Dion Money Management Blog   Money Management for Retirees and Their Families

As copper hits a three-week high today on demand from China and positive U.S. January homebuilding data, it draws attention to PowerShares DB Base Metals Fund(DBB), which has been turning some heads recently with its erratic gains and losses.

The fund had positive performance that was strong enough to put it on my weekly ETF winners list last week, rising 6.3%, but it also had enough negative performance to make my weekly ETF losers list the week before that, falling 4.9%.

The fund is certainly volatile and started the week yesterday with an increase of 5.6%, one of the strongest gains among all ETFs on the day. One thing about DBB seems certain: Whichever direction it takes, it will go there fast.

DBB tracks an index composed of futures contracts for copper, aluminum and zinc in approximately equal weightings. Investors with risk tolerance that are interested in gambling on sharp upturns in industrial metals should choose DBB over some similar metal fund alternatives because it is the only ETF tracking an industrial metal basket with sufficient liquidity.

The basket of industrial metals will rise or fall in value depending on the world economic outlook for overall growth and construction. Changes in these factors alter the demand side of the equation for the price of these metals.

On the supply side, factors that can influence the price of these metals have to do with the speed of metal production or mining. Also, inventory levels that individuals, companies or countries accumulate can also influence the price of the metals if stockpiled supplies are put out on the market. Large inventories can also reduce demand for metals since the owners of the inventory may not need to purchase new quantities in the marketplace when they have the ability to draw on their own ample reserves.

In an example of how demand concerns can eat away at the value of DBB, the fund fell by 13% in the period from Jan. 19 to the end of the month after the Chinese government announced that it would restrict rampant lending.

, the iShares FTSE/Xinhua China 25(FXI), fell by about 10% while the S&P 500 dropped by 7%, showing how sensitive DBB can be to certain economic trends.

The decrease in DBB was greater than that of FXI since the speculation about interest rate increases in China also led to speculation that inventories would become less desirable in comparison to bank deposits. This would lead to less demand for metals and a decrease in the value of DBB. Speculation about this trend compounded the decrease in DBB that was caused by concerns that there would be less construction as a result of fewer loans.

Factors beyond China also influence DBB, but the relationship between economic policy in that country and metal prices in the latter part of January serves as a fine example of how volatile DBB can be in response to news. It also shows the potential for lucrative trades if they are timed correctly, as the fund has rebounded by 12% since Feb. 5.

Right now may not be the best time to jump into this fund, however, following its recent rally. Still, it would be prudent for investors to keep the dynamics of this ETF in mind should an opportune situation arise in the future.

Disclaimer

The outlook for Japan’s economy is far from perfect and the country has several issues confronting it, such as large government debt, an aging population, and persistent deflation.

However, the country’s annualized GDP figure though for the fourth quarter of 2009 was recently reported to be the best figure since the first quarter of 2008, signaling an improved economic outlook for the world’s second largest economy.

Even better, these ETFs are among the best performing international ETFs in 2010, with small gains compared to losses for many European and emerging market ETFs. Investors that want exposure to Japan should know what their choices are and here are the best fund options for three different strategies of investing in Japan.

Large-Cap Strategy

For ETF investors interested in Japanese large-cap companies, iShares MSCI Japan Index Fund(EWJ) is the best choice. The fund’s top three holdings are Toyota(TM), Mitsubishi UFJ Financial Group, and Honda Motor(HMC) Corp.

The fund has 327 total holdings though, which is a relatively large number for a country-specific ETF, with the top three holdings account for only 5.2%, 3.0%, and 2.6%, respectively. The four most prominent sectors, which account for a combined 70.1% of the fund, are consumer discretionary, industrials, financials, and information technology.

EWJ has a lower expense ratio than its mutual fund equivalents and its trading popularity gives it ample liquidity. Also, in a sign of investor bullishness on the fund, EWJ saw $232 million flow into the ETF last month.

Small-Cap Approach

For an investment strategy with exposure to Japanese small caps, there are some ETF choices such as iShares MSCI Japan Small Cap(SCG), but none of them trade with sufficient liquidity. A better choice for investors interested in small caps is a mutual fund called Fidelity Japan Smaller Companies Fund(FJSCX).

This mutual fund has a higher expense ratio than its ETF peers but it is lower than its mutual fund equivalents. It also had much better performance in the past year in comparison to the three Japanese small cap ETFs. Like EWJ, FJSCX is largely comprised of consumer discretionary, financial, industrial, and information technology companies, with these four sectors accounting for 83.4% of the fund as of Dec. 31, 2009.

Mutual funds generally have less transparency than ETFs, and this lack of transparency is one reason why many investors have moved out of mutual funds and into ETFs in 2009. For a small-cap investment strategy on Japan though, FJSCX is still the best choice for now.

Currency Play

Investors can also invest in Japan’s currency as a way to play the country’s economic strengths and year to date, the performance of the currency has outpaced that of the equity funds.

The yen has increased in value against the dollar and the euro, as the latter has weakened on debt concerns in some of the monetary union’s member states. The yen has been used as a funding currency for the carry trade, but as investors fear a further drop in value for the euro and global assets, they have covered their bets against the yen.

ETF investors have four options for playing a continued strengthening of the yen against the dollar, but the only liquid choice is CurrencyShares Japanese Yen Trust(FXY). The other three ETF choices to go long on the Japanese yen against the dollar do not trade with sufficient volume.

To summarize, for investors interested in Japan, the best large cap option is EWJ, the best small-cap choice is FJSCX, and the best currency fund is FXY.

Fashion Week in New York concludes this week, with the optimism of fashion houses reflected in a larger luxury apparel event than last year.

The ETF that best tracks the success of companies in the high-end apparel industry and the broader luxury sector is Claymore/Robb Report Global Luxury Index ETF(ROB Quote).

Fashion exposure in the top 10 holdings of ROB comes from Polo Ralph Lauren(RL Quote) and Moet Hennessy Louis Vuitton, which each account for 4.5% of the fund.

There’s much more to ROB than apparel though.

The top holding in the ETF is the Swiss watch company Swatch Group, which receives a 6.0% allocation. Luxury carmakers Daimler(DAI Quote), Bayerische Motoren Werke (also known as BMW), and Porsche account for a combined weighting of 10.7%.

Small jet manufacturers such as the Brazilian company Embraer and the French firm Dassault Aviation account for a further 6.2%, while high-end hotels Mandarin Oriental, Shangri-La, and Wynn Resorts Ltd.(WYNN Quote) have a combined weighting of 8.4%. The fund even allocates 3.3% to Northern Trust(NTRS Quote), an asset management firm catering to wealthy families.

Ultimately, the outlook for these and the other luxury companies in ROB will depend on the sustainability of the global economic recovery.

The recovery of 2009 saw many luxury companies outperform the market and ROB increased by 48.7%, well ahead of the 26.3% gain in SPDR S&P 500 Index(SPY Quote). As shoppers become more convinced that a double dip recession is not going to occur, the outlook for luxury companies will continue to improve, although some foresee trouble for the industry.

Reflecting concerns were shares of Coach(COH Quote), which dropped after earnings were reported during the pessimistic market environment that characterized the second half of January.

Revenue for the company was better than expected for the previous quarter, but domestic comparable sales missed analyst predictions. Goldman Sachs then downgraded the company in early February from “buy” to “neutral,” citing an end to the luxury recovery for now.

The outlook is not uniformly gloomy though, and there is positive information coming from other parts of the sector.

Department store Nordstrom(JWN Quote), a 4.2% holding of ROB, says that it is under-inventoried after strong sales in late 2009 and retail research firm Retail Metrics Inc. is quoted by Bloomberg as saying that apparel sales and department store sales in January increased by 8.0% and 2.7%, respectively.

When department stores see declining inventories, it is bullish for the luxury goods companies that the stores buy products from. Even if consumer sales for luxury goods in the first quarter of 2010 are slower than in late 2009 as Goldman Sachs alludes to, the companies in ROB that produce apparel, jewelry, and accessories will see a boost as high-end department stores seek to replenish inventory.

Many consultants and luxury industry executives are also optimistic about growth in 2010 as companies adapt, offering more items at the lower price range while raising prices and exclusivity for their top-tier items.

Also, with 60% of the companies in ROB from euro-zone countries, the continued weakness in the euro against the U.S. dollar will boost sales for these companies in the U.S. Countries that peg their currency to the dollar, most notably China, will also buy more luxury goods from the euro-zone as their purchasing power increases. The yen has strengthened against the euro as well, so stronger sales will come from Japan too.

Investors should take note that volume for ROB is somewhat lower than what I am comfortable with, but liquidity is sufficient enough to support entry and exit of the fund with smaller orders.

Disclaimer

The unflolding drama in Greece along with earnings and government housing statistics will weigh on investors this week.

ETF investors should keep an eye on how all this plays out for these five funds in gold, the euro, natural gas, home construction and natural gas.

Market Vectors Gold Miners(GDX)

Four holdings, accounting for 30% of assets in GDX, will report earnings this week. On Wednesday, Kinross Gold(KGC), Agnico-Eagle Mines(AEM) and IAMGOLD(IAM) report, while on Thursday, Barrick Gold(ABX) reports. Barrick accounts for 16% of GDX, more than the other three holdings combined, so it will be the most important earnings report of the group.

Higher gold prices in the fourth quarter, when gold enjoyed a run to $1200 an ounce, should at least help revenues. Individual earnings will show how well management is operating these firms, but investors will likely place more weight on production forecasts.

As of Friday’s close, GDX was 20% below its recent closing high, set in early December 2009, of $54.65 per share.

CurrencyShares Euro(FXE)

EU Finance ministers meeting yesterday and today were expected to hammer out the details of a plan to aid Greece. Volatility is likely to be high in the near term as traders and investors try to decide whether the result in bullish or bearish for the currency.

The chart of FXE turned a little more bearish last week, when the 50-day moving average crossed below the 200-day on Thursday. Unless a rescue plan eases investor concerns, the current momentum suggests that lower prices are likely for FXE, but due to that recent weakness, a deal would likely result in a very strong rally.

First Trust NYSE ARCA Biotechnology Index Fund(FBT)

Genzyme(GENZ), found in several biotechnology ETFs, has its largest allocation in FBT at more than 5% of assets. The company reports fourth- quarter earnings on Wednesday, and analysts expect it to report $0.29 per share and about $1.1 billion in revenue.

Besides Genzyme tomorrow, Teva Pharmaceuticals(TEVA) has an earnings conference call scheduled for today at 8:30 a.m. The stock accounts for 22.5% of iShares MSCI Israel Capped Investable Market Index Fund(EIS), and is also found in the iShares Nasdaq Biotechnology Index Fund(IBB). Teva and Genzyme combine for almost 11% of IBB’s assets.

Merck(MRK) also announces earnings today. Although biotech ETFs do not hold Merck, they could benefit if Merck’s report helps lift the broader healthcare sector.

First Trust ISE-Revere Natural Gas(FCG)

One of the bellwethers of the natural gas industry, Chesapeake Energy(CHK), reports earnings on Wednesday. Analysts are looking for $0.69 per share in the fourth quarter, and revenue of $2.0 billion.

Although it doesn’t have the largest allocation to Chesapeake, First Trust ISE-Revere Natural Gas(FCG) is the ETF that has the largest natural gas exposure. For a slightly larger position in Chesapeake, along with a little more oil exposure, investors can try iShares Dow Jones U.S. Oil & Gas Exploration & Production(IEO) (IEO).

iShares Dow Jones U.S. Home Construction(ITB)

Housing starts for January will be announced tomorrow. While that statistic can sometimes generate movement by itself, ITB has been enjoying a nice run of outperformance versus the S&P 500 Index in the past few weeks, offering a bullish counter trend to the prevailing bearishness in the market. It will be interesting to see if the fund can keep it up.

Since the market’s began to swoon on January 19, ITB has managed a gain of 1%, versus the more than 6% drop in the S&P 500 Index.

One company lifting the index is D.R. Horton(DHI) (DHI), a builder of budget homes. The government’s first-time home buyer tax credit has increased home sales and D.R. Horton was able to capitalize due to selling homes in the price range of first time buyers. Shares of the company are up 6% since January 19.

Disclaimer

Thanks to a 50-for-1 stock split in January, Warren Buffett’s Baby Berks(BRK.B) (BRK.B) were added to the S&P 500, and that will be reflected in many index ETFs starting Tuesday.

Now, aside from playing BRK.B via the common stock, investors will soon be able to gain direct exposure to Buffett’s company via financial instruments like the iShares Dow Jones U.S. Financial Index Fund(IYF).

With a nearly unmarked, multidecade record of beating the S&P 500 and a knack for picking winning companies, Buffett is viewed by many as the world’s greatest investor. Due to his investing prowess, the Oracle of Omaha has amassed a following that includes not only retail investors, but market commentators and politicians. When Buffett makes a move, both Wall Street and Main Street listen.

Still, despite his many successes and droves of admirers, there are observers who are not overly impressed by Buffett’s tenure. Last week, in an interview for an online magazine, Nassim Taleb, author of Black Swan, took a jab at Buffett’s investing savvy, saying that there is not enough statistical evidence to say that Buffett’s investing success can’t be attributed to chance.

Offering up an example of a more statistically impressive investor, Taleb pointed to George Soros .

Taleb’s apathetic attitude towards Buffett’s track record is based on his belief that, in a large enough pool of random investors, there will always be a small number of people who outperform the masses. In this scenario Buffett happened to be this inevitable outlier. In his most recent controversial comment, Taleb insists that he does not feel that Buffett is unskilled, but that his success can largely be attributed to random luck.

Needless to say, Taleb’s words had barely made it to the online forum before being pounced upon by a number of Buffett followers. Among them was Janet Tavakoli, president of Tavakoli Structured Finance and author of a book based on the famous investor.
In a scathing email to CNBC, she defended Buffett’s investing record and offered up Taleb’s own Empirica Kurtosis fund, which after a strong initial performance posted years of subpar returns and eventually closed, as a more appropriate example of dumb luck.

Interestingly, though no response has come from Buffett himself, there is a chance that he and Nassim Taleb may actually see eye to eye. When asked about his success in an interview with the BBC in late 2009, the Oracle of Omaha himself echoed the author’s feelings, saying, “…if I was born in a different time or a different place, I’d be an animal’s lunch. I’m lucky…”

Whether due to skill or luck, it’s hard to deny Buffett’s success. He may have benefited from a bull market in stocks, but his long track record of beating the S&P 500 shows that his ability to find undervalued companies also plays a role in his success.

Even though he failed to beat the S&P 500 in 2009, Buffett and Berkshire Hathaway(BRK.A) pocketed billions with his bets on both the struggling Goldman Sachs(GS) and the small Chinese electric car company, BYD.

With the amount of heat that Taleb’s statements about Buffett have generated, and with many investors now becoming shareholders via index ETFs and mutual funds, it would be interesting to see what readers at TheStreet.com have to say about the issue. Where do you stand?

Please feel free to leave a comment below sharing your take on Buffett’s investing success.

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 emerging-market ETFs, the state of biotech ETFs, and China’s huge  investments in commodity funds.

Emerging-Market ETFs Show Resilience
Posted 02/08/2010 10:33 a.m. EST

While Europe and many emerging markets are generally in decline, some emerging-market ETFs are showing relative strength, such as the Market Vectors Indonesia(IDX) fund.

One of the best European country funds last Thursday and Friday was iShares Switzerland(EWL), which lost 5.8%, the same as Market Vectors Indonesia. Volatile emerging markets such as iShares Turkey(TUR) fell 10.0%, while iShares MSCI Emerging Markets(EEM) lost 5.6%. The iShares MSCI EMU Index(EZU) fund fell 7.0% over the same period.

If you look at those numbers and consider the problems with the Spanish housing market that could spill into the banks, along with the headline-grabbing but smaller problems in Greece and Portugal, it makes sense to own an emerging-market ETF such as the Indonesia fund, which represents a region whose economic future looks brighter. Normally, a fund such as IDX would be crushed in a global market selloff. Instead it was in line with Europe and other major emerging markets.

Portfolio composition also reiterates the strength in IDX. Despite 25% in financial services, 24% in materials and 15% in energy — all sectors that underperformed globally — IDX held up relatively well. Furthermore, those energy and materials sectors export to China, and worries over Chinese growth derailed funds such as iShares Brazil(EWZ), but not Market Vectors Indonesia.

More important, IDX is very strong in long-term momentum and has shown resilience on other down days, leading to its -2.6% year-to-date return. Often, momentum strength turns into a fund’s weakness as investors quickly exit in a falling market. Case in point: iShares Brazil lost 14.6% this year.

The fact that IDX could perform as well as it did last week says something, as does the fact that it is outperforming all four BRIC countries (Brazil, Russia, India and China) in 2010. This fund is strong, and it is not succumbing to fear. The cost of owning this fast-growing, developing nation, which is endowed with natural resources and is fortuitously near the Chinese market — with debt-to-GDP ratio of only 30% to boot — appears to be very low, relative to history and the behavior of formerly “safe” Europe.

It may also be that investor perceptions have finally changed, that some emerging markets are no longer automatically the “risky” countries, while the veiled risk in the debt-laden developed nations has been exposed.

Besides IDX, other emerging-market ETFs that did well on Thursday and Friday were iShares Malaysia(EWM), which was down 2.9% over two days, Market Vectors Vietnam(VNM), which was down 2.1%, and iShares Israel(EIS), which was down 3.4%.

iShares Israel has been climbing in long-term momentum, aided by its huge 22.4% allocation to Teva Pharmaceuticals(TEVA), which is up 1.0% in 2010. iShares Malaysia does not have impressive momentum, while Market Vectors Vietnam is more than 20% below its October peak, making it the more speculative but potentially more rewarding play, should recent performance indicate a more long-term reversal of fortune.

For the moment, Europe is the epicenter of current market malaise, with pockets of weakness and strength in emerging markets. For international allocation, I would gravitate toward those emerging-market ETFs that are performing well. The already strong IDX appears to be one of the best plays.

Biotech ETFs Are Looking Healthy
Posted 02/08/2010 4:50 p.m. EST

Biotech ETFs, healthcare-sector laggards in 2009, are suddenly showing signs of life. These funds have seen an improvement in relative momentum, managing to hold above their 50-day moving averages, while most sectors have broken below theirs.

This relative outperformance could become even more impressive if President Obama’s Feb. 25 bipartisan healthcare summit brings both sides closer to agreement on healthcare reform. Even if it fails, though, healthcare spending is set to rise, benefiting the sector.

There are three main biotech ETFs worth considering here, in my view: SPDR S&P Biotech (XBI), iShares Nasdaq Biotech (IBB) and First Trust NYSE Arca Biotech (FBT). All of the funds have adequate volume and assets, though the leader in both areas is IBB.

In portfolio terms, the three cover slightly different slices of the biotech market. IBB has assets weighted towards the largest companies in the industry, with Amgen (AMGN) in the top spot, at 10.2% of assets, followed by Gilead (GILD) at 8.1% and Teva Pharmaceutical (TEVA) at 7.9%.

FBT uses an equal-weight strategy across 20 holdings and has 5.9% in its largest holding, Affymetrix (AFFX), and 4.5% in Celera (CRA), the smallest holding.

XBI also uses an equal-weight strategy across 26 holdings.

Given the home-run nature of the industry, the equal-weight approach makes the most sense, I believe. Still, the high level of variation in stock performance also means that performance of these ETFs will vary much more than other sector ETFs. For example, last year, the returns on FBT, IBB and XBI were 45%, 15% and 0%, respectively, as FBT was helped by a 1,300% return in Human Genome Sciences (HGSI).

Unless investors have a specific stock to which they want exposure, either FBT or XBI is an acceptable choice. IBB will likely be less volatile and is an option for those who want market cap-weighted exposure. I expect it to underperform the other two biotech ETFs, but outperform most other healthcare ETFs.

China Makes Huge Investments in Commodity Funds
Posted 02/12/2010 8:41 a.m. EST

“China” has been both the spoken and unspoken word in every conversation that investors have had about shipping, coal and raw materials (just to name a few), so the plan by China’s central bank to raise its reserve requirement ratio will weigh heavily on many sectors of the market today. Everything from Market Vectors Steel (SLX) to iShares FTSE/Xinhua China 25 Index (FXI) could take a beating.

While U.S. investors dedicate a lot of resources to figure out how to invest in this growing emerging market, a recent report gives valuable insight into how Chinese investors are snapping up U.S.-traded investments themselves.

In a recent filing, China Investment Corp. (CIC), the nation’s sovereign wealth fund, disclosed that it not only invested in U.S. Oil (USO) for the first time, but it was now the fourth-largest holder of the fund with 3.48% of outstanding units. (Goldman Sachs (GS) is currently the largest holder of USO shares, owning 5.3% of the fund.)

Another interesting disclosure was CIC’s 1.45-million-share stake in State Street’s SPDR Gold (GLD). This investment amounts to 145,000 ounces of bullion.

As I mentioned in my earlier blog, GLD is now the second-largest ETF (when measured by assets) in the market today.

It seems both American and Chinese investors are seeking protection in bullion-backed GLD. With so much uncertainty, the ETF should continue to grow ever larger.

Adding gold to a diversified portfolio is always a wise idea, but timing your entry to the gold market has historically been a difficult task. If you add gold, add it because you’re diversifying, and think of how it fits with your other objectives over the long term.

Disclaimer

This week, basic materials managed an impressive performance, but it was mainly a rebound from the previous week.

Winners

iPath Dow Jones-UBS Nickel ETN(JJN) +8.5%

iPath Dow Jones-UBS Copper ETN(JJC) +6.8%

iPath Dow Jones-UBS Industrial Metals ETN(JJM) +6.4%

PowerShares DB Base Metals Fund(DBB) +6.3%

In the previous week, fears of subpar demand in China, coupled with a rallying greenback and recovery concerns, sent both JJC and DBB lower for the week. On Friday of this week, shares also fell for the same reasons, but gains earlier in the week were strong enough to make these funds winners.

Until a longer trend develops, it is likely that the base metals will continue to have this type of volatile performance.

iShares S&P Latin America 40 Index Fund(ILF) +4.5%

iShares MSCI Brazil Index Fund(EWZ) +4.6%

While Greece’s debt issues continued to weigh on Europe this week, Latin America provided a comforting source of strength for investors looking for gains abroad.

Brazil’s market, as tracked by EWZ, was the biggest mover in the region despite a less than stellar earnings report from mining giant Vale. ILF, with nearly two-thirds of its portfolio dedicated to the nation, was brought along for the ride.

Heading into next week, Brazil’s markets will be closed Monday and Tuesday for Carnival. During this time it will be interesting to see if Mexico and Chile, which account for the remainder of ILF’s portfolio, can prolong the region’s gains.

Claymore/AlphaShares China Real Estate(TAO) +5.0%

iShares FTSE/Xinhua China 25(FXI) +3.7%

Claymore/AlphaShares China Small Cap(HAO) +3.1%

China tightened its monetary policy on Friday by raising the reserve ratio for banks, sending shares lower on the day. China ETFs gained for the week though, after rebounding from large losses in the previous week.

HAO has the best return of the above ETFs in 2010, but it has lagged on rebound days, which led it to underperform this week.

Losers

U.S. Natural Gas(UNG) -1.2%

iPath Dow Jones-UBS Natural Gas ETN(GAZ) -1.9%

U.S. 12-Month Natural Gas(UNL) -1.0%

The recent winter storms helped deliver a larger than expected drawdown in natural gas inventory last week. The Energy Information Administration’s inventory report was delayed one day this week, to Friday, due to another round of storms, and the weekly update on natural gas was cancelled entirely.

The drawdown had investors bidding up natural gas on Friday, but the losses from earlier in the week were too large to overcome.

iShares Cohen & Steers Realty Majors(ICF) -0.7%

iShares Dow Jones U.S. Real Estate(IYR) -0.8%

SPDR Dow Jones REIT(RWR) -0.7%

Vanguard REIT(VNQ) -0.2%

ProLogis(PLD), a holding in several REIT ETFs, declined after reporting fourth-quarter earnings this week. The 2010 outlook was below expectations, and occupancy at the firms’ properties was down in the fourth quarter.

Shares have lagged this year however, and rising interest rates may be playing a role. Corporate bond ETFs have sold off this year and fell again this week.

Market Vectors Solar(KWT) -3.3%

Claymore/MAC Global Solar(TAN) -2.7%

The solar sector continued to suffer from negative sentiment based on concerns about planned subsidy cuts to the industry in Germany that will go into effect in April and July. Overall skepticism in the eurozone about a rescue plan for indebted Greece also weighed on the European heavy ETF.

Disclaimer

The uncertainty hampering the markets, the components of which I have outlined in my recent emails to clients, certainly took center stage again this week. There was a renewed focus on Greece and its potential default; speculation continued to swirl over whether a failure to resolve this fiscal crisis would have a contagion effect that could ripple through the rest of Europe, pulling down weaker nations in its wake. This uncertainty has limited investors’ conviction that the global economic recovery is strong enough to sustain lapses in economic indicators or new shocks to the system.

The crisis facing Greece and the eurozone is the type of event that economists always warned policymakers about, believing that a coordination of fiscal and monetary policy would prove too difficult under times of stress. Although the European Union (EU) still lacks a mechanism to deal with events such as this one, it is unlikely that Greece would be allowed to default and risk destabilizing the union at this stage.

Nevertheless, investors do fear the outlying risk of contagion, no matter how remote. More likely, however, the inaction or lack of clarity is fueling these concerns. The latest statements by EU officials lacked concrete details, and there were rumors that Germany was hesitant to move forward. Germany has always feared that its own involvement in a monetary union would lead to demands on its fiscal responsibility, which is why it mandated a “no bailout” clause from the outset. Even today, direct bailouts are unpopular, but in the case of Greece, a combination of fiscal tightening and financial-underwriting by stronger EU nations, or even the International Monetary Fund (IMF), is likely.

Many of the headwinds currently facing the market are actually supportive of core funds such as Federated Strategic Value (SVAAX). Low interest rates, the expected below-trend economic growth, the effects of fiscal stimulus withdrawal, and sovereign debt concerns should have investors focusing on dividends and yield once again.
Dividends did not matter much to investors in the 1990s when stock prices were rising 15% or more, nor did they matter much to corporations that were focused on share-buyback programs, which were used in part to disguise stock-option incentives that otherwise diluted shares outstanding. But after two bear market swoons snuffed out years of price gains, investors once again realize that dividends often provide a stable—and sometimes the only—source of positive real return.

Although dividends per share declined 21% in the U.S. over the course of 2009 due to a strong corporate emphasis on conserving cash, dividend growth is expected to rise 9% this year among S&P 500 companies. However, not all companies will participate. In fact, 30% of companies are expected to cut or maintain their current dividend payments, but 25% are expected to grow their payouts by 25% or more. Instead of searching just for high yield among stocks, which is often associated with high risk (whether it is perceived or not), it is better to focus instead on quality companies that offer solid or rising dividends, such as those found in SVAAX.

Disclaimer

ETF Investors interested in online brokerages have two ways of gaining exposure to the industry, with iShares Dow Jones U.S. Broker Dealers Index Fund(IAI) the slightly better choice over SPDR KBW Capital Markets(KCE) right now.

IAI has a greater allocation than KCE to Internet broker companies, with 20.6% of the holdings of IAI falling into this category and 16.8% of KCE’s. Although investors should note that these fund are hardly pure plays on Internet brokers, their allocation to the sub-sector is strong enough to influence the funds.

A big reason for the difference in online brokerage exposure between the funds is that KCE has no allocation to E*Trade Financial(ETFC), while the company accounts for 3.6% of IAI.

Although small, the allocation to E*Trade contributed to IAI’s recent underperformance of KCE. Year to date, ETFC declined by 15.3% and helped IAI fall by 9.5%, in comparison to KCE’s decrease of only 8.5%.

The latest developments in the industry have been price cutting. E*Trade recently lowered its highest trading fees from $12.99 to $9.99 in the latest installment of an online brokerage price competition, a response to Fidelity’s recent drop in its per-trade commission from $19.99 to $7.95. Although ETFC went up on the news of its own fee reduction, price wars are rarely constructive for the parties involved.

Customers may enjoy trading more freely with lower fees, but it could hurt the bottom line of online brokers and another round in this price war would not reflect well on these ETFs.

TDAmeritrade(AMTD), which accounts for a small part of both IAI and KCE, set the trading price level that other companies, including Schwab(SCHW), are competing to reach.

Shares of the TDAmeritrade may face downward pressure as they lose market share to competitors that are now offering prices closer to their level. AMTD was recently downgraded from ‘buy’ to ‘hold’ by TheStreet.com Ratings, due in part to a low growth score.

Fidelity’s entrance into the pricing fray should not be discounted either. Even though it is not in either IAI or KCE, the company may take away customers from ETFC, SCHW, or AMTD with its new reduced trading fees and the 25 ETFs that they now allow customers to trade for free.

On top of the pricing upheaval in the industry, the performance for the online brokerage companies in IAI and KCE has been dismal, as has the performance of the funds. Unpredictable financial regulation from Washington cast a shadow on the traditional banks and brokerages that are prominent in these funds, such as Goldman Sachs(GS) and Morgan Stanley(MS), and the outlook from here looks tepid at best.

While the two funds are similar enough that performance should be similar, investors that have confidence in the industry should choose IAI on the chance that E*Trade, which has been the target of takeover speculation for several months now, may find a buyer.

Both ETFs trade with sufficient liquidity, although IAI’s average for the trailing three months is about four times greater at 404,000 shares in comparison to 98,000 shares for KCE. In terms of fees, IAI has a higher expense ratio of 0.48% compared to 0.36% for KCE, but I think its performance potential will help it overcome this fee difference.

Disclaimer

Omaha hosted two of the most influential players of the recent financial crisis this week.

Hometown hero Warren Buffett sat down with former Treasury Secretary Hank Paulson to discuss Paulson’s new book, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, at the annual meeting of the Greater Omaha Chamber of Commerce.

During the nearly hour-long discussion, Buffett and Paulson touched on a number of topics concerning not only the book but Paulson’s personal life as well. However, what seemed to gain the most media attention was the discussion geared towards the actions taken by Washington to combat the financial meltdown.

Though the two men have not always taken the same stance on political issues, when discussion centered on the government’s bailout of the U.S. financial crisis in 2008, both enthusiastically voiced their support.

Buffett’s approval of the government’s decision to inject $700 billion into the U.S. economy once again brings to mind an interesting contradiction concerning the Oracle’s views on debt.

While Buffett commends the government’s actions in the time of crisis, he has traditionally been opposed to increasing government deficits. These concerns were highlighted in a New York Times op-ed he wrote last August. In the piece, Buffett explained that if the government continues to issue excessive quantities of “greenback emissions” into the economy, the U.S. will lose its financial integrity.

Despite Buffett’s apparent contradiction, highlighted by his views on the bailout and our growing deficit, his approval of the actions taken to save the U.S. financial system from collapse is hardly surprising.

After all, for Buffett, benefits of the bailout are direct, while the costs are indirect or borne by the public.

When the U.S. financial system was teetering on the edge of collapse, Warren Buffett had a lot of chips on the table. Berkshire Hathaway’s(BRK.A) portfolio contains a large number of U.S. financial companies, including Wells Fargo(WFC), US Bancorp(USB) and American Express(AXP).

Additionally, prior to the government bailout, Buffett decided to make a large bet on Goldman Sachs(GS) whose future at the time was uncertain.

Buffett needed the government bailout to ensure that all of these companies could weather the economic storm. Luckily for the investor, not only did the injection of funds help all of his firms survive, but with victims of the collapse like Lehman Brothers, Bear Stearns and Merrill Lynch out of the picture, Buffett-backed Goldman Sachs was able to take up the uncontested throne as the king of Wall Street. In return, Goldman, Buffett, and Berkshire Hathaway have been able to pocket billions.

When it comes to the government bailout of the financial system, Buffett can’t help but find himself torn. While the injection of funds raises concerns about rising debt, the investor would have broken his number one rule, “don’t lose money,” if no action had been taken.

In the end, given the losses that were at stake and the profits earned as a result of the government’s bailout, it is no wonder that Buffett supported it.