Dion Money Management Blog   Money Management for Retirees and Their Families

The ETF industry recently hit a milestone, as assets passed the $1 trillion dollar mark despite uncertain market conditions. The transparency, accessibility and cost efficiency of ETFs have made these products attractive alternatives to index-tracking mutual funds.

When adding ETFs to your portfolio, it is important to be aware how each fund will function as part of your larger investment strategy. The narrowly themed nature of many ETF products can be a double-edged sword. A narrowly themed ETF can help you to target specific regions of the market without stock picking, but it can also lead to increased volatility or over-concentration.

Step 1: Establish a Core

Whether you add ETFs to an existing portfolio or construct a well-rounded portfolio from ETF products, diversification is key. At the core of your portfolio, a broad-based index ETF like the SPDR S&P 500(SPY), Diamonds Trust(DIA) or PowerShares QQQ(QQQQ) helps in providing the foundation for building a complete investment picture.

Step 2: Sector Exposure

Large, liquid sector ETFs allow investors to add emphasis to their investment philosophy. From the Financial Select Sector SPDR ETF(XLF) (XLF) to the iShares Dow Jones US Technology(IYW), heavily traded sector ETFs allow investors to layer on exposure to particular sectors or themes.

As you add sector ETFs to your portfolio, it is important to be mindful of any overlap between your sector holdings and your core positions. Investors starting with the QQQ ETF should be aware of that fund’s emphasis on technology. These investors should consider this exposure before adding a sector ETF that magnifies the emphasis of their core holding.

Keeping track of exposure is key when building a well-balanced ETF portfolio. As you add more ETFs, unintentional pockets of concentration can often emerge when fund holdings overlap.

Step 3: High Touch or Low Stress?

A key step in selecting ETFs for your portfolio should be a fundamental assessment of how much you want to be involved in daily trading.

Because ETFs offer both short- and long-term strategies, it is important for investors to pick ETFs that offer the high-touch daily access or low-stress long-term exposure that they are looking for.

The greatest portfolio problems arise when investors pick ETFs that do not match up with their strategies. While highly-leveraged ETFs such as Direxion’s Daily Financial Bear 3X Shares(FAZ) may be appropriate for a short-term trader looking to hedge exposure on a daily basis, these funds can reek havoc in a long-term portfolio.

Likewise, “smart” indexing strategies, which seek to do more than just track a traditional index, are often better suited for long-term portfolios. While “quant” or “dynamic” strategies may deliver over time, they may not be the most suitable choices for short-term traders who rely on liquidity.

The rise of ETFs has corresponded with a departure from “set-it-and-forget-it” investing strategies and an increasing demand for transparency. A broad range of ETF products offer everything from daily hedging strategies to long-term portfolio strategies. Investors must first understand their own goals before selecting the appropriate ETFs.

As ETF investors move into the heart of earnings season, they should keep an eye on funds that are top-heavy in companies that are reporting, such as Johnson & Johnson(JNJ), Boeing(BA), Altria(MO) and Chevron(CVX).

In addition to earnings, investors should be tuned to economic data in the week ahead. Housing numbers, an impending Fed meeting and fourth-quarter GDP will all weigh on broad-based funds.

Financial Select Sector SPDR(XLF)

President Obama’s reform proposals, delivered during the heart of bank earnings, will continue to impact the financial sector the week ahead.

Cap-weighted financial funds like XLF will be especially vulnerable as investors digest proposed reform and weigh the likelihood of big bank break-ups. Top XLF components like Bank of America(BAC), Goldman Sachs(GS) and Citigroup(C) would all be impacted by rules regulating the scope and activities of banks.

Financial ETFs took a hard hit at the end of last week as Obama’s plan reached investors. This week will test whether the market has overreacted to plans for financial reform.

PowerShares QQQ(QQQQ)

Apple(AAPL) may have a double impact on QQQ this week as the company releases earnings and unveils the highly-anticipated tablet.

Because the computing giant makes up more than 15% of QQQ, today’s earnings could sway this tech-heavy ETF. Analysts expect Apple earned $2.07 on revenue of $12.1 billion in the fourth quarter.

AAPL has surprised investors on the upside in the past four quarters by an average of 23%, but the punishment Google’s(GOOG) endured last week should keep investors on guard.

A wave of excitement and anticipation could also help to boost AAPL and QQQ mid-week, as anxious consumers await the unveiling of the new tablet.

this week, AAPL’s announcements could help QQQ to stand out from the rest of the pack.

iShares Barclays TIPS Bond(TIP)

Proposals that seek to curb lending will help to keep inflation a hot topic this week. TIP has been a popular pick for investors looking to hedge the risk of inflation over the last year.

President Obama’s new banking proposals, which would curb lending practices, sent stocks down in Asia on Friday as investors across the globe pondered inflation risks.

iShares Dow Jones U.S. Healthcare Providers Index Fund(IHF)

The earnings reports, coupled with the Massachusetts election results, could help to send IHF higher in the week ahead.

Wellpoint(WLP), IHF’s second largest component, will deliver earnings results on Wednesday. Health care providers could continue to rebound as a dramatic overhaul of our health care system becomes a more distant reality.

UnitedHealth Group(UNH), IHF’s top component, reported positive results on Friday but was swept downward with the broader market correction. As investors regain their footing this week, this stock could pop and help to lead IHF higher.

iShares Dow Jones U.S. Aerospace & Defense Index Fund(ITA)

As investors await earnings from four aerospace companies this week, ITA could benefit from an improved sector outlook.

Top ITA components Boeing(BA) and Lockheed Martin(LMT) will be reporting results this week.

ITA has reflected the improvement in the aerospace sector over the last year, rising 30.70% during the one-year period ended Jan. 21. Year to date, ITA has already risen nearly 3%.

Positive results for BA and LMT, which together make up more than 13% of ITA, could help this ETF in the week ahead.

Disclaimer

Still Bullish on Mexico
Posted 1/19/2010 2:49 p.m. EST

When it comes to international ETFs in 2010, some of the most promising strength appears to be coming from Mexico.

While I continue to hold the iShares MSCI Mexico Investable Market Index Fund (EWW) as a play on strength across the broad Mexican markets, I am also optimistic about the country’s peso vs. the U.S. dollar. For this reason, I hold the CurrencyShares Mexican Peso Trust (FXM) as a small currency position as well. With the Mexican and U.S. economies heading toward recovery, the stage is set for both of these funds to head higher.

I’m not alone in my positive outlook for the nation’s currency. Recently, firms including Deutsche Bank, Pimco and Aberdeen have come out to share their own optimistic outlooks for the Mexican currency. In an article by Bloomberg, an Aberdeen representative said that Mexico’s peso is significantly undervalued and offers some of most upside in Latin America.

Already this year the peso’s 3% rise against the U.S. dollar makes it the second-strongest currency against the greenback, beaten only by the Korean won.

While a strong peso will buoy FXM, EWW should also be a beneficiary. All else held equal, a strong peso would hinder exports to foreign nations like the U.S., but the United States’ growing demand for more goods and services should offset currency-driven losses.

Additionally, as I mentioned when discussing the Korean won, the peso has remained markedly weaker vs. the dollar than other currencies over the past five years, including the yen, euro and real. The peso still appears to have room to appreciate against the dollar before valuation begins to cut into exports.

The outlook for exports appears optimistic in light of peso strength, but even if companies do see a decline in their exports, investors holding EWW should still see net upside. The underlying holdings of the fund — America Movil (AMX), Walmart de Mexico (WMMVY), etc. — are priced in pesos and many do a large amount of their business domestically, where a stronger peso has no effect to a slightly positive effect (as import prices decline). Therefore, American investors in these firms’ shares will capture all gains in the peso vs. the U.S. dollar, while earnings will take a smaller hit from any lost exports.

A Pipeline Spark for Nat Gas
Posted 1/19/2010 10:49 a.m. EST

JPMorgan Alerian MLP Index ETN(AMJ) will benefit from a restructuring at Williams Cos.(WMB) and its two publicly traded partnerships.

Williams Partners(WPZ) will acquire Williams Pipeline Partners(WMZ), in addition to purchasing pipeline assets from Williams Cos. The combined entity will have more than 14,000 miles of pipeline, including a key pipeline that runs from Texas to New York City, right through the potentially huge reserves of the Marcellus Shale in Pennsylvania.

Investors sent shares of all three stocks rising more than 10% in early trading Tuesday, with Williams Partners in the lead, up 15% this morning.

This is another bullish piece of evidence for natural gas as a long-term fuel source. It also supports my investment thesis that producers and transport firms are the best way to play this trend. Though natural-gas prices remain low due to high production, companies such as Williams Partners are well-positioned to benefit from the large volume. As more energy consumption shifts to cheaper natural gas, prices will eventually rise.

AMJ allocates only 0.4% of its assets to Williams Pipeline Partners, and another 1.3% to Williams Partners. Enterprise Products Partners(EPD) and Kinder Morgan Energy Partners(KMP) will still trump the restructured Williams Partners in terms of earnings. They make up 13.5% and 12%, respectively, of AMJ, which tracks a market-cap-weighted index.

Another ETF, iShares S&P Global Infrastructure Index Fund(IGF), invests 3.1% of assets in Williams Cos.

Oklahoma ETF(OOK) has the largest exposure — 7.9% in Williams Cos., 4.1% in Williams Partners, and 2.4% in Williams Pipeline Partners — but the fund averages less than 2,000 shares a day in volume, making it too illiquid to trade at this time.

Investors interested in the broader natural-gas story should consider First Trust ISE-Revere Natural Gas(FCG), which owns both natural-gas producers and explorers.

ETFs for Dipping a Toe Into Amazon
Posted 1/21/2010 9:50 a.m. EST

Amazon’s (AMZN) brilliant and aggressive strategy with its Kindle shows why the company continues to be an investor favorite. Its latest move, at once a strike at the jugular of the publishing industry and a pre-emptive move against Apple (AAPL), highlights the company’s business instinct.

Yesterday, Amazon announced that the company will give authors and publishers 70% of the sales from their Kindle books, minus delivery costs of about 6 cents. Though there are some stipulations and the move seems aimed at smaller and independent publishers, the industry needs to be worried because of the rising popularity of e-books.

An L.E.K. Media Consumption Survey shows that e-reader owners are reading 18.2 hours per week. This implies that users are heavy readers and many are shifting consumption from physical to digital products, in addition to consuming more overall.

With Apple set to launch a tablet computer that is rumored to have e-reader capabilities, the number of users may surge as Apple draws its fan base into the e-book market. I also expect that if the rumored functions are true, Apple will also move in on Amazon’s market and try to do for e-books what the company did for digital music.

Since Amazon has established itself in books and has launched an e-reader, however, I believe that it is well positioned to battle Apple in a way that music sellers were not. During the holiday season, I said that the fight between Amazon and Wal-Mart (WMT) was bad news for their competitors. The same can be said of Amazon and Apple, as they will likely create far more collateral damage to competitors than direct damage to each other, and a direct battle may even be a win-win if it boosts sales of their products.

My main concern with Amazon is the firm’s valuation. Even if it can increase 2010 earnings 30% above consensus estimates — three of its last four quarterly earnings surprised by more than 30% to the upside — that assume 25% growth already, shares would still be trading at nearly 40 times 2010 earnings. This is a bullish story for a bullish market, but a slip up in either could batter shares.

For ETF investors interested in Amazon-weighted funds, the Internet HOLDRs (HHH) has 40.3% of assets in Amazon, PowerShares Nasdaq Internet (PNQI) has 7.3% of assets in Amazon; and First Trust Dow Jones Internet Index (FDN) has 6.3% of assets in Amazon.

With another 20% in eBay (EBAY) and 15% in Yahoo! (YHOO), HHH is too concentrated for my tastes. PNQI and FDN have very similar portfolios, but FDN has greater trading volume, making it my preferred choice for an Amazon-weighted ETF.

Another reason I like FDN (and PNQI, if it had more volume) is that the fund holds other Internet retailers that are changing the face of retail, in addition to the firms that supply the infrastructure and support services for these companies. The larger the fight between Amazon and Apple, for instance, the more money is likely to end up in the hands of many of the firms that make up FDN, which is why I continue to hold it in my ETF Action Newsletter.

Disclaimer

Friday was a bad end to a bad week for the market and for financials in particular, in the wake of President Obama’s statements on limiting the risk-taking of large American banks.

Leading the downward march on Friday were shares of American Express (AXP), which lost almost 9%, and Capital One(COF), which fell more than 12%, highlighting how investors reacted wildly to negative information as the week came to a close. New credit card regulations were expected to affect the companies negatively.

In comparison to AXP and COF, credit card company peer Visa(V) shed only a modest 2% on Friday, and even the main target of populist anger against Wall Street, Goldman Sachs(GS), was down only 5%. Stranger still is the fact that AXP’s earnings were slightly better than the market expected.

However, after this week, the pattern should no longer be surprising. Important companies have been beating expectations left and right since earnings season began, but even when earnings have been stellar, the market has not seen it as positive enough to placate concerns about the future of the economy.

Macroeconomic issues such as China’s tightening of lending and Obama’s plans for banking regulation have made the market wary of a future slowdown in economic recovery to the point that the success of fourth-quarter earnings and even the whole of 2009 is barely relevant.

The market’s wariness, when given unsettling future information alongside positive past results, may not be an entirely bad thing.

This is because, if investors had forgotten the fact that recovery into 2010 is not going to be a sprint, then this week may have been a healthy reminder, preventing exuberance that may have led to an even larger market letdown later in the year. As I have said in my outlook for 2010, the year will test the market’s stamina. I think this week was the first but probably not the last example of why this will be true.

With that in mind, here are this week’s ETF winners and losers:

Winners

ProShares UltraShort China(FXP) +11.4%

There were plenty of inverse and inverse leveraged ETFs dominating the winners this week, but it was China’s tightening of monetary policy (and fears of further tightening) that triggered much of the week’s global selloff, earning FXP a well deserved spot as a winner this week.

PowerShares DB U.S. Dollar Bullish Fund(UUP) +1.4%

The U.S. dollar index snapped higher after the euro sold off. A stronger yen tempered the gains, however, and while the U.S. dollar has appreciated vs. the euro, UUP did not break its December highs.

iShares Barclays 20+ Year Treasury(TLT) +1.1%

SPDR Barclays Long Term Treasury(TLO) +1.0%

Investors sought shelter from the storm last week and they gravitated to U.S. Treasuries. A stronger U.S. dollar didn’t hurt either, as it made dollar-denominated assets more attractive to own.
Losers

Market Vectors Coal(KOL) -10.6%

The most favored ETFs of the previous few weeks and months became the most sold this week. There wasn’t any other reason for the selloff in KOL, for instance, although it was hurt a bit by exposure to China. Investors are worried that monetary tightening will crimp economic growth, and that could lead to lower than expected coal demand.

Market Vectors Gold Miners(GDX) -7.7%

Market Vectors Junior Gold Miners(GDXJ) -11.6%

A stronger U.S. dollar sent commodities broadly lower, and gold bullion ETFs lost about 3% on the week. Miners were hit hard by a trifecta of a fall in gold prices, the larger decline in commodities and the decline in stocks.

Market Vectors Solar(KWT) -13.2%

Claymore/MAC Global Solar(TAN) -11.7%

In the previous week, France cut its subsidies to solar power makers, and Germany was expected to follow. This week, Germany delivered with the cuts and an already jittery market slammed solar shares. The news overshadowed a positive change for the solar industry in Ontario, where the government passed a $10 billion alternative energy deal with Samsung.

Disclaimer

Despite a solid start to the latest round of corporate earnings reports, stock markets declined this week due, in part, to legislative uncertainties. After an initial rally on Tuesday to begin the holiday-shortened week, political events took center stage as a Senate election and financial reform proposals had investors reassessing this bull rally and the prospect of higher returns in the short run.

The election of Scott Brown in Massachusetts put U.S. healthcare reform in limbo, if not outright jeopardy. As a result, I expect healthcare sectors and the pharmaceutical industry, in particular, to receive additional investor support over time. Among my favorite healthcare picks are iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE) and ICON Healthcare (ICHCX), which have both been long-term holdings in my fundamental portfolios for more than a year.

Healthcare stocks lagged the market during the early part of this rally, but momentum improved as investors turned to undervalued and defensive sectors and the outcome of the much-debated healthcare reform appeared more benign. As it stands, even if the Senate bill passes, the pharmaceutical industry likely only has a 3% – 4% earnings exposure. But if reform fails due to the latest political headwinds, IHE should benefit as this uncertainty is lifted. ICHCX allocates 47% of its portfolio to the pharmaceutical industry, but the fund also has exposure to healthcare services and healthcare providers, making this a more diversified means of gaining an overweight to the sector.

The last time that healthcare reform failed, pharmaceutical stocks outperformed the broader market by approximately 130% over a five-year period. Although we can never count on history to repeat itself, history often serves as a good guide during times of uncertainty. During the last bout of similar uncertainty—when healthcare reform was seemingly at advanced stages—pharmaceutical stocks traded at historic lows, just as they do now. If the reform fails altogether, I expect pharma stocks to outperform again moving forward. But even if the current Senate bill passes, this rather benign reform has limited impact on the pharmaceutical companies comprising IHE and ICHCX. Given the two likely reform scenarios, these stocks look set to get re-rated in the eyes of investors.

Finally, 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.

Amazon’s (AMZN) brilliant and aggressive strategy with its Kindle shows why the company continues to be an investor favorite. Its latest move, at once a strike at the jugular of the publishing industry and a pre-emptive move against Apple (AAPL), highlights the company’s business instinct.

Yesterday, Amazon announced that the company will give authors and publishers 70% of the sales from their Kindle books, minus delivery costs of about 6 cents. Though there are some stipulations and the move seems aimed at smaller and independent publishers, the industry needs to be worried because of the rising popularity of e-books.

An L.E.K. Media Consumption Survey shows that e-reader owners are reading 18.2 hours per week. This implies that users are heavy readers and many are shifting consumption from physical to digital products, in addition to consuming more overall.

With Apple set to launch a tablet computer that is rumored to have e-reader capabilities, the number of users may surge as Apple draws its fan base into the e-book market. I also expect that if the rumored functions are true, Apple will also move in on Amazon’s market and try to do for e-books what the company did for digital music.

Since Amazon has established itself in books and has launched an e-reader, however, I believe that it is well positioned to battle Apple in a way that music sellers were not. During the holiday season, I said that the fight between Amazon and Wal-Mart (WMT) was bad news for their competitors. The same can be said of Amazon and Apple, as they will likely create far more collateral damage to competitors than direct damage to each other, and a direct battle may even be a win-win if it boosts sales of their products.

My main concern with Amazon is the firm’s valuation. Even if it can increase 2010 earnings 30% above consensus estimates — three of its last four quarterly earnings surprised by more than 30% to the upside — that assume 25% growth already, shares would still be trading at nearly 40 times 2010 earnings. This is a bullish story for a bullish market, but a slip up in either could batter shares.

For ETF investors interested in Amazon-weighted funds, the Internet HOLDRs (HHH) has 40.3% of assets in Amazon, PowerShares Nasdaq Internet (PNQI) has 7.3% of assets in Amazon; and First Trust Dow Jones Internet Index (FDN) has 6.3% of assets in Amazon.

With another 20% in eBay (EBAY) and 15% in Yahoo! (YHOO), HHH is too concentrated for my tastes. PNQI and FDN have very similar portfolios, but FDN has greater trading volume, making it my preferred choice for an Amazon-weighted ETF.

Another reason I like FDN (and PNQI, if it had more volume) is that the fund holds other Internet retailers that are changing the face of retail, in addition to the firms that supply the infrastructure and support services for these companies. The larger the fight between Amazon and Apple, for instance, the more money is likely to end up in the hands of many of the firms that make up FDN, which is why I continue to hold it in my ETF Action Newsletter.

Disclaimer

Li Ka-shing’s business savvy and acumen in real estate investing have helped him become one of the world’s richest individuals and earned him a number of nicknames including “Superman” and the “Warren Buffett of Asia.”

Like the actual Professor Buffett, when this financier makes a move, investors tend to listen.

Li has amassed his great fortune through business ventures which have tapped into a vast number of industries and market slices. The financier has stakes in sectors, including retail, energy, manufacturing, and real estate.

Aside from running his successful businesses, Li is an avid philanthropist. According to its Website, the Li Ka-Shing Foundation aims “to nurture a culture of giving and to foster creativity, constructive engagement, and sustainability through supporting capacity empowerment focused projects.”

While he is currently ranked the second richest man in Asia, Li has not always had this kind of financial stability.

Li was born in 1928 in Southeast China. In 1940, his family, looking to avoid the perils of war, left their home for Hong Kong, where his family stayed with a wealthy uncle whose wealth Li envied. When he was just 15 years old, Li was forced to quit school and enter the workforce to support his family after his father passed away.

In 1950, after years of hard work, Li was able to start his own company: a plastics manufacturing plant called Cheung Kong Industries.

As the head of Cheung Kong, Li watched not only his business, but his personal wealth, blossom. By the mid-1980s, the firm had gained a listing on the Hong Kong Stock Exchange and acquired two additional firms: Hutchison Whampoa and Hongkong Electric Holdings Limited.

Today, though his businesses span a vast number of sectors, his real estate ventures have grown to become perhaps the most notable. Both of his listed conglomerates — Hutchison Whampoa and Cheung Kong Holdings — have been able to benefit from the dramatic rise in Hong Kong real estate prices, which have grown over 75% in the past year.
While this growth has benefited individuals like Li, it has also caused many to voice concerns. Recently, representatives from Hong Kong’s government and prominent market commentators like Jim Rogers have expressed their fears that the city’s real estate market is facing a bubble.

Still, even with the criticism, Li does not appear fearful. In fact, over the past few months, the businessman has frequently increased his stakes in his own firms. In early January, when questioned about his purchases, the investor said he does not fear a housing bubble in Hong Kong. Rather, he expects to see continued strength in the Hong Kong housing market and, in order to benefit from that, in the future, he would keep increasing his stakes.

Thanks to ETFs, investors today have the opportunity to follow Li’s lead and play the Hong Kong real estate market. Currently two ETFs: the Claymore/AlphaShares China Real Estate ETF(TAO) and the iShares MSCI Hong Kong Index Fund(EWH), provide investors with exposure to a number of top properties players in the Hong Kong real estate industry like Li ’s Cheung Kong and Hutchison Whampoa.

While both of these funds should see strong gains prices continue to head higher, investors could be in for a gut-wrenching drop if Li is wrong and prices fall.

In order to avoid getting caught in such a dip, I have recommended on numerous occasions that when it comes to investing in China in 2010, investors should set their sights on the nation’s small-caps. While funds like EWH and TAO may falter, the Claymore/AlphaShares China Small Cap ETF(HAO) should show strong stable growth throughout the year.

No matter how the story plays out in the Hong Kong real estate market, investors and non-investors alike can benefit from internalizing Li’s lessons on the importance of hard work, dedication and prudence.

Disclaimer

The successful launch  of the ETFS Physical Platinum Shares(PPLT) and ETFS Physical Palladium Shares(PALL) ETFs on Jan. 8 once again proved the efficiency of ETFs in opening up segments of the market to everyday investors.

Now, the price of platinum in the U.S. — once influenced by a small group of manufacturers, futures traders and miners — will reflect the demand of American investors, who have flocked to ETFs for inexpensive, transparent exposure.

Criticism of PPLT and PALL, the first U.S. ETFs to offer physically backed exposure to platinum and palladium, is both misguided as well as misdirected.

According to a Jan. 19 Wall Street Journal article, “Platinum and palladium futures rose sharply Tuesday, settling at their highest levels since July, boosted by demand from newly launched exchange-traded funds that are luring investors, but could be a headache for consumers of the physical metals.”

While platinum and palladium futures markets will undoubtedly reflect the increased demand for the physical metal, PALL and PPLT can hardly be held responsible for manipulating the futures market and “luring” investors.

Like the massive SPDR Gold Shares(GLD) and iShares Silver(SLV) ETFs, PALL and PPLT are backed by physical assets, meaning that the funds have to buy and store the metals to meet investor demand for shares.

Physically backed ETFs like PALL and PPLT are a world apart from the futures-backed funds that have recently drawn the ire of the Commodities Futures Trading Commission (CFTC). It is futures-backed funds, such as the United States Natural Gas(UNG), that truly have the potential to manipulate markets and lure investors into vehicles inappropriate for their strategies.

Prior to physically backed PALL and PPLT, investors looking to access platinum through an exchange-traded strategy had to settle for the futures-backed iPath Dow Jones Platinum ETN(PGM). This exchange traded note’s latest brush  with futures regulation is a good illustration of how investors can be misled by some commodity funds.

On Oct. 15, 2009, Barclays (BCS) announced that it was suspending further sales and issuance of PGM. New limitations on futures positions capped the size of PGM, halted new share creation, and effectively turned PGM into a closed-end fund.

This kind of disruption in trading taxes investors, causing dislocation between a fund’s underlying value and market value. Ideally, an ETF’s or ETN’s trading value should be as close as possible. The proximity of these values is useful in judging a fund’s liquidity, as well as the general effectiveness of its strategy.

The capping of PGM’s share creation is currently taxing investors with a premium. As trading commenced today, investors wanting to buy PGM had to pay $39.50 for a share worth $38.68.

PALL and PPLT offer straight-forward, transparent access to physical platinum and palladium. Rather than having to buy and safeguard the physical metal, investors can instead scoop up shares of PALL and PPLT.

ETFs have once again made part of the market more accessible to U.S. investors. It is up to them to safeguard this privilege.

Disclaimer

The new natural gas ETF from Jefferies(JEF) should not be the cornerstone of your energy holdings.

Launched Wednesday, the Wildcatters Exploration & Production Equity ETF(WCAT) offers exposure to small- and mid-cap firms in the oil and natural gas sectors.

While exposure to these firms may be helpful in balancing your energy holdings, WCAT will be more volatile than established funds like the First Trust ISE-Revere Natural Gas Index Fund(FCG), which tracks larger-cap names.

WCAT joins other popular funds like United States Natural Gas(UNG) and FCG in offering exposure to the natural gas sector with a small-cap twist. WCAT has an expense ratio of 0.65% and 55 underlying holdings.

The top three holdings in WCAT’s underlying portfolio — Forest Oil(FST), Encore Acquisition(EAC) and St. Mary Land & Exploration(SM) — make up 5.77%, 5.09% and 4.69% of the fund respectively.

Buying into a portfolio of small-cap companies can be a volatile proposition, but WCAT’s methodology helps to mitigate the risk of trying to pick single natural gas stocks. A wave of small-cap ETFs like WCAT have helped to round out an ETF universe still dominated by market-cap weighted funds.

Equity funds like WCAT and FCG also help to provide exposure to natural gas prices without relying on the purchase of natural gas contracts. UNG, which is designed to track a basket of NYMEX-traded futures, has been the target of commodities reform in recent months.

Quartered in both the United States and Canada, WCAT’s holdings offer a higher-beta play on the natural gas and oil sectors. While investment in these small-cap stocks may be risky, they also offer the potential for merger and acquisition activity and higher growth.

Top component FST Forest Oil has several years of promising onshore drilling prospects, with core holdings in emerging Texas and Canadian tight gas and gas shale properties. The company is currently planning on selling more than $1 billion in assets to reduce current debt and provide additional liquidity.

Natural gas firms are a promising long-term play in a sector where global demand continues to increase. Prospective WCAT investors, however, should give this new ETF some time to gain traction before scooping up shares.

WCAT faces two challenges when it comes to liquidity: the liquidity of its underlying stocks and the liquidity of the ETF as a whole during daily trading. Small-cap companies are less liquid than large-cap stocks, and most ETFs take some time to attract investor attention.

Small-cap ETFs like WCAT are welcome additions to the ETF industry, but they should be considered in conjunction with a broader portfolio.

The election of Republican Scott Brown to a U.S. Senate seat in Massachusetts Tuesday could give a short-term lift to the big-name medical device manufacturers at the top of the iShares Dow Jones US Medical Devices ETF(IHI) roster.

Top medical device firms like Medtronic(MDT), Thermo Fisher Scientific(TMO) and Stryker(SYK) have been under pressure during this young presidency as a major overhaul of the health care industry took shape.

As health care reform, once hallmarked by a government-backed public option, was increasingly slowed by the legislative process and mercurial public opinion, health care stocks rebounded.

Subsector ETF offer investors the unique ability to compare and track narrow slices of the market. While many ETFs currently compete in the health care space, a quick analysis of the iShares line-up offers a revealing look into this sector’s trends.

The iShares Dow Jones US Medical Devices ETF(IHI), iShares Dow Jones US Pharmaceuticals ETF(IHE) and iShares Dow Jones US Healthcare Providers ETF(IHF) all fell significantly in 2008 as President Obama’s election loomed large and rebounded in 2009 as a massive health care overhaul seemed increasingly improbable.

In 2008, IHI, IHE and IHF fell 36.79%, 14.91% and 43.46%, respectively. As a “public option” became less of a threat to health care providers in 2009, IHF rebounded more than 35%. IHI and IHE also improved 38.49% and 30.06% in 2009, respectively.

Year to date, the controversy surrounding health care reform appears to have strengthened the stocks of top industry names. IHI, IHE and IHF are up 3.49%, 2.53% and 5.76% year to date respectively.

While once-embattled health care providers like UnitedHealth Group(UNH) and WellPoint(WLP) are leading the pack, the companies that comprise IHI’s portfolio could also get a jolt from the latest slow-down in health care reform.

Although investors have largely dismissed the emergence of a government-run insurance competitor, the outlook for medical device makers has been uncertain. Companies like Medtronic, the top component in IHI’s portfolio, depend on Medicare reimbursements. Investors have been trying to figure out how much rate-cutting is priced into the medical device-maker group.

The political change in Massachusetts reflects a public reluctance to health care proposals. The more that the rate-cutting measures in the health care bill are challenged, the more that IHI stands to gain.

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