Dion Money Management Blog   Money Management for Retirees and Their Families

Lloyd Blankfein and his firm appear to have taken to heart his controversial statement that Goldman Sachs(GS) is doing God’s work.

In what appears to be a sign of atonement for past sins, Goldman has enlisted the help of Warren Buffett to help prove to the American people that it deserved the billions in bailout money that kept it afloat during their darkest days. It hopes to achieve this goal through a philanthropic effort aimed at assisting small businesses.

While this was a surprise move from Goldman, Warren Buffett watchers know that the financier is no stranger to philanthropy. His own charitable organization, the Susan Thompson Buffett Foundation, which assists college bound students across Nebraska, has raised billions in assets.

The investor’s most famous charitable act occurred more than three years ago when he announced he would donate 83% of his fortune to the Bill and Melinda Gates Foundation. Additionally, Buffett has auctioned off cars and lunches in an effort to raise money for different organizations.

On the surface this latest plan appears virtuous. However, not ones to miss out on a profit, it is likely that the new initiative will bag both Goldman Sachs and Professor Buffett a nice profit.

This is not the first time that Buffett has come to the aid of Goldman Sachs. Last year, in the midst of the financial meltdown that claimed big names like Bear Stearns and Lehman and left others like JP Morgan(JPM) and Bank of America(BAC) gasping for air, Goldman desperately turned to the Oracle for relief.

The company offered to sell Buffett’s Berkshire Hathaway(BRK.A) $5 billion in preferred shares with warrants paying 10% interest. Buffett bought in and as since earned over $2 billion in profit.

Today, thanks to both Buffett, and the billions of dollars from the taxpayer’s bailout, Goldman Sachs holds the throne as the reigning king of Wall Street. Recently, the firm has returned to announcing strong earnings and setting aside large bonus pools for its employees.

However, while the bank holding firm is riding high, the rest of the U.S. economy can not say the same. With rising debt, high levels of unemployment, and other problems, the taxpayers who saved Goldman continue to suffer from the mess the firm helped to create. Needless to say, many taxpayers have responded with anger, questioning whether or not Goldman was worthy of their help in the first place.

This week, CEO Blankfein showed his empathetic side by issuing an apology on behalf of the financial giant. At a New York corporate conference, the CEO told listeners that Goldman regretted taking part in the cheap credit boom that helped fuel the pre-crisis bubble.

He then turned the focus onto Goldman Sachs’ newest venture: a program to help small businesses. Co-chairing the “10,000 Small Businesses” initiative would be none other than Warren Buffett.

The aim of the “10,000 Small Businesses” program is to provide small businesses in the United States with access to capital, education and networking opportunities in hopes of spurring productivity and getting them back on their feet.

In order to fund the initiative, Goldman has pledged to contribute $500 million to the cause. Blankfein, Buffett, and Dr. Michael Porter of Harvard Business School will be on the advisory council which is responsible for the development, execution and evaluation of the program.

While, it appears to be a sign of goodwill, Both Buffett and GS will likely see a boost from the program.

Buffett, who has consistently remained bullish on the U.S. economy, sees small business owners as a necessary component of growth. Domestic growth will lead to big gains for Berkshire Hathaway and its affiliates.

For Goldman, the program couldn’t have come at a better time. Although Blankfein insisted that the decision to launch “10,000 Small Businesses” was not motivated by the controversy surrounding Goldman Sachs, one can’t help but look at the timing. With anti-Goldman sentiment mounting and CIT in the throes of bankruptcy, Goldman has a golden opportunity to improve its public image while branching off into the world of small business lending. Whether the program is profit driven or not is still up for debate. However, for Goldman’s sake, it would be in their best interest to ignore the bottom line for a while and focus on helping the people who helped them. The $500 million and Buffett’s blessing are a good start, but it’s going to take results, rather than an apology, a pile of cash, and a press release, to regain the public’s respect.

Disclaimer

Investors have been pouring money into gold exchange-traded funds. In order to avoid surprises during tax season, however, it’s important for investors to understand how different gold ETFs are taxed.

Bullion-backed Gold ETFs

Bullion-backed gold ETFs are structured as grantor trusts in which investors are considered to own undivided interests in the gold owned by the ETF. SPDR Gold Shares(GLD), the largest example of a gold bullion-backed fund, is currently the second largest ETF when measured by assets. Other bullion-backed gold ETFs include iShares Comex Gold(IAU) and ETFS Gold Trust(SGOL).

Since investment in a bullion-backed ETF is treated as ownership of physical gold, ETFs like GLD, IAU and SGOL are taxed at the same maximum tax rate of 28% rate as collectibles (gold bars, baseball cards, etc.).

If an investor buys a bullion-backed gold ETF and holds it for more than one year, sale of the fund will be subject to the maximum tax rate of 28%. If an investor buys and sells shares of a bullion-backed ETF within one year, the investment is subject to ordinary income rates.

Investors may also be surprised to learn that they may incur gains or losses even if they simply buy and hold the fund. If an ETF like GLD or IAU sells gold to pay expenses, a common practice, the gains and losses of these sales are passed on to the investors. While investors do not receive distributions, they must include their share of profits in gross income, taxable at 28%.

Equity-Backed Gold ETFs

A less direct way to gain exposure to the gold market is through ownership of equity-backed gold funds. Funds like the Market Vectors Gold Miners ETF(GDX) and the recently debuted Market Vectors Junior Gold Miners ETF(GDXJ) provide exposure to a group of gold mining companies.

While the fortunes of these mining companies are certainly tied to the price of gold, they are not as “pure” a play on gold prices as bullion-backed funds like GLD.

When it comes to tax treatment, however, equity-backed funds are advantageous. GDX and GDXJ are subject to the 15% maximum tax treatment for long-term capital gains.

Futures-Backed Gold ETFs

ETFs that use futures to track the price of gold or silver are organized as master-feeder trusts. Investors in PowerShares DB Gold(DGL) and PowerShares DB Silver(DBS) are taxed as partners in a partnership.

As a shareholder of DGL, and a partner in the master-feeder trust, you will be liable to pay 60% long-term capital gains taxes and 40% short-term capital gains taxes for distributions. Investors may not even receive these distributions, as they are reinvested back into the ETF. Investors in DGL are also liable to be taxed on the ordinary interest income gained from the fund’s collateralized Treasury bill positions.

ETNs

While there are no specific exchange-traded notes for tracking gold, funds like the iPath Dow Jones-AIG Commodities ETN(DJP) and iPath Dow Jones-UBS Precious Metals Subindex Total Return ETN(JJP) offer investors exposure to precious metals.

The tax treatment of ETNs is favorable for many long-term investors. ETNs are subject to capital gains taxes based upon when investors buy and sell the product. Rather than the periodic taxes faced by owners of bullion-backed and futures-backed gold funds, investors in ETNs only face this capital gains tax when they sell shares.

Since ETNs track underlying notes, rather than equities or futures, they are subject to the credit risk of the issuer. Many ETNs, like JJP, are also thinly traded and may be difficult for investors to trade in and out of.

Gold ETFs are a great way to diversify your portfolio, but it is important to consider the tax implications before selecting a fund. Talk to your tax adviser or evaluate your investment time frame before trading any gold ETF.

Disclaimer

When exchange-traded notes first appeared on the market in 2006, investors rushed to invest in what was heralded as the next generation of exchange traded products. Three years later, the ETN universe is contracting. Are ETNs a portfolio risk, or simply underutilized and misunderstood?

According to data from the National Stock Exchange, the total number of listed ETNs decreased from 90 in October 2008 to 84 in October 2009. As of Oct. 31, there was $699 billion invested in ETFs compared to only $7.6 billion in ETNs.

Like ETFs, ETNs trade throughout the trading day and track an underlying index. The most critical difference between ETFs and ETNs are the index components. While ETFs track baskets of stocks, bonds or derivatives, ETNs track “unsubordinated debt notes.” The “N” in ETN is what sets these products apart.

Commodity ETNs offer certain advantages over commodities ETFs. ETNs are designed to have no “tracking error” between the product and its underlying index. While buyers of futures-based commodity products like United States Natural Gas(UNG) or United States Oil(USO) have to deal with futures market forces like contango and backwardation, owners of the iPath Dow Jones-AIG Commodity ETN(DJP) will get the return of the index, minus management fees.

A second reason to pick commodity ETNs over commodity ETFs is the tax treatment. Investors who hold a commodity ETN for more than one year will only pay a 15% capital gains tax when they sell the product. Futures-based commodity ETFs like PowerShares DB Commodity(DBC) are taxed like futures, and gains are marked-to-market each year. This 23% vs. 15% tax difference helped to herd commodity investors toward the ETN industry.

With the almost-rabid interest in commodities, you would think that ETNs would be launching left and right. Why is the universe of ETNs shrinking, even as the demand for commodities products is expanding?

of the issuing bank. In an era where bank failure isn’t something you need a lot of imagination to visualize, this structural risk should be a concern for investors.

Lehman Brothers, for example, launched three ETN products before going out of business. Investors who kept their money in these products until the collapse of Lehman walked away with zero.

The likelihood that Barclays, the issuer of iPath ETNs, will collapse overnight is pretty remote. Potential ETN investors, however, should be wary of the credit rating of issuers and keep an eye on the issuing bank.

A more practical, and pressing, issue for ETN investors is liquidity. While a lot of these ideas look great on paper, they have failed to attract investor interest in the open marketplace. When buyers and sellers are not present, funds tend to trade further away from their underlying values. Investors may have to buy a fund at a premium, only to sell it at a discount, if the fund is illiquid.

While the number of ETN products has been declining, assets in the remaining products have been increasing. Total ETN assets nearly doubled from October 2008 to 2009, as the fittest ETNs survived, and thrived.

ETNs have failed when it comes to investor education. These products can be useful for the right investor in the right sector. Investors who are interested in ETNs should first understand the unique credit risks and secondly, use products that have proved themselves in the open market.

Disclaimer

Van Eck has announced that it will launch a Market Vectors Poland ETF, providing investors with exposure to a fast-growing central European economy.

The new ETF, which will take the ticker symbol PLND, is expected to debut later this month. It will focus on small- and mid-cap stocks. Components will have a market cap of at least $150 million and a three-month average daily trading volume of at least $1 million to be eligible for the ETFs underlying Poland Index.

Van Eck has seen tremendous growth in the assets invested in its ETFs, from $3.3 billion in October 2008 to $10.4 billion last month.

Much of this growth can be attributed to Market Vectors products being in the right place at the right time. Both the Market Vectors “hard asset” equity ETFs, like the popular Gold Miners ETF(GDX) and Junior Gold Miners ETF(GDXJ), and international equity ETFs have offered focused exposure to areas of the market where investors have been piling in.

The new Poland fund will join other single-country Market Vectors funds like the Brazil Small-Cap(BRF), Indonesia(IDX), Russia(RSX) and Vietnam(VNM).

These narrowly themed funds have attracted a lot of attention as investors regain their appetite for risk.

BRF, launched in May of 2009, has already attracted nearly $500 million in assets. During the three-month period ending Nov. 17, BRF jumped nearly 41%. Although the IDX, launched in January 2009, took some time to attract investor interest and volume, the fund now has $188 million in assets and a three-month average trading volume of 102,000 shares.

The performance of VNM and RSX, both popular funds with investors, illustrate the importance that sector allocation plays in determining the movement of a fund. VNM, which is up 11.3% for the three-month period ending Nov. 17, has nearly half of its underlying portfolio allocated to the financial sector. RSX, up nearly 150% year to date, has nearly 50% of its underlying portfolio allocated to oil and gas and energy.

catch on as quickly as Market Vector selections like BRF and RSX? The performance of the fund’s largest underlying sectors and costs associated with the fund will help to determine popularity. According to a recent release from Van Eck, the most heavily weighted sectors in PLND’s portfolio will be financials, energy and industrials, with 40%, 14% and 11% allocations, respectively.

While Van Eck is touting Poland as the “largest and fastest growing economy in Central and Eastern Europe”, it will take more than this country’s fast growth to attract investors to the fund. Another emerging-market fund, RSX, can attribute its strong performance to its status as an “energy play.” For PLND to succeed, it will need to draw investors who are not only interested in diversifying internationally but who also like the type of sector-specific exposure the fund provides.

Country-specific funds like PLND are helpful in diversifying a broader international portfolio, or in playing short-term trends in international economies. Since they are so narrowly themed, investors have a greater chance of experiencing increased volatility. Because of this, if you add PLND to your portfolio, be sure to keep an eye on it.

Disclaimer

The Propelled by an increase in global demand for coal, the Market Vectors Coal ETF (KOL) has jumped nearly 140% year to date, and this fund is showing no signs of slowing down in the months ahead.

According to the “World Energy Outlook,” published by the International Energy Agency last week, “coal remains the backbone fuel of the power sector worldwide.” The report predicts that the demand for coal will continue to rise faster than that for any other fuel.

KOL tracks 40 global firms that derive at least 50% of their revenue from the coal industry. Top components include Peabody Energy Corp (BTU), Consol Energy (CNX), Arch Coal (ACI) and Massey Energy (MEE). The fund attracted a net cash flow of $17 million during the month of October, and currently has $299 million in assets. This focused fund has an expense ratio of 0.62%.

The demand for coal in emerging markets like China is skyrocketing, even as demand for other energy sources, like gas, drops. According to the IEA report, an abundant supply of natural gas in the U.S. should continue to put pressure on natural gas prices through the next decade.

The U.S. currently fulfills about 90% of its natural gas need through domestic production. Companies are now turning to alternative methods to produce additional natural gas. Recently, Pennsylvania officials opened nearly 32,000 additional acres of state forest for lease to shale gas drilling companies. The land is located over the massive Marcellus Shale formation.

While the overabundance of natural gas has hurt ETFs like United States Natural Gas (UNG) (See Low Natural Gas Prices Hurt ETF), focused energy ETFs like KOL allow investors exposure to other areas of the energy sector. (See ETFs: Coal vs. Natural Gas)

China’s stimulus efforts have helped to increase demand for coal in the region. Significant net coal imports are now flowing into the country, aided by many of the top components in KOL’s portfolio. U.S. components like Peabody Energy are also exporting to other emerging markets, like India, who are ramping up efforts to add even more coal-fired energy.

Abroad, top KOL component China Shenhua Energy has seen an increase in demand as snowstorms sweep the nation. The storms have disrupted supply and increased demand, driving up coal prices and stocks of coal producers. China Shenhua, KOL’s third-largest holding, is China’s largest coal producer by market value. The largest holding in KOL, China Coal Energy, could also get a boost in share value as the government orders power plants to stockpile coal in the face of storms.

KOL continues to be an attractive way to gain exposure to coal producers in both the short and long term. Since this ETF is narrowly focused on a cyclical sector, potential investors should be risk-tolerant.

Investors looking for a more diversified approach to hard-asset producers should consider the Market Vectors Hard Assets Producers ETF (HAP). Top HAP components include Monsanto (MON), Exxon Mobil (XOM) and Potash of Saskatchewan (POT). More than 40% of HAP’s underlying portfolio is allocated to energy companies.

Disclaimer

The Royal Bank of Canada has put additional restrictions on double- and triple-leveraged ETF products.

In addition to providing a possible glimpse of what’s to come in the U.S., the move underscores the risk and complexity of these ETFs, something investors should be aware of regardless of whatever regulations are in place.

The new Canadian regulations limit the purchase of these leveraged ETFs to investors who are already approved for options trading.

Leveraged ETFs, which utilize complex derivative instruments like futures or swaps to achieve their investment objectives, seek to amplify the returns of their underlying indices. Some are bearish, which means they multiply the inverse of an index’s moves. An example of a bullish leveraged ETF is the Direxion Daily Financial Bull 3X ETF(FAS), which is designed to give investors 300% exposure to the Russell 1000 Financial Services Index on a daily basis. The Direxion Daily Financial Bear 3X ETF(FAZ), on the other hand, is designed to provide inverse 300% exposure to the same index.

As leveraged ETFs have become popular, regulators in both the U.S. and Canada have expressed concern about the complexity of these securities and have examined different ways of restricting their sale.

Since these funds offer leveraged exposure to their underlying indices on a daily basis, a compounding effect occurs when the funds are held long term. While most investors use triple-leveraged funds like FAS and FAZ to hedge daily exposure, investors who hold the funds for more than one day may not get the returns they are expecting.

In the U.S., both regulators and financial firms have been encouraging the proper use of leveraged ETFs. In June, the Financial Industry Regulatory Authority issued a notice “reminding” firms of proper sales practices for leveraged and inverse ETFs.

In the notice, FINRA described leveraged ETFs as “highly complex financial instruments” that are “useful in some sophisticated trading strategies.” It warned firms that, “inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”

Following the warning, firms like Edward Jones and UBS(UBS) banned or restricted access to leveraged ETFs for their brokerage clients. Several other firms, like Ameriprise(AMP) and Morgan Stanley(MS), followed suit.

FINRA released an additional notice in August, alerting investors to changes in margin requirements for leveraged fund investors. The new requirements, effective Dec. 1, will make it necessary for owners of leveraged ETFs or uncovered options on leveraged ETFs to have margin in their accounts that is commensurate to the degree of leverage in their investments.

Citing the derivative instruments, such as options, futures or swaps, that underlie many leveraged ETF funds, FINRA noted that “leveraged ETFs are inherently more volatile than their underlying benchmark or index.” FINRA added that, “in view of the increased volatility of leveraged ETFs compared to their nonleveraged counterparts, FINRA believes higher margin levels are necessary.”

Canada’s answer to leveraged ETF concerns is perhaps the most comprehensive to date. By restricting the purchase of leveraged ETFs to investors who are already approved for options trading, regulators are, in effect, screening investors for suitability.

In both the U.S. and Canada, investors who wish to trade options must complete additional paperwork and meet certain requirements when opening a brokerage account. These steps are designed to ensure that options traders understand the risks of these products as well as make sure that traders meet certain financial requirements.

While an understanding of options trading does not guarantee that an investor will be knowledgeable about leveraged ETFs, the application-for-options process helps to narrow the field to more savvy investors. Both leveraged ETFs and options are complex financial instruments, and increased requirements are designed to protect and inform investors about how these products function.

The Dec. 1 margin increases for U.S. leveraged ETF investors, and new requirements for Canadian leveraged ETF investors, should help to achieve the universal goal of investor education.

It is also possible that FINRA will take additional steps, like those taken by RBC, to protect leveraged ETF investors. In the meantime, investors should continue to remain cautious in their use of leveraged ETF products.

President Obama’s trip to China has helped to heighten speculation about the renminbi and the issue of currency appreciation. While Obama’s recent references to a greater balance in trade have been met by stiff opposition from China’s officials, a recent report from the People’s Bank of China suggests that appreciation of the yuan is not out of the question.

The best way to play this potential appreciation is through ownership of alternative assets, such as gold, rather than directly owning China’s currency. Hedge fund manager Hugh Hendry speculated that the rise in oil in 2008 was a result of the rise in the yuan because the oil bubble popped right when the yuan stopped rising.

As the yuan slowly appreciated, the Chinese were able to do the carry trade with U.S. dollars. Once the appreciation stopped, the speculators exited and oil plunged.

Oil was the focus of 2008, but in 2009, gold has the attention of investors and is the better play. And as with oil previously, traders already have implemented the “dollar down, gold up” strategy. Even if the Chinese do not increase purchases of gold, other investors will buy as the dollar weakens.

Bullion ETFs such as SPDR Gold Shares(GLD) and iShares Comex Gold(IAU), and stock ETFs such as Market Vectors Gold Miners(GDX) and Market Vectors Junior Gold Miners(GDXJ) are a good way to play these alternative assets.

For less risk, use a more diversified approach via ETFs such as Market Vectors Hard Asset Producers(HAP).

Appreciation of the yuan would lead to further pressure on the dollar. Thus far, investors have been able to turn to the PowerShares DB U.S. Dollar Bearish Fund(UDN) to benefit from the dollar slide.

UDN, however, may not benefit much from China currency appreciation, because a stronger yuan could take some pressure off the euro. The euro makes up 57% of the Dollar Index that UDN tracks.

While the WisdomTree Dreyfus Chinese Yuan(CYB) would also seem like an obvious play here, investors will make more money by figuring out what the Chinese would buy with appreciated currency rather than by buying the currency itself.

In the People’s Bank of China’s third-quarter report, the bank changed its language regarding the exchange rate and many took it to mean that the government may allow the renminbi to appreciate. The 46-page report states that: “Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange-rate formation mechanism.”

China’s policy-makers are slow to move, and the country’s leaders will likely wait until the opportunity feels right to let the currency appreciate. Mounting pressure from the EU, U.S, IMF and World Bank, however, underscored by Obama’s recent visit, will keep more investors’ eyes glued to the yuan.

While timing the appreciation of the yuan will be difficult, the best way for investors to play this shift is with alternative asset ETFs like GLD. Investors in emerging markets such as China and India have been turning to gold as a currency alternative. Soaring gold prices, economic fears and potential yuan appreciation should continue to fuel gold ETFs.

Disclaimer

The United States Natural Gas ETF(UNG) may have resolved regulatory concerns, but the futures-based fund continues to come under pressure from an abundance of supply that is expected to suppress future prices.

The current supply issues will keep gas prices depressed until 2015 despite a possibile economic recovery that could spur an increase in demand in the near future, according to a new report from the International Energy Agency’s World Energy Outlook. Representatives said the oversupply would likely stem from this country’s decreased demand for imported gas.

The report is just the latest challenge for UNG, which has come under fire in recent months. UNG managers were forced to halt the share-creation process in July of 2009 after the remaining pre-approved shares had been issued. Further concerns about regulatory changes from the Commodities Futures Trading Commission delayed the resumption of normal trading.

The interruption in the creation process caused a price bubble in UNG, as the market price of the fund was dislocated from its underlying value. UNG began trading at a premium . The normal creation and redemption of ETF share units is designed to keep these two values in line.

Despite the resumption of normal trading in late September, market pressures have created further problems for owners of UNG. The popping of the UNG premium bubble certainly contributed to UNG’s 60% decline year to date, but burgeoning natural gas supply should continue to pull down the fund.

The U.S. already produces about 90% of its natural gas need domestically, and many companies have begun to turn to unconventional methods as a way to produce the fuel stateside. Recently, Pennsylvania officials opened nearly 32,000 additional acres of state forest for lease to shale gas drilling companies. The land is located over the massive Marcellus Shale formation.

Tumbling natural gas prices have exacted their toll on UNG. According to data from the National Stock Exchange, UNG had a net cash inflow of $308 million in October of 2009. Despite the fact that investors sunk more than $300 million into the fund, UNG’s net assets fell by $263 million from September through October 2009. This drop can be attributed to the fund’s falling price.

While the additional supply expected to come from shale and other means of unconventional production should further depress UNG, the U.S. companies involved in the transport, storage and production of the natural gas will see increased business.

In June, I encouraged investors to avoid UNG and use the First Trust ISE-Revere Natural Gas Index Fund(FCG) for exposure to natural gas.

FCG tracks a portfolio of natural gas producers, and is up nearly 42% year to date. While the fate of these companies is certainly tied to natural gas prices, I believe that this fund could continue to perform in the short term.

Another natural gas alternative is JPMorgan’s Alerian MLP Index ETN(AMJ). AMJ’s investors gain access to the natural gas market through the stocks of companies that store and transport natural gas, many of which are structured as master limited partnerships.

Disclaimer

Both ETF issuers and mutual fund companies are vying for investors in commodities. Investors looking for exposure to the broad commodities sector can now choose from active or passive management and futures or equities-based strategies.

When comparing commodity ETFs and commodity mutual funds, the fundamental differences should certainly be considered. While ETFs trade throughout the trading day, mutual funds are generally priced just once. Passive ETF strategies are generally lower-priced than active mutual funds.

While an active trader should use ETFs to easily trade in and out of the commodities sector during trading sessions, long-term investors may prefer the oversight provided by mutual fund managers.
Equities-Based Funds

Equities-based commodity ETFs and mutual funds track the stocks of commodities producers. Rather than tracking the physical commodities themselves, these funds track companies that are involved in the commodities business.

The Fidelity Global Commodities(FFGXC) mutual fund, Jefferies Global Commodity ETF(CRBQ) and Market Vectors Hard Assets Producers ETF(HAP) all track large, global, commodities producers. All three funds count Monsanto(MON), Exxon Mobil(XOM), Potash(POT), Syngenta and Chevron(CVX) among their top 10 holdings.

While the three funds may share similar holdings, there are differences in fees, size and track record. HAP, launched in August of 2008, is the oldest of the bunch. Fidelity’s FFGCX was introduced in March of 2009, while CRBQ recently began trading in September of 2009.

CRBQ has an expense ratio of 0.65%, while HAP and FFGCX have expense ratios of 0.75% and 1.75% respectively. When it comes to concentration, the top 10 holdings in CRBQ, HAP and FFGCX account for 37%, 33% and 27% of those funds’ assets respectively.

Since all three funds are relatively new, it is difficult to compare performance. Year to date, HAP is up nearly 33%. For the three-month period ending November 12, HAP and FFGCX were up 10.5% and 11.1% respectively.

All three funds have similar holdings and portfolio concentration, so the best bet here is to go with an HAP. The mutual fund selection, FFGCX, could prove to be more stable over time, but investors should stick to the cheaper ETF with a slightly longer track record for now.
Futures-based Funds

A group of derivative-based mutual funds and ETFs offer investors exposure to the price of a basket of commodities. The Rydex Commodities Strategy(RYMBX) mutual fund and iShares S&P GSCI Commodity-Indexed Trust(CSG) ETF both aim to track the S&P GSCI™ Commodity Index. Investment in these funds provides investors exposure to the prices of energy, livestock, agricultural and metals futures.

While futures-based commodity funds offer a more “pure” exposure to commodities prices than equity-based peers, uncertain regulation has plagued these products in recent months. The Commodities Futures Trading Commission is expected to set limits on the numbers of futures contracts that these funds can hold.

These futures limitations have already impacted the trading of $1.7 billion dollar GSG, and could potentially affect the $66.5 million dollar RYMBX if investor interest amps up. GSG had to halt creation of new shares of the fund in August to stay within anticipated regulatory limits. Changes in this regulation could be passed on to investors as premiums in the trading of ETFs or increased costs for mutual funds.

Year to date, GSG has advanced 10.35% while RYMBX has risen just 4.80%. Rydex charges a 1.64% net expense ratio for RYMBX, while iShares sets GSG’s net expense ratio at 0.75%.

Between these two futures-based funds, the less-expensive GSG makes more sense in lean times. Since they both track the same index, and both face the same regulatory challenges, the accessibility of the ETF pays off for now.

Another option worth considering is the massive $14.6 billion dollar PIMCO Commodity Real Return Strategy(PCRAX) mutual fund. This fund also uses derivatives to track commodity prices, but collateralizes this exposure with bonds. This fixed income portion of the portfolio is heavy in TIPS, and has performed well in the stock-market bounce-back. Year to date, PCRAX is up more than 31%.

The cost-effective structure of ETFs has helped to make these products affordable competitors in the commodity space. Active investors who need to trade in and out of the sector should consider using liquid ETFs to gain exposure.

Sometimes, however, an active manager and strong firm can bring value to a fund. In the case of PCRAX, PIMCO’s renowned team of fixed-income experts have helped the fund to outperform.

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 Van Eck’s new gold miner ETF, a negative development for networking ETFs and the asset that would benefit from an appreciating Chinese currency.

For investors concerned about investing in small-caps, I wrote this about the junior miners ETF: “While the underlying components in the Junior Miners portfolio have small market-caps, they have high trading volumes. Creation of the Junior Miners ETF, done in blocks of 50,000 shares, will likely not impact the trading of the underlying stocks.”

Still, GDX is riskier than bullion funds such as IAU, and GDXJ is riskier than GDX. GDXJ will often gain more and lose more than GDX, and it may sometimes correlate to stocks more than it correlates to gold. This ETF is appropriate as a speculative position in a portfolio, but I wouldn’t buy shares here given the recent run-up in gold stocks. Investors who don’t even own GDX or a bullion ETF would do better to start there, but again, I’d wait for a pullback.

Time to Take Profits in Networking ETFs
Posted 11/13/2009 10:26 a.m. EST

Positive news failed to spark a sector rally in networking, a bad sign for a networking ETF with heavy exposure to the companies involved. Motorola(MOT) is planning to sell more business lines as the company seeks a return to profitability. This will affect iShares S&P North American Technology-Multimedia Networking Index(IGN), which holds 8% of assets in the firm, its second-largest holding after Cisco(CSCO).

The company’s desire to shed its handset business has been known for some time, but now Motorola is talking about selling its home entertainment business, a division responsible for one-third of revenue.

The sale of these two divisions could affect the company’s weight in the index. Although it would still retain some networking businesses, the company’s market cap would decline, and that may result in a reweighing.

Investors didn’t react much to the news yesterday, Motorola stock fell 0.5%, a little better than the Nasdaq’s 0.8% drop.

Year to date, Motorola has helped the networking ETF. While IGN is up 58% this year, Motorola is up 96.8%. Top holding Cisco gained 43.6%.

Earlier in the week, Hewlett-Packard(HPQ) announced it would buy 3Com(COMS), which makes up 3.85% of the index, sending 3Com shares up more than 30%.

The positive news didn’t lift IGN, however, which has been steadily losing long-term momentum.

I suggest taking profits on the networking ETFs here — PowerShares Dynamic Networking(PXQ) offers similar exposure, sans Motorola — and rotate into a broader tech ETF such as iShares Dow Jones U.S. Technology(IYW) to maintain technology exposure. IYW has stronger momentum and outperformed IGN by more than 5% in the past month.

A Stronger Yuan Would Boost Gold Even More
Posted 11/11/2009 5:50 p.m. EST

Some investors have begun to speculate that China will allow its currency to appreciate, but they may not have considered gold as the asset that will get the most bang from a stronger Chinese buck. In the People’s Bank of China’s third-quarter report, the bank changed its language regarding the exchange rate; several analysts quoted by Reuters took it to mean that the government may allow the renminbi to appreciate.

A stronger yuan would be bearish for the U.S. dollar. The only direct ETF on bet on a falling dollar, the PowerShares DB U.S. Dollar Bearish Fund (UDN), will go up, but with 57% of the underlying index invested in the euro, it isn’t a direct bet on Chinese currency appreciation.

While the WisdomTree Dreyfus Chinese Yuan (CYB) might seem like the obvious ETF play in this case, more money can be made by figuring out what the Chinese would buy with their appreciated currency.

One potential target is commodities. Hedge fund manager Hugh Hendry speculated that the rise in oil in 2008 was a result of the rise in the yuan, because the oil bubble popped right when the yuan stopped rising. As the yuan slowly appreciated, Chinese speculators were able to do the carry trade with U.S. dollars. Once the appreciation stopped, the speculators exited and oil plunged.

Oil was the focus of 2008, but in 2009, gold has the attention of investors and is the better play. And as with oil previously, traders already have implemented the “dollar down, gold up” strategy. Even if Chinese investors do not increase purchases of gold, others will buy as the dollar weakens.

Buying bullion ETFs such as iShares Comex Gold(IAU) and stock ETFs such as Market Vectors Gold Miners(GDX) and Market Vectors Junior Gold Miners(GDXJ) would be the most powerful way to play an appreciating Chinese currency. For less risk, use a more diversified approach via ETFs such as Market Vectors Hard Asset Producers(HAP).

Disclaimer