ETF Prime Archive

401(k)s Gobble Up ETFs

As investors and financial advisors continue to educate themselves on the benefits that exchange traded funds (ETFs) can offer, the growing appeal of ETFs seems to be making its way into retirement plans.

Most recently, Ian Salisbury of the Wall Street Journal reported that BlackRock Inc., the largest ETF provider, estimates that investors hold nearly $2 billion worth of its ETFs in 401(k) plans.  This marks tremendous growth when compared to the $500 million that was held in these plans last year.

Some of the benefits that ETFs can offer include transparency, lower costs, tax efficiency and flexibility.  Flexibility, in particular, is one of the key drivers behind ETF growth.  ETFs enable investors to reach hard-to-access markets such as commodities, currencies and international markets with the same ease as a run-of-the mill domestic company stock (More on ETF Benefits).

For example, an investor can easily access crude oil through the US Oil Fund (USO) or play the agriculture markets by gaining diversified exposure through the PowerShares DB Agriculture Fund (DBA), which is a one-stop shop for access to cattle, soybeans, lean hogs, coffee, corn, and sugar.

Additionally, as developing nations start to decouple from the United States and Europe, they have become more appealing to investors.  With this in mind, ETFs give investors the choice to play international markets using a country-specific strategy, like the iShares MSCI Brazil Index (EWZ), which gives exposure to emerging Brazil, or a diversified strategy, like the iShares MSCI Emerging Markets Index (EEM), which gives exposure to Brazil, South Korea, Taiwan, China and India (Other Ways To Go International). 

The continued growth and appeal of these investment tools has driven many large financial institutions to enter the landscape to get a piece of the pie.  Companies like Charles Schwab and T.Rowe Price, who are big players in the retirement plan space, have entered the ETF marketplace which will likely further boost the use and appeal of these advantageous products in 401(k)s.

International Bond ETFs Offer Diversification

As developing nations continue to grow and investment dollars find their way overseas, international bond exchange traded funds (ETFs) may be the answer to portfolio diversification and risk minimization.

As ETFs continue to grow in popularity, they can offer investors exposure to international debt with relative ease.   The reasons behind gaining exposure to international debt include spreading out the sensitivity of U.S. interest rate movements and playing currency exchange movements.  However, Kyle Waller of Index Universe states that it is generally a better idea to use international bonds of developed nations rather than that of emerging nations.

It is equally important to consider the risks involved in dealing with international bond ETFs – in particular, the increase in default risk that is expected to be seen in some European nations (Know the risks of Bond ETFs).  For this reason, it is important to completely understand what one’s investments hold.

A few international bonds to consider are:

• iShares S&P/Citi Intl Treasury Bond (IGOV), which carries an expense ratio of 0.35% .  IGOV holds 44 different bonds with an average duration of 5.8 years and gives bond exposure to markets like Japan, the United Kingdom, France and Germany.
• iShares S&P/Citi 1-3 Yr Intl Treasury Bd (ISHG), which carries an expense ratio of 0.35 %.  ISHG holds 26 bonds with an average duration of 1.67 years and gives exposure to markets like Japan, Belgium, Spain and Finland.
• SPDR Barclays Capital Intl Treasury Bond (BWX), which carries an expense ratio of 0.35%.  BWX holds 82 different international bonds, is primarily focused on Japan, Germany and Italy and has an average duration of 6.1 years.

A New Way To Play International Markets

In an era where exchange traded funds (ETFs) continue to draw appeal, ETF providers are in full swing and introducing new products at the blink of an eye.

Most recently, WisdomTree announced its newest ETF, the WisdomTree International Hedged Equity Fund (HEDJ).  This ETF is designed to give exposure to international markets, particularly Europe, Asia and Australia, while neutralizing currency movements in these regions versus the U.S. dollar (More Ways To Play International Markets).

What’s unique about HEDJ is that it is a fund of ETFs, meaning that its holdings are comprised of other ETFs.  The new ETF invests primarily in the WisdomTree Europe Total Dividend Fund (DEB), the Japan Total Dividend Fund (DXJ) and the Pacific ex-Japan Total Dividend Fund (DND).  From a sector perspective, financials, industrials and energy are the top three sectors tracked by HEDJ.  In regards to country exposure, the United Kingdom and France make up over 33% of its total asset base.

According to WisdomTree, HEDJ, which carries an expense ratio of 0.58%, gives investors the ability to diversify by gaining exposure to international markets without having to worry about appreciation or depreciation of currencies.  The ETF achieves this by using forward contracts to neutralize the movement of the currency in direct proportion to the country weights of the equities in the fund.   This will be beneficial if the U.S. dollar gains strength against other currencies (Possible U.S. Dollar Plays).

Transportation ETFs That May Shine

As economies around the world start to rebuild, the International Monetary Fund (IMF) has anticipated that the global economy will expand by 2.5% in 2010, which will likely be beneficial to the transportation sector. 

Transportation as a whole is a barometer of economic activity and generally moves in tandem with the overall economy.  As economies expand, they demand more goods, which require transportation.  In fact, the Baltic Dry Index (BDI), which is a measure of worldwide international shipping prices of various dry bulk, has been creeping upward over the past few months. 

This indirect measure of the global supply and demand for commodities is of importance because it is an efficient indicator of future economic growth and production.  Generally, as the BDI increases, demand for dry bulk, which includes such things as food, grains, coal, steel and building materials is outpacing supply. 

As these supply and demand forces continue to deviate from an equilibrium price, more goods will be transported around the world resulting in an uptick in the transportation sector.  Some ETFs to consider include the following:

• PowerShares Global Progressive Transportation Portfolio (PTRP), which carries an expense ratio of 0.75%.  PTRP holds 36 stocks and focuses on businesses which seek to utilize cleaner, less costly and more efficient forms of transportation. 
• Claymore/Delta Global Shipping (SEA), which carries an expense ratio of 0.65% and holds 30 companies in the shipping business.
• iShares Dow Jones Transportation Average (IYT), which carries an expense ratio of 0.47% and holds 20 companies including railways, freight carriers, airlines and package carriers.

US Dollar ETFs For The New Year

Many currency experts are expecting the U.S. dollar to rally in 2010 and gain back some of the ground that it lost in 2009 and for good reason.

One reason for the expected rally is due to the Federal Reserve’s decision to hold interest rates steady, states Alexandra Zendrian of Forbes.  Traditionally, when interest rates are low, currencies perform poorly, but in this case, keeping interest rates low may be a good thing for the dollar when compared to the Euro and the British Pound. 

The Euro and Pound, both which gained enormous ground against the dollar, are both facing uphill battles as fiscal problems in some of the Eurozone nations like Spain and Greece are expected to put a damper on the strength of the region’s economic recovery.  Additionally, signs of economic strength in the U.S. appear to be more evident than in Europe.

A second reason that the dollar is expected to gain some appeal is the desire of foreign investors to utilize the currency as a safe haven.  Although many international regions are expected to post GDP growth in 2010, these regions are still somewhat unstable and many investors are likely to turn to the dollar for protection. 

From an investor’s perspective, ways to play this anticipated trend in the dollar include the following:

• PowerShares DB US Dollar Index Bullish (UUP), which uses futures contracts to go long in the dollar against a basket of currencies including the Euro and the Pound and carries an expense ratio of 0.50%.
• ProShares UltraShort Euro (EUO), which enables investors to gain twice the inverse performance of the Euro against the dollar and carries an expense ratio of 0.95%.
• CurrencyShares British Pound Sterling Trust (FXB), which seeks to track the price of British Pound Sterling and carries an expense ratio of 0.40%.  An investor can short this ETF to bet against it.