Dion Money Management Blog   Money Management for Retirees and Their Families

The creators of United States Oil(USO) and United States Natural Gas(UNG) have launched a new fund, the United States Short Oil Fund(DNO).

The premiere of DNO comes at a difficult time for leveraged and commodity ETFs, as regulatory uncertainty puts pressure on many popular funds.

DNO, an inverse-exchange-traded product, is designed to track the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Okla., as measured by the price changes of a designated benchmark futures contract on light, sweet crude oil traded on the New York Mercantile Exchange.

Both regulators and the financial community have threatened the status of derivative-based and leveraged funds in recent months. The Commodities Futures Trading Commission recently held two meetings to measure the effect that passive indexing strategies, like USO and DNO, have on the price of commodities they are designed to track.

In the past, regulators have used a light touch when limiting the trading of futures on the New York Mercantile Exchange. The 2008 oil bubble, global financial crisis and goals of the Obama administration could cause a change in the status quo, however, as “speculators” are targeted with increased position limits. The CFTC is expected to announce increased regulation this fall in a move that will dramatically affect funds like DNO.

While the new restrictions have yet to be imposed, they are already taking a toll on popular exchange-traded products. The release of DNO comes in the wake of the closing of Deutsche Bank’s(DB) popular PowerShares DB Crude Oil Double Long ETN(DXO). In anticipation of the new restrictions, DXO’s managers shuttered the fund , knowing that the fund’s size would make it particularly vulnerable to position limits.

United States Commodity Funds LLC, the creator of DNO, is well versed in the difficulties that the new inverse oil fund could face. One of the issuer’s most popular funds, United States Natural Gas, had to halt share creation in July when the fund reached critical mass. The gigantic fund began to trade at extreme premiums to its underlying value while fund managers waited for the approval to continue growing the fund.

DNO will face the same hurdles that tripped up DXO and UNG as the fund grows. While creation limitations may take a while to kick in, there is a good chance that this fund could be curtailed if it proves to be popular. Early indications, including DNO’s first-day trading volume, seem to indicate that this fund could attract a large number of investors.

The warning on the bottom of DNO’s website succinctly sums up the fund’s risks: “Commodities and futures generally are volatile and are not suitable for all investors. The Fund is speculative and involves a high degree of risk. An investor may lose all or substantially all of an investment in the Fund. Funds that focus on a single sector generally experience greater volatility.”

While these factors alone should give investors pause before buying DNO, the most threatening factors are outside of the issuer’s control. New regulation could dramatically impact the way that funds like DNO operate. Investors should hold tight and gauge the regulatory affects before jumping in DNO.

Disclaimer

This is the final installment of our series on the 10 Most Dangerous ETFs. Be sure to read Part 1 and Part 2.

Both of these ETFs have layers of risk heaped onto already complex strategies. Internal and external forces have made them riskier than they outwardly appear, so it is especially important for investors to understand the multiple reasons why these funds are the top two most dangerous for buy-and-hold investors.

These funds — United States Natural Gas(UNG) and PowerShares DB Crude Oil Double Short ETN(DTO) — can wreck your portfolio.

Most Dangerous ETFs

2. United States Natural Gas. As the Obama administration makes efforts to coordinate regulatory authorities and crack down on commodity speculators, UNG has found itself in the headlines. UNG’s complex underlying strategy has been made riskier by regulatory uncertainty. Here are the top three reasons why investors should avoid UNG.

* The strategy: In theory, UNG and United States Oil are “purer” plays on oil and natural gas prices than other ETFs like iShares Dow Jones US Oil & Gas Exploration(IEO) and Energy SPDR(XLE) that track equities. While UNG is designed to reflect natural gas prices, it tracks the near-month futures contracts for natural gas, not the spot price. This methodology inherently causes the fund to deviate from its objective, a problem that USO has also encountered.

* Creation confusion: The price of an ETF should reflect the underlying value, or NAV, of the fund. Unlike closed end funds or mutual funds, ETFs achieve their tracking objectives by the creation and redemption of shares.

Regulatory limits caused UNG’s creation process to grind to a halt back in July. As fund managers waited for the SEC to approve more shares, UNG began trading at a massive premium to its underlying value.

* UNG’s future: After a summer of premiums, the SEC has approved additional UNG shares, and the fund managers will begin issuing new shares on Sept. 28. As UNG is once again allowed to operate as designed, the creation of new shares should cause the fund to once again trade in line with its underlying value. This shift should eliminate the premium and pop the UNG bubble.

1. PowerShares DB Crude Oil Double Short ETN.

* The strategy: DTO tracks a basket of futures contracts and employs leverage to achieve its strategy. Futures are inherently volatile and leverage adds volatility, so DTO can be one wild ride. Since DTO is structured as an ETN, rather than an ETF, it is also exposed to the credit risk of its issuer. In an era where once-solid banks have crumbled, credit risk is more of a concern than ever before.

* Bad genetics: When DTO was originally released, it was paired with the PowerShares DB Crude Oil Double Long ETN(DXO). On Sept. 9, DXO was shut down by its managers because the fund’s size had triggered regulatory limitations. While DTO has yet to achieve the popularity of its former pair, investors in this fund should be wary of a potential shut-down.

* Regulatory smackdown: As regulators home in on ETFs like UNG and DTO that use derivative contracts to achieve their objectives, DTO could face double the regulatory restrictions in the months to come. Increased position limits, or restrictions on the number of futures contracts a fund can own, would affect both UNG and DTO and impact their creation process.

The Financial Industry Regulatory Authority has also recently issued warnings about the risks of leveraged funds. Additional margin requirements will be imposed on Dec. 1. Since DTO is both leveraged and futures-based, this fund faces double the regulatory uncertainty in the months ahead.

Normally, futures-based and leveraged products like UNG and DTO would be appropriate for sophisticated investors who understand the underlying risks. Because of the regulatory uncertainty, however, these products could be dangerous to any investor if requirements suddenly change.

As ETF assets grow, and exciting new products make their debut, it is an exciting time to invest in the ETF industry. New issuers are offering the next generation of ETF products, while increased competition is helping to drive down fund fees.

Investors can safely participate in this environment by following a few basic rules. First, make sure you understand the objective of any fund that you invest in. Secondly, make sure you understand how that ETF plans to achieve its objective. Third, make sure the fund has adequate liquidity and investor interest to make trading safe.

Enjoy the increasing selection of ETFs and avoid dangerous funds.

Amazon.com recently listed more than 200,000 titles under the keyword “investing.” Some of those books are useful. Others are a waste of time. And many, designed to exploit our ignorance and greed, are downright dangerous.

How do you approach this slew of investment information without getting overwhelmed? Every month, financial writers and journalists churn out hundreds of articles that aim to explain the financial world to ordinary investors. The financial media is full of investment picks, ideas, strategies and other advice.

Books still play an important role, however, in mastering the art of intelligent investing. Selecting the right tome can be a daunting proposition. The first place to start is with the basics. The best investment books avoid the sleazy manipulation of the get-rich-quick schemes you’ll find in many books, magazines and, newsletters. Instead, they seek to impart the hard-won wisdom of the great investors to readers like us.

Which books should you read?

Books can serve to strengthen your fundamental investing knowledge while providing you with an important historical prospective.

In addition to several guides and anthologies that offer timeless advice, a number of books about Warren Buffett’s philosophy provide a valuable foundation for any long-term investor.

While Warren Buffett has never penned his own book of investing advice, several stand-out books have been written about his investing style.

Even if you stick to mutual funds, rather than picking individual stocks, Warren Buffett’s method of stock selection can help you evaluate the skills and strategy of a mutual fund manager.

Here are some picks. The best investors, like Warren Buffett, use a strong understanding of the fundamentals to inform their personal investment philosophies. One good place to begin developing your own foundation is an anthology.

Charles Ellis, a money manager himself, compiled Classics: An Investor’s Anthology for an audience of students and professional money managers. It includes many short pieces by respected investment thinkers — the kind of material that has appeared in professional journals over the years.

When it comes to economic trends, history often repeats itself. Familiarizing yourself with the history of investment ideas is one of the most effective ways to prepare for the future.

The Only Investment Guide You’ll Ever Need isn’t quite what its title claims, but it’s one of the books every investor should read. The book was written by Andrew Tobias and first published back in 1978, when very few readers sought out books about personal finance. It became a national best seller for two reasons: the book is funny and creative.

The revised version is worth reading whether you are a novice or an expert. Tobias’ ideas about taxes, commodities, stocks, insurance and other financial matters will help you rethink some of the conventional wisdom that gets many investors in trouble.

Want a good story? Have a look at Buffett: The Making of an American Capitalist. This lively, well-researched biography is a great book about his life and his investment methods.

It’s also great background for readers who want to dip into The Essays of Warren Buffett: Lessons for Corporate America that is edited by Lawrence A. Cunningham. Buffett has never written a book, but his annual letters to shareholders are famous for their wit and intelligence. Cunningham has compiled some of the best material in this slim book. This book serves as a window onto his methods and his beliefs.

Here’s a brief sample: “I’ve said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. I just wish I hadn’t been so energetic in creating examples. My behavior has matched that admitted by Mae West: ‘I was Snow White, but I drifted.’”

The Snowball: Warren Buffett and the Business of Life is unique among other Buffett pieces. The author, Alice Schroeder, sits down with the legendary investor to discuss everything from Berkshire Hathaway(BRK.A) to his family life. This book is the closest thing to a Buffett autobiography on shelves today.

To truly understand Buffett, the best place to start is with his inspiration. Buffett got his start as a student of Benjamin Graham, the father of securities analysis. Graham’s 1934 classic, The Intelligent Investor, is a wonderful introduction to the master’s methods. The book has sold more than a million copies in hardcover; more importantly, it offers insight into how Graham thought about investing — in particular his notion of a margin of safety. Graham advocated buying cheap stocks of companies with sound financials, establishing a “margin of safety” by purchasing the stock below its intrinsic value.

The Intelligent Investor suggests that stocks can be prudent investments, given the right approach. That idea shocked people who had endured the stock market crash of 1929 and the ensuing Depression. Jason Zweig, a senior writer for Money magazine, has done an excellent job in the latest issue of the magazine of updating the book without undermining its essential wisdom.

It was Graham’s lessons that helped Buffett find winning companies such as Coca-Cola(KO), Burlington Northern Santa Fe(BNI), Goldman Sachs(GS) and Nalco(NLC).

For a little hint to readers who may find the 368-page book daunting, Buffett has gone on the record saying that the most crucial chapters in “The Intelligent Investor” are 8 and 20.

Navigating through the sea of investment advice books can be a daunting task. The Buffett basics are a good place to start, and the wisest investors will stay on top of new investing trends while keeping in mind the fundamentals.

Disclaimer

Domestic REIT investors have four ETFs to choose among. Though there are more exchange-traded funds available, the big four offer diversification, liquidity and low fees. They are: iShares Dow Jones U.S. Real Estate(IYR), iShares Cohen & Steers Realty Majors(ICF), Vanguard REIT(VNQ) and SPDR Dow Jones REIT(RWR).

All four of the big real estate investment trust ETFs have a share price around $40 to $50, which makes a comparison of their volume straightforward. Over the past three months, IYR is by far the most popular ETF, with volume of 24 million shares a day. VNQ follows with 3 million, ICF trades 1 million, and RWR sees 0.8 million shares change hands each day.

RWR costs 0.25% in fees; VNQ costs 0.15%; IYR costs 0.48% and ICF costs 0.35%.

RWR has $1.3 billion in assets; VNQ had $3.4 billion at the end of August; IYR has $2.9 billion in assets; and ICF has $1.7 billion.

VNQ tracks the MSCI US REIT Index. VNQ is actually a slice of the Vanguard REIT fund, which can be purchased via mutual fund shares as well. It has total assets of around $9 billion. Information on VNQ’s holdings is delivered quarterly, the same as the mutual fund.

Since many funds rebalance quarterly, this isn’t as big of a strike against Vanguard ETFs, but for investors looking for up-to-date information on the asset allocation among the fund’s holdings, this one will not deliver. For buy-and-hold, however, it will be near impossible for any competitor to match Vanguard’s low fees given its economy of scale.

RWR tracks the Dow Jones U.S. Select REIT Index, a float-adjusted, market cap-weighted index that rebalances quarterly.

ICF follows the Cohen & Steers Realty Majors Index, takes into account management, portfolio quality and sector and geographic diversification. It rebalances quarterly such that no fund exceeds 8% of assets.

IYR tracks the Dow Jones U.S. Real Estate Index, a float-adjusted, market-cap weighted index.

Below I have a comparison of the top 20 holdings of RWR, vs. where these holdings rank among the other funds. Except for a few exceptions, they mostly line up. If a fund was not in the top 20, it was often in the fund and the difference in weighting was typically small.

IYR had the most distinct outliers because two of its top 20 holdings are timber REITs (Rayonier(RYN) and Plum Creek Timber(PCL), which do not appear in other ETFs. Along with Potlatch(PCH), these three accounted for 4% of assets.

Top 20 Holdings of SPDR Dow Jones REIT (RWR) vs. Other REITs

Clearly, ICF makes the heaviest bets on individual REITs, but with only 32 holdings, it is guaranteed to have more concentrated positions.

RWR and IYR have almost the same number of holdings. The heavier bets in the top holdings for RWR come at the expense of slightly lighter holdings among the sub-1% stocks. VNQ has about 20 more holdings than these two, and the sum of their allocations only came to 2.4% as of June 30.

In terms of returns, IYR and VNQ are up 21.7% and 21.6% year to date, respectively. RWR and ICF are up 18.8% and 16.4%.

Over the past five years, VNQ leads with an annualized return of -3.5%, followed by RWR, also -3.5%; ICF -3.6%; and IYR -4.4%.

Since the funds tend to have similar allocations, fund flows into one or the other won’t have a disproportionate affect on the REIT market, though if ICF were more popular, it would favor the large companies over the smaller ones.

For a buy-and-hold, long-term position, the Vanguard fund is the best bet. You won’t have up-to-the-day portfolio updates, but if you’re buying and holding, it’s not critical, and the savings from low fees will add up over time.

Investors who used a hedge strategy may prefer to short IYR, because it has higher fees, although different strategies may make better use of another ETF.

This is the second part of a three-part series on the 10 most dangerous ETFs. To read “ETFs: 10 Most Dangerous (Part I),” click here.

Non-traditional ETF funds that invest in derivative contracts like futures have been the subject of regulatory scrutiny in recent months.

Rather than simply tracking a basket of equities like their predecessors, non-traditional ETFs use futures contracts, swaps and other complex financial instruments to meet their investment objectives. Often, the uses of these contracts make non-traditional funds riskier than their passive, equity-tracking peers.

In this second installment of our countdown of the 10 Most Dangerous ETFs, all three of the funds discussed use leverage to achieve their goals. Leveraged ETFs are inherently more volatile than unleveraged ETFs and are designed with sophisticated investors in mind.

Leveraged ETFs can be caustic in the hands of long-term, buy-and-hold investors who do not understand their strategies completely. The three ETFs listed below are some of the more dangerous of the bunch.

5. MacroShares Major Metro Housing Up(UMM) and MacroShares Major Metro Housing Down(DMM).

After the failure of two sets of leveraged oil funds, MacroShares has set its sights on the housing market, as measured by the S&P/Case-Shiller Composite-10 Home Price Index. This pair of funds is designed to provide the investor with three times the exposure of this index for both bullish and bearish bets.

Rather than investing in stocks or bonds, like other ETFs, UMM and DMM use short-term Treasury securities and overnight repurchase agreements to track their underlying indexes.

Perhaps the most dangerous aspect of the funds is that they are designed as paired trusts and pledge assets to each other over time. Generally, fund issuers create additional shares of a fund if investor demand peaks and assets pour in.

Since UMM and DMM are tied financially, a creation in one of these funds will spark a creation in the other. Investors can get burned when fund managers take money from one pocket and put it in the other.

The failure of MacroShares’ oil funds following the 2008 spike in oil prices does not bode well for UMM and DMM, the last surviving funds from this issuer. Investors should avoid these unconventional leveraged funds and their triple bets.

4. PowerShares DB G10 Currency Harvest (DBV).

Trying to earn incremental returns while facing huge potential risk is like trying to pick up pennies in front of a steam roller. DBV has earned the number #4 spot on our “10 Most Dangerous ETFs” countdown because – for buy and hold investors – the rewards are not worth the risks.

DBV gives investors exposure to the “carry trade,” which is one of the oldest trading strategies in finance. Using this strategy, an investor borrows money in a currency with low interest rates and invests it in another with higher interest rates.

DBV specifically borrows the three lowest yielding currencies and invests in the three highest yielding currencies.

4th most Dangerous ETF

The goal is to make small profits over time. Historically, the higher-yielding currencies tend to maintain their exchange rate against lower-yielding currencies or even appreciate slightly, and traders can lock in the difference in the two yields. While this may be just a small amount over time, funds like DBV use leverage to increase the profits.

The problem is that this strategy tends to fall apart during times of economic turmoil, or if the currency tide shifts. When the trend reverses, carry trade investors can lose their gains very quickly.

DBV has been doing well lately as currencies with low interest rates like Australia’s dollar rise and the US dollar falls. But, if the dollar gains strength, for whatever reason, this fund could get flattened. When the trends that propel funds like DBV reverse, they can quickly erase gains that have taken months to accumulate.

Unless you’re a sophisticated investor with an eye for currency and timing, stay away from buying and holding DBV.

3.Direxion Daily Financial Bull 3X Shares(FAS Quote) and Direxion Daily Financial Bear 3X Shares(FAZ Quote).

While sophisticated traders may find these funds effective daily hedges for more complex strategies, they can be devastating to buy-and-hold investors who don’t understand their objectives.

Volatile markets can erode leveraged strategies over time, a challenge that FAS and FAZ have recently faced. Here’s the math problem with leveraged ETFs: These funds are designed to give you three times the return of their underlying indexes on a daily basis.

Each day, these funds “reset,” compounding returns over time. Direxion recently executed a reverse split in both of these funds because their prices fell so dramatically.

To see the top two most dangerous ETFs, check back tomorrow.

Disclaimer

E*Trade Financial (ETFC) shares continued to trade heavily on Tuesday, but the stock ended the day in the red.

E*Trade was by far the most active stock on the Nasdaq exchange Tuesday with in excess of 250 million shares changing hands. The issue’s level of activity was more than double that of the second most active stock on the exchange — Delta Petroleum (DPTR) at 93 million — and well ahead of its three-month daily average of 86.6 million. As was the case on Monday, E*Trade was again the second most actively traded U.S.-based stock for the session behind Citigroup (C). E*Trade shares closed at $1.92. down 3.5%, pulling back from a session-high of $2.08.

E*Trade shares ended Monday up 11%, despite a lack of obvious news. The stock’s rise followed a surge on Friday after Goldman Sachs analysts upgraded the stock to a buy rating and lifted a six-month price target to $2.30.

Some investors suggested that the stock’s push higher on Monday was a continuation of Friday’s positive move. But Monday’s price surge came in the afternoon, well after investors had time to digest the Goldman call, which arrived before Friday’s opening bell.

Others speculated that perhaps the company was potentially getting ready for a sale to one of its rivals, TD Ameritrade (AMTD) or Charles Schwab (SCHW).

E*Trade does have two things going for it — a recently completed recapitalization plan through debt swaps and an equity offering, in addition to a well-performing brokerage business.

The rapid expansion of the ETF industry has been tempered by a Darwinian-like natural selection process that helps to protect investors against bad funds.

In order to invest successfully and safely, investors must be aware of the unique structure of these funds and the market forces that help to perpetuate popular ETFs while killing off weaker funds.

Is the ETF marketplace oversaturated? Yes. Will issuers keep dumping new funds into the marketplace? Yes. Are some of the new ETFs dangerous? Yes. Is this situation a bad one for investors? No.

ETF issuers chase trends in the marketplace while trying to establish first-mover status in new, exotic fund areas. ETFs that were launched during the summer of 2009 reflect the trends that are making headlines in the financial world.

The debut of the Emerging Global Shares Dow Jones Emerging Markets Financials Titans Index Fund(EFN) and Market Vectors Vietnam ETF(VNM) underscored the renewed appetite for risk in the wake of the global financial crisis. The release of the Pimco 1-5 Year U.S. TIPS Index Fund(STPZ) and ETFS Silver Trust(SIVR) reflected ongoing concerns about inflation.

Just because an ETF makes it into the marketplace, however, doesn’t guarantee the fund’s success. The pedal hits the medal when new ETFs begin trading continuously throughout the trading day, and investor interest begins to drive creation. As the assets of a fund grow, authorized market participants create additional shares to meet investor demand.

One quick way to gauge the investor interest in a fund is to check out the three-month average daily trading volume, available on sites like Yahoo! Another good test is to divide the number of outstanding shares by the number of shares per creation unit. This information is usually available on a fund’s Website and in the fund prospectus. It is a good way to see how many additional units, outside of the first few of seed capital, have been created to satisfy investor need.

Not all ETFs attract the investor interest that is needed to survive. The first ETF closing happened in 2003, a decade after the first ETF hit the market. As is still often the case, the first four funds to close were part of a series. Between 2003 and 2007, just one additional ETF, the SPDR O-Strip, closed its doors.

A change occurred, however, when the ETF banner year of 2007 was followed by the economic downturn of 2008. Nearly 300 ETFs joined the market during 2007, and the economic realities of 2008 revealed that the ETF industry had grown too large too fast. In 2008, a total of 58 ETFs closed down, many due to lack of investor interest.

The ETF market is growing once again, and the same natural selection will come into play. Savvy ETF investors will avoid low-volume funds while benefiting from new copy-cat funds that attract large volume due to attractive features like lower fees. Investors who are able to strike this balance will benefit from the surging growth in the ETF industry.

While natural selection is the main way in which exchange traded products are eliminated, other outside forces can sometimes kill off a fund. On Sept. 9, PowerShares opted to redeem the $407 million in outstanding notes that comprised its DB Crude Oil Double Long ETN(DXO).

Even though DXO had a huge average daily trading volume of nearly 13 million shares, PowerShares decided to close the fund due to regulatory pressure.

Rather than fretting about the explosion of the ETF industry and the proliferation of sub-par ETF products, investors should learn to read the clues supplied by a fund’s open market trading. Average daily trading volume and total assets are easy statistics to find when analyzing an ETF. There are two sides to every trade, and when it comes to buying and selling ETFs, you want to make sure you have plenty of company.

This is the first of a three-part series this week on 10 ETFs investors should avoid. We begin the first part with the least riskiest of the group.

ETFs have offered investors unprecedented access to the financial markets. Broad funds like the SPDR S&P 500 ETF(SPY) offer exposure to major benchmarks, and narrower funds like iShares MSCI Emerging Markets Index(EEM) and SPDR Gold Shares(GLD) provide investors exposure to individual commodities and international regions.

As ETF assets continue to grow, issuers are forging into increasingly unfamiliar territory. While these ETFs have unprecedented themes, they also can have unprecedented risks. Many of the more complex and non-traditional ETF strategies are appropriate for only sophisticated investors.

The “10 Most Dangerous ETFs” are funds that are not for the average buy-and-hold investor. As always, potential investors should examine each fund with an eye toward their own goals in order to determine suitability.

10. Elements Benjamin Graham Large Cap Value ETN(BVL).

BVL tracks large, liquid companies like Alcoa(AA), Wyeth(WYE) and Allstate(ALL), but is one of the most illiquid ETFs on the market today. This ETF is one of the smallest of all time, with a market cap of just $1.3 million and a three-month average daily trading volume of 173 shares.

It is the lack of investor interest in BVL, rather than its methodology or holdings, that makes this fund dangerous. Illiquid funds can be difficult to trade in and out of, and for a 0.75% management fee, investors can do better. Avoid the trilogy of unsuccessful Benjamin Graham funds, which includes BVL, Elements Benjamin Graham Small Cap Value ETN(BSC) and Elements Benjamin Graham Total Market Value ETN(BVT).

9. TDX Independence 2040 ETF(TDV).

Target-date ETFs like TDV are designed to give investors investment exposure that is appropriate for their retirement date goals. TDX Independence ETFs offers one generic fund and four specific target date funds with retirement goals of 2010, 2020, 2030 and 2040. As the target date approaches, these funds are designed to shift investor funds from aggressive allocations to conservative allocations.

In 2008, both target-date ETFs and target-date mutual funds took a huge blow as the markets slid downward. Target date funds that were more aggressively allocated for further retirement dates were hit worst.

TDV fell 40% in 2008. While the retirement date for its target audience is still far off, these returns are unnerving. Funds like TZD are dangerous because they combine a long-term trading strategy with a product that trades daily on an exchange. It would be difficult to watch an ETF fall 40% and stay invested for the long term.

Investors who have any level of financial knowledge are better off building a basic, diversified portfolio rather then putting all their eggs in TDV’s basket.

8. Claymore/BNY Mellon Frontier Markets(FRN).

The risks of investing in this “frontier markets” ETF are not yet worth the potential rewards. FRN invests in the most emerging of emerging markets, areas that are inherently volatile economically and politically. FRN’s top five country allocations are Chile, Poland, Egypt, Colombia and Kazakhstan.

The three-month average daily trading volume for FRN is a low 13,221. Since the fund is illiquid, investors face illiquidity compounded with inherent volatility. While this fund may be worth a look in the future, for now it is simply dangerous.

7. UltraShort Health Care ProShares(RXD).

RXD has two things going against it: the fact that it’s illiquid and the fact that it’s leveraged. ProShares, the pioneer of the leveraged fund industry, released RXD as part of a short/long pair in a series of leveraged sector funds.

Leveraged funds have come under fire, with a lawsuit currently against RXD’s peer, UltraShort Real Estate ProShares(SRS). RXD could face similar pressures as time wears on.

RXD’s average daily trading volume is fewer than 8,000 shares, making this fund dangerously illiquid. While all leveraged funds are risky, RXD’s double risk factor makes this fund one to avoid.

6. iPath S&P 500 VIX Mid-Term Futures ETN(VAZ) and iPath S&P 500 VIX Short-Term Futures ETN(VXX).

The much anticipated VXZ and VXX offer investors exposure to volatility plays. These ETFs track market volatility through the use of derivatives, and their complex strategies make them appropriate for only the most sophisticated investors.

Recent market fluctuations have made the topic of increased volatility a popular theme, and these products could be helpful in hedging a large, multilayered strategy. Average investors, however, should stay away from betting on volatility. Making a bet on volatility by itself is like sitting at a craps table and picking red or black.

The RealMoney contributors are in the business of trading and investing all day on the basis of ongoing news flow. Below, we offer the top five ideas that RealMoney contributors posted today and how they played those ideas.

Dell-Perot
By Jim Cramer
7:04 a.m. EDT Weird Dell(DELL)-Perot Systems(PER) hookup. I guess Dell wanted some recurring revenue. I bet this stops the nascent run in Dell.

Dollar/Yen
By Helene Meisler
Just prior to my time off late last week, I made a fuss over the dollar/yen chart, stating that it had not made a lower low down through 90. This morning finds it not only having rallied sharply but having crossing through a steep downtrend line as well as peeking its head up through that resistance at 92.

As I said last week, the relentless rise in the stock market began right around the point the dollar/yen peaked and headed lower, so a potential bottom here should add to the overbought situation in the stock market.

http://i.thestreet.com/files/tsc/common/images/storyimages/0921_dollaryen.gif

Verichip Jumping on the H1N1 Bandwagon
By Hal Uy
Shares of Verichip(CHIP) are up over 200% on news that the company has been granted an “exclusive license for patents used in Virus Triage Detection Systems for H1N1 Virus.” The problem is that CHIP hasn’t developed a test yet for H1N1 based on the Virus Triage Detection System.

With pandemic flus generally lasting less than two years, even if the the company is successful, the H1N1 pandemic will be long over. Here is the white paper (note: it’s a .pdf file) on the test they want to develop.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Verichip, to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

Short CHIP

GM Cars in Demand but We Need Inventory
By Don Dion
Doug Kass raises an interesting question on Real Money Silver concerning car sales. In checking with my uto dealer clients, it appears that they would be selling a lot more cars if GM in particular could deliver the new cars to the dealers. The 60-day money-back program is driving customers into the GM showrooms, but there is nothing to drive away with.

Positions: long FSAVX

Arris
By Tim Melvin
I first suggested Arris Group(ARRS) as an IT infrastructure play back in December of this year. The stock has pretty much doubled from those lows, and it is probably time to take some off the table. I would look to either sell some stock here or write the November or January 15 calls on a bounce up in the stock. This is a good company, but the price has overshot the fundamentals for now. Insiders have been selling, and it is time to join them.

In February I suggested buying long-term calls on the stock. If, as I did, bought the Jan $7.50 2010 calls it is time to just sell them. A triple in seven months is more than enough for me.

Positions: Long ARRS calls but entering order shortly after this is published to sell.

The Dent Tactical ETF(DENT) from AdvisorShares may very well be the dumbest ETF of 2009. I hesitate to speak so soon, as the ETF industry rapidly expands and three months remain in the calendar year, but this new fund is truly one of the worst ideas I have seen in quite some time.

Launched on Sept. 16, DENT is an actively managed ETF with “five key attributes”: proprietary demographic analysis, tactical investment approach, risk mitigation process, management expertise and active management. Forget cap-weighted, revenue-weighted or dividend-weighted, DENT takes methodology complexity to a whole new level.

Oh, by the way, the total expense ratio is 1.56% and the management fee is 0.95%.

The ETF industry is booming, and with good reason. Investors have sought out ETFs because of their transparency, low expense ratios, sector access and hedge-ability. DENT is a high-cost ETF whose assets are adjusted at the portfolio at the manager’s whim and whose daily holdings are published only after the trading day is complete.

ETFs have traditionally helped investors stay on the highway or gain access to specific sectors at a low cost. Funds like the SPDR S&P 500 ETF(SPY) and PowerShares QQQ(QQQQ) help investors passively track benchmarks without the transactional costs of buying and selling the underlying components. Market Vectors Steel(SLX) and iShares Turkey(TUR) offer sector and international exposure.

Actively managed ETFs like DENT have failed to take hold in an industry known for low-cost passive strategies. The first actively managed ETF, the Bear Stearns Current Yield Fund(YYY) was shuttered soon after its debut when JPMorgan Chase(JPM) stepped in and took over the reins. After the acquisition, YYY liquidated its holdings.

In April 2008, PowerShares launched its own line of actively managed funds. So far, the most “popular” of these funds, the PowerShares Active Low Duration ETF(PLK), has a dismal average daily trading volume of 8,898 shares. The PowerShares Active Mega Cap Fund(PMA), PowerShares Active AlphaQ Fund(PQY) and PowerShares Active Alpha Multi-Cap Fund(PQZ) all have average daily trading volumes of less than 2,000 shares.

A more recent addition to the actively managed ETF family is the Grail American Beacon Large Value ETF(GTV). This new fund is also struggling, with an average daily trading volume of just over 4,000 shares.

DENT is the first actively managed ETF to rely on ETFs as components. Layering ETF on top of ETF has the effect of taking low-cost vehicles and making them high-cost. The managers of DENT have promised to cap the fund’s net expenses at 1.50% for the next 50 weeks. What is included in the fund’s 1.56% total expense ratio? A management fee of 0.95%, “acquired funds” fees of 0.17%, interest, taxes, brokerage commissions, expenses, and extraordinary expenses.

While the high fees will certainly turn off many investors, I believe that the fund’s fuzzy strategy is even more damaging to this new ETF’s success. DENT managers will purportedly use the five key attributes to track “the overall trend of the U.S. and global economies and how consumer spending patterns may change based on this analysis.”

The most successful ETFs have clear objectives that fit nicely into a larger portfolio picture. With an actively managed ETF, you can never be quite sure what you will get six or eight months down the line. If you can’t anticipate what a fund will contain, it is difficult to figure out how it fits as part of your larger strategy.

Investors are better served considering the fundamentals of the DENT strategy, rather than buying DENT itself. By analyzing trends in consumer spending, looking for areas of potential growth and mitigating risk, investors can build a successful portfolio.

A personalized investment strategy, which employs a variety of ETFs, mutual funds and other investment vehicles, is a more effective way to achieve long-term financial goals than a buy-and-hold catch-all fund like DENT. Active ETFs have a long way to go before they start capturing market share.

Disclaimer