Dion Money Management Blog   Money Management for Retirees and Their Families

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 the decline in strength of a large media ETF, an investor opportunity to take advantage of a knock to Japan’s credit rating, and how consumer staples is a smart play to avoid Washington’s headwinds.

This Media ETF Looks Headed for a Fall
Posted 01/29/2010 11:30 a.m. EST

While the PowerShares Dynamic Media ETF(PBS Quote) has shown strong long-term momentum, its strength can largely be attributed to a bounce from a single player in the struggling newspaper industry: Gannett(GCI Quote). With the outlook uncertain for this company and the broad newspaper industry, PBS’ days of strength may be numbered.

In the past three months through Jan. 25, Gannett has gained 50% while the vast majority of PBS’ other top holdings have remained in the single digits or even dipped into the negative.

Currently, PBS has some of the heaviest exposure to the printed word in the entire ETF industry. This instrument has 4% of its assets exposed to Gannett, publisher of USA Today, another 5% of its portfolio allocated to Rupert Murdoch’s News Corp.(NWSA Quote), which owns The Wall Street Journal and the New York Post, and 3% in The Washington Post Co.(WPO Quote).

Other companies listed among PBS’ top holdings include Comcast(CMCSA Quote), CBS(CBS Quote), Direct TV(DTV Quote) and Viacom(VIA>B Quote). Together, the fund’s top 10 constituents account for nearly 45% of the fund.

Gannett is scheduled to report its fourth-quarter earnings on Monday, and according to recent comments by company executives, the outlook is not as dire as one would expect from reading headlines about the death of the industry. Rather, thanks to cost-cutting measures taken and slowing revenue decreases, executives predict that the fourth quarter could have been the strongest three-month period for the firm in 2009.

Despite the company’s optimism, the long term outlook for the industry is still questionable, and playing the newspapers may be best done from the sidelines.

Last week, The McClatchy Co.(MNI Quote) reported that cost-cutting measures and an increase in revenue from online advertising helped it swing to profit in the fourth quarter of 2009. Cost-cutting efforts were also cited in the strong fourth-quarter earnings report from another newspaper firm, Media General(MEG Quote).

Though cost-cutting measures helped beef up these companies’ most recent earnings reports, at some point the newspaper industry will have to find a way to make solid revenue. Recently, the New York Times announced that, come 2011, it would institute a pay-for-content strategy. No one knows whether the plan will prove effective or fail miserably.

For example, Cablevision(CVC Quote), which accounts for 2.6% of assets in PBS, instituted a $5-per-week paywall for Newsday, and three months later, it has gained fewer than 40 subscribers.

At this point, because of uncertainty facing the newspaper slice of PBS’ index, and the fact that it was that slice that contributed heavily to recent strong momentum, now is the time to take any profits and sell this ETF.

Disclaimer

Another tough week for the stock market left the S&P 500 down 1.6%. Even a positive GDP number, which showed 5.7% growth for the fourth quarter of 2009, wasn’t enough to turn the market higher. The Nasdaq  fell 2.6% and the Dow Jones Industrial Average declined 1.0%. For the month, these indexes are down 3.7%, 5.4% and 3.5%, respectively.

It was a busy week for earnings. Amazon(AMZN) beat estimates handily, while Qualcomm’s(QCOM) guidance disappointed the market. Procter & Gamble(PG) beat estimates; AT&T(T) reported strong earnings thanks to the Apple (AAPL) iPhone, while Apple itself reported a great quarter and unveiled the iPad.

Unlike the iPhone, the iPad will not be exclusive to AT&T, but the firm did partner with Apple to offer a data subscription deal. Reviews of the product were mixed, and it will take some feedback from users before we know whether this is another hit like the iPod and iPhone, or whether it is another Newton.

Despite the positives, the market preferred the negatives. Caterpillar(CAT), for one, delivered disappointing guidance with its earnings report and carried the entire heavy-equipment sector lower.

Toyota(TM) announced a massive recall and stopped selling many popular models due to a problem with the accelerator. The supplier of that part, CTS(CTS), fell more than 10% on the week.

In contrast, the last of the Big Three in nongovernment hands, Ford(F), reported its first annual profit since 2005 and shares gained 3.2% for the week.

Finally, Ben Bernanke was reappointed to the position of Federal Reserve chairman on the closest vote in history. Eighteen Republicans, 11 Democrats and one independent joined together in opposing his appointment.

Here are this week’s ETF winners and losers:

Winners

iShares MSCI Belgium(FXE) +1.0%

Worries over Greece’s debt, an issue simmering for many weeks, finally led to bailout rumors this week that sent the euro and weaker European country ETFs much lower. CurrencyShares Euro(FXE) fell 1.9% on the week, iShares MSCI Spain(EWP), often mentioned as having the next weakest European finance after Greece, tumbled 3.8%.

iShares MSCI Turkey(TUR) +0.9%

Turkey may be next door to Greece, but the economies are very different, and their markets took different paths last month. TUR gained 3.5% in January, while the Athens composite index has declined 9.6% this year. The broader European ETF, iShares MSCI EMU Index (EMU) sank 7.8% in January, mostly on those Greek concerns.

iShares Dow Jones U.S. Home Construction(ITB) +1.6%

SPDR S&P Homebuilders(XHB) +1.1%

Housing numbers for December haven’t been good, but earnings reports were positive. Ryland Group(RYL), a top ten holding in ITB, reported a gain of 11 cents, while analysts were looking for a loss of 26 cents per share.

Analysts also expected a loss at Meritage Homes(MTH), another top ten holding in ITB, but the firm came in with a profit.

Due to ITB’s much heavier allocation to homebuilding stocks, it outperformed the more retail oriented XHB this week.

Losers

U.S. Natural Gas(UNG) -10%

iPath Natural Gas ETN(GAZ) -11.3%

U.S. 12 Month Natural Gas(UNL) -6.4%

Welcome back, UNG. It’s been awhile since the fund has led the decliners, as a cold winter snap had reduced inventories and sparked optimism in the market. Recently, a spate of warm weather sank prices and last week’s inventory decline was less than expected.

PowerShares DB Base Metals(DBB) -9.5%

iPath Copper ETN(JJC) -9.5%

FreeportMcMoRan Copper & Gold(FCX) was slammed the past three weeks on concerns over Chinese growth. Since Jan. 11, FCX and Southern Peru Copper(PCU) are down 24.2% and 26.7%, respectively.

Copper initially had less extreme losses, but this week it sank along with the producers. Since Jan. 11, it is down 12.1%.

Market Vectors Steel(SLX) -7.6%

Although it doesn’t own Chinese steelmakers, concerns over Chinese growth weighed on this popular ETF. Investors may be especially concerned about Chinese supply hitting the international market if it cannot find a home in China. SLX, which gained 113% last year, is down 11.6% after the first month of 2010.

Disclaimer

Uncertainty continued to weigh on stocks this week. The result was the sharpest sell-off since this bull market began, causing the broader indices to lose 5% from their 16-month highs. Although much of the trouble emanated from Washington, news from China also made investors skittish. The selling subsided at the outset of this week, as investors looked to pick up attractive shares at reduced prices. After rising nearly every month since last March, stocks need to consolidate and digest the latest round of economic data, corporate earnings, and legislative agenda.

Trouble began with the election of Scott Brown in Massachusetts, which put the U.S. health care reform in jeopardy. Washington appeared to immediately digest the implications for its current legislative initiatives, as well as other policy issues such as financial reform and taxation. Without 60 Democrats, the Senate no longer had the majority to control the agenda or pass one-sided legislation.

Nevertheless, President Obama last week added to the uncertainty by announcing a proposal that, on the surface, appeared to be a sweeping pass at new bank regulation. However, it essentially lacked the details to achieve widespread support, nor did it propose a timeframe, which would allow analysts to estimate the impact of any change. Although the high probability of financial reform has been an unsettling prospect for months now, the timing and aggressiveness of the announcement still came as a surprise. The State of the Union address delivered this week mixed a defiant defense of this agenda with calls for unity among legislators.

Additional uncertainty out of Washington during the last two weeks surrounded the confirmation of Fed Chairman Ben Bernanke. Once additional senators announced their opposition to his re-election to a second term, the President reaffirmed his support, announcing that he still considers Bernanke the best person for the job. Although the chairman is battle-tested and knowledgeable about depression-era tactics to right the economy, his ability to read the tea-leaves and correct current policy were the more important questions at hand. On Thursday, Bernanke won approval from the Senate.

Actions taken by China to curb lending growth were the most important of global developments causing uncertainty. By raising reserve ratios and restricting lending outright at the most aggressive banks, China was clearly pulling in the reins. This caused ripples in all markets, but especially those trades benefiting from expansionary policies.

Please note: Although the IRS is giving most custodians until mid-February to issue their tax documents, Fidelity Investments has informed us that they applied and received approval for an additional IRS extension for their own 2009 Tax Forms. Fidelity’s new deadline for providing tax information is February 28, 2010. This may not affect all account holders, but it is best to expect a possible delay. A notification letter to those customers affected by the later deadline should be sent by February 5.

In an age where a single speech or confirmation can alter the course of the U.S. market, investors can government-proof their portfolios with several types of ETFs.

Bank failures, massive bailout packages, regulatory overhaul, health care overhaul and near-zero interest rates have all weighed heavily upon the U.S. equity market. It is nearly impossible for Americans to predict what new measure will sway the stock market.

ETFs are a good way of government-proofing your portfolio with alternative assets. By adding measured exposure to precious metals, Treasury Inflation Protected Securities, or TIPS, and international funds, you are one step closer to protecting your portfolio from unpredictable U.S. policy.
Precious Metals
Physically backed precious metals ETFs are the safest, most effective way to gain exposure to the metals market. SPDR Gold Shares (GLD), the second-largest U.S. ETF, gives investors access to ownership in a stockpile of the physical metal. Owning GLD is an inexpensive, low-stress alternative to buying gold bars. The iShares Silver Trust (SLV) gives investors access to physical silver — a metal that has a number of industrial applications. SLV is also large and liquid.

The latest competitor in the physically backed metals ETF space is international ETF issuer ETF Securities. After launching both physically backed gold and silver funds in 2009 to compete with entrenched U.S. ETFs, ETF Securities most recently launched physically backed platinum and palladium funds.

Investor interest in the newly launched ETFS Physical Platinum ETF (PPLT) and the ETFS Physical Palladium ETF (PALL) is already soaring. Together, the funds had attracted more than half a billion in assets as of January 22.

Since gold, silver and platinum all have different applications, it may be most effective to use two of the funds to build a small precious-metals position in a diversified portfolio.

TIPS
One way to proof your portfolio against U.S. government policy is by gaining exposure to securities that will help protect against inflation. While buying individual Treasury Inflation Protected Securities can be tricky, investors can gain exposure to an index of these instruments through the iShares TIPs ETF (TIP).  TIP tracks the Barclays Capital U.S. Treasury Inflation Protected Securities Index, and it holds 29 issues with AAA ratings. While there are new ETFs (specifically from competitor PIMCO) trying to make a name in this space, TIP is still the largest and most liquid TIPS ETF.

Emerging Markets Funds

The globe may be flattening, but the tremendous growth in emerging markets is obvious to even the most casual investor. While these developing areas tend to have more volatility than developed regions, limited exposure to growing markets can help to augment a more traditional portfolio.

Many areas like China and India have exhibited a surge in growth, even as the U.S. has struggled to regain its footing.

Two ETFs to consider for India are the PowerShares India Portfolio ETF (PIN) and the Wisdom Tree India Earnings ETF (EPI). While both of these funds share many of the same holdings, PIN is more heavily weighted toward tech at this time.

While China has already experienced tremendous growth, more potential remains. One ETF to consider is the Claymore/AlphaShares China Small Cap(HAO). This ETF contains fewer of the state-run companies that dominate other ETF portfolios.

Government intervention and support has been one of the greatest market forces since 2008. While U.S. equities appear to be staging a recovery, it is nevertheless important to diversify your portfolio with different types of assets.

This type of investing isn’t “betting against the U.S.” It is simply smart diversification.

Li Ka-shing’s recent investment in Jia Sheng Holdings shows that the businessman may be taking his nickname as the “Warren Buffett of Asia” to heart. The move closely mirrors a similar bet made by the Oracle of Omaha that earned the investor big returns through 2009.

Jia Sheng Holdings, which has a niche in the Hong Kong market as a brokerage and investment firm, recently took steps to go in a new direction. The company plans to spend HK $2.75 billion to purchase Union Grace Holdings to gain control of Thunder Sky Energy Group, which produces batteries for electric cars.

The recent developments draw interesting parallels to Buffett’s investment in the Chinese electric car and battery company, BYD. In September 2008, Buffett paid nearly $2 billion for a 10% stake in this firm which, at the time, was relatively unknown outside of China.

With the growing popularity of environmentalism and electric car prospects, the small firm, once mainly known for producing cell phone power sources, has grown to become one of the most recognizable car companies in not just China, but around the world.

In the time since the bet was made, BYD has grown to become the fourth largest car maker in China and shares of firm have ballooned five-fold. In return, Buffett and Berkshire Hathaway (BRK.A) have pocketed billions.

Li Ka-shing’s Jia Sheng investment is considerably smaller than that of Professor Buffett. However, the Hong Kong businessman’s 400 million shares which, together translate into a 2.5% stake in the firm, still set him back nearly $38 million. These funds will be used to pay for the company’s efforts to build battery factories.

On the day Li was announced as a major shareholder, the company’s stock responded by shooting up nearly 70%. This was the largest intraday gain for the firm since 2003.
Both Li and Buffett have expressed their confidence in the electric car industry through their massive investments. However, going forward, I would advise against trying to follow these two gurus into this risky industry.

Though electric cars have gained impressive popularity and a lot of press as of late, production of the vehicles and the batteries that power them is still expensive. For instance, the BYD e6, which the firm hopes to see hit U.S. roads in 2010, is expected to carry a $40,000 price tag.

Therefore, in order to make the vehicle attractive to the public, the government will be forced to offer incentives. If the government decides to abandon its support, there will be a steep rise in prices and buyers will disappear. BYD, in return, will suffer.

I encourage using caution when attempting to play electric cars. However, I am much more confident playing the broader auto industry. In fact, with companies like Ford(F) and Johnson Controls(JCI) seeing strength, it appears that this sector has room to run. Even in light of the broad auto sell-off thanks to the massive Toyota(TM) recall, I am confident that, when the issue works itself out, playing this industry will still prove beneficial.

The Fidelity Automotive Select Fund(FSAVX) provides investors with exposure to a strong collection of top players involved in the U.S. auto industry. This instrument has seen impressive strength since hitting market bottoms and, as the industry continues to heal, it should continue to perform well.

In the past year, the fund has gained well over 150%.

Top holdings in FSAVX do not include the big three U.S. auto makers. Instead, the instrument depends mainly on the success of parts makers like Johnson Controls, Autoliv(ALV) and BorgWarner(BWA). Neither Toyota nor CTS Corp(CTS), the firm responsible for the firm’s defective accelerators, are present among the fund’s portfolio.

Though Buffett and Li Ka-shing have emphatically thrown their hats into the electric car industry, investors should not get carried away trying to follow suit.

In the end, playing electric cars is not a short-term play. Rather investors need to be prepared for what could be rocky performance over the next decade or so. Looking to the nearer future, investors will find much more stability in the auto sector playing a fund like FSAVX.

Disclaimer

As President Obama’s focus shifts from a faltering health care initiative to the economy, major pharmaceutical manufacturers will have some breathing room.

Investors interested on adding a pharma-focused holding to their portfolios should consider either iShares S&P Global Healthcare(IXJ) or iShares Dow Jones US Pharmaceuticals(IHE).

While the president reaffirmed his commitment to health care reform in the latter portion of last night’s speech, the majority of the State of the Union address was devoted to the economy and job creation. The recent defeat in Massachusetts, coupled with unemployment concerns, should help keep the heat off pharma in the short term.

Both IXJ and IHE have benefited over the last three months as a major U.S. health care overhaul became less certain. During the three-month period ended Jan. 27, IXJ and IHE rose 8.85% and 12.10% respectively.

U.S.-focused IHE has benefited the most from the faltering support for Obama’s plan, but both funds focus on many of the same major drug companies. Johnson & Johnson (JNJ) and Pfizer (PFE) are the top two holdings in both IHE and IXJ.

Johnson & Johnson’s diversified business structure and strong pipeline will help to power both IHE and IXJ in the months ahead. A wide range of business segments has helped to keep this firm afloat in rocky markets, while a pipeline with promising drugs for pain, arthritis and cardiovascular products, should keep JNJ trending upward as baby boomers age.

The recent acquisition of Wyeth, coupled with a strong dividend, should help to keep Pfizer in favor with investors in the months ahead. While the acquisition of Wyeth will help PFE to offset losses from patent expirations, a 4% dividend (as of December 2009) will help investors to hold on.

Investors looking for a more global portfolio can benefit from a wide range of companies in IXJ’s roster. More than 61% of IXJ’s holdings are U.S.-traded companies, but this portfolio offers exposure to global giants like Novartis(NVS) and AstraZeneca(AZN). AZN, in particular, has a strong pipeline of drugs that should resonate with baby boomers.

Whether you’re looking for a pure play on U.S. pharma firms or exposure to the global market, IXJ and IHE have the focus and liquidity to make these ETFs trade-able. IHE has 33 holdings and an expense ratio of 0.48, while IXJ has 81 holdings and an expense ratio of 0.48.

While pharma has already recovered significantly in recent months, there is still room for growth as health care shifts out of the regulatory spotlight. Both IXJ and IHE should benefit from this transition over the next few months.

IHE is a holding in my ETF Action portfolio, helping followers to make gains in recent weeks.

Disclaimer

Betting against equities hasn’t worked out well for five of Direxion’s leveraged funds. In mid-February, Direxion will be executing a reverse split for five bearish funds pummeled by the recent market rally.

Once again, news of a leveraged fund split underscores the complexity of these professional products, and emphasizes the danger that many of these funds pose to investors.

The five funds involved in Direxion’s reverse split are the Monthly Small Cap Bear 2X Fund(DXRSX), Monthly Emerging Markets Bear 2X Fund(DXESX), Monthly Developed Markets Bear 2X Fund(DXDSX), Monthly NASDAQ 100 Bear 2X Fund(DXQSX) and the Monthly S&P 500 Bear 2X Fund(DXSSX).

Direxion’s official announcement notes that Feb. 12, 2010 will be the last date of the pre-”reverse split” price, and that Feb. 16, 2010, will be the first day reporting the post-”reverse split” price.

Since these funds have sunk under the weight of a rallying market, the reverse split will serve to lift the funds’ NAVs. Direxion’s latest move demonstrates that daily-tracking ETFs are not the only leveraged funds investors have to fear.

While the reverse-split may be unfamiliar to Direxion’s mutual fund holders, the issue is fresh in the memory of leveraged ETF holders. Rather than tracking a monthly objective, like Direxion’s mutual funds, Direxion’s 3X ETFs track daily trading objectives.

Just as markets can erode triple-leveraged ETFs, a solid trend can crush monthly-tracking mutual funds. The Direxion Monthly NASDAQ 100 Bear 2X fell 73.30 during the one-year period ended Jan. 26. DXQSX is currently worth less than $5.

When funds are crushed by “adverse” market trends, transaction costs grow for buyers and sellers. This is especially the case for investors in triple-leveraged ETFs, who have to pay additional transaction costs to buy more of a fund in order to achieve the same hedge.

The five monthly mutual funds follow three daily ETFs in executing their reverse splits. The first Direxion ETF to execute a reverse split was the Direxion Daily Mid Cap Bear 3X(MWN).

Before MWN’s split, the ETF was priced at $32.48 on June 24,2009. Following the 2-for-1 reverse split, MWN traded at $60.25 on June 25, 2009. Currently, MWN is priced at $23.74, the result of gradual market recovery.

In early July, Direxion attempted to set straight the popular Direxion Shares Daily Financial Bull(FAS) ETF and the Direxion Shares Daily Financial Bear(FAZ) with a 3-for-1 split. FAS is currently trading around $70 while FAZ has fallen to approximately $20.

If erosion were responsible for the previous decline, it is now trending — not volatility — that is to blame. When FAS and FAZ split 3-for-1, market volatility had eroded both the bullish and bearish bets. The next five mutual funds that Direxion splits are all bearish bets — showing the weakness of leveraged bear bets in a strengthening market.

Whether you’re dealing with monthly or daily leverage, it is important to understand the complexity of these products before investing.

For more on leveraged funds, check out the links to these articles on leveraged ETF rule changes; four types of nontraditional ETFs; and a regulatory storm brewing for ETFs.

Disclaimer

In a mere 10 trading days, the newly launched ETF Securities Physical Platinum Shares(PPLT) and Physical Palladium Shares(PALL) have amassed more than $500 million in assets.

The new physically backed platinum and palladium ETFs are the most recent funds from ETF Securities, a global ETF issuer. PALL and PPLT are the first U.S.-traded funds to offer investors exposure to bullion-backed platinum and palladium trusts.

It is not surprising that investors have gravitated to these new precious metals ETFs, or that ETF Securities was the first firm to debut such funds in the U.S. ETF Securities launched the first physically backed gold ETFs in Australia and London in 2003. SPDR Gold Shares(GLD), the first physically backed gold fund in America, is currently the second-largest ETF by assets in the U.S.

ETF Securities launched its first two U.S.-traded funds in 2009 — the firm’s own physically backed gold and silver funds, designed to compete with entrenched U.S. competitors like GLD and iShares Silver(SLV). As of Jan. 25, the ETFs Physical Silver Shares(SIVR) and ETFs Physical Gold Shares(SGOL) had attracted approximately $134 million and $335 million in U.S. assets respectively.

“We’re excited to be able to bring this unique offering to the US ETF market,” noted William Rhind, head of sales & marketing for ETFS Marketing LLC. “We have seen good demand and investor interest in all four physically backed ETFs; SGOL, SIVR, PPLT & PALL.”

“Investors should think about investing in platinum and palladium as they typically exhibit a higher volatility than gold and are more geared to a global economic recovery,” Rhind added.

The highly anticipated platinum and palladium funds offer the same transparency and convenience of their familiar gold and silver peers. Rather than having to gain exposure to precious metals through jewelry, coins or futures contracts, investors can use physically backed ETFs to track the price of rare and expensive commodities.

While there has been some resistance to the new funds among the small group of buyers and sellers who formerly dominated the U.S. platinum marketplace, early asset flows indicate that investors are embracing these new investment vehicles.

The remarkable popularity of physically backed gold ETFs — GLD had more than $40 billion in assets at the end of 2009 — has led precious metals to be an asset class onto itself. Investors looking to protect against inflation, deflation or global meltdown can all scoop up shares of precious metals ETFs to ease concerns.

PALL and PPLT provide another tool for investors looking to diversify their precious metals holdings. While gold, platinum and palladium are all precious metals with limited supply, platinum’s and palladium’s industrial utility set these metals apart.

Ownership of PPLT and PALL can be viewed as more than a bullish bet on the price of these metals. The majority of platinum and palladium is used in the creation of catalytic converters. As emissions standards worldwide tighten, PALL and PPLT will reflect the demand for these “industrial” metals.

PPLT also serves as a good proxy for South Africa. The majority of the world’s platinum comes from South Africa, but a volatile political situation and locally priced equities keep many investors from venturing into that developing market.

ETFs continue to allow investors daily access to specific market segments. Investors should consider these funds when assessing their precious metals holdings, and watch these funds as they reflect the global demand for platinum and palladium.

Disclaimer

Mutual fund giant Fidelity Investments has given early indications that it could enter the $1 trillion dollar ETF industry with its own set of proprietary funds.

Following in the footsteps of asset managers like Schwab(SCHW), PIMCO, State Street(STT) and Blackrock(BLK), Fidelity’s new funds could help to expand its audience and create a “stickier” customer base.

The recent announcement coincided with the retirement of Rodger Lawson, Fidelity’s second-highest ranking executive. Lawson, who will be leaving the firm at the end of March, recently noted that the firm may consider opening actively managed ETFs modeled after its sector mutual funds, known as the Fidelity Select funds.

While the timing of Lawson’s announcement may be surprising, the ETF industry is becoming an increasingly popular destination for large asset managers. In an article earlier this month, I suggested that Fidelity was “late to the ETF game.”

However, as investors shift assets from traditional mutual funds into lower-cost ETF models, Fidelity’s hesitancy is costing the firm. Since 2007, iShares, recently acquired by Blackrock, has gained more than $126 billion in assets. Fidelity, according to the Wall Street Journal, lost more than $15 billion in assets during that period.

Vanguard, whose low-cost, copy-cat ETFs continue to pique investor interest, nearly doubled net ETF assets in 2009. According to data from the National Stock Exchange, Vanguard’s ETF assets doubled from $45 billion in December 2008 to $91.5 billion in December 2009.

Newcomer Schwab netted $348 million in ETF assets in less than two months, after launching its first proprietary ETFs in November 2009. Like Vanguard, many of Schwab’s first funds took aim at traditional mutual fund themes. Among the funds launched in November are the Schwab Large Cap Growth ETF(SCHG) and the Schwab Large Cap Value ETF(SCHV).

Interest in ETFs heightened as confidence in traditional fund managers waned in the wake of the financial crisis. Traditional arguments for the mutual fund model are no longer resonating with investors unsatisfied with underperformance, especially as innovative ETFs encroach on mutual fund territory.

While traditional, passive, cap-weighted ETFs like SPDR S&P 500(SPY) and iShares MSCI Emerging Markets(EEM) still dominate the list of largest ETFs, issuers are coming up with new ways to beat benchmarks, and not just track them.

The latest trend in ETF development, an area where Fidelity hopes to make its mark, is “actively managed” funds. Firms like T. Rowe Price and Putnam have both expressed interest in joining this segment of the ETF industry, despite the chilly reception for many early actively managed ETF models.

PIMCO’s new actively managed ETF funds have managed to attract noticeable investor attention . Launched in November of 2009, the PIMCO Enhanced Short Maturity Strategy Fund(MINT) has already netted $52 million in assets. The PIMCO Intermediate Municipal Bond Strategy Fund(MUNI), also launched last November, has attracted $13 million in assets.

PIMCO, which joined the ETF industry in June of 2009, managed to net $470 million in ETF assets during the first year .

Innovative, low-cost products are the hallmark of the ETF industry, and Fidelity reluctance to launch its own products could continue to drive investors elsewhere. One of the more remarkable aspects of Schwab’s proprietary ETF launch was the announcement that clients could trade the products commission free. By creating low-cost trading platforms that are one-stop-shops for a variety of financial products, firms like Schwab will continue to grab market share.

Fidelity’s plan to launch proprietary ETFs is a logical addition to existing ETF tools as well as a logical extension of existing Fidelity Select Funds, which track individual market sectors. Fidelity currently offers ETF research on its website.

As ETFs become a more fundamental part of 401k planning, Fidelity’s dominance among this group of investors could come under pressure if the firm doesn’t develop the new funds expediently.

2010 could prove to be an interesting year for Fidelity, as both financial firms and investors grapple with the changed economic landscape. While the process of developing and launching successful ETFs is a challenge for any firm, it will be an obstacle that Fidelity has to overcome to stay relevant.

Disclaimer

Idle ships are sinking the Claymore/Delta Global Shipping ETF(SEA), a fund that tracks companies within the global maritime shipping industry.

While demand for some types of vessels remains strong, the companies which comprise SEA’s portfolio own and contract a broad range of ships, making the fund vulnerable to the recent draught.

Companies at the top of SEA’s roster, like Seaspan(SSW), Teekay Tank(TNK), General Maritime(GMR) and Euronav(EURN), face a difficult climate in the wake of the global economic crisis as ready fleets outstrip demand in many sections of the industry.

SEA’s underlying portfolio includes shipping companies that derive more than 80% of their revenues from one of the following segments of the shipping industry: the seaborne transport of dry bulk goods and the leasing and/or operating of tanker ships, container ships, specialty chemical ships and ships that transport liquid natural gas or dry bulk goods.

Strong demand for raw materials like steel has helped to keep bulk ships busy, but a drop in buyers of finished goods is keeping container ships stuck in harbors. According to a recent New York Times article, one tenth of the world’s container ships are estimated to be idle.

Empty ships are clogging international ports as commercial vessels sit idle — a trend that has not been missed by industry insiders. A recent report from the Baltic and International Maritime Council, an independent international shipping association, noted that, “the sheer number of ships currently swinging around their anchors either waiting to load or discharge throughout the month of January has been exceptional.”

The shipping industry is prone to boom-and-bust cycles, and SEA has picked up some steam since December 2009 lows. For the one-month period ended Jan. 21, SEA is up more than 10%.

Exaggerated gaps in demand between bulk and container ships will make SEA an unstable investment in the short term, and investors should use other ETFs to access profitable areas of the shipping industry.

While SEA is a well-designed way to gain exposure to the shipping industry as a whole, supply issues make more targeted funds preferable investments in the months ahead.

Demand for raw materials like coal and steel, much of which are transported by the global maritime industry, can be accessed through funds like Market Vectors Steel(SLX) and Market Vectors Coal(KOL). These funds target companies that deal specifically with these raw materials.

Over the long haul, shipping companies will self-correct and investors will be safe to broaden their focus. When times get tough for global shippers, companies accelerate scrapping or selling off ships, and they postpone or cancel new build orders. Towards the end of 2010, this process should help many of SEA’s holdings to rebound.

Disclaimer