Dion Money Management Blog   Money Management for Retirees and Their Families

This week’s earnings calendar is dominated by big names in the retail industry. Investors looking for the strongest, long-term play on these companies should look to the SPDR S&P Retail ETF (XRT).

Before the bell on Tuesday, Sears (SHLD), Barnes & Noble (BKS), Macy’s  (M), Target  (TGT) and Office Depot (ODP) issued earnings reports documenting their performance throughout the most recent quarter. In all, the results have been optimistic. All five firms managed to beat analysts’ expectations.

One of the more notable highlights from today’s reports came from Sears. In the fourth quarter, the company saw its profit more than double from the prior year. Cost cutting and strong sales from its Kmart chains helped Sears post its best quarterly profit in three years.

Although today’s reports have been impressive, not everyone’s numbers have been as good. On Monday, Nordstrom (JWN) kicked off the week’s retail-fueled earnings calendar with less-than-stellar results. The luxury retailer’s revenue was considerably stronger than the previous year’s and in line with what analysts had predicted. However, expectations were high and the firm’s fourth-quarter earnings per share missed estimates by 2 cents.

Looking to the remainder of this week, investors can expect to learn how Limited (LTD) and TXJ fared on Wednesday. Gap (GPS), Kohl’s (KSS) and Safeway (SWY) are slated to report their own quarterly performance on Thursday.

XRT is designed to provide investors with broad exposure to top retail giants. In doing so, the fund takes a traditional consumer discretionary fund and blends in holdings often found within consumer staples ETFs. This allows investors to benefit from the upside potential of a company like Tiffany & Co (TIF) and American Eagle Outfitters (AEO), while holding more stabile firms such as CVS Caremark (CVS) and Wal-Mart (WMT).

According to the fund’s sector breakdown, 80% of XRT is dedicated to the consumer discretionary sector, while the rest of the index is represented by staples.

Aside from its distinctive sector breakdown, XRT benefits from its wide array of holdings. This fund tracks more than 60 different companies, providing plenty of diversification.

For instance, of all the retail firms reporting this week, SHLD is the only one that can be found among XRT’s top 10 holdings. However, despite the firm’s high ranking, it accounts for only 2% of XRT’s total portfolio.

Nordstrom, listed as the 45th largest holding in the fund, accounts for 1.5% of the instrument’s portfolio.

In the past month through Feb. 22, XRT’s unique investing strategy has paid off. Its 6% returns have trumped those of more traditional consumer staples and consumer discretionary ETFs like the Consumer Staples Select Sector SPDR Fund (XLP) and the Consumer Discretionary Select Sector SPDR Fund (XLY), which have returned 3% and 4%, respectively.

Investors looking for a retail holding for this earnings season and beyond should keep their eye on XRT. Although its near equally weighted portfolio prevents it from seeing any large moves, its unique take on the consumer industry is ideal for investors looking for a long-term holding that will see stable growth.

Disclaimer

Crude oil recently passed its six-month high and is near $80 per barrel on stepped-up buying from hedge funds and a continuing strike at Total SA refineries in France.

With winter coming to a close, should investors in coal, natural gas, or oil ETFs be concerned that the value of these funds will decrease as spring temperatures reduce demand for heating?

The short answer is “no.”

If the price of oil declines, it will not necessarily be due to winter ending. According to the historical performance of United States Oil Fund(USO), which tracks the price of crude oil, there usually has been no drop-off in prices when spring begins.

The outlook for oil will continue to follow the path of the global recovery, with the price of oil increasing if economies worldwide improve and industry continues to expand.

What about natural gas fund investors? Will they see a spring thaw dip in the value of an ETF such as United States Natural Gas Fund(UNG)?

For UNG as well, there seems to be no correlation between the season and the value of the fund. The high for UNG during the fall months in 2009 was higher than any price level reached by the fund so far this winter. And like USO, UNG’s 2008 high occurred in the middle of summer.

The sad thing about UNG is that there also has been little correlation between it and the broader economic recovery. On the other hand, my recommended alternative way to invest in natural gas, First Trust ISE-Revere Natural Gas(FCG), appreciated in the past year. Based on its historical performance, it will also not experience a weather induced springtime drop.

Like oil, there are economic factors that can move natural gas upwards during warm seasons and natural gas ETF investors should not fear the spring. A sudden rise in natural gas prices should not be expected either as the U.S. Energy Information Administration predicts that prices will not rise dramatically in 2010.

The trends in coal prices and for the Market Vectors Coal ETF(KOL) also look to be independent of the weather. Coal has rallied this year, partly due to this unexpectedly cold winter’s effect on inventories, but analysts in a Bloomberg  survey expect that prices will continue to increase and remain elevated in 2010 at roughly 20% over their current values, partly because of greater-than-usual demand from China. The companies in KOL and the fund as a whole will benefit from this price trend.

In conclusion, ETF investors do not have to worry this spring about seasonal fluctuations in natural gas, oil, or coal prices.

In the very short term, there may be speculative bumps upward or downward depending on the outlook for severe weather.

But what investors should really focused on the longer term reasons that they may have for investing in these fuels, such as the economic recovery in emerging and developed markets.

Disclaimer

Italy has become the new focus of euro skeptics as pessimism over Europe grows.

Many investors were focused on the Spanish housing and banking situation, expecting it would be the source of financial turbulence for the currency union, when Greece stepped into the picture and seized global attention.

Over the course of a month, the euro fell from $1.45 to $1.35, but the decline has slowed recently. Greece has until March 16 to come up with a plan to cut its deficit, and this has calmed the markets for the moment.

However, the pause in activity didn’t turn attention back to Spain; instead, investors have taken a deeper look at Italy. At the national level, and similar to Greece, Italy used currency swaps to help it enter into the common currency. Although Italy is not in the same fiscal situation as Greece, the parallel is still a disconcerting one.

Italy’s municipal governments also used derivatives. Earlier this month, the Italian government seized assets of Bank of America(BAC) and Dexia SA as part of an investigation into derivatives contracts within one municipality.

All told, 519 municipalities have used derivatives contracts that have resulted in nearly a billion euros in losses. The amount isn’t the concern here, but rather the widespread use of derivatives, which for obvious reasons carry a negative connotation with investors.

On top of these concerns, this weekend, Columbia economics professor Robert Mundell, widely credited as laying the intellectual groundwork for the creation of a common currency, said Italy is the greatest threat to the euro. Italy has about 25% of eurozone debt, several times larger than Greece’s share, and a crisis there would be several times larger than the crisis in Greece.

Together, these stories show that Italy is gaining attention in a way that it hadn’t before. It was lumped together with other troubled counties via the PIGS acronym, but Italy was in the shadow of Greece, Spain and Portugal because Italy’s situation isn’t as bleak. The country’s budget deficit is not far out of the bounds of the Maastricht Treaty, which limits annual deficits to 3%, and no one is looking for a sovereign default or a banking crisis.

Although Italy has mostly stayed out of the headlines, investors have been punishing the iShares MSCI Italy(EWI) ETF. Over the past three months, EWI is the second worst performing Europe ETF, ahead of only iShares MSCI Spain(EWP). In terms of long-term momentum, EWI is one of the weakest international country ETFs.

Going forward, EWI and EWP will be the most volatile European country ETFs in the near term. They are under pressure due to Greece’s problems and should Greece fall, one or the other will become the next nation at the center of global attention, with a weaker euro dragging returns on all European assets.

On the flip side, some of this pressure is already priced into these ETFs. A positive outcome for Greece would be most bullish for EWI and EWP because negativity is already priced into shares. Over the past three months, for instance, the losses in EWI and EWP are about double those of iShares MSCI Belgium(EWK) (EWK).

More broadly speaking, if Italy adds increasing weight to the worries of investors, it will add more selling pressure to the euro, which will drag on the returns of all ETFs holding assets priced in euros.

Disclaimer

Don Dion posts his current insights on the stock, bond, commodity and currency markets in his RealMoney blog, anticipating which ETFs will be in play next.

In the following three blogs from the past week Don offered cautionary advice on a new closed-end ETF, explained why gold-backed ETFs are good to hold for the long term, and advised investors to keep a certain bellwether agriculture ETF in their long-term holdings.
Wait for This Closed-End ETF to Prove Itself
Posted 02/19/2009 12:09 p.m. EST

Today, PowerShares launched the first exchange-traded fund of closed-end funds (CEFs), the PowerShares CEF Income Composite Portfolio ETF(PCEF).

On paper, PCEF looks like an innovative, tax-efficient income option for investors looking to gain exposure to a broad spectrum of CEFs. Where the rubber hits the road, however, this fund may not have the goods to appeal to ETF investors.

Since CEF’s have “pass-through” tax structures, like open-end mutual funds, they do not pay taxes at the fund level on amounts distributed to investors. The taxation is said to “pass through” to the shareholders.

Shareholders of PCEF will receive this income and tax benefit in the form of dividends. PCEF consists of CEFs across three income categories: taxable investment-grade fixed-income, taxable high-yield fixed-income and equity option writing (selling).

PCEF’s methodology is also designed to screen and weight funds according to their discount to NAV. Funds trading at a discount have a higher potential for yield.

The top five holdings in PCEF are currently the Eaton Vance Limited Duration Income Fund(EVV), NFJ Dividend & Premium Strategy Fund(NFJ), AllianceBernstein Income Fund(ACG), Eaton Vance Tax-Managed Diversified Equity Income Fund(ETY) and the BlackRock Global Opportunities Equity Trust(BOE).

Sounds good, right?

The problems arise, however, when you examine PCEF in light of the three characteristics of ETFs listed above.

1. Fees: Since PCEF is a fund of funds, investors have to pay both the ETF expense ratio (0.50%) as well as “acquired fund fees and expenses” (1.31%) due to the underlying CEFs. So, rather than buying a low-cost portfolio, investors have to choke down total annual operating expenses of 1.81% for PCEF.

2. Transparency: While a list of underlying components is readily available on the PowerShares Web site, this is just one level of transparency. Since PCEF is a fund of funds, and the underlying CEF’s are actively managed, ETF investors can’t see all the way to the bottom of the well. PCEF’s performance is dictated not just by how well the ETF itself tracks its net asset value but by the fluctuations in NAV of the underlying components. This adds an additional level of complexity.

3. Liquidity: This measure of success is yet to be determined, but prospective investors should pay close attention.

Since fund-of-fund ETFs rack up the fees, many of the existing funds that attempt this strategy have failed to gain traction with investors. PowerShares, in fact, has three fund-of-fund ETFs already: the PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio(PAO), PowerShares Autonomic Balanced NFA Global Asset Portfolio(PCA) and PowerShares Autonomic Growth NFA Global Asset Portfolio(PTO).

All three funds, which are “ETFs of ETFs,” suffer from anemic daily trading volume  and erratic trading.

Since PowerShares is the first mover in the “ETF of CEF” space, PCEF has the potential to attract more volume than its PowerShares fund-of-fund predecessors.

Income ETFs have been gaining traction with investors as the baby boomer generation ages and more long-term investors enter the ETF space. PCEF could be a good pick for a long-term investor looking for income.

Before you dive into PCEF, however, wait to see if anyone else is hovering around the pool. As of 11:30 a.m. today, not a single share of PCEF had changed hands. PCEF must prove itself before becoming a suitable investment. This fund is one to watch from the sidelines.

Gold ETF Holders Should Ignore the Frenzy
Posted 02/18/2010 11:45 a.m. EST

Investors who have purchased bullion-backed funds — such as SPDR Gold Shares(GLD), iShares Comex Gold(IAU) and ETFS Gold Trust ETF(SGOL) — for the right reasons will have to sit on their hands during days like today.

News that the International Monetary Fund will start selling gold on the open market (as part of an already-announced plan) rocked futures earlier this morning, but GLD moved higher after the open as the broader market rallied.

These kinds of mixed messages can trigger emotional responses in ETF investors, and gold-backed ETF holders can end up selling the right investment for the wrong reasons.

What are the right reasons to buy a bullion-backed gold ETF? Adding physical gold to your investment mix helps to protect your portfolio against panic. Whether the threat of the day is inflation, deflation or Armageddon, physical gold is a solid investment for the long term.

The very characteristics that make GLD an easy, efficient way to access gold, however, are the same characteristics that cause investors to buy and sell these gold-backed funds at the wrong times.

While adding physical gold to your portfolio is a good move for the long term, trying to time your purchase of the asset is a nearly impossible task. As was evident this morning, gold prices are notoriously difficult to predict, and any purchase should be made with an eye toward the long term.

This would be an easy rule to follow if you were buying gold bars to bury under the doghouse for a rainy day. Buying the gold is a major investment, digging the hole takes time, and once Fido is moved back in, you’ll be hesitant to unearth your investment at the slightest movement in the gold market.

Funds such as GLD, even though they offer exposure to physical gold, are, in some ways, a trickier proposition. At $109 a share, GLD is far more affordable than gold bars, and you’ll save yourself a lot of trouble about reseeding the lawn.

On the flip side, however, easy access to GLD shares throughout the trading day tends to spark an emotional response to market stimuli. Anyone with a computer can sit and watch GLD move tick by tick, and when the market is volatile, it’s easy to forget that your purchase was a long-term investment.

The IMF is selling gold? Sell! Soros’ biggest position is GLD? Buy!

Needless to say, this approach can poison your portfolio over time. GLD is taxed like collectibles (baseball cards, etc.) — it is subject to rates of up to 25%. Not something you want to be buying and selling incessantly.

Gold-backed ETFs are good long-term portfolio additions, and if you don’t already have exposure to physical gold, it is worth checking out one of these funds.

On volatile days like today, just remember to sit back on your hands and watch the Olympics.

Deere Gives Agriculture ETF an Added Boost
Posted 02/17/2010 8:50 a.m. EST

Deere(DE), a top component of the Market Vectors Agribusiness ETF(MOO) and a bellwether of the agriculture industry, reported a 19% jump in quarterly earnings, surprising analysts and confirming the strength of the sector.

Yesterday, I made the case for adding MOO to your portfolio because of the positive news from the agriculture sector. Yara’s bid for Terra Industries(TRA) helped to lift MOO components such as Mosaic(MOS) and Potash(POT) higher.

Today’s “surprise” report from Deere should continue to push MOO higher during the trading day today.

Rather than making MOO a short-time trade, however, I still recommend adding this well-balanced ETF to a diversified portfolio for the long term.

Disclaimer

Here are this week’s ETF winners and losers.

Winners

iPath Dow Jones-UBS Nickel ETN(JJN) +12.2%

iPath Dow Jones-UBS Copper ETN(JJC) +8.8%

iPath Dow Jones-UBS Industrial Metals ETN(JJM) +8.5%

PowerShares DB Base Metals Fund(DBB) +7.6%

For the second consecutive week, base metals were some of the biggest winners across the ETF arena. Though it was nickel that saw the steepest jump, copper had a nice rally as well. Both the iPath Dow Jones UBS Nickel Total Return Sub-Index ETN and the iPath Dow Jones UBS Copper Total Return Sub-Index ETN are back above their 50-day moving averages.

While copper and nickel performed well, PowerShares DB Base Metals Fund lagged. Nickel is absent from the fund, which has one-third of its portfolio dedicated to copper. Instead, the remaining two-thirds of DBB’s index are dedicated to aluminum and zinc: two metals that underperformed this week.

iShares Cohen & Steers Realty Majors(ICF) +5.6%

iShares Dow Jones U.S. Real Estate(IYR) +5.0%

SPDR Dow Jones REIT(RWR) +5.5%

Vanguard REIT(VNQ) +5.4%

REITs made the losers list last week, although the losses were tepid in a week when the S&P 500 Index marched higher. This week, they reversed course strongly and erased nearly a month’s worth of losses.

The big news of the week was Simon Property Group’s(SPG) $10 billion offer for General Growth Properties(GGWPQ), which is currently in Chapter 11 bankruptcy. General Growth rejected the offer but appears willing to deal for the right price.

PowerShares Dynamic Media Fund(PBS) +6.0%

PowerShares Dynamic Media Fund came out a big gainer this week. Viewers tuning in to watch the likes of Shaun White and Lindsey Vonn win gold at the 2010 Winter Olympics had little impact on the fund’s rise. TV companies including Comcast(CMCSA), Time Warner(TWX) and Viacom(VIA) ended the week with only slight gains or in line with the broad market.

Instead, it was largely radio that powered the fund higher. On Wednesday, Sirius XM Radio(SIRI) broke the $1 dollar mark and managed to hold that level, gaining more than 20% this week. PBS is one of the only exchange-traded funds to hold a notable position in the satellite radio company. The firm is the ETF’s eighth largest holding, accounting for more than 4% of its assets.

Losers

CurrencyShares Japanese Yen(FXY) -1.8%

Although the problems with debt in the eurozone and the euro’s struggle against the dollar continued to grab headlines this week, it was not the only major currency to lose ground against the dollar. The yen declined even more against the dollar, while the CurrencyShares Euro(FXE) was down only 0.2% this week. At its current level, FXY is nestled just above its 200-day moving average.

Market Vectors Solar(KWT) -0.3%

Claymore/MAC Global Solar(TAN) +0.3%

The solar sector continued to underperform after bad news on Friday. Most importantly, First Solar’s(FSLR) forecast disappointed investors. Germany plans to cut its solar subsidies. That may cause a spike in near-term sales as Germans rush to take advantage, but once it is gone, sales may slump considerably.

Shares of FSLR lost more than 8% on Friday, even though they actually ended the week slightly higher. The company is the top holding in TAN and the second largest holding in KWT.

Elsewhere, Canadian Solar(CSIQ), a top-10 holding in both funds, cut its fourth-quarter margin estimates on Friday. Shares tumbled nearly 16% on the news and the slide was responsible for a considerable amount of the Friday losses in these ETFs.

United States Natural Gas(UNG) -6.8%

iPath Dow Jones-UBS Natural Gas ETN(GAZ) -6.6%

United States 12-Month Natural Gas(UNL) -6.3%

Natural gas inventories declined as expected, but investors are starting to look at the calendar. March is right around the corner, and natural gas demand will start to decline as temperatures rise, while inventories remain near the high end of their five-year average.

Disclaimer

The four-week slide for most stock markets ended last week after two-thirds of global markets had declined more than 10% since the mid-January highs. The S&P 500 managed a nearly 1% gain last week, reversing its own 8% decline since Jan. 19. After last year’s outsized rally, which was largely in anticipation of a lasting recovery, this year’s performance has been tempered by fears of stalling or muted growth. But, so far, those fears are largely unwarranted. This week the broader markets marched higher and added nearly 3% to their upswing through Thursday.

Despite its attempts to be transparent and prepare investors for adjustments, the Federal Reserve raised the primary credit rate, or discount rate, by 0.25% on Thursday. The only hint that this change was eminent seemed to appear in Chairman Bernanke’s testimony, in which he stated that we should expect a higher discount rate “before long.” It is probable that the lack of additional notice was due to the fact that this adjustment is minor and does not reflect any change in policy. Although the change can be seen as the first step toward tightening, the Federal Funds rate remains unchanged and monetary policy remains extremely accommodative. The Fed has wound down several of its emergency programs this month, indicating that credit conditions have normalized even further.

Additional positive data over the past two weeks included retail sales and manufacturing results. January retail sales surprised to the upside, with a 0.5% increase that beat expectations. Although consumer confidence remains weak, an influx in spending indicates a pickup, especially at the high-end of retail. The sales component, on which gross domestic product (GDP) is based, climbed 0.8% month over month in January, indicating a 2.8% annual rate in the first quarter, which is a stronger annual pace than we recorded during the second half of 2009. This week the Empire State manufacturing index rose by more than expected in February’s reading, but results hinted at trend moderation. The Philadelphia Fed manufacturing survey also climbed higher, but details, such as the new orders component, were stronger.

The corporate earnings picture continues to shape up nicely. Now that more than 80% of the S&P 500 market capitalization has reported, earnings per share (EPS) are estimated to be $17.33 for the fourth quarter, even after accounting for Troubled Asset Relief Program (TARP) paybacks. Adding back the one-time hits implies an annual rate of $74 EPS for S&P 500 stocks, which would be more than 40% higher than the initial $51.50 projections for 2009. Unlike previous quarters, higher sales rather than cost cutting has added to the strong results and positive outlooks. In fact, nearly 70% of companies have beaten their sales estimates, indicating that a sustained recovery in revenues and earnings is underway.

Disclaimer

The dollar is gaining further against the euro Friday as the Fed’s plan to raise the discount rate in America has pushed up the value of the U.S. currency relative to the European Union’s.

This movement will add to the popularity of currency trading, which has taken center stage as a Greek tragedy plays out in Europe. While there’s no perfect ETF to play this move, there are two plays for investors here, one leveraged and one diluted.

ProShares UltraShort Euro(EUO) offers two times the daily move in the U.S. dollar versus the euro.

Volume has increased markedly since December, when the U.S. dollar enjoyed a brief rally versus most major currencies. Volume growth accelerated into January and February as the euro tumbled. Where EUO traded 50,000 to 100,000 shares per day in the autumn, it now trades 500,000 to 1 million or more shares per day.

Although it is a leveraged ETF, due to the lower volatility of daily currency moves, the tracking error has not been as large of a problem for EUO. Investors still need to time any trades correctly, but EUO is the most direct way to bet on a falling euro.

Another option is the PowerShares DB U.S. Dollar Index Bullish Fund(UUP), though UUP isn’t a direct a bet on the euro.

UUP tracks an index that is long the U.S. dollar against a basket of currencies containing the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc. The index weighs its exposure to these currencies at 57.6%, 13.6%, 11.9%, 9.1%, 4.2%, and 3.6%, respectively.

Like EUO, UUP has seen volume explode as investors turn to currencies, recently hitting a high of 17 million shares on Feb. 5, well above the sub-one-million share days for much of 2009.

While volume shows that investors are interested in trading currencies, asset flows suggest they haven’t been as bullish on the U.S. dollar, or at least the U.S. dollar ETF.

Last autumn, creation of UUP had to be halted twice due to capital inflows from dollar bulls. Once the dollar rally ended in December, though, funds began to exit, and assets under management have fallen from $3.2 billion at the end of 2009 to just $2.1 billion as of today.

This shows that investors are not bullish on the dollar as much as they are bearish on the euro, and 2010 performance bears this out. UUP gained 2.5% this year through Feb. 18, compared to a 4.9% loss in CurrencyShares Euro(FXE).

One factor holding back UUP has been the strength in the Japanese yen. Year to date, CurrencyShares Japanese Yen(FXY) has gained 1.9%.

Although there is not an ETF that goes long the dollar and short the euro without leverage, investors have two liquid options in UUP and EUO. Investors who expect a broadly stronger U.S. dollar, or who do not want to trade heavily, should stick with UUP over EUO. Those who want a focused play on a weaker euro should go with EUO.

For investors interested in emerging market currency ETFs tracking currencies such as the Chinese yuan or Indian rupee, see my previous article discussing the WisdomTree lineup .

Disclaimer

As expected, Warren Buffett’s 13-F filing for the fourth quarter of 2009 provided some interesting insights into the Oracle’s investing outlook for 2010.

In past quarters, analysts have been interested in the new companies added to the Berkshire Hathaway(BRK.A)  portfolio. This time, what was absent from the company’s portfolio gained the most attention.

In the final three months of 2009, Buffett, without adding any new names, made some noteworthy increases in positions in his portfolio. Most notable were the increases in favorites such as Wells Fargo(WFC) and Wal-Mart(WMT), as well as the purchase of shares in Iron Mountain(IRM) and waste management firm Republic Services(RSG). Iron Mountain saw the most love from the investor, who more than doubled his firm’s stake in the data security firm.

Although some of Buffett’s increases were significant, the Oracle came out a net seller in fourth quarter 2009. The 13-F highlighted his continued selling of Moody’s(MCO) and a decrease in his positions in Johnson & Johnson(JNJ) and Proctor & Gamble(PG) positions.

However, his two most mentionable cuts were to his major oil positions: Exxon Mobil(XOM) and ConocoPhillips(COP).

This is not the first time that Buffett has reduced his exposure to COP, since he cut his exposure in the third quarter as well. In the past, Buffett has explained that he made a mistake in 2008 when he dramatically increased his stake in COP at the height of oil’s rise.

Buffett’s decision to cut Exxon Mobil, on the other hand, is surprising. Exxon got a big Buffett blessing when the investor was shown to have bought a nearly $100 million stake in the firm in the third quarter. However, according to the most recent 13-F, in the fourth quarter of 2009 the position was cut by nearly 70%. With no follow-up comment from Buffett or Berkshire Hathaway, the drastic decrease has left many analysts scratching their heads.

The short period Buffett held the oil major before making a sale goes against his traditional buy-and-hold investing strategy. Some believe that his decision to dump such a large portion of XOM may reflect his disappointment with the firm’s decision to buy natural gas giant XTO Energy(XTO).
In recent months, Buffett spoke out against the stock-heavy Kraft’s(KFT) acquisition of Cadbury(CBY). Despite the criticism, according to the recent 13-F filing, no changes were made to his Kraft position at the close of 2009.

The opposite appears to be the case with the Exxon deal. When the multibillion-dollar, all stock transaction was announced in December, the Oracle barely made a peep. Instead, he took action.

As I’ve highlighted in previous articles, Warren Buffett does not typically favor takeover bids fueled by company stock. The financier’s concerns stem from the belief that when a company issues additional shares, it floods the market with excess supply, drives down prices and dilutes shareholder power.

In the past, when Warren Buffett made a move, investors listened. Does his decision to dump large chunks of oil giants like COP and XOM have you second guessing your own energy positions? Are you planning to make any changes to your portfolio now that Buffett’s holdings have gone public? Feel free to leave a comment below.

Disclaimer

This week major natural gas players Chesapeake Energy(CHK), Cimarex Energy(XEC) and Newfield Exploration(NFX) beat analysts estimates with their fourth-quarter earnings.

Next week other players in this sector will report, including wildcatter St. Mary Land & Exploration(SM), Plains Exploration & Production(PXP) and Southwestern Energy (SWN).

With all the earnings headlines about these natural gas companies, investors may be wondering what is the best way to play this sector.

Of course, one can always purchase the common stock of firms like Anadarko(APC) and Chesapeake, but I am confident that investors can find solid upside, along with diversification, by holding an ETF or mutual fund that tracks a diverse basket of natural gas producers.

Today, there are three funds in particular that can achieve this goal.

The First Trust ISE-Revere Natural Gas Fund(FCG) is an ETF designed to provide investors with exposure to the largest players in the natural gas arena.

Representing the top five positions of FCG are Delta Petroleum(DPTR), Brigham Exploration(BEXP), Forest Oil(FST), Newfield Exploration and Cimarex Energy.

FCG’s strong diversification ensures investors will not be burned by any single holding. The ETF’s basket consists of 31 companies with top holding Delta Petroleum accounting for only 5% of the fund’s total portfolio. The top five together make up 20% of FCG.

The Fidelity Select Natural Gas Fund (FSNGX) is a mutual fund offering that seeks to achieve a similar goal as FCG. Top holdings include Anadarko, Chesapeake, Plains Exploration & Production, Southwestern Energy Company and Denbury Resources(DNR). FSNGX is slightly more top-heavy than FCG, with the top five constituents accounting for 33% of the fund’s portfolio.

Lastly, a newcomer to the ETF arena provides investors with access to a basket of wildcatters. Unlike FCG and FSNGX, which track natural gas through the industry’s largest players, the Jefferies TR/J CRB Wildcatters Exploration & Production Equity ETF(WCAT) tracks a basket of small-cap drillers.

Because it tracks small-caps, the fund’s play on natural gas is more volatile than others, which means stronger rallies but also steeper declines.

Top holdings include Forest Oil, Encore Acquisition(EAC), Atlas Energy(ATLS), St. Mary Land & Exploration and Progress Energy Resources(PRQ). The WCAT portfolio benefits from good diversification, with only 24% of its portfolio dedicated to its top five constituents.

Going forward, although each of these funds provides investors with ample exposure to the U.S. natural gas players, my personal favorite is FCG.

FCG gains a leg up on FSNGX thanks to its stronger performance. FSNGX is actively managed and can shift its holdings to follow trends in the industry, yet in the three-month period ending Feb. 16, it gained only 1%, compared with 6% for FCG.

In comparing FCG to the small-cap-focused WCAT, the difference is in the volume. Although WCAT is marginally ahead of FCG in the period since Jan. 22, its low volume is an issue. Since it started trading, the fund’s daily volume has failed to break 10,000 more than once. FCG, on the other hand, has an average trading volume of 600,000 shares.

In the future, WCAT may be a strong competitor; however, until a following develops, investors would be best off holding FCG and watching WCAT from the sidelines.

Disclaimer

Retailers are set to unleash their fourth quarter earnings on the market, with Wal-Mart’s(WMT) report due before the market opens on Thursday.

Next week, Target(TGT), Home Depot(HD) and Lowe’s(LOW) report as well.

Investors can play these reports with an ETF that has large positions in these companies, or play the broader impact of their reports with a more diversified retail ETF.

While retail stocks are found in many consumer ETFs, investors looking for a pure play have limited options due to liquidity. In the end, there are just two funds worth considering: Retail HOLDRS(RTH) and SPDR S&P Retail(XRT).

For investors searching for a diversified ETF, the choice is XRT. This fund has 62 holdings. Its No. 1 holding Sears(SHLD) accounts for less than 2% of the fund’s assets and the smallest holding, Best Buy(BBY) has 1.3% of assets. Assets are rebalanced quarterly and the expense ratio is 0.35%.

Besides spreading assets evenly across all the holdings, the positions themselves are spread across the retail universe. Its top 10 holdings range from the aforementioned Sears to Children’s Place(PLCE), Netflix(NFLX), Family Dollar(FDO), Supervalu(SVU) and Officemax(OMX) (OMX). Individual investors with limited capital would have a hard time replicating the holdings in this ETF, in addition to holding their expenses low.

That’s not the case with the Retail HOLDRS. RTH, which has only 18 holdings and very unevenly distributed assets. Wal-Mart accounts for 20.8% of assets, followed by 12.8% in Home Depot, 8.7% in Amazon(AMZN), 8.6% in Target, 6.9% in Walgreen and 6.9% in Lowe’s.

By adding the holdings in TJX Companies(TJX) to Wal-Mart, a quarter of the fund is in discount retailers. One-fifth is in the two home-supply stores, while pharmacies grab 12% of assets. Notably, while RTH has almost 20% in the home improvement stores, XRT has 0% of assets in these retailers.

The downside to RTH is the overweighting in single companies and sectors, but that’s also the potential upside. Investors willing to do a little more homework may find a reason to be overweight these sectors or firms, and RTH allows them to do so easily at a very low cost of $0.08 per share, which comes out to an expense ratio of about 0.09% based on the current price per share. Part of the reason costs are low is because RTH does not rebalance.

The diversity in the portfolios has led to periodic differences in performance. Since the inception of XRT in June 2006, returns have actually been quite similar, with both funds down less than 5% over that time frame. However, in the year from November 2007 to November 2008, XRT lost nearly 40% while RTH fell only 20%. The S&P 500 was down about 35% in the same period. Wal-Mart actually gained during this period and that explains much of the outperformance in RTH.

Due to that previous underperformance and the subsequent economic recovery and stock market rally, XRT gained 82% in the past year through Feb. 16 compared to a 39% gain in RTH. The S&P 500 Index gained 35% over the same period. Wal-Mart is up only 18% in the past year.

Going forward, investors will have to decide for themselves whether the current economic and stock market conditions favor RTH or XRT. On that score, year to date, despite continued high unemployment and a stock market sell-off, XRT leads RTH by about 2%.

Disclaimer