Dion Money Management Blog   Money Management for Retirees and Their Families

As gold hits record highs day after day, the performance of other precious metals and hard-asset producers have been largely overlooked.

Investors looking to gain exposure to precious metals and commodities have options beyond the popular bullion-backed SPDR Gold Shares (GLD) and equity-backed Market Vectors Gold Miners (GDX) and Market Vectors Junior Gold Miners (GDXJ). The massive iShares Silver Trust (SLV) offers physically-backed exposure to silver, while Market Vectors Hard Asset Producers (HAP) offers diversified exposure to hard asset producers.
iShares Silver Trust: Silver is the most plentiful and least expensive of the precious metals. Unlike gold, silver is a necessary ingredient for a number of industries, including jewelry producers and photography, and it has several industrial uses as well. This demand will continue to rise as the global economy picks up.

Most investors looking for a pure play on silver have turned to the iShares Silver Trust. This massive fund boasts $5.5 billion in assets and has gained nearly 63% year to date. SLV is backed by physical silver held by the iShares Silver Trust, which according to the fund’s Web site currently amounts to 9,252.02 tons. The fund is very liquid, with an average volume of 11.9 million shares trading hands each day.

The ETFs Physical Silver Shares (SIVR) is also backed by physical silver held in a vault by custodian HSBC. This fund, launched July 24, has gained 33.25% through Nov. 23. With $181.7 million in assets and an average trading volume of 180,000, it still has plenty of ground to cover before it catches up with SLV.

While SLV and SIVR provide investors with direct exposure to the metal, the PowerShares DB Silver Fund (DBS) tracks silver through the Deutsche Bank Liquid Commodity Index — Optimum Yield Silver Excess Return. This index is made up of silver futures contracts and is intended to accurately reflect performance. DBS is even smaller than SIVR, with $106.3 million in assets and trades close to 17,500 shares on average. Year to date, this fund has gained 62%.

Market Vectors Hard Asset Producers (HAP): With more than $105 million in assets under management, HAP tracks the Rodgers-Van Eck Hard Assets Producers Index, which was developed in concert with international investor Jim Rogers and is described by the fund’s website as the definitive global benchmark for commodity equities. HAP seeks to track the largest global hard asset companies, who are engaged in the production and distribution of hard assets and related products and services.
The top five holdings in the fund’s portfolio are Monsanto(MON), Exxon Mobil (XOM), Potash (POT) and Syngenta (SYNN). A total of more than 280 underlying holdings helps to provide investors with diversified exposure while limiting security-specific risk. The fund’s net expense ratio is 0.75% and HAP has a three month average daily trading volume of 89,000 shares.

Hard Assets are the building blocks of the global economy, and the companies in HAP’s portfolio will be central to the expansion of the global economy, particularly in the emerging markets. As countries like China experience phenomenal growth, they will demand the essential services provided by these companies in the energy, agriculture and infrastructure areas.

Gold equity and bullion ETFs are a great way to diversify a well-rounded portfolio with a precious metal hard asset. Funds like SLV and HAP, however, provide an alternative to gold ETF funds. Whether you choose gold, silver, or hard asset equities, these funds are a good addition for a small portion of your portfolio.

Disclaimer

Since its Nov. 11 debut, the Market Vectors Junior Gold Miners ETF(GDXJ) has advanced nearly 7% and drawn significant investor interest.

Already, this addition to the gold ETF funds universe has an average daily trading volume of more than 2.8 million shares.

Its popular large-cap predecessor, the Market Vectors Gold Miners ETF(GDX), has a three-month average daily trading volume of 12.6 million shares.

GDXJ helps to provide investors exposure to junior gold miners with enormous potential for growth, while helping to minimize security-specific risk.

Because some of the companies in GDXJ’s underlying portfolio companies have yet to generate material revenues and operate at a loss, trying to pick individual junior mining stocks can be like playing the lottery. GDXJ’s portfolio includes 39 junior gold miners, reducing the impact that the failure of any single underlying component would have on the investment as a whole.

While the number of GDXJ’s underlying components helps to temper the risk of this ETF, 46% of assets are dedicated to the fund’s top 10 holdings. Investors and prospective investors should, therefore, familiarize themselves with GDXJ’s top components. The performances of GDXJ’s top five holdings, in particular, have a significant impact on the fund’s trading.

The largest holding at 6.41% is Coeur d’Alene Mines(CDE).

In addition to being a gold producer, Couer d’Alene is one of the world’s largest silver companies. CDE currently has mines in Bolivia, Mexico, Chile, Argentina and a surface mine in Nevada. In addition to owning mining operations, CDE also has non-operating interests in several mines.

New silver mines Bolivia and Mexico are expected to increase cash flow in the upcoming months. According to a recent research report from Knight Capital Group, CDE’s production of silver is expected to increase to 18 million ounces in 2009, up 50% from 2008. The opening of Kensington Gold Mine in 2010 is also expected to increase gold production.

The second largest holding at 5.65% is Hecla Mining(HL).

Hecla Mining is involved in the discovery, acquisition, development, production, and marketing of silver, gold, lead, and zinc. With mines located in Idaho, Alaska and Mexico, HL produces and sells lead, zinc and bulk concentrates for custom smelters as well as unrefined silver and gold bullion bars for precious metals traders.

The purchase of Alaska’s Greens Creek mine in April 2008 has contributed to increased silver production in 2009. Cash flow from operating activities increased 62% to $32.3 million in the third quarter of 2009, compared to $20 million for the second quarter of 2009. Due to its increased cash position, HL was able to repay all outstanding debt in the fourth quarter of 2009.

Silver Standard Resources(SSRI) is the third largest holding at 5.38%.

SSRI focuses on the acquisition, exploration and development of mineral resource properties, primarily silver, gold, copper, lead and zinc in Argentina, Australia, Canada, Chile, Mexico, Peru and the United States. The company has interests in a number of global mining projects, including an alliance with Minco Silver to pursue silver opportunities in China.

High expenditures and uncertain cash flows make this company a high risk/reward holding. Investment in a new silver/tin mine in Argentina is expected to increase cash flows over the next year.

Rounding out GDXJ’s top five holdings are Gammon Gold(GRS) and New Gold(NGD), with 4.97% and 4.56% allocations, respectively. GRS focuses on gold and silver interests in Mexico, while New Gold is involved in acquisition, exploration, extraction, processing, reclamation, and production of gold, copper, and silver.

While investment in “junior” companies, like those featured in the GDXJ portfolio, is inherently more risky than owning an ETF that tracks large-cap gold miners, this fund offers leveraged-like exposure to gold prices. As gold prices continue to soar, GDXJ still looks like an attractive opportunity.

Disclaimer

Warren Buffett has traditionally been known to discover and invest in undervalued firms with a lot of potential upside. However, today the famous investor appears to be taking a much safer approach to making money.

In recent months, instead of making big bets on risky firms with strong upside potential like BYD. At play, the investor has set his sights on larger, safer firms. If this is a sign of a new era of Buffett investing, investors looking to mirror the financier should be prepared to for slow, steady returns in the future.
Although the global economy appears to be on the heal, a number of issues continue to threaten the long-term stability of the market’s rally. These various weaknesses have not only caught the attention of Professor Buffett, but a number of other prominent financiers including Bill Gross, George Soros, Jim Rogers and John Paulson.

Each individual has designed and shared his unique investment strategy with the public through personal buying and selling, market commentary or a combination of both. Whether it’s by using gold, commodities, utilities or traditional fundamental analysis, each strategy strives to successfully prepare for future market conditions in an environment that has never before been experienced.

For Buffett, being successful in today’s market is an issue of managing safety. During the downturn that left the vast majority of investors gasping for air, Buffett’s portfolio was not spared. In fact, during the drop, he lost over $20 billion as well as his top position on Forbes’ list of wealthiest people. Since taking the hit, the investor appears to have taken a note from the tortoise made famous in the fable, The Tortoise and the Hare, as his recent investments appear to be aimed at steady, albeit slow, positive performance.

The largest of these new plays was his purchase of Burlington Northern Santa Fe(BNI). At $34 billion, the railroad investment is Buffett’s biggest on record.

However, unlike BYD, which has rocketed in value in the short time since receiving Buffett’s blessing, the Oracle does not expect BNI to blast off. On the contrary, he expects the firm’s performance to remain relatively stable. Buffett has even implied that the play is not for the short term, but rather a 100-year play for Berkshire Hathaway(BRKA).
Additional signals that Buffett is looking to take on less risk could be found in his recent holdings disclosure last week. Investors anxiously waiting to see which exciting new firms would received the Oracle’s blessing in the third quarter instead found a number of increased bets on previously held, top-ranked, well-known companies.

Some of the most notable bets included Wal-Mart(WMT), Nestle(XOM). and Exxon Mobil(NSRGY). In the case of Wal-Mart, Buffett nearly doubled his exposure to 37.8 million shares from 19.9 million shares.

By holding strong, stable discount retailers, candy makers and oil firms in his portfolio, Buffett appears to be diversifying his holdings across a number of sectors with the aim of positioning himself for limited growth over the long term.

Interestingly, he also appears to be prepping his portfolio to benefit from short-term boosts that will likely occur during the holiday season. In particular, as cash strapped consumers look to discounters rather than higher end retailers for holiday shopping, Wal-Mart and Nestle will see some of the biggest boosts. Exxon will also likely see a strong performance as the winter season drives thermostats up.

With the market’s rapid turnaround, many investors who were wary of the environment are now kicking themselves for not jumping in earlier. However, although the recent rally has been stellar, this does not mean that investors should be taking on excessive risk in hopes of catching up.

On the contrary, with the longevity of this rally still very much up in the air, investors would do better by spreading their assets across a broad number of strong sectors and asset classes. Like Buffett, this strategy may not lead to the biggest jumps, but it will ensure that you will not be left in the dust in the event of another gut-wrenching downturn.

Over the long haul, slow and steady will win this race.

Disclaimer

Gold ETF funds are an efficient, easy way to gain access to soaring gold prices.

As this precious metal continues to test new highs, investors are flocking to ETFs like Market Vectors Gold Miners(GDX) and SPDR Gold Shares(GLD).
Investors add gold ETF funds to their portfolios for a variety of reasons: diversification, concerns about inflation, concerns about deflation and fear of financial crisis. Before adding a gold ETF to your portfolio, however, it is first important to establish your investment time frame.

ETFs can be effective vehicles to target and capture quickly moving market trends. The upward movement of gold prices has been fast and furious, and many of the investors looking to gold ETFs are hoping to cash in on a continued rise in gold over the short term.

These short-term investors should consider one of the Market Vectors Gold Miner ETFs. GDX, the large-cap gold ETF, gives investors exposure to some of the largest gold mining companies worldwide, such as Barrick Gold(ABX), Goldcorp(GG) and Newmont Mining(NEM).

Market Vectors Juniors(GDXJ), on the other hand, offers investors exposure to junior mining firms. The success of gold mining firms has outpaced the advance of gold prices themselves, so both of these funds are good to capture gold’s upward moment in the short term.

These funds are aimed at risk-tolerant investors. Investors who want to take on the most short term risk, with potentially the biggest payoff, should check out the junior gold mining fund. Investors who prefer a larger-cap holding, with potentially less volatility, should consider GDX.

The success of gold miners is certainly tied to gold prices, but other factors like fixed costs increase volatility. While this volatility makes these investments key short-term bets, investors looking for the long term should consider more pure play on gold prices such as gold bullion ETFs like SPDR Gold Shares and iShares Comex Gold(IAU).

Although physically-backed bullion funds like GLD and IAU are taxed higher as collectibles, they provide convenient, fractional ownership in a stockpile of gold held for the fund. Over time, these funds will tack the prices of gold more closely, and for long term holders, this investment is worth the difference in taxes.
Understanding the key differences in structure and tax treatment is necessary for investors looking to add sector ETFs to their portfolios. Certain ETFs are geared toward shorter term investors, while others are more effective over the long term.

While investors debate the probability of inflation, deflation, recovery and economic collapse, the only thing that seems certain is the ongoing uncertainty in the financial markets. Gold has been just the panacea to soothe concerns across the investment spectrum. Whether you’re a short-term sector investor or someone building a long-term portfolio, there are many compelling reasons to investigate gold ETF funds.

In the latest challenge to the mutual fund industry, Pimco has launched the Enhanced Short Maturity Strategy Fund(MINT) to compete with money-market funds.

The new ETF, which Pimco notes is “intended to be a higher yielding alternative to money market funds,” is actively managed and will primarily invest in short-duration investment-grade debt securities.

While a number of other bond ETFs, such as the Vanguard Short-Term Bond Fund(BSV), the iShares Barclays 1-3 Year Treasury Bond Fund(SHY), the SPDR Barclays Capital 1-3 Month T-Bill ETF(BIL), the WisdomTree U.S. Short-Term Government Income Fund(USY) and Pimco’s own 1-3 Year U.S. Treasury Index Fund(TUZ) currently provide investors with exposure to short-maturity fixed-income instruments, the aim of MINT is to challenge money-market mutual funds such as Fidelity’s Cash Reserves(FDRXX).

Seeing money-market yields hovering near zero, Pimco hopes to use its proven fixed-income prowess to promise stronger returns. Although MINT will mainly hold the same assets as other money-market funds, the instrument is also open to holding longer-maturity bonds and other investment-grade fixed-income securities to meet this goal.

While this fund is yet to prove its effectiveness, with a low 0.35% net expense ratio, MINT may become a strong contender among veteran money-market mutual funds if it can successfully achieve the returns it promises.

Thus far, MINT appears to have stirred up some investor interest. Since it was launched last week, MINT has had an average daily trading volume of 18,950 shares. This level of trading is solid for a new fund, and especially notable since many actively-managed ETFs have struggled to garner interest in the past.

While mutual fund investors are required to earmark funds for tax purposes, ETF investors often pay capital gains taxes only when the funds are sold. These tax advantages, along with the transparency inherent to the ETF structure, have helped to drive many investors from mutual funds to ETFs.

Pimco’s latest offering could help to bolster investor interest in actively-managed bond ETFs. As of October, existing actively managed bond ETFs have only managed to attract $25 million in aggregate assets. Pimco’s high-profile brand name, and reputation as a giant in the bond industry, could help to bring recognition to the actively-managed ETF universe.

MINT is managed by Jerome Schneider, an executive vice president in Pimco’s Newport Beach office who joined PIMCO in 2008. Before joining PIMCO, Schneider was a senior managing director with Bear Stearns specializing in credit and mortgage-related funding transactions.

From fixed income products to emerging markets investments, ETFs are canvassing the investment universe with low-cost alternatives to traditional mutual funds. MINT is the first of five planned active ETFs from PIMCO, and this fund will certainly be one to watch.

A weak dollar and emerging-market demand continue to propel the Market Vectors ETF(SLX) skyward in 2009.

During the one-year period ended Nov. 20, SLX was up more than 200%. If economic conditions persist, there’s reason to believe that this ETF, which tracks steel companies like Rio Tinto(RTP) and Vale S.A. (VALE)(VALE), will continue to gain steam.

The perfect storm brought on by the economic crisis battered the steel industry over the past several years. A weakening in construction and auto sales dragged down steel prices, depressing the type of companies tracked by a fund like SLX. Over the past year, however, growing demand in emerging markets like China has helped to boost steel and the stocks of companies that deal in its production.

In addition to RTP and VALE, the top five holdings in SLX’s portfolio also include ArcelorMittal(MT), Posco(PKX) and Gerdau SA(GGB)

While all of SLX’s 27 underlying components are listed in the U.S., nearly 60% of the portfolio is staked in international companies. The use of U.S.-traded equities in the underlying portfolio helps to ease the ability of SLX traders to hedge the fund during the day, while providing investors with exposure to an international portfolio.

To be considered for inclusion in SLX’s underlying portfolio, components must first be primarily involved in activities related to steel production such as mill operation, steel fabrication, and the extraction and reduction of iron ore. To ensure liquidity in the underlying basket, the market capitalization of each component must be greater than $100 million.

While SLX offers investors the unusual opportunity to track producers of this particular hard asset, it is not the only ETF to do so. The PowerShares Global Steel Portfolio(PSTL), launched in September of 2008, offers access to U.S.-listed and international steel companies. Year to date, PSTL is up 56%. During the same period, SLX has advanced 98%.

The difference in performance can be traced to the weighting of out-performing companies like RTP and VALE in the two portfolios. PSTL, which has 60 components to SLX’s 27, has a lower concentration of assets in its top components. More than 48% of SLX assets are allocated to its top five holdings, while just 36% of PSTL’s assets are allocated to its top five holdings.

Concentration in top weightings can help to boost an ETF’s performance when these companies outperform index rivals. A larger, and more diversified, fund like PSTL can provide investors protection from security specific risk over the long haul, however.

Thus far, investors have favored SLX as the steel-ETF-of-choice. SLX has the advantage of being the first mover in the Steel ETF space, having launched in 2006, and the fund has a three- month average daily trading volume of 403,000 shares. PSTL, by comparison, has an average daily trading volume of 7,340 shares. The relative expense ratios of SLX and PSTL, 0.60% and 0.75% respectively, may have also helped to sway investors towards SLX.

The demand for steel in emerging markets continues to be strong, and a weak dollar is helping the companies that comprise the SLX portfolio. While this fund has already advanced a significant amount in the past year, risk-tolerant investors may still have time to cash in.

The ETF universe is expanding, and new products are launching on a weekly basis. While most large, liquid ETFs provide transparent, low-cost exposure to sectors and themes, the performance of some funds has been disappointing and even misleading for some investors.

The advent of electronic trading has made it easier for individual investors to trade ETFs, but successful order execution requires more than just an idea and a computer screen.
Whether you are looking to buy a large market index like the SPDR S&P 500 ETF(SPY), a commodities fund like SPDR Gold Shares(GLD) or an international fund like Vanguard Emerging Markets(VWO), the following tips will help you select “ETFs that work” and trade them successfully.

Pick ETFs That Work

An “ETF that works” is one that successfully tracks its underlying index. Every ETF has two values: an underlying net asset value (NAV) and a market price during the trading day.

ETFs are designed as transparent trading vehicles, whose share creation and redemption processes keep the funds’ market price in line with the funds’ NAV.

During the trading day, there will be very little difference between their NAV and market price in the most successful ETFs. The bid/ask spread will be tight, and investors can trade in and out of the fund without having to buy at a premium or sell at a discount.

Liquid ETFs, whose market price closely tracks their NAV, provide the tracking and transparency that investors should expect when dealing with these products.

In order to test the liquidity of an ETF before purchase, investors should look at the prospective fund’s average trading volume using a finance site like the one at Yahoo.com. Some very liquid ETFs like PowerShares QQQ(QQQQ) will have three-month average trading volumes in the millions.

ETFs with average daily trading volumes greater than 50,000 shares are generally liquid. Investors looking to buy a fund with lower trading volume should make sure that their order would not represent more than 10% of the trading volume on an average trading day.

Knowing When to Trade

Certain times of the day are better than others when buying and selling an ETF. Investors should look to buy and sell ETFs when they are most likely to closely track their NAV. This is generally during times of the day when market participants can actively arbitrage and provide tight markets in ETF products.

During the opening of the market at 9:30 a.m. EST and the last 10 minutes of trading (3:50 p.m. to 4 p.m.) there are often order imbalances. During these times, supply and demand is more apt to determine market price than the underlying value of the ETF. These market forces can cause an ETF to trade at a steep premium or discount to underlying value.

While gaps between NAV and market price do not always occur at the openings and closings of the market, regular investors are better off waiting until after the open to execute an order. Often, an ETF is more apt to trade close to its underlying value at 9:45 a.m. rather than 9:30 a.m.

Order Types

There are several order types that investors commonly use when executing ETF trades. A market order, which is time sensitive but not price sensitive, executes immediately at the next bid or offer. If an ETF is liquid with a tight bid/ask spread near NAV, a market order should be sufficient to get an appropriate price.

Investors who insist on trading less liquid products, with larger bid/ask spreads, may have better luck trading with limit orders. Rather than entering a market order, which sweeps the book without regard to price, investors in illiquid ETFs may be better entering a limit order at last sale.
While this method does not guarantee execution, limit orders are price sensitive. By entering a limit order, you can be assured that you will not get five different prices during execution, with each price further away from NAV.

The variety and complexity of ETF products requires basic knowledge of trading principles in order to get successful execution. These three tips are a good place to start.

Disclaimer

Don Dion posts his current insights on the stock, bond, commodity and currency markets in his RealMoney blog, anticipating which ETFs will be in play next. Among his blogs this week were the following, in which he wrote about caution signals for emerging market currencies, John Paulson’s plans to set up a gold fund and what it means for gold investors, and the short-term weakness in the financials.

Caution Signals for Emerging-Market Currencies

Posted 11/20/2009 2:36 p.m. EST

The discussion and implementation of capital controls is a barometer for the currency market, and investors in emerging-market currency ETFs should take heed.

In the past month, Taiwan moved to block hot money from sitting in time deposits, and Brazil initiated a tax on foreign equity investors.

Hong Kong reports that in the six weeks between Oct. 1 and Nov. 13, close to $75 billion flowed into the country. To put that in perspective, Hong Kong’s GDP was $215 billion last year. Stock market capitalization exceeds $2 trillion, but 50% of the market is made up of Chinese firms. Hong Kong’s government is concerned about the huge inflows, and it is not alone.

Bloomberg also reports that, “Officials from India, South Korea and Indonesia are among those expressing concern over overseas capital stoking stock and real estate prices.”

These nations remember the 1997 Asian crisis well and do not want to suffer a repeat. The main focus of their concern is the ultra-low interest rate on the U.S. dollar that is fueling the carry trade. Emerging markets are seeing increases in asset prices along with their currencies, and it may eventually cause global imbalances that will be corrected via another currency crisis.

While emerging-market equities still have room to advance, the easy currency gains are gone. It’s impossible to know when the current currency trends will end, but the growing concern from South America to Asia is a sign that we are entering the middle phase of the current rally. Note that the policies are unlikely to change the market; rather, by the time the slow-moving governments finally act, the market has already shifted.

Investors in emerging-market currency ETFs, such as WisdomTree Dreyfus Emerging Currencies(CEW) do not need to sell now, but I would not add new positions.

Another Reason to Go With Gold

Posted 11/19/2009 4:44 PM EST

John Paulson’s announcement that he is setting up a gold fund sends a bullish signal to gold bugs and retail investors that the yellow rock still has room to run.

I currently hold the Market Vectors Gold Miners ETF(GDX) and the Market Vectors Junior Gold Miners ETF(GDXJ) as a play on the mining industry, and the iShares Comex Gold Trust(IAU) as a play on the actual commodity.

I would advise investors to hold on to gold ETFs for the time being. Although prices of the metal dipped from their record highs on today, I feel the current economic environment is well suited for further upside.

For Paulson, investing in gold is not a new endeavor. In fact, according to The Wall Street Journal, the hedge fund manager’s firm has amassed considerable holdings in both AngloGold Ashanti(AU) and Kinross Gold(KGC) throughout this year. Both AU and KGC are top holdings in GDX.

Paulson, who pocketed $20 billion shorting the housing market prior to the downfall, has made a name for himself by successfully forecasting recent events. He also practices what he preaches: he reportedly followed up his announcement by saying that he would invest a quarter billion dollars into his own new fund.

I personally like GDXJ for its small-cap exposure. Although it is a more volatile play on the gold industry, any moves on the upside in the sector will be magnified by holding the smallest firms. Less risk-tolerant investors can aim for larger-cap exposure with the GDX or physically backed gold ETF funds such as IAU and the SPDR Gold Trust(GLD).

Look for More Lagging From Bankers

Posted 11/18/2009 12:48 p.m. EST

One sector displaying short-term weakness is the financials, although there are some bright spots in long-term momentum.

WisdomTree International Financial(DRF) was the best-performing financial ETF in recent weeks, with a 1.5% increase in the past month and 17.5% gain in the past three months through Nov. 17. It ranks highly in both short- and long-term momentum; the downside is that it only trades about 18,000 shares a day and has about $18 million in assets. (It is the only financial ETF with strong short-term momentum.)

DRF has had the best performance of a group of international financial ETFs, which includes iShares S&P Global Financials(IXG), the most liquid option. IXG gained 13.2% in the past three months. These returns are mostly due to the strong euro, however, the same factor that helped international utility and telecom ETFs outperform the strictly U.S.-based ones.

After the international financials, no other subsector of financial funds has performed especially well, though two individual ETFs are worth considering. SPDR KBW Insurance(KIE) has good long-term momentum, as does PowerShares Global Listed Private Equity (PSP). They’ve returned 11.8% and 15.0%, respectively, over the past three months.

After those financials, momentum drops off quickly. After passing iShares S&P U.S. Preferred Stock(PFF) and iShares Dow Jones U.S. Broker Dealers(IAI), which rank in the middle of all ETFs, the weakest funds are found in PowerShares Dynamic Banking(PJB), iShares Dow Jones U.S. Regional Banks(IAT), PowerShares Dynamic Insurance(PIC) and PowerShares Dynamic Financials(PFI).

On Oct. 2, I warned on financials, specifically IAT, PJB, and SPDR KBW Bank(KBE). Since that time, these three have returned 2.8%, 0.6% and -1.3%, compared to an 8.6% rise in the iShares S&P 500 Index(IVV).

This underperformance in banking will continue. Investors’ best bets are with DRF, IXG and PSP thanks to the weak U.S. dollar, while investors looking for a strictly domestic financial ETF for the near-term should go with KIE.

Disclaimer

It was a mildly down week for the stock market. The S&P 500 lost 0.2%, and the Dow Jones Industrial Average slid 0.5%. The Nasdaq lost 1%, hurt by poor earnings from Dell(DELL) and a Bank of America analyst downgrade of the chip sector.

Gold made headlines on Monday and Tuesday, but it traded sideways for the remainder of the week. the iShares Comex Gold(IAU) gained 2.8% for the week. Housing starts grabbed headlines as well, after they fell in October, with most analysts predicting an increase. The iShares Dow Jones U.S. Home Construction(ITB) lost 3.7%.
And now for this week’s ETF winners and losers…

Winners

iShares Silver Trust(SLV) +6.2%
PowerShares DB Silver(DBS) +6.2%

Silver prices have spent most of this year catching up with gold prices, but silver can still gain more than 15% before it reaches the gold:silver ratio seen in early 2008. Silver will need more weeks like this past one though. Over the past month, gold outperformed silver.

PowerShares DB Base Metals(DBB) +4.6%

iPath Copper Total Return ETN(JJC) +5.2%

iPath Industrial Metals Total Return ETN(JJM) +4.6%

iPath Aluminum Total Return ETN(JJU) +4.2%

With copper comprising one third of DBB assets and 44% of JJM, this week’s copper rally helped lift these funds. Aluminum makes up another third of DBB and 26% of JJM.

The industrial metals have performed well, since they benefit from both inflation fears and increased demand during the economic recovery.

iPath Grains Total Return ETN(JJG) +3.3%

Market Vectors Agribusiness(MOO) +3.8%

PowerShares DB Agriculture(DBA) +1.9%

Agriculture remains popular with ETF investors, but prices have lagged other commodities. Bullish gurus such as Jim Rogers have plugged the sector and inflation fears have investors looking for any commodity that will preserve purchasing power. Crop yields are unlikely to provide the lift necessary to justify the price increases, however, opening the sector up to decline if inflation doesn’t arrive in time.

Losers

iShares Turkey(TUR) -8.1%
TUR’s magnificent run turned into a turkey last week. Mark Mobius, manager of Templeton Emerging Markets Fund (EMF), said the country could have a correction, and the market delivered. Mobius said other emerging markets could also decline, but he also added that investors should regard the drop as a buying opportunity.

Year to date, TUR is still up 77%.

iShares Japan Small Cap(SCJ) -2.4%

PowerShares FTSE RAFI Japan(PJO) -4%

iShares Japan(EWJ) -2.9%

WisdomTree Japan Small Cap(DFJ) -2.6%

WisdomTree Japan Total Dividend(DXJ) -2.6%

Optimistic headlines were sparked by reports of third-quarter GDP growth of 4.8% year over year, but then investors learned that prices fell by 2.6%. Much of the growth came due to the deflation, not from increased production. While this isn’t a problem by itself, Japan has a large debt burden. An economy with no growth can shrink its debt burden with inflation, but an economy with no growth will increase its debt burden with deflation.

FirstTrust ISE-Revere Natural Gas(FCG) -4%

Natural gas prices sank again last week and U.S. Natural Gas(UNG) reached an all-time low, but UNG only fell 0.8% during the week. After months of following the stock market higher, however, FCG may finally be trading in sympathy with natural gas prices.

Disclaimer

All eyes are on the U.S. dollar, the principle scapegoat for the ongoing appreciation of most asset classes, from stocks to bonds to gold. Monday illustrated this point, as even Treasuries gained ground while stock and commodity prices took their cues from the currency markets and some uncharacteristic comments by the Federal Reserve chairman, Ben Bernanke. Speaking before the Economic Club of New York, he reiterated the standard Federal Open Market Committee line, which states growth is under way even though risks persist, and that interest rates will remain low as long as necessary.

Bernanke did diverge, however, to comment on the U.S. dollar’s slide. The value of the dollar does matter, so much as it relates to the Fed’s dual mandate of maximum employment and price stability. Bernanke also raised eyebrows by making uncharacteristic remarks regarding asset prices in general (e.g. stocks), saying that he did not see any large misalignments anywhere in the financial system.

Other economists have noted the absence of valuation misalignments in either global equity or credit markets, indicating that good fundamentals, not leverage, are responsible for the strong gains in asset prices. The reductions in volume, margin trading, and derivative use are reflected in the nominal growth of the financial sector, which otherwise would be ballooning if speculation were at the root of asset appreciation. Instead, economic recovery, cost reductions and emerging market strength are supporting this return to normalcy.

The Dow Jones Industrial Average has remained a clear leader since the Dow’s mid-October rally brought the index back above 10,000 for the first time since it plummeted in October 2008. Barron’s presented some interesting research that slices and dices the Dow into different groups of stocks, all of which point to an upward trend.

First there are stocks such as American Express (AXP), which are building upon a clear upward trend, that have shown both solid momentum and volume. Next are firms such as DuPont (DD), which are breaking out to new highs after having traded in a range-bound manner while the broader market had moved higher. The upward trendlines have held, thus ensuring that stocks like DuPont continue participating in the bull market.

Finally, there are stocks such as Boeing (BA), which is recovering from a pullback and breaking out, or like Johnson & Johnson (JNJ), which has turned a failed bearish technical signal into a bullish one. Both of these groups of stocks could have been early signs of failure, but they have found support and are chasing the Dow’s leaders. Either the equity or debt of all these companies is represented in the diversified portfolios of most clients through funds such as Federated Strategic Value (SVAAX), Federated Capital Appreciation (FEDEX), ETF Market Opportunity (ETFOX), or MDT Balanced (QABGX).