Dion Money Management Blog   Money Management for Retirees and Their Families

Stocks continued to meander their way through the last two months of 2009, including the shortened trading week ahead of Christmas and the New Year. Yet, they did manage to stroll beyond resistance levels toward new highs, even though this failed to spark any great reaction or follow-through on behalf of the bulls or of the bears due to light trading volumes. The S&P 500 quietly surpassed the 1,121 threshold, which was an important technical milestone. Because it has reached this level on low volume and during poorly attended trading sessions, however, a truer test will be its ability to hold the line here once trading resumes in force next year.

The year ended far better than most would have predicted at the March lows, when the headlines were still full of bad news and the most dire predictions. The bear market — ushered in by the bursting of the real estate bubble, the ensuing financial meltdown and credit crunch and the global recession that followed — was the second-worst in the last 80 years. The 20-month slide ended this year only after an unprecedented government response of tax cuts, stimulus spending, and financial bailout packages.

If 2009 was an important year in stemming those losses and in setting the groundwork for a lasting economic recovery, 2010 is shaping up to be the year when the recovery’s strength and stamina will be tested. For its part, the Dow Jones Industrial Average has rallied more than 19 percent year to date, and nearly 60 percent from its bedeviling bottom, placing its climb among the strongest of major market rallies from potential secular lows. Now, after settling into a seven-week trading range, the index looks ready to break out.

In the short term, I expect to rely on some of the funds that have recovered strongly in 2009, such as Federated High Income Bond Fund (FHIIX) and ICON Information Technology Fund (ICTEX), which have provided returns of more than 50 percent and 46 percent, respectively, year to date. I also expect to hold funds such as Federated Strategic Value Fund (SVAAX), which has recovered more than 40 percent from its March lows, yet only has a 12 percent return year to date. The fund is beginning to outperform both the Dow and the broader S&P 500.

With the advent of the New Year, I would like to remind you how important it is to review your investments in their totality. Dion Money Management strives to be your most trusted advisor, and we are more than happy to review any investments managed by other advisors or that you manage on your own. We can perform a portfolio review and provide a clear picture of your complete asset allocation, making recommendations to position your investments opportunistically in 2010 that are in line with your risk tolerance.

Disclaimer

2009 was a year of big moves for Warren Buffett.

As we wrap up this year and set our sights on 2010, it is a good time to look back at some of the biggest plays and best lessons to take away from the Oracle of Omaha. By internalizing these actions, investors can look forward to a financially prosperous new year. Patience Is Key

This year, Buffett proved once again that successful investing requires a strong stomach and plenty of patience. The Oracle has famously been quoted as saying that his favorite holding period is forever.

The financier’s all-in bet on Burlington Northern Santa Fe (BNI) is a shining example of his persistence.

Unlike many of his other investments, the financier has made it clear on a number of occasions that his investment in BNI is not expected to ever see rocketing performance.

Rather, as the United States and other nations around the world regain strength, the railroad industry will see slow, albeit steady returns. Instead of the looking forward to the next few months or years, Buffett believes that this BNI is well suited to benefit Berkshire Hathaway(BRK.A) long after Buffett is gone and even into the next century.

As moments of weakness present themselves in this recovering market, having the patience to weather market volatility will prove crucial to successful investing in 2010.

Know When to Fold

Buffett has stated that his two most important rules when it comes to investing: Don’t lose money, and don’t forget that rule. In 2009, the investor has shown just how dire the consequences are when his investments fail to live up to these two rules.

Professor Buffett’s most noteworthy dud in 2009 was Moody’s(MCO) . Since July of this year, the investor has cut Berkshire’s stake in this damaged credit ratings agency on six different occasions.

The most recent share cut occurred on Dec. 23, when the investor dumped nearly 88,000 shares. Berkshire’s stake in Moody’s has been cut 34% from the 48 million shares it owned at the end of June. It is likely that, by the end of 2010, Buffett’s portfolio will be nearly, if not completely free of Moody’s exposure.

Another big loser in Buffett’s portfolio this year has been NetJets. Not only has Buffett slashed 800 employees from the struggling firm, but he replaced the company’s CEO in August in hopes of turning the firm around.

Thanks to the broad market reversal in 2009, the returns have been plentiful. However, looking to 2010, investors need to remain vigilant in their search for not only strong buys but also safe windows to exit underperforming holdings.
Take Intelligent Risks

This year, the Buffett saying, “Be fearful when others are greedy and greedy when others are fearful” was perhaps the most important . In 2009, this single lesson netted the Oracle billions.

Goldman Sachs(GS) is Buffett’s biggest success story of 2009. In September, the Oracle of Omaha invested $5 billion into the firm, essentially saving it from collapse. Buffett’s blessing has paid off beautifully as Goldman Sachs’ shares have rocketed through the second half of 2009, earning the investor billions in profit.

The company has risen from the ashes to currently hold the throne as king of Wall Street. Because Buffett had faith in the U.S.’s financial system when others were fearful, the investor has earned over $3 billion in profits. Heading into 2010, expect Buffett to rake in even more from this play.

It is important to remember that Goldman Sachs was not the only financial firm that sought the help of the Oracle. On the contrary, when the sector as a whole was faltering, a number of other big names looked to Buffett for assistance.

However, through doing a significant amount of research and homework, he found many of these firms to be inherently damaged and lacking attractive upside potential. While risky, Goldman proved to be the safest play for a rebound in the U.S. financial system.

As Buffett has shown, taking risks is essential to earning big returns. However, doing your homework is even more important. In 2010, investors will have even more opportunities for big profits. However, only by following Buffett’s example and doing your homework, will you be able to weed out the winners from the losers.

Disclaimer

As investors digest Tuesday’s data from the Case-Shiller housing indexes, they will have one less tool to work with.

On Monday, MacroShares shuttered two ETFs that allowed investors to make bullish and bearish bets on the Case-Shiller Composite-10 Home Price Index.

The Major Metro Housing Up(UMM) ETF and Major Metro Housing Down(DMM) ETF, is the third paired ETF group from MacroShares to close down. MacroShares has also shelved two sets of oil funds since 2008, as structural problems and oil volatility sunk the pairs.

While investors pay particular attention to the release of housing data, UMM and DMM failed to capture its intended audience. These two funds recently reached an early termination trigger when their assets on deposit fell under $50 million.

According to the latest Case-Shiller report, U.S. home prices fell at a slower annual rate in October. While housing declines in major metropolitan areas do not appear to be getting worse, the data show that the indexes are flat when compared with the previous month.

The goal of MacroShares’ funds was to allow investors to bet on the direction of the Case-Shiller indexes and the prospects for major metropolitan housing. The paired funds were unable to attract enough investor assets to continue their investment strategy.

The fate of the MacroShares funds should be of particular concern to ETF investors, who face an increasingly broad range of choices when selecting strategies. The failure of the paired-fund approach continues to raise concerns about the future of non-traditional ETF strategies.

When ETFs close down, investors are often the hardest hit. Generally, there is a period between when a fund announces its closing and the final halt of trading. During this period, investors can choose to sell their shares or hold on to their investment in order to receive its underlying value at a future date.

Selling an ill-fated ETF in the open marketplace can often be a losing proposition. An influx of sellers and absence of buyers often causes the fund to trade at a discount to its underlying value, or NAV. Investors who choose to wait for redemption have to weigh the opportunity cost of having funds tied up.

In the case of UMM and DMM, investors will have to pay up as the funds wind down. MacroShares estimates that the early termination expenses will range from $0.85 to $0.90 per share, or about 4% of the share price.

Structure and liquidity are important factors in determining the viability of an ETF. While a fund may track an important investment concept, sometimes it fails to attract investors or has a strategy that fails in open-market trading.

UUM and DMM may have been the only ETFs to track the Case-Shiller indexes, but investors have other options for betting on real estate in the ETF universe. REIT ETFs, such as the SPDR Dow Jones REIT ETF(RWR) and the First Trust S&P REIT(FRI), provide different ways to access the REIT marketplace.

Disclaimer

As I review the most important developments in the ETF industry during 2009, two stories stand out prominently: natural gas and the trading of leveraged funds.

What’s more, these stories continue to evolve and may prove crucial in 2010 as well.

Here is a look at some of the natural gas articles that received the most interest from readers. Later this week, we’ll review some of my most popular 2009 articles on leveraged funds.

Natural Gas ETF ‘Taxed’ by Delay
Originally posted 07/14/09 03:14 PM EDT

In the latest chapter of the United States Natural Gas ETF(UNG) saga, the fund has begun to trade at a noticeable premium to its actual value, forcing investors to “pay up” to get a hold of shares.

UNG closed at a 2.56% premium to net asset value (NAV). This predictable move is a result of a regulatory hang-up in the fund’s creation process that defines the very nature of ETFs.

Unlike mutual funds or closed end funds, ETFs have a transparent portfolio. Each day, investors can find out exactly what is in the basket of stocks that make up each fund. Baskets generally include securities or futures and a cash amount. The price of an ETF should be close to its NAV, since it is possible to determine what the fund is worth while the contents of its basket are trading.

In the normal course of events, several factors can cause an ETF to deviate from its NAV. That may occur if the contents of the ETF basket are not trading at the same time as the ETF — e.g., the fund contains Chinese equities that trade only on Chinese exchanges during Chinese exchange hours, not 9:30 a.m. ET to 4 p.m. ET — or if some component of the basket is halted during normal trading. A fund with a low number of buyers and sellers, and consequently a low trading volume, can also deviate from NAV.

In the case of UNG, however, the entire pricing mechanism has been thrown off by a halt in the creation process. When an ETF first appears on the market, an approved market maker will create units of the fund to sell to customers. As demand for the fund increases, market makers will create additional units to sell to investors.

grows and demand increases, he will have to make bigger and bigger batches each day to meet demand if he doesn’t want to raise the price.

UNG has become like a lemonade stand on a super highway of demand. In anticipation of the volume that the fund would generate each day, designated market makers have had to make bigger and bigger batches of the fund. On July 7, the SEC cut off the supply of lemonade. In a regulatory filing issued last Tuesday, UNG had to suspend issuing new shares while it waits to see if it can create 1 billion new units. UNG had originally been approved to create 200 million units.

In the meantime, investors are still thirsty for shares of UNG, driving the price of the existing UNG shares above their NAV. While some investors may not care about the price increase and just want to get into the fund, it is important to understand that this method of pricing runs against the “spirit” of ETFs. The eventual approval of more units is very likely, and this move will drop the price of UNG until it is back in line with NAV.

As I have mentioned in previous posts creation difficulties are not the only problem with UNG.

There are compelling reasons to invest in natural gas ), and fortunately there is another ETF that offers investors exposure. The First Trust ISE-Revere Natural Gas(FCG) tracks a basket of natural gas companies. Investors interested in natural gas exposure can use FCG to gain access to the industry.

Just one month before UNG creation was halted on June 7, the U.S. Commodity Futures Trading Commission announced that it would hold hearings this summer to consider imposing position limits for “all commodities of finite supply.” See this article..

Any change in these regulations could further impact the pricing of UNG or even force UNG’s issuer to redesign the fund to meet requirements. In the meantime, investors should stay clear of UNG until the dust settles.
Natural Gas Heads for Super Contango
Originally posted 08/28/09 08:19 AM EDT

Late last year and into early 2009, West Texas Intermediate crude prices entered what was dubbed “super contango.” The spot price for oil was far below the futures price, guaranteeing a huge profit for anyone who bought and stored barrels of oil and sold an offsetting futures contract.

The reason for the extremely low price was because storage was maxed out at the Cushing, Okla., delivery point. Previously high prices led to a demand reduction that was exacerbated by the global financial panic. Oil was “too cheap,” but there was nowhere to store it and that caused prices to crater. Eventually, investors filled supertankers with oil, parked them offshore, demand picked up and prices recovered.

Natural gas may be headed into super contango as well. The spot and near-month futures contracts sell for less than $3 per million BTUs, but October 2010 futures can be sold for $6. Buy the gas today, store it and next year earn a 100% profit less storage fees. One problem –where are you going to store it?

Natural gas storage is 18% above five-year averages and, according to the Energy Information Administration, regional storage may max out. Unlike oil, natural gas is much more of a regional energy source because it still mostly moves from producer to consumer via pipelines. Liquefied natural gas may change that in the future. Local storage facilities may run out of space in another month or two, and then the gas has nowhere to go — unlike the price, which will rapidly drop.

Many people think it’s easy to switch between natural gas and oil, but in fact they serve different markets: 70% of crude oil goes towards transportation, whereas natural gas is split three ways between residential & commercial, industrial and electric generation demand. Switching from one to the other is a lengthy and expensive process and most of the switches have been made.

The international nature of crude oil means if people in Ulan Batur demand more oil, the price may change in New York. But a natural gas shortage in Mongolia will not raise American prices because there’s no easy means to transport it. There were major discoveries of natural gas last year and New York Governor David Patterson is pushing to open up the Marcellus shale to drilling, with environmental concerns taking a backseat to the need for tax revenue.

On top of that, renewable energy currently is aimed at electricity generation, not transportation (though that may also change depending on the popularity of electric cars).

Natural gas has abundant natural reserves, excessive supply and reduced demand and is a competitive threat — it was one of the hottest ETFs in the past three months, based on money flows.

As I warned almost two months ago, the fundamentals pointed to lower natural gas prices. I was right and prices have fallen. I’ve also warned against investing in U.S. Natural Gas(UNG) countless times.

UNG became a slow-moving target in the futures market that allowed savvy speculators to front-run its monthly contract roll. It already created an exacerbated the near-month contango and cost investors money each time it rolled. Now due to concern over pending regulatory changes, UNG ceased issuing new shares and trades at a whopping premium of 17%. The iPath Natural Gas ETN(GAZ) doesn’t offer much advantage; it had an 8% premium at close yesterday.

Ironically, if we see a final super-contango cratering of UNG, it may create the conditions for the next bull market, but that could take months to years to play out, however, and depends on multiple factors. I’ve recommended First Trust ISE-Revere Natural Gas(FCG), which holds the stocks of producers and has outperformed UNG since March, as a better way to play natural gas if that’s your desire. But unless another Katrina rips through the Gulf region, the outlook for natural gas prices is grim.

A Natural Gas ETF to Play Contango
Originally posted 08/31/09 01:04 PM EDT

The JPMorgan Alerian MLP Index ETN(AMJ) offers investors exchange traded exposure to the natural gas marketplace without the problems of United States Natural Gas(UNG).

Although AMJ is less of a “pure play” on natural gas prices than UNG or even First Trust ISE-Revere Natural Gas(FCG), it’s much more predictable over the long term.

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. While this exchange traded product comes with the risks of exchange traded notes, it is large and liquid, allowing investors to trade in and out of the fund with relative ease.

The companies that AMJ tracks are well diversified businesses involved in natural gas pipeline and storage. According to the fund’s fact sheet, the top five holdings in the fund are Kinder Morgan Energy Partners(KMP), Enterprise Products Partners(EPD), Plains All American Pipeline(PAA), Energy Transfer Partners(ETP)and Energy Transfer Equity(ETE).

These firms are a sort of “tax collector” as natural gas passes through the system, taking a toll even when natural gas prices are low. Natural gas is currently in huge supply at low prices. Eventually this price discrepancy, along with cold weather, hurricanes, or other typical drivers, will push consumers toward natural gas.

UNG’s structure aims to track natural gas prices at the risk of contango , while AMJ tracks MLP’s at the risk of issuer J.P. Morgan. AMJ is a collection of debt notes, rather than equity, which exposes the fund to the credit risk of its issuer. AMJ was originally launched by Bear Stearns under the symbol BSR, but changed its symbol when J.P. Morgan took over and relaunched the index on June 2, 2009.

Rather than having to roll futures contracts month to month like UNG, AMJ is designed for investors seeking income. The MLPs that AMJ tracks are designed to pass on earnings to investors through their dividends. AMJ’s quarterly dividend amounted to 43.6 cents in August. This payout is similar to the dividend that BSR paid in the past, setting AMJ up to yield around 7%.

ETNs are structured for savvy investors, because of the added risk. This risk, however, pales in comparison to the problems over at UNG. As UNG fights to survive regulation and expand, it is exposing investors to increasingly risky derivatives. AMJ is much more suitable for conservative investors looking to make income over time.

Another added benefit for AMJ investors is the tax structure of the fund. MLPs pass their income through to investors, which results in a K-1. Since AMJ is an ETN, it issues a 1099, allowing investors to avoid the K-1. Do-it-yourself tax preparers will appreciate the difference between these two forms.

While UNG, FCG and AMJ offer unique perspectives on the natural gas marketplace, UNG tracks spot prices, FCG tracks producers and AMJ tracks MLPs. Of these funds, AMJ is the most appropriate for savvy income investors. The “toll booth” firms that underlie AMJ will continue to pick off the flow of natural gas and continue to be indispensable participants in the energy marketplace.

Disclaimer

In 2009, I brought several interesting and timely funds to your attention as best fund choices.

First, there was the diversified growth mutual fund, ETF Market Opportunity (ETFOX), for the second quarter; an international fund, Fidelity China Region (FHKCX), for the third quarter; and Third Avenue Focused Credit (TFCVX) for the fourth quarter.

My picks performed well, with ETFOX up 17.1% in the second quarter; FHKCX gaining 13.6% in third quarter; and TFCVX has up 3.1% though Dec. 23.

Fidelity Telecom and Utilities Fund (FIUIX) is my pick for the best mutual fund of the first quarter in 2010.

Bond yields have come down as credit markets returned to normal and Federal Reserve policies aimed at restarting the U.S. economic engine depressed rates. While investors have done well from appreciating bond and stock prices, this has reduced yields, and many income investors are stuck in money market or savings accounts earning less than 1%.

Meanwhile, the Federal Reserve is in no rush to raise interest rates. The Fed plans on ending some liquidity programs in February 2010, and it certainly won’t hike before then.

Federal Reserve Chairman Ben Bernanke, a student of the Great Depression, will want to see definitive evidence of inflation, but at the moment, there are few signs.

Those investors, anticipating inflation, have bought Treasury inflation-protected securities, stocks and commodities (especially gold), but they are ahead of the economy — and it’s possible that inflation and interest rates will remain low well into 2010.

Already, some investors are moving out of low-yielding assets and into higher-yielding telecom and utility stocks, a move that I expect will grow into a larger trend next year.

Utilities were recently championed by Pimco’s Bill Gross in his December outlook, entitled “Anything but 0.01%,” in which he argued that tighter regulation on banks, government control of automakers and more regulation in general will lead to utility-like returns for many stocks.

As he put it, “I figure, why not just buy utilities, if that’s what the future American capitalistic model is likely to resemble.”

The telecom and utility sectors improved over the past month, thanks to many investors finding truth, and income, in that argument. Month to date as of Dec. 22, utilities had the best return among S&P sectors, up 5.82%. Telecom service was third, with a 4.57% return.

While it might seem as though the train has left the station, these sectors still are the two worst year to date: Utilities gained only 7.41% and telecom gained 2.62%, compared to 26.72% for the S&P 500 index. These sectors have a lot of room to play catch up.

For that reason, these sectors will continue to outperform as the income-hungry search for yield in 2010, and that is why I am selecting Fidelity Telecom and Utilities Fund as my best mutual fund for the first quarter of 2010.

The fund currently holds a mix of companies involved in electricity generation, cable and satellite television, cell towers, telecommunications and even a small holding in Google (GOOG), 0.56% of assets as of Oct. 30.

Although it started the year with AT&T (T) and Verizon (VZ) as the top two holdings, accounting for nearly 40% of assets, the latest report shows no trace of either company in the fund.

As of Oct. 30, the top 10 holdings accounted for 58.5% of assets. In the past month, the fund was helped by a top-10 holding in Comcast (CMCSA), which acquired NBC from General Electric (GE). The market responded favorably and shares of Comcast are up about 15%.

Also contributing to recent performance was FirstEnergy (FE), the No. 1 holding, with 10.1% of assets at the end of October.

The utility, which serves customers in Ohio, Pennsylvania and New Jersey, gained more than 10% in the past month, as did Constellation Energy Group (CEG), another top-10 holding.

Fidelity reported that FIUIX’s yield was 3.05% as of Dec. 21, and the fund carries a 0.77% expense ratio. Although the fund does not have a short-term trading fee, there is a minimum purchase of $2,500.

Disclaimer

In 2009, investors in exchange-traded funds flocked to alternative assets, emerging markets and bonds.

The SPDR Gold Shares ETF(GLD) and Vanguard MSCI Emerging Markets ETF(VWO) both had net asset inflows of more than $1 billion.

Bond funds like iShares’ TIPS ETF(TIP) and Investment Grade Corporate Bond ETF(LQD) ranked among the largest funds in the ETF universe.

In the wake of the global economic crisis, some investors regained their appetite for risk, while others sought protection from it.

As 2010 begins, a different group of market forces, political pressures and investor frustrations will guide the flow of ETF assets and help to shape the future of the fund industry. ETFs, with their unique structure and low management costs, will continue to offer investors convenient ways to access individual sectors, market trends and portfolio strategies.

While many of the concerns that inspired investors in 2009 will still affect investing in the months ahead, ETF investors should consider the three following themes, and their corresponding funds, as they prepare their portfolios for 2010:

Dividends: iShares Dow Jones Select Dividend Index ETF(DVY)

With rates pegged near zero for the foreseeable future, investors will have to venture out of bond and money market funds and into equities to find returns. High-yield dividend stocks are attractive holdings for investors looking to step off the sidelines and put their money to work.

ETFs like DVY are a good way to gain exposure to high-yielding equities while minimizing security-specific risk.

DVY’s strategy is to identify companies with the highest-paying dividends, and then eliminate the riskiest holdings with a series of “screens.” In an effort to avoid exposure to extremely distressed firms, DVY’s index omits REITs, as well as firms that have paid more than 60% of earnings in the form of dividends or cut their dividend in the past five years.

DVY is a large, liquid ETF with top holdings that currently include Chevron(CVX), Kimberly-Clark(KMB) and McDonald’s(MCD). The top sector allocations in DVY’s portfolio are utilities, consumer goods and industrials, with 26.56%, 18.55% and 14.97% allocations, respectively.

Inflation Protection: iShares Barclays TIPS Bond(TIP)

Low interest rates, a weak dollar and massive stimulus spending will continue to keep talk of both inflation and deflation in the headlines in 2010. While hard economic data has yet to demonstrate a real inflation threat, it makes sense to include inflation protection in your portfolio, and to do so before periods of high inflation.

Buying shares of an ETF like TIP, which tracks a portfolio of Treasury Inflation Protected Securities (TIPS), is an easy and inexpensive way to protect against inflation in a diversified portfolio. TIP has the advantage of being the first mover in the TIPS ETF space, and this ETF has a laddered structure to provide exposure to securities with different maturities.

According to recent data from the National Stock Exchange, TIP is the sixth largest fund in the ETF universe when measured by assets. TIP experienced an incredible expansion in 2009, and government initiatives, coupled with investor fears, should help to keep this fund at the top of the pack in 2010.

Green Energy: PowerShares WilderHill Clean Energy(PBW)

Science has yet to come to a consensus on global warming, but two hard facts will keep “green energy” a hot topic in 2010. First, the rapid expansion of emerging markets and limited natural resources have helped to put a premium on the development of green energy technology. Secondly, both legislation and regulation are working to curb carbon emissions in both the U.S. and abroad. (See “Five Energy ETFs to Watch”.)

PBW is designed to deliver capital appreciation through exposure to companies that focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy. This large, liquid ETF tracks 52 firms, including JA Solar Holdings(JASO), Fuel Systems Solutions(FSYS) and Advanced Battery Technologies(ABAT).

in PBW will already be ahead of the curve. (See “ETF Plays for Copenhagen Talks”.)

ETFs are an easy, inexpensive way to gain access to short-term market trends and diversify a long-term portfolio. As investors move assets into segments of the market like clean energy, inflation protected securities and high-yielding equities, the rapidly expanding ETF marketplace will evolve to meet their changing needs.

Inflation concerns fueled the recent launch of three additional TIPS ETFs by bond giant PIMCO, while the buzz over renewable energy has produced increasingly focused green ETFs.

Investors looking to participate in these areas of the market should aim for ETFs with high liquidity and low expense ratios. (See “Tips for Trading ETFs”.)

DVY, TIP and PBW are good funds to target in 2010.

Disclaimer

In 2010, a Warren Buffett holding to follow will be General Electric (GE). For the Oracle, 2009 was marked by the stellar performance from a number of his riskier plays, including Goldman Sachs (GS) and BYD.

Additionally, Professor Buffett made some uncharacteristically conservative plays, including his all-in purchase of Burlington Northern Santa Fe(BNI), as well as his increased stake in Wal-Mart(WMT).

While a number of his investments in 2009 have earned the financier a comfortable profit, one that continues to lag is GE.

In October, Buffett invested $3 billion into the global conglomerate in hopes of banking on the U.S.’ expected economic recovery. The deal provided Berkshire Hathaway (BRK.A) with perpetual preferred stock with a 10% dividend that is callable after three years at a 10% premium. Additionally, Buffett’s firm received warrants allowing him to sell his $3 billion in common stock at $22.25.

Today, the shares remain below the crucial benchmark needed to turn a profit. In fact, thanks to missed revenue, a credit downgrade and challenges facing a number of its branches, GE’s share price as of Dec. 22 is actually at a lower level than the day Buffett made his investment. As the year comes to a close, Buffett appears to be breaking his No. 1 rule: “Don’t lose money.”

However, it is important to remember that Buffett does not make short-term investments. Rather, one of the financier’s most enduring qualities is his patience. He has famously gone on record saying, “Our favorite holding period is forever.” This patience may pay off in 2010 as GE looks to reverse a year of struggles.

Last week, at an annual investor meeting, CEO Jeff Immelt made it clear that, though the firm has bled profits and taken a hit this year, he believes that the worst is over. Looking to 2010, he feels that, though the damage done by the downturn will linger, the firm has made the moves necessary to benefit.

arm and working toward completing its sale of the unprofitable NBC Universal branch to Comcast(CMCSA). In their place, the firm will also refocus on its industrial arm through a number of energy and health care projects.

Fortunately, these two sectors will likely see some of the strongest growth in the new year as the U.S. gets closer to signing into law the new health care bill, and nations around the world look to develop more alternative energy in light of the Copenhagen climate talks.

Rarely does Buffett lose out on a deal. While GE has not earned him the profits of Goldman Sachs in 2009, I would advise investors to avoid writing off the firm in 2010.

Rather, if 2010 provides a prime chance to get in cheap, investors may want to take a look at the available exchange-traded funds that are heavily weighted in the conglomerate. These will see a big boost if GE regains its former strength.

Currently, the iShares Dow Jones US Industrial ETF(IYJ) and the Industrial Sector SPDR (XLI) provide the strongest exposure to the firm. GE currently accounts for 12% of IYJ and 13% of XLI.

While these funds are heavily weighted in GE, they are not solely reliant on the company for their performance. On the contrary, although GE has struggled throughout this year, IYJ and XLI have still gained 23% and 20% in 2009 through Dec. 18.

GE is not the only similarity between these two funds. In fact, aside from differences in weighting, both instruments share the same 10 top holdings. Among these is another prominent Buffett play: BNI. This railroad is a minor holding accounting for 3% of XLI and 2% of IYJ.

In all, I feel that the strongest play on GE and Buffett is XLI. Because of their similarities, the decision largely comes down to the variations in expense ratios and size. In both of these categories, the SPDR fund comes out on top.

XLI, which has nearly $2 billion assets under management, charges a 0.21% fee. That is considerably lower than IYJ, which charges 0.48%. The iShares fund has $273 million under management.

While I would advise investors to go with XLI, either of these instruments would be an excellent way to follow Professor Buffett into the new year.

Disclaimer

Investors aren’t flocking to religion-themed ETFs so far.

Earlier this month, the FaithShares Baptist Values Fund(FZB), FaithShares Catholic Values(FCV), FaithShares Christian Values(FOC), FaithShares Lutheran Values(FKL) and FaithShares Methodist Values(FMV) joined the ETF universe.

On Monday, Dec. 21, the Catholic and Christian funds led the pack with 2,825 and 2,305 shares traded respectively. The Baptist, Lutheran and Methodist funds all had fewer than 200 shares of trading volume.

The indexing strategies for these funds involve picking the 400 largest U.S. stocks and then eliminating companies that have behavior that is objectionable to the religion in question. Depending on the fund, companies involved with tobacco, gambling, alcohol, weapons and pornography are left out.

After applying additional screens, like respect for the environment, treatment of workers, and community involvement, the underlying basket for each fund is whittled down to 100 stocks.

For example, the top two holdings in the Christian fund are Brown Brothers Sweep and Nordstrom(JWN). The top two holdings in the Catholic fund are Brown Brothers Sweep and Capital One (COF).

While the FaithShares funds are the latest ETFs to “track” a set of beliefs, they are not the only ETFs to do so. On June 29, newly minted issuer Javelin Exchange Traded Shares, launched the JETS Dow Jones Islamic Market International Index Fund(JVS) on the New York Stock Exchange Arca platform.

JVS’ objective is to track a group of Shari’ah-compliant securities. The underlying indexing strategy seeks to select the most liquid companies that comply with Shari’ah, or Islamic law.

What comprises a Shari’ah-compliant ETF? When it comes to JVS, what’s excluded is perhaps more important. This ETF’s underlying index cannot contain businesses involved with alcohol, conventional financial services, casinos and gambling, pornography, tobacco manufacturers, pork-related products and weapons companies. Companies classified in other industry groups may also be excluded if they are deemed to have material ownership of or revenue from the businesses mentioned above.

Currently, JVS counts companies like BP(BP), Novartis(NVS) and BHP Billiton(BHP) among its top components. The top three sectors represented in the ETF are oil and gas, basic materials and health care, which comprise 28.97%, 20.96% and 18.14% of the portfolio, respectively. JVS has 100 underlying holdings, and an expense ratio of 0.68%.

JVS also has been unable to attract investor attention. According to data from the National Stock Exchange, JVS had amassed $14 million in assets as of Nov. 30. JVS also has a low three-month average daily trading volume of 4,500 shares.

Most popular ETFs have clear-cut objectives achieved through a straightforward indexing strategy. Religion and politics are difficult areas to argue, because each individual, even within a distinct group, interprets the views of the group differently.

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As the Senate took the U.S. one step closer to national health care on Sunday, some ETFs in the sector could face a second round of Obama-inspired losses. As billions of new taxes are levied on insurers, large pharmaceutical companies and medical device makers, health care subsector exchange-traded funds will face different challenges.

The increasingly likely health care law could smother recent gains seen by medical devices and pharmaceutical ETFs, like the  iShares Dow Jones U.S. Medical Devices(IHI) and iShares Dow Jones U.S. Pharmaceuticals(IHE).

ETFs that track health care providers, like the iShares Dow Jones U.S. Healthcare Providers (IHF), and biotech companies, like the iShares Nasdaq Biotechnology ETF(IBB), may already have seen the worst of their losses.

The initial hit to health care ETFs came in the wake of President Obama’s election. As plans for sweeping reform materialized, ETFs across health care’s subsectors were impacted. In 2008, IHI and IHE dropped 36.79% and 14.91%, respectively.

IHF, which tracks health care providers like UnitedHealth Group(UNH) and WellPoint(WLP), fell 43.46%, while IBB fell 12.28%.

In 2009, as health care reform appeared to be sinking while the market recovered, health care ETFs reversed course. Year to date, IHI and IHE are up 35.74% and 27.89%, respectively.

IHF and IBB also have been on the upswing in 2009. Year to date, IHF is up 34.85% while IBB has increased 11.68%.

While the broad spectrum of narrowly focused health care ETFs have, thus far, moved as a group, the transformation and passage of the health care reform bill could send these funds in different directions.

Now, the objective of health care ETF investors is to determine which health care sectors already have the impact of the bill priced in.

The “public option,” or government insurance alternative, has been stripped out of the Senate’s version of the bill, and the existing employer-based health-insurance system is basically left untouched. While new fees will be harmful to the insurance providers in IHF’s portfolio, the absence of a government-alternative health-insurance plan is good news for the holders of this fund. IHF will probably not see another 35% gain in 2010, but it will likely avoid disastrous losses similar to 2008.

Biotechnology, the least-harmed subsector in 2008, has the potential for gains in 2010. Biotech firms, tracked by ETFs like IBB, are largely hit-or-miss operations working to develop cutting-edge technologies. If a company hits the proverbial biotech lottery, the blockbuster drugs are often sold off to Big Pharma.

This critical difference between biotechnology and pharma is what will help biotech and hurt pharma when the new bill hits the industry. The new health care bill focuses on cutting costs, implementing reforms that will emphasize generics and hurt Big Pharma’s profits.

Many biotech drugs, on the other hand, offer unique benefits to small groups of patients. This specialization will minimize the leverage that pharmacy-benefit managers have over drug firms as the two groups battle over cost-cuts.

Medical device manufacturers, like the companies tracked by IHI, face a tougher road ahead. Cuts to Medicare, which currently reimburses many medical device companies, coupled with new taxes, could harm this subsector. IHI’s volatile journey through 2008 and 2009 could continue in 2010.

Investors have been bracing themselves for the impact of Obama’s health care initiatives for some time now. Public options, public opinion and politics have helped to shape the course of health care ETFs over the last two years.

Just as economic crisis and reform speculation have produced a herding effect in these funds in 2008 and 2009, the passage of the health care bill may produce a divergence of health care’s subsector ETFs in 2010.

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While a short trading week will mean lower liquidity and higher volatility for ETF investors, there are still plenty of funds to watch while surfing the Web for last-minute gift ideas.

Retail data, housing starts, orders for durable goods and a GDP revision will help to keep this short week interesting. Here are five ETFs to follow:

First Trust Dow Jones Internet Index (FDN)

Shoppers are waiting until the last minute, suggests a recent survey from the National Retail Foundation. After the second week of December, consumers admitted to having just 46.7% of their holiday shopping done – the lowest level of completion since 2004. Approximately 20% of shoppers noted that they hadn’t even started yet.

Weekly measures of retail activity are important during the holiday season, so Tuesday’s retail data will be an important indication of consumer health. Since so many shoppers have admitted putting off purchases to the last minute, data for the week ended Dec. 19 should reflect a last-minute spending binge.

More than ever, shoppers are using the Internet to search for holiday bargains. As the days to Christmas tick closer, FDN’s components will see increased activity. Consumers will flock to top FDN holdings like Amazon(AMZN) and eBay (EBAY) for gifts and hopefully checking Priceline(PCLN) and Expedia(EXPE) for plane tickets home.

FDN, which targets companies that generate at least 50% their annual sales/revenue from the Internet, could benefit from procrastinating consumers. (FDN is a holding in my ETF Action Portfolio.)

SPDR Gold Shares(GLD)

Gold ETFs have been a popular safehaven for investors as the price of this precious metal trends upwards.

There has been another pattern for funds like GLD, however, as the price of the ETFs have waxed and waned with some regularity over the past few months. After spiking in mid-December, GLD has sold off. Interestingly, GLD also sold off at the end of September, October and November.

With rates hovering near zero and uncertainty plaguing the marketplace, ETFs like GLD continue to look like an attractive investment into 2010.

If gold’s monthly cycle continues, this week may be the best moment to pick up shares of GLD before investors ring in the New Year.

iShares Dow Jones U.S. Consumer Goods Sector Index Fund(IYK)

On Wednesday, when the final December reading of the Reuters/University of Michigan Consumer Index is absorbed by the marketplace, the news could have an impact on consumer goods ETFs like IYK, the SPDR Consumer Staples Select Sector SPDR Fund(XLP) and Vanguard Consumer Staples ETF (VDC).

All three of these funds are top heavy – loaded with large cap firms like Wal-Mart(WMT), Coca-Cola (KO) (and Philip Morris International(PM). While the sentiment of American consumers will certainly impact these U.S. based companies, components of these consumer ETFs generate a lot of their revenue abroad.

A number of factors will be weighing on these consumer goods ETFs this week. In addition to the final reading of the Consumer Sentiment Index, a volatile dollar could impact the companies that make up these ETF funds.

It will be interesting to see how a fluctuating dollar and an expected positive outlook for Consumer Sentiment impact consumer goods ETFs.

iShares Dow Jones US Home Construction(ITB)

Housing starts have been rebounding, and ITB has been bouncing back ahead of a raft of housing data out this week. During the three month period ending Dec. 17, ITB dropped 13.57%. During the one week period ending Dec. 17, however, ITB rose 3.92%.

If new and existing home sales continue to firm up, ITB could erase even more of its three-month losses in the week ahead.

Even though the tax credit for homebuyers has been extended, many deals are currently in the works. Data this month will likely still reflect the urgency that many homebuyers felt before the extension.

Over the next six months, the housing market as a whole, along with ITB will continue to face challenges like unemployment. This week however, if housing data is positive, ITB could jump in the short term.

iShares Dow Jones Transportation Average (IYT)
IYT stands to benefit from data for durable goods, set to be released on Thursday. While orders for civilian aircraft will likely be lower, the increased sale of motor vehicles, and the subsequent effort to replenish those inventories, could help to boost the companies that comprise IYT.

Airlines make up just 7% of this motor vehicle-heavy ETF, which is up nearly 20% year to date.

Much of the recent gains can be attributed to Warren Buffett’s acquisition of IYT’s top component, Burlington Northern Santa Fe(BNI). The $44 billion deal has attracted investor interest railroads, which make up more than 30% of IYT.

Since many of Wall Street’s biggest players will be on vacation this week, ETF investors should trade strategically, with an eye towards the most active funds. Investors with short term ETF positions should double-check their exposure before 1 p.m. on Thursday. When U.S. markets close after a half day on Christmas Eve, investors will have to wait until Monday, while the rest of the world trades through the end of the week.

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