest in Prospect Capital Corporation's High Dividend

Where can you earn 17% dividend on a US based company? At Prospect Capital Corporation (PSEC). The upcoming dividend is .40625, which is a 16.89% yield at $10.17 share price which will ex-dividend on July 6th 2009. This dividend is the same amount that is had paid out for the prior 4 quarters.

It earns its dividends from investing into companies needing capital. What I like about this company is that the firm has expertise in energy and industrial sectors. It wisely invests in oil and gas, coal, materials, industrials, information technology, utilities, pipeline, storage, power generation, renewable and clean energy, and other types. Energy, materials, and technology are three candidates that have great potential for high ROI, as well as dividend payback.

Insiders are agreeing with me, as insider buying has been regular and intensive. Insider buying is just a clue - but a good one.

Prospect Capital has raised capital recently. It announced it has raised $64 million in gross proceeds from its public offering of roughly 7.8 million shares of common stock. Those shares were priced at $8.25 and investors are probably believing that the newly raised capital will be invested in more companies, that is in demand in this tight economy by companies of all types. This quarter's dividend is a repeat of the priors, the next quarter dividend could go down due to share dilution.

See this Yahoo Finance chart for more information about previous dividends and stock price movement.

We see stock appreciation over the long term, when the US & Canada economy picks back up in 2010 and 2011. In the mean time, why not earn a really nice dividend? Examine the chart closely and potentially buy on the dips. The chart shows a share price drop after each dividend payout.

Disclosure I am long PSEC shares in my Closed end fund folio.

Cobham, Northrop Grumman Get 2.4 Billion U.S. Army Deal

Cobham and Northrop Grumman(NOC) have been selected to provide the VIS-X Vehicular Intercommunication System Expanded for the U.S. Army, Cobham said Monday. The companies will be required to deliver up to 500 VIS-X systems per month during the first year following completion of first article testing and up to 2,000 systems per month in subsequent years. The total value of the 10-year contract has an anticipated not-to-exceed ceiling of $2.4 billion, of which Cobham's share is 50%.

Disclosure I am long NOC shares in my industrial goods folio.

Will Corporate Bond ETFs Make It or Break It? | ETF Trends

What effect will the rise in government bond yields have on corporate bonds and the exchange traded funds (ETFs) that track them?

Government bond yields have been rising at an alarming rate. This is indicative that fear is starting to leave the markets and some are optimistic that an economic recovery is in sight. This could be good for corporate bonds in that creditworthiness should recover along with profits, states Richard Barley of The Wall Street Journal.

On the other hand, if government yields are rising because of the huge amount of paper being printed to fund record deficits, then corporate bonds could be in trouble. As long as corporate bond yields remain in the 6%-7% range in a low-interest rate world, they will be attractive. Corporate bonds offer a good opportunity for investors, as companies’ cash holdings increase as a result of slimming down operational costs, says an official at MFC Global Investment Management.

• iShares GS $ InvesTop TM Corporate Bond Fund (LQD): up 1.4% year-to-date. It yields 5.7%.

For more stories on corporate bonds, visit our corporate bond category.

Kevin Grewal contributed to this article.

Disclosure I am long LQD in my Bond 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).