Dion Money Management Blog   Money Management for Retirees and Their Families

Lessons From an ETF ‘Crossover’ Stock
Posted 12/17/2009 2:35 p.m. EST
The presence of Cree(CREE) in a variety of semiconductor and green ETFs means the stock is drawing investors from diverse market segments.

One of the driving factors behind a stock’s performance is investor demand, and stocks that achieve high growth often have support from multiple sectors or multiple “stories.” A company that can market itself to different groups of investors will be able to tap more investor dollars. ETFs facilitate sector investing and “story” investing to a degree that wasn’t as readily available a few years ago, and this year we have seen the effects with semiconductors and clean energy.

American Semiconductor(AMSC) is found in many alternative-energy ETFs but not the semiconductor ETFs, while Cree is found in both. AMSC is involved with wind power, while CREE makes energy-saving LEDs.

Year to date, AMSC is up 145.7% and CREE is up 229.6%. Both returns are stellar, but it helps that CREE is pulling in dollars from semiconductor ETFs in addition to a slew of alternative-energy funds. According to NSX data, iShares S&P North American Tech Semiconductors(IGW) has seen inflows of $43 million in the 11 months through Nov. 30, and SPDR S&P Semiconductor(XSD) has taken in $44 million. Compare that $87 million total with the $120 million that has flowed into the eight clean-energy funds listed on the table below.

It would take a lot more money flowing into these ETFs to really move these stocks, though. The total holdings in AMSC in the above ETFs amounts to only about 2% of its market capitalization of $1.8 billion, while the holdings in CREE come to about 1% of its $5.4 billion market cap.

Still, the ETFs also serve as a gauge of investor interest. If clean energy and semiconductors both see large inflows, for instance, CREE would likely be an even stronger performer.

f CREE were a consumer product, I’d say it was marketing itself well. Whether that means CREE is a buy here is another question, and it’s one that single-stock investors may want to answer.

Dollar Rally or Euro Decline?
Posted 12/15/2009 at 4:21 p.m. EST

Many investors and traders watch the U.S. Dollar Index and ETFs that track this index, such as PowerShares DB U.S. Dollar Bearish Fund(UDN) and PowerShares DB U.S. Dollar Bullish Fund (UUP), to get an idea of the value of the dollar.

The euro makes up about 58% of the U.S. Dollar Index, however, with another 25% or so split between the Japanese yen and British pound plus 9% for the Canadian dollar. Other developed nations’ currencies make up the rest of the index.

Notably missing are emerging-market currencies. Brazilian real, Chinese yuan, Indian rupee and South Korean won are absent from the index calculation. An extended rally in the U.S. Dollar Index would signal investors to shift assets from an ETF such as iShares MSCI EAFE (EFA) to a global ETF such as iShares S&P Global 100(IOO) or a domestic ETF such as SPDRs (SPY), but it wouldn’t say much about other markets.

In the past five days through Monday, UDN lost 0.64%, less than the 1.08% drop in CurrencyShares Euro (FXE). Clearly, the decline in UDN this past week was due to a weaker euro. Problems in Greece and Austria were among the reasons why the currency headed lower vs. the greenback.

Meanwhile, CurrencyShares Japanese Yen (FXY) gained 1.06%, while WisdomTree Dreyfus New Zealand Dollar (BNZ) gained 2.47% and CurrencyShares Australian Dollar (FXA) gained 0.65%. WisdomTree Dreyfus Emerging Currency (CEW) fell 0.37%.

These moves were mirrored by the equity funds: iShares MSCI EMU Index (EZU) fell 1.68%; iShares MSCI Japan (EWJ) gained 0.50%; iShares MSCI Australia (EWA) added 0.17%; iShares MSCI Emerging Markets (EEM) climbed 0.36%.

While FXA and FXY fell more than FXE today, FXE and EZU were among the worst performing of the aforementioned ETFs. UUP gained 0.71% on the day.

At least for the past week, the advance in the U.S. dollar was mainly against the euro, suggesting that capital is still flowing from the U.S. and into markets such as Brazil, India, China and South Korea, as well as Australia and New Zealand. As I warned last week about Greece and with Austria having banking issues, thus far the situation is a weak euro rather than a strong dollar. Allocate accordingly.

This week, the climate talks in Copenhagen escalated as leaders from around the world converged on Denmark to try to influence the outcome of the negotiations. However, at the close of the week, it appears as though the talks may not be able to produce any definitive measures.

In notable currency developments, the dollar rallied against the euro as concerns over countries such as Greece and Austria weighed on the value of the European Union’s currency. This week also saw the value of the dollar rise to more than 90 yen, continuing an increase away from the year’s bottom near 86 yen reached in late November.

ETF investors became so bullish on the U.S. dollar that they forced another halt in the creation of PowerShares DB U.S. Dollar Bullish Fund(UUP), the second since early November, after inflows caused the fund’s assets under management to double since Nov. 30.

Wall Street was surprised when the U.S. Treasury decided that it did not want to sell its stake in Citigroup(C), meaning that the beleaguered bank will not be getting out from under the government’s wing as soon as Citi executives would like.

American markets had another week of small movements as the S&P 500, following a minor loss last week, was down about 0.4%. The Dow was down even further, by roughly 1.4%, while the Nasdaq made a gain of about 1% on the week.

Here are the ETF winners and losers for the week:
Winners

U.S. Natural Gas(UNG) +11%

iPath Natural Gas ETN (GAZ) +9%
The previous week was cold, and UNG was one of the weekly winners. This week was cold too, and UNG was the winner again. This time there was also help from the inventory report, which showed a drop of 207 billion cubic feet (Bcf) for the week ending Dec. 11. The bulls will need to see temperatures stay low for a while, however, for this move to continue.

First Trust ISE-Revere Natural Gas (FCG) +9.1%

iShares Dow Jones U.S. Oil & Gas Exploration & Production(IEO) +8.1%

iShares Dow Jones U.S. Oil Equipment (IEZ) +3.7%

SPDR S&P Oil & Gas Exploration & Production(XOP) +6.5%

SPDR S&P Oil & Gas Equipment & Services(XES) +4.2%

Exxon Mobil(XOM) made a splash when it made an offer for XTO Energy(XTO), a producer with large natural gas interests. The announcement sent shares of natural gas producers and explorers higher and lifted FCG. ETFs with greater natural gas exposure — such as IEO, which has a top 10 holding in XTO –saw greater price increases.

Market Vectors Gulf States(MES) +7.9%

WisdomTree Middle East Dividend (GULF) +3.9%

Abu Dhabi provided $10 billion to Dubai, and it helped soothe investors’ fears. Shares of MES are up 9.1% since bottoming on Dec. 9, while GULF is up 7.2% since November 30. MES bottomed later due to larger direct exposure to the United Arab Emirates, of which Dubai is a member.
Losers

iShares MSCI Brazil (EWZ) -4.7%

iShares S&P Latin America 40(ILF) -4.3%

Market Vectors Brazil Small Cap(BRF) -4.4%

A stronger U.S. dollar hurt foreign shares in general, but the added effect on commodity prices weighed on Brazilian shares. With 23% of assets in Petrobras(PZE), EWZ was most affected and underperformed the typically more volatile BRF.

Market Vectors Junior Gold Miners(GDXJ) -1.8%

Market Vectors Gold Miners(GDX) -3.2%

iShares Comex Gold(IAU) fell 0.3% for the week as gold prices succumbed to the stronger U.S. dollar. With the U.S. dollar offering safe-haven status from European troubles this week, some investors who might have bought gold may be sticking with the greenback.

Claymore/AlphaShares China Real Estate(TAO) -7.1%

iShares FTSE/Xinhua China 25 (FXI) -4.8%

Claymore/AlphaShares China Small Cap(HAO) -5.5%

Investors worried that some new regulations on the Chinese housing sector would impact the industry in a negative way. TAO lost ground every day last week, generating the worst performance, but the overall trend in Chinese shares was lower.

Disclaimer

It may surprise investors to realize that the market has become range-bound in recent weeks, especially after the extreme volatility at the outset of this year and the nearly unrelenting climb from the March lows. Yet the upward trend has narrowed this month, as investors reassess their appetite for riskier trades and digest the most recent economic news, not to mention subtle changes in the Federal Reserve’s communications.

The deal announced by Exxon (XOM) to acquire XTO Energy (XTO) helped to provide stocks with just the right boost for restarting their ascent and reach new highs, but its implications may be more far reaching. As companies such as XTO have discovered huge amounts of natural gas in areas from Texas to the mid-Atlantic, they have transformed themselves into acquisition targets, luring other energy giants to pay up for growth rather than to fall behind. This could be one of many such acquisitions revealed in the months to come.

Moreover, other industries consisting of large firms sitting on plentiful cash positions and strong balance sheets may set the stage for acquisitions of their own. The impetus would be to “buy growth,” as XOM illustrates, or simply to create value for shareholders in an otherwise difficult environment in which other investments are scarce. You will note that your portfolios have exposure to companies such as XOM, XTO, and other future acquisition/merger candidates in funds such as Federated Capital Appreciation (FEDEX), MDT Balanced (QABGX), and ETF Market Opportunity (ETFOX)

One asset class that had benefited from riskier trading was that of commodities—and gold in particular—although there are reasons beyond financial investment (or speculation) alone for holding any commodity. After reaching nearly consecutive new highs for more than a month through early December, gold has corrected quite sharply as a result of its rapid appreciation. Rather than defining a peak in commodities, however, this should prove to be a constructive correction, and one that will allow gold, commodities, and stocks to reach a higher equilibrium in 2010.

With the approach of the New Year, I would like to remind eligible clients to put their 2010 IRA contributions to work as early as possible. You will find a postage-paid envelope and deposit slip in this month’s client letter, which I will mail next week. Please note that there will not be any weekly commentary next Friday due to the Christmas holiday. I would like to wish everyone a peaceful and joyous holiday season.

Warren Buffett has made some interesting bets on energy this year with his Burlington Northern Santa Fe (BNI) play; BYD play; and Exxon Mobil(XOM) play.

These investments have done well as the United States and other nations increase their energy demand. However, while the Oracle has a broad number of energy plays in his hand, he has not made a large bet on natural gas.

That changed with Exxon’s recent purchase of XTO Energy(XTO). This move has placed the Buffett right in the midst of the struggling natural gas market. Whether this move will earn Exxon and Berkshire Hathaway(BRK.A) profit will depend on the oil giant’s ability make changes to fix natural gas.

This year, because of drastic oversupply, the natural gas market has taken a gut-wrenching nosedive. ETF investors hoping to play the physical commodity with the U.S. Natural Gas Fund(UNG) know exactly what I’m talking about.

In the time I have been warning investors about the dangers of holding UNG, I have seen the fund fall to under $9 from $16 per share a result of supply issues and contango. Fortunately, investors have seen a bit of relief recently as a rally sent it over $10. However, at the rate which gas is being produced, supply issues are expected to down prices into the next decade.

With the future of natural gas looking dire, it is interesting that Exxon Mobil would express an interest in expanding further into the industry. Up to now, the firm has made only small efforts to break into the natural gas industry, but that changed this week when it made a multi-billion-dollar bet on the fuel source with its acquisition of XTO Energy.

The acquisition will not only make the oil giant a larger energy presence, but a leader in alternative natural gas production. The merger gives XOM access to an additional 14 trillion cubic feet of proven reserves, 80% of which are natural gas. Additionally, the acquisition of XTO boosts Exxon’s unconventional natural gas acreage to 8 million acres — the largest in the industry. With this large a position, it’s possible that the firm will be able to bring some consolidation and standardization to the U.S. natural gas market.

In the past years, XTO has grown to become one of the largest independent natural gas producers and a leader in alternative natural gas production methods, including horizontal drilling and fracturing wells. While the development of these methods has allowed XTO to flourish, it has also attracted new producers and increased competition that has led to sky-rocketing supplies and plummeting prices.

This could change if large natural gas firms like Chesapeake Energy(CHK) and Devon(DVN) see Exxon’s decision to buy up XTO as prime opportunity to bump up their own unconventional gas efforts.

If so, they may decide to buy up some smaller companies in the industry. This will, in turn, decrease the total competition in the sector.

Additionally, low natural gas prices may lure other oil majors including Chevron(CVX) and ConocoPhillips(COP) into the arena, pushing more small firms out.

Ultimately, the Darwinian trimming would leave only a small number of strong natural gas producers running the lion’s share of the unconventional gas market. Under this scenario, XOM, Buffett and other large natural gas and oil players would be in an ideal position to earn some strong profit.

ETF investors looking to benefit from the possibility of future natural gas industry consolidation would best benefit from owning the First Trust ISE-Revere Natural Gas Fund(FCG).

While this fund tracks a broad array of firms responsible for the production, transportation and storage of natural gas, it has recently followed the performance of oil funds like the U.S. Oil Fund(USO) and other exploration funds like the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund(IEO).

This has allowed the fund to remain more stable as UNG suffered a freefall. However, if Buffett and Exxon can initiate changes to save the natural gas market, this fund will likely break out and prove to be a big winner.

Disclaimer

With Christmas looming on the horizon, last-minute shoppers are scouring Amazon.com(AMZN) and eBay(EBAY) for gifts and hopefully checking Priceline(PCLN) and Expedia(EXPE) for plane tickets home.

While most consumers would prefer to have these purchases out of the way before mid-December, the age of the Internet has enabled a new level of procrastination. If you’re up for taking the likely bet that many consumers are still combing the Web for Christmas purchases, the best way to do it is with First Trust’s Dow Jones Internet Index ETF(FDN).

This narrowly themed technology ETF targets companies that generate at least 50% their annual sales/revenues from the Internet. From search engines like Google(GOOG) and Yahoo!(YHOO) to high-end retailers like Blue Nile(NILE), FDN’s components should see a lot of traffic in the days ahead.

Since I first recommended FDN on Oct. 21, shares have advanced nearly 2%. FDN is currently a holding in the ETF Action portfolio.

If you put off buying this fund the first time around, however, the prospects for this fund continue to be bright as Christmas draws closer.

According to a recent survey from the National Retail Federation, people had completed just 46.7% of their holiday shopping by the second week in December. This is the lowest level of completion since 2004, with nearly 20% of shoppers admitting that they hadn’t even started yet.

Where will this statistically significant group of procrastinating shoppers turn? With thinner wallets and tighter budgets, many will check sites like Google or Yahoo, which allow shoppers to quickly compare prices. Amazon can help you find the perfect gift at the right price, wrap it, and get it to Grandma without her knowing you waited until Dec. 20.

Investors looking for a tech ETF that still has prospects, long after the eggnog is gone, should still consider FDN. Google’s new deals with social networking sites will help this top FDN component sharpen Internet advertising in the months ahead.

Purchasers of Amazon’s Kindle, or a package deal from FDN component Netflix(NFLX), will return to these websites time and time again for content.

Beyond holiday shopping, FDN’s portfolio also includes security maven Checkpoint Systems(CHKP) and infrastructure creator Juniper Networks(JNPR). The largest two sector allocations in FDN’s underlying portfolio are information technology and consumer discretionary, which comprise 69% and 21% of assets respectively.

As consumers increasingly snap open their laptop, rather than walking to the porch, for the daily paper, the pressure is on Internet megastars to market to the next generation of customers.

From research to trading to travel reservations, the Internet has become the nexus for many aspects of our day to day lives. Members of FDN’s underlying portfolio have embraced this shift, and learned to profit from it. Investors would be wise to check out this fund sooner, rather than later.

Disclaimer

With a massive government take-over of the healthcare industry looking less likely, shares of the iShares Dow Jones U.S. Healthcare Providers Index ETF(IHF) and the PowerShares Dynamic Healthcare Services ETF(PTJ) have jumped.

It may not be too late to participate in the run-up. As the Senate continues to strip out provisions in the health care bill, IHF components like Wellpoint(WLP), UnitedHealth Group(UNH) and Aetna(AET) could continue to move to the upside.

Rather than buying into the health care sector as a whole, purchasing shares of IHF or PTJ allows investors to target the subsector of the health care industry most threatened by proposed reform: providers.

Here’s a breakdown of these two targeted ETFs, and a recommendation for prospective investors.
What They Track

IHF tracks the iShares Dow Jones U.S. Healthcare Providers Index Fund, a modified cap-weighted index that tracks 47 firms in the healthcare industry. The top component, UnitedHealth Group, comprises 11.33% of this ETF. More than 80% of this fund is allocated to large and medium cap companies.

PTJ tracks the Dynamic Healthcare Services Intellidex Index, which uses factors like fundamental growth, stock valuation, investments and risk factors to rank health care companies. While PTJ has just 30 underlying components, the largest holding in the portfolio, WLP, makes up just 5.14% of the ETF. PTJ’s portfolio also encompasses a larger scope of health care firms: nearly 50% of the companies in PTJ’s portfolio can be classified as small cap.

Despite differences in composition, PTJ and IHF share five out of their 10 top components. Both funds count UNH, WLP, Quest Diagnostics(DGX), Laboratory Corp. of America(LH) and Humana(HUM) among their top holdings.

Fees, Assets and Liquidity

IHF has an expense ratio of 0.48%, while PTJ’s expense cap is 0.60%. Launched in May of 2006, IHF currently has $172 million in assets and a three-month average daily trading volume of 150,000 shares.

PTJ, which was launched in October of 2006, has attracted just $12 million in assets, and has a three-month average daily trading volume of 8,500 shares.
Performance and Outlook

During the three-month period ending Dec. 15, IHF and PTJ advanced 11.13% and 10.23% respectively. Year to date, IHF is up more than 36%, while PTJ has increased just 18.13%.

Looking forward, investors should consider their investment timeframe before selecting a health care provider fund. Since IHF is larger and more liquid fund, ETF investors looking to jump in and out of health care providers should stick with this fund.

While PTJ hasn’t had the short-term pop that IHF has had, this fund’s more balanced portfolio should help to reduce volatility for long term investors. Since the average daily trading volume for this fund is relatively low, investors should not use PTJ for day trading.

Disclaimer

Explosive growth in emerging markets, as well as a trend toward efficient energy technology and “green” energy use, makes the energy sector a compelling area to allocate assets both in the short and long terms.

Equity-based energy ETFs offer exposure to everything from large, integrated firms like Exxon Mobil(XOM) to clean energy pioneers like Cree(CREE), while avoiding the regulatory hassles of funds that use futures and swaps to access the sector.

These five energy ETF picks are well constructed, liquid funds that are worth considering when building a well-diversified portfolio.

• iShares S&P North American Natural Resources Sector Index Fund(IGE). IGE tracks U.S-traded, natural resource-related, firms in both the energy and materials sectors.  While much of this portfolio is focused on large energy firms like XOM, Chevron(CVX) and ConocoPhillips(COP), IGE’s underlying basket also includes miners like Barrick Gold(ABX) and construction materials producer Vulcan(VMC).  This highly-traded, reasonably priced ETF is a good addition for investors looking to gain exposure to U.S.-traded energy firms, while avoiding overconcentration in the oil/gas subsector.

• First Trust ISE-Revere Natural Gas(FCG) While the success of the companies that comprise FCG is certainly tied to cyclical natural gas prices , the demand for the extraction and production of this energy source make this ETF a promising play over time.  Top components like Pioneer Natural Resources(PXD) and XTO Energy(XTO), which have helped to propel FCG in 2009, still look like solid plays in 2010. FCG is certainly focused, but this fund’s low concentration of assets in its top holdings helps to minimize security-specific risk.

• PowerShares WilderHill Clean Energy(PBW). Scientists may disagree on global warming, but investors can be relatively certain that both legislation and regulation will favor “green energy” companies in the future.  Investors looking to get ahead of the curve should consider PBW, a fund that includes firms like LED-provider CREE and solar power companies across the globe. PBW’s well-balanced portfolio and reasonable expense ratio help to make green energy firms accessible to traders.

• PowerShares Dynamic Oil & Gas Services(PXJ). Investors looking to gain exposure to oil and gas through ETFs have a wide variety of choices, but PXJ’s indexing strategy sets this fund apart.  Rather than just focusing on the largest gas and oil firms, PXJ’s portfolio is selected using factors like fundamental growth, stock valuation, investment timeliness and risk factors.  While PXJ’s components include industry giants like Halliburton(HAL) and Schlumberger(SLB), no single company makes up more than 5.21% of the underlying portfolio. PXJ’s diverse large-, mid- and small-cap components help this fund to stand out among its peers.

• iShares S&P Global Energy(IXC). Despite the top-heavy nature of its underlying portfolio, IXC offers inexpensive exposure to a wide range of global energy firms. This large, liquid, ETF tracks the S&P Global Energy Sector Index.  Prospective investors should be aware that top component XOM makes up more than 14% of this fund’s assets.  Other top components in IXC include Royal Dutch(RDSA) and Petroleo Brasileiro(PBR). This fund is a good place to start for investors seeking broad exposure to the global energy market

Disclaimer

Investors willing to take some extra risk to achieve higher returns from the fixed income portion of their portfolio should consider the Third Avenue Focused Credit Fund(TFCVX).

While fixed-income investing has become popular amongst a broad range of investors, attractive yields are hard to find . Money market fund yields have steadily decreased throughout 2009, and the seven-day yield on taxable money-market funds has been holding steady at a record low of 0.03%.

Municipal bonds are becoming riskier, as regions of the country are bogged down by debt, and many investors fear Treasury bonds will fall in price as rates rise.

Popular ETFs like the iShares iBoxx High Yield Corporate Bond ETF(HYG) and the SPDR Barcap High Yield Bond ETF(JNK) have attractive yields , but also expose the investor to considerable risk.

Even in an improving economy, these investments have the risk of default, and disruptions in credit markets have caused these ETFs to trade at marked differences from their underlying values.

Fortunately, for risk tolerant investors, there’s another market out there: the distressed debt market. Many companies are still bankruptcy risks or have their bonds trading at discounts. Investors looking for a fixed income investment that has a good risk/reward scenario should consider the Third Avenue Focused Credit Fund.

TFCVX managers can “go anywhere” in search of deals , from bank loans, high-yield, and convertibles, to holding stock as part of a restructuring. Instead of owning a fund in one of these sectors, investors have exposure to the ones the managers believe have the best chance of appreciation.

Third Avenue Focused Credit has the following stated objective: “Seeks total return from a combination of capital appreciation and interest income, by focusing capital in our highest-conviction ideas across the credit spectrum.”

Manager Jeffrey Gary was the head of BlackRock’s high yield and distressed investment team before joining Third Avenue. His approach is to “focus on our downside risk first and then our upside potential.” He wants to concentrate the portfolio in 50 to 60 holdings, and will select securities based on what has the best upside potential, regardless of what type of security it is. Finally, the fund will be event driven. Gary has said, “We want an event that will drive price higher and reduce credit risk of our investment.”

Troubled economic times can be great news for distressed debt because it offers the opportunity for a reallocation of assets, most notably when equity holders are wiped out in bankruptcy. The fund will run the gamut of distressed situations, from purchasing undervalued debt all the way to participating in bankruptcy restructurings.

Even though high-yield debt has recovered since March, credit spreads are still extremely wide, and bankruptcies are likely to continue in the next several quarters. These negative conditions can also provide investment opportunities, and TFCVX’ open-ended structure allows this fund to be more nimble than a passively-managed ETF like JNK or HYG.

Disclaimer

China, the world’s largest producer of carbon emissions, could also become a global giant in the fight for green energy through solar power.

Economies of scale have helped to reduce the costs of solar energy production, and China’s massive workforce may soon be supplying the globe with cheaper solar solutions.

The U.S. and China, who both stand at the center of the climate talks in Copenhagen, will be looking to cut emissions while trying not to compromise growth.

The pressure is on developed countries, like the U.S., to cut carbon emissions and implement alternatives. China, which is able to produce these technologies at increasingly cheaper prices, could become a key player in the global implementation of solar power.

Two ETFs, the Claymore/Mac Global Solar Energy Index ETF(TAN) and Market Vectors Solar Energy ETF(KWT), focus specifically on the development of solar energy worldwide.

Both TAN and KWT track companies that derive their revenue from the solar energy industry and related products and services. Both funds also are tied to the success of solar in the U.S. and China. When it comes to country allocation, more than 55% of TAN’s portfolio is allocated to solar firms in the U.S. or China. More than 56% of the firms that comprise KWT’s underlying portfolio are in the U.S. or China.

Both TAN and KWT share top China-based holdings like Yingli Green Energy(YGE), Suntech Power Holdings(STP) and Trina Solar(TSL). All three of these companies have helped to contribute to China’s 30% share of the global market for solar panels, since all three firms export most of their products to the U.S and Europe.

China’s ability to produce solar panels at a cheaper point has contributed to two phenomena: a 30% drop in world solar power prices, and an increased focus in countries like the U.S. to produce innovative products with unique technology to distinguish theirs from the influx of panels from China.

One U.S.- based solar energy provider that had managed to stay a dominant player in the global solar energy market is First Solar(FSLR). Both TAN and KWT count FSLR among their top components. First Solar uses cadmium telluride to convert sunlight into electricity, while more than 85% of solar panels worldwide are higher-cost silicon-based models. Since FSLR closely guards its unique, low-cost process, imitators abroad have been unable to replicate its technology.

The dominance of U.S.-based solar energy firms like FSLR prove that countries need to be both cost-efficient and innovative to succeed in the solar energy business. While China may be able to reproduce existing solar technologies more cheaply, innovative companies in the U.S. and Europe will still stand a chance in this competitive business.

While China will continue to argue that new international energy agreements should make fewer demands on emerging economies, it is indisputable that most of the world’s carbon emissions will come from these emerging markets in the future.

As the Copenhagen talks continue, and pressure is put on both emerging markets and developed markets to curb carbon emissions, the firms that comprise KWT and TAN could benefit as a result of compromises.

Whether the companies that make up KWT and TAN are producing solar panels for their own country, or exporting them to emerging or developed markets abroad, demand for the least-expensive and most innovative solar technology will continue to grow.

Disclaimer

Now that the U.S. dollar has shown early signs of life after an extended decline, investors may be rethinking their emerging-market strategies. The situation may have them fleeing the riskier fare in exchange for markets with greater ties to the U.S. and solid historical track records.

Last week I introduced my ETF Action newsletter subscribers to the iShares MSCI Mexico Investable Market Index Fund(EWW). So far, this fund has navigated the global downturn better than expected. Not only did EWW hold up longer than other foreign exchange-traded funds in 2008, it has recovered just as quickly.

One reason that Mexican stocks appeared more resilient at the outset of the crisis was diversifying trade. While the U.S. still remains by far Mexico’s most important trade partner, Mexico also has steadily increased the amount of exports it sends to other nations in recent years. Mexico’s trade with Costa Rica, Chile, Honduras and the European Union has grown rapidly, helped along by a number of trade agreements.

Also, Mexico has been cushioned from the full impact of the U.S. downturn by its extensive access to commodities — especially oil. Mexico is the third-largest supplier of oil to the U.S. and is the world’s 10th-largest crude producer. Rebounding oil prices have supported revenue for the government, which controls the country’s oil industry and relies on oil for more than one third of its revenues. Mexico also exports silver, copper, fruits, coffee, cotton and other major commodities — so as long as commodities prices continue their upward trend, Mexico can insulate itself from the worst effects of the troubled U.S. economy.

EWW invests in a broad range of stocks that mirror the Mexican market, but benchmarking the Mexican bourse results in some dramatic sector weightings and concentrated positions. These include stocks in telecommunications firms such as cell phone provider America Movil(AMOV), basic materials firms such as cement manufacturer Cemex(CX), consumer-oriented firms such as Wal-Mart de Mexico, and financial services firms such as Grupo Financiero Banorte. About one third of the fund’s assets are invested in its top three holdings, and recent top holding America Movil alone has long held more than a fifth of the fund’s assets. The stock has been a driving force in EWW’s 2009 recovery.

America Movil is the largest cell-phone company in Latin America, claiming 70% of Mexico’s market share, but it also has expanded into Central and South America, accumulating more than 130 million customers outside of Mexico. The firm is positioned to dominate the Latin American telecommunications sector for years. One institutional buyer is the Bill and Melinda Gates Foundation Trust, which has increased its stake to 1.5 million shares, according to Barron’s.

The firm should also benefit from its deal with Wal-Mart(WMT) announced earlier this fall to roll out Straight Talk, a prepaid phone service. AMOV currently earns 5% of its revenue in the U.S. via Tracfone, but the new joint venture could double its current subscriber base of 712,000 in just five years.

Cemex is EWW’s third largest holding. Since purchasing competitor Rinker in 2007, CX has become one of the largest cement makers in the world, giving it a lock on huge market shares in a broad array of countries. The stock tanked along with the building bust, acting like dead weight in the portfolio until this year, when CX rebounded from a low of $3.87 in March to a high of $14.20 in September.

Another recent factor supporting EWW has been the strength in the Mexican peso, which is benefiting from global weakness in the dollar. But even if the greenback rebounds, the peso could benefit from local factors, such as fiscal and structural reforms and ongoing economic recovery. Also, with 80% of its exports destined for the U.S., any strength from its neighbor will support the peso.

However, weaker-than-expected performance from the U.S. or Mexican economies would be bad news for EWW. The fund is quite volatile — its three-year standard deviation through Nov. 30 was 32.19 — more than 50% greater than that of the U.S. market — so changes are likely to be abrupt. Yet investors should also be aware that EWW weights its holdings by market capitalization, so it primarily invests in stocks of huge companies.

The fund recently held an average market capitalization of more than $18 billion, and more than 30% of its assets were in giant-cap firms. If large-caps continue to outperform, this will provide additional support to the fund.

Disclaimer