Dion Money Management Blog   Money Management for Retirees and Their Families

Google(GOOG) is grabbing headlines as the company is expected to shutter its Chinese Web search operations in the very near future.

Shares have slipped and several ETFs are affected, including First Trust Dow Jones Internet Index(FDN), which has 8.8% of assets in Google, the fund’s No. 1 holding.

Today’s headlines may be negative, but the trend away from physical production and transportation towards digital content and delivery continues, as does the shift towards knowledge-based industries that can quickly adapt in a rapidly changing world.

The latest victim is the post office. The relatively inefficient company is unable to adapt to the changes in the economy and carries an enormous burden of legacy pension costs. The strategy here, as with other government services, is to reduce service and increase fees and taxes, in order to make good on generous pension promises. First to go may be Saturday delivery.

On the other side is an army of businesses ready to grab market share. First in line, obviously, are direct competitors such as FedEx(FDX) and UPS(UPS). Right behind them, however, is a phalanx of content delivery firms.

At 6.1% of FDN, Amazon.com(AMZN) is blazing the path towards the electronic delivery of books, via its Kindle service. Apple(AAPL) will join the competition on April 3, when it launches the iPad and begins selling books in its iBook store. Post office competitors may pick up some business, but they are just as likely to lose some business as content increasingly goes digital.

Another example is Netflix(NFLX). The company, which makes up 2.7% of FDN, is unlikely to rely on U.S. Postal Service competitors if Saturday delivery is terminated. Instead, the firm and its customers are likely to accelerate the shift toward streaming movies and video games.

Besides content, there are the millions of letters, bills and advertisements sent through the mail. Each increase in the cost of mail, be it service or cost related, will entice more customers to go paperless. For instance, IAC/InterActiveCorp(IACI), which accounts for 2.4% of FDN, owns a firm called Evite, which allows users to send online invitations.

While many firms in FDN can find ways to cut costs via the Internet, or help other companies become more efficient, the fund is also packed with the infrastructure and service firms that build and maintain the Internet. Juniper Networks(JNPR), for instance, has recently tested a 100-gigabit router with Verizon(VZ). That bandwidth will be necessary as more and more consumers stream movies and television to their computers and TVs.

Investors have a choice besides FDN in the Internet space: it’s PowerShares Nasdaq Internet Portfolio(PNQI). However, the fund trades only 10,000 shares per day and has just $15 million in assets.

PNQI has a large position in Baidu(BIDU) that has grown to its largest single position, 9.2% of assets, after the firm rallied more than 50% in the wake of Google’s Jan. 12 announcement that it may leave China.

FDN has no exposure to BIDU, and the difference in this holding has meant FDN underperformed PNQI by about 1.5% since Google’s announcement. That small advantage isn’t worth the drawbacks of low volume.

Saturday delivery isn’t crucial to the mail business. The post office will still process mail on the day and losses will be small. This one service change isn’t the end of the story, though. The problems at the organization go deeper and will take longer to solve. Saturday delivery will likely be the first casualty in a multi-year reorganization.

And what happens with the U.S. Postal Service is a microcosm of the larger economy, which is also reorganizing itself in the wake of the worst financial crisis since the Great Depression. Besides cost cutting, the firms in FDN are well-positioned financially due to much lower average debt levels. Whatever the day to day headlines deliver, these long-term fundamentals are working in the sector’s favor.

Disclaimer

Although still a comfortable distance away from the more than $1,200-per-ounce highs at the end of last year, gold bullion and gold miners remain attractive investment options for investors looking for strong plays against a weakening dollar, inflation and general economic uncertainty.

Finding the most efficient way to play the yellow metal, however, can prove to be a time consuming and overwhelming task.

Thanks to mutual funds and ETFs investors are now provided with a vast number of options, all of which can satisfy even the most ravenous craving for precious metals.

Looking for an ETF play on gold miners? Today, investors can choose whether they want to play established operations like those in the Market Vectors Gold Miners ETF(GDX) or smaller, more volatile companies found in the Market Vectors Junior Gold Miners ETF(GDXJ).

The number of mutual funds that expose investors to gold miners is much greater.

Given the staggering number of options on the table, it is easy for investors to become overwhelmed. Therefore, to relieve some of this confusion, I will provide my personal picks for the best gold miner mutual funds and ETFs. This list contains three gold miner funds that I feel are the strongest, cheapest, and most liquid options available in the gold arena.

Fidelity Select Gold Fund(FSAGX)

Of the gold mutual fund options currently available, few offer as low a fee as the Fidelity Select Gold Fund, whose 0.86% expense ratio has likely aided in the fund’s ability to accumulate over $3 billion in assets since its inception 25 years ago.

The five top equity positions of FSAGX are akin to a who’s who of the gold mining industry. The top holdings include Goldcorp(GG), Barrick Gold(ABX), AngloGold Ashanti(AU), Newmont Mining(NEM) and Newcrest Mining. Together, these positions account for 41% of the fund’s portfolio.

FSAGX, however, offers more than just exposure to gold miners. Over 7% of its portfolio is allocated to physical gold bullion, giving investors some exposure to the commodity itself.

In the past three months through March 12, FSAGX has fallen 3%

Tocqueville Gold Fund(TGLDX)

Launched in 1998, TGLDX is another mutual fund option for investors looking for gold mining exposure. Over the past three-month period through March 12, TGLDX has outperformed FSAGX, with a 1.8% gain.

TGLDX’s strength stems from its fund manager, John Hathaway, who has managed the fund since its inception. Under his stewardship, the portfolio has returned 22.8% annualized over the past 10 years compared to FSAGX’s 18.3% annualized run over the same period.

Currently, the fund’s top equity positions include Ivanhoe Mines(IVN), Randgold Resources(GOLD), Iamgold(IAG), Osisko Exploration, and Eldorado Gold(EGO).

Like FSAGX, TGLDX provides investors with access to physical bullion, though on a larger scale, with physical gold coins its largest position at nearly 10% of its total portfolio.

Investors should be aware this fund carries a significantly higher expense ratio that its Fidelity competitor, with a charge of 1.50%.

Market Vectors Gold Miners ETF(GDX)

While TGLDX and FSAGX are fine choices for accessing the gold market, investors seeking the transparency, liquidity and low costs that come with owning ETFs should look no further than GDX.

Van Eck, the company behind GDX, has blazed a trail within the ETF ring by offering a number of industry firsts. Among other things, GDX is the first ETF that is exclusively focused on the gold mining industry. Using this instrument, investors can gain access to a broad selection of the largest gold miners.

GDX’s top holdings include Barrick Gold, Goldcorp, Newmont Mining, AngloGold Ashanti and Kinross(KGC). Together, these five positions account for half of the fund’s total portfolio.

Unlike the two mutual fund offerings, GDX does not hold any physical gold in its underlying portfolio. This has caused the fund to underperform over the past three months agains its more diversified competitors, as it dipped 5%.

This lag can be mitigated, however, by combining exposure to GDX with the better performing GDXJ (down 0.5% in the past three months) and one of the trio of physical gold ETFs (all down about 2%).

A combination of GDX, GDXJ and the SPDR Gold Trust(GLD), iShares COMEX Gold Trust Shares(IAU) or ETFS Physical Swiss Gold Shares(SGOL), could deliver a return equal to or better than FSAGX.

Any mix of those ETFs could not beat the return of Hathaway’s TGLDX in the past three months or the past year, however. Investors who are unwilling to do their homework in this sector may do better with a manager who has a solid track record going back more than a decade.

Disclaimer

This week has the potential to be volatile, with EU finance ministers meeting to discuss Greece and the Federal Reserve meeting to discuss monetary policy on March 16. The tentative deadline for health care reform in Congress is March 18, but that’s already looking tentative. Here’s the ETFs to watch this week.

Euro Shares(FXE)
The euro has been consolidating after a swift decline from mid-January until mid-February. The FXE has bounced slightly from its lows, and the price is back to early February levels.

Politicians were able to put the brakes on the decline by saying they would offer aid for Greece if it trimmed its deficit. Since then, Greece has pushed through a series of spending cuts and tax increases designed to close its budget shortfall.

However, it’s unclear whether the Germans will go along with a bailout. Last week Der Spiegel ran a cover story on “The Euro Lie.” It mirrors other articles that have attacked Greece for “deception,” editorials that have criticized the early Greek retirement age and politicians that have fired barbs at the country.

There’s a May regional election that could cost Chancellor Angela Merkel’s party control of the upper house in parliament and she doesn’t want to hand an issue to her opponents. It’s likely, then, that the outcome of EU finance ministers meeting will be to delay a final decision on Greece. Since it may be weeks until the next step in the process, the euro is likely to follow the course it sets this week.

iShares: FTSE Xinhua(FXI)
China’s consumer inflation reached 2.7% in February, while producer prices increased 5.4%. Chinese monetary tightening led to a global sell-off earlier this year, with FXI and resource producers bearing the brunt of the decline.

An increase in the reserve ratio or other policy changes will likely induce more selling. Weaker global financial markets may be bad news for Greece and the Europeans as well, if selling spreads there, but if the Greek rescue package includes bonds, it could reduce the interest cost for the continent.

iShares Dow Transport(IYT)
Investors will be looking to FedEx’s(FDX) third-quarter earnings report on Thursday. FedEx lowered guidance for this quarter when it last reported in December, but it raised guidance for 2010. The company accounts for 11.4% of IYT, but the impact will be much broader with major indexes at or near new highs and investors looking for some clear economic data. If FedEx maintains or raises its guidance, it would be welcome news to the bulls who already expect an earnings beat.

iShares: Dow Jones U.S. Health Care Providers Index Fund(IHF)
The companies with the most to lose in health care reform will be paying close attention to the March 18 deadline for action on the bill in Congress. With pro-life Senate Republicans willing to vote pro-choice in order to make the bill unpalatable to pro-life House Democrats, the chances of passage seem slim to none, but health care has been on the ropes before only to make a comeback–and President Obama has an extra three days to work with after delaying his Asia trip until March 21.

SPDR Gold(GLD)
There are a lot of factors that will have an impact on currency valuations and inflation expectations this week. In addition to everything mentioned already, the Federal Reserve meets Tuesday. It is expected to hold policy and rates steady, but any change in wording or outlook will have an impact. A surprise is more likely to be negative though, so investors should be cautious ahead of the meeting.

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 commented on the trends that are working so far this year, the balanced approach of the SPDR S&P Retail ETF and his ETF Oscar winner.

Three Trends That Are Working for ETFs

Posted 03/10/2010 1:15 p.m. EST

A helpful approach is to look at what’s been working in 2010, and fundamentally assess whether these trends will continue. Here are three themes that stand out.
Biotech Bullishness

Bidding has helped to buoy biotech as companies with cash look to buy earnings. OSI Pharmaceuticals(OSIP) and Millipore(MIL) have been sector standouts, helping to push biotech ETFs higher.

In a sector characterized by homeruns and strikeouts, ETFs offer a way to gain exposure while mitigating single-security risk. While Human Genome Sciences(HGSI) now trades over $30, a more than 5,000% increase from the same time last year, a late-stage failure for Medivation’s (MDVN) Alzheimer’s drug set that stock back 65% in a single session last week.

How to play: First Trust NYSE Arca Biotech Index(FBT) uses an equal-weight methodology to give investors exposure to 20 firms that represent a cross section of the sector. Unlike iShares Nasdaq Biotechnology(IBB), which concentrates assets in industry giants and top holdings, FBT offers a more balanced viewpoint.

It also doesn’t hurt that FBT’s portfolio contains both OSI Pharmaceuticals and Millipore.
Regional Banks Roar

As the Volcker rule proposal signals a change of tone in Washington, ETFs focused on regional banks, such as iShares Dow Jones U.S. Regional Banks(IAT) and the regional-bank-heavy SPDR KBW Bank(KBE), have outperformed big-bank funds.

While the Volcker proposal will likely continue to meet resistance, its introduction marks a shift from the big-bank bailouts that put giants such as Goldman Sachs(GS) and JPMorgan Chase(JPM) in the spotlight.

How to play: As the government sets it sights on financial reform, KBE and IAT could continue to outperform. Both ETFs are strong, liquid picks for regional banking exposure.

Indefatigable Japan

Despite the ongoing problems at top-holding Toyota(TM), it seems like nothing can derail the iShares MSCI Japan Index(EWJ).

A stronger yen is lifting the returns of the equity ETFs, and EWJ is up 4.41% year-to-date. Investors are anticipating an increase in exports to China, Japan’s second-largest export market after the U.S., which would boost profits for Japan’s manufacturers.

Political changes have also fueled hope for this previously stagnant economy. In August 2009, the Democratic Party of Japan won a landslide victory over the entrenched Liberal Democratic Party. Reform could help to fuel growth in the months ahead.

How to play: EWJ is a direct way to bet on Japanese firms, but ETF investors need to remember that this fund is highly influenced by currency changes. Since EWJ does not hedge its currency exposure, shares of this fund represent an unhedged investment in overseas securities.

When the dollar is appreciating against the yen, this fund gets a boost, but currency cuts both ways. Investors using EWJ to bet on Japan will want to have a full understanding of the currency situation.

The Best Big-Picture Retail ETF
Posted 03/10/2010 8:54 a.m. EST

Earnings reports from specialty retailers keep pushing the SPDR S&P Retail(XRT) higher, and sector sentiment should continue to improve with holdings such as J. Crew(JCG) reporting better-than-expected earnings.

The company released its earnings after the bell yesterday, beating analysts’ expectations. Lean inventories helped this retailer report a quarterly profit of 61 cents a share, way ahead of Wall Street’s consensus at 46 cents per share and a sharp contrast to last year’s loss of 22 cents a share.

Another XRT holding, American Eagle Outfitters(AEO), reported adjusted fourth-quarter earnings of 33 cents per share, just meeting consensus, but the big news was that the company will close its Martin + Osa concept stores, which will slim down inventory, and refocusing on its core business.

While writing about specific holdings is certainly instructive in understanding the movement of an ETF, especially those that are top-heavy, when focusing on funds, you must view the holdings as a group. Determine the scope. See what kind of picture they paint. Does the strategy make sense?

Successful ETFs (balanced, liquid funds that closely track their underlying values) don’t hinge on the performance of an individual component; they capture the movement of a sector.

In the case of XRT, its weighting methodology keeps any one stock from influencing the performance of the fund. To put this into perspective, consider this fact: Top RTH holding Target(TGT) makes up just 1.64% of the fund’s total portfolio.

J. Crew makes up 1.51% and American Eagle 1.49% of XRT. To say that either one of these stocks will be responsible for the success or failure of XRT would be ridiculous.

I picked XRT for just that reason: Its well-balanced portfolio will give investors exposure to a sector that has been outperforming, while minimizing exposure to the inevitable few bad apples.

XRT’s modified market-cap design allows for this fund to take the temperature of the retail sector, not just let you know how Wal-Mart’s(WMT)  doing on any given day.

I’ve been bullish on the retailers in this fund because many of them offer cost-conscious alternatives to pricier brands. I believe that’s the world in which we live. Case in point: As the market floundered in its darkest days, President Obama’s daughters showed up to the inauguration in J. Crew, not an uber-expensive custom designer.

Many of the companies in XRT’s portfolio have been effective at cutting costs and raising dividends. I believe that innovative new marketing methods will continue to lift the retail sector as the market improves.

Viewing the world through an ETF lens means having to look at the big picture, not calling red or black. XRT is my pick for retail because its well-balanced structure helps to maximize exposure while minimizing risk. In a marketplace where so much is uncertain, you can’t ask for anything more.

The ETF Oscar Goes to …
Posted 03/08/2010 08:01 a.m. EST

Like an award-winning movie, the successful release of an exchange-traded fund is a combination of innovative strategy, good timing and dumb luck.

Watching the Oscars Sunday night after having read Mark Harris’ excellent story about Oscar strategy in New York magazine last month, I was reminded once again of the exciting and often surprising process of watching a newly-released ETF succeed or fail in the open marketplace.

Whether an ETF is an indie-breakout or a big budget premiere, sometimes things go right, sometimes things go wrong, but you never really know until the rubber hits the road. The real measure of a product’s success is its reception: No matter what an ETF is about, it’s only a hit if people show up.

It may be only early March, but a raft of new ETF products already have been released in 2010 with varying success. Looking back at the beginning of 2010, however, there is already one product that stands out when judged by factors like timeliness, strategy and. most importantly, reception.

Thus far, the ETF Oscar for best new product of 2010 goes to: ETF Securities’ ETFS Physical Platinum Shares(PPLT).

Launched on Jan. 8, PPLT already has amassed more than $430 million in assets, helping to make ETF Securities’ fledgling U.S. ETF operation the 15th-largest ETF issuer when measured by total assets.

This global ETF brand was the first to introduce physically-backed gold ETFs in Australia and London in 2003.

Physically-backed, bullion-based products like PPLT and SPDR Gold Shares(GLD) have transformed the way that U.S. investors access precious metals, transforming a small segment of the market into an asset class.

PPLT offers investors fractional exposure to a physical stockpile of platinum. The performance of the fund is determined by the demand for and price of physical platinum.

PPLT’s launch couldn’t have been more perfectly timed — a result of good luck and market conditions. ETF Securities filed for PPLT and the accompanying ETFS Physical Palladium Shares(PALL)  back in early 2009, first introducing the idea of a physically-backed platinum product to U.S. investors.

Already familiar with products like GLD and iShares Silver(SLV), ETF investors were ready to embrace a new way to access an extraordinarily expensive asset. Having already introduced two successful physically backed products into the U.S marketplace to compete with already-entrenched competitors, ETF Securities was ready to make its name as a first-mover in the platinum space.

As a new participant in the U.S. ETF marketplace, ETF Securities had to rely on strategy — rather than notoriety — when introducing PALL and PPLT. They stepped into a gap in the ETF industry and presented a new investment vehicle to an equity-wary investor pool.

In his article about the process of Oscar campaigning, Harris notes “there is no war room, per se, but there are early front-runners that fade, grassroots insurgencies, even primaries. Ultimately, most of the nominees emerge from a combination of good planning, good movies, and good luck.”

PPLT has been able to capitalize on a booming segment of the ETF industry, an exciting new strategy, and a moment in market history.

While other ETFs will ultimately enter the exchange-traded space in 2010 and compete for the attention of investors, PPLT has already made its mark and this product won’t be easily forgotten in the months ahead.

Disclaimer

Leading the ETF pack this week were the regional banks. Though these institutions have been able to benefit as Washington continues its assault on Wall Street giants, speculation also played a part in these firms’ rise over the past few days.

Winners

SPDR KBW Bank ETF (KBE) +3.8%

iShares Dow Jones U.S. Regional Banks Index Fund(IAT) +3.2%

SPDR KBW Regional Bank(KRE) +2.1%

The U.K. financial goliath Barclays stirred up the regional banking sector on Wednesday when a report indicated that the firm was looking to acquire U.S. retail banking assets.

KBE saw an additional rise when Vikram Pandit of Citigroup(C) provided investors with an optimistic outlook for the troubled company. Citigroup accounts for 8% of the fund’s index.

First Trust NYSE Arca Biotechnology Index Fund(FBT) +4.5%

SPDR S&P Biotechnology(XBI) +2.3%

PowerShares Dynamic Biotechnology and Genome Portfolio(PBE) +2%

For the second week in a row, the biotech industry was a big winner in the ETF arena. As with last time, the FBT managed to handily beat its SPDR and iShares competitors to lead this health care subsector higher.

Helping to power FBT over XBI this week was InterMune’s(ITMN) 60% jump on Wednesday. In the past month alone, ITMN has managed to gain more than 120%. This week, the company saw a rise from the optimism that the FDA would approve its experimental drug used to treat idiopathic pulmonary fibrosis, a disease that causes scarring of the lung.

After the advance, InterMune is now FBT’s top holding, accounting for more than 10% of the fund’s total portfolio.

Market Vectors Indonesia(IDX) +3%

Standard & Poor’s raised Indonesia’s foreign currency sovereign credit rating on Friday, and the nation’s central bank raised growth estimates for 2010 and 2011. The country will be visited by President Obama later this month, and then by Chinese Prime Minister Wen Jiabao in April.

Though the fund is up 9.2% this year, it is still has about 1.5% to go before it surpasses its Jan. 19 high of $68.82.
Losers

United States Natural Gas Fund(UNG) -4.6%

iPath Dow Jones-UBS Natural Gas Subindex Total Return ETN(GAZ) -4.4%

United States 12 Month Natural(UNL) -3.7%

UNG continues to set new records. The only problem for long investors is that those records are record lows. UNG broke $8 a share this week to close at $7.97. It was the first time the security traded below $8 intraday as well.

This week’s slide came as inventory numbers met expectations. The decline in prices continues to be a healthy sign of natural gas supply, and investors will have to wait for a pickup in demand before UNG can put in a bottom.

iPath Dow Jones-UBS Grains Subindex Total Return ETN(JJG) -2.4%

PowerShares DB Agriculture Fund(DBA) -1.6%

Soybean, wheat and corn futures stumbled this week in light of strong forecast yields from top-producing nations including the U.S. and South America. As supplies continue to outweigh demand, expect commodity-backed agriculture funds like DBA to continue their underperformance.

iPath Dow Jones-UBS Nickel ETN(JJN) -3.8%

Despite the continuation of a nearly seven-month mine strike in Subury, Ontario, nickel prices still faltered this week, and JJN led the losers.

Though this week’s performance was dismal, global nickel prices may soon see a rebound. According to a report from UBS, global demand for the metal appears to be stabilizing, and producers in the developed world are beginning to ramp up production.

With the outlook for both demand and supply improving, the days of nickel’s downfall may soon be numbered.

Disclaimer

Investors have shown time and again that when it comes to exchange-traded funds, transparency and low costs trump management. For now, investors seeking active management are sticking with the mutual fund industry, but that’s not stopping Wall Street firms from launching actively managed ETFs. However, as these newcomers enter the ETF game, many largely disregard the qualities that have made ETFs so successful.

With over 900 products on the market and more than $1 trillion in assets, it is no wonder that an increasing number of dominant Wall Street players have announced plans to enter the expanding ETF arena. Some companies, such as Goldman Sachs (GS), Eaton Vance (EV) and T. Rowe Price, are still awaiting approval to launch their first products, while others, such as PIMCO and Schwab (SCHW), have already released a number of products in the past year.

On Thursday, JPMorgan (JPM) joined the bandwagon when it announced its own plan to launch a collection of exchange-traded funds. The firm already offers the popular JPMorgan MLP Alerian Index ETN (AMJ), a fund I have long promoted as a stable play on the natural gas industry.

As evidenced by February’s NSX data, the exchange-traded fund industry is still dominated by the likes of Blackrock (BLK), State Street (STT) and Vanguard, whose products largely reflect the original three tenants of these instruments: transparency, passivity and low costs.

Despite seeing the past success of these traits, a common trend highlighted by this wave of ETF newcomers is the desire to launch actively managed products.

Though long touted as the future of the exchange-traded fund industry, for the most part, actively managed ETFs have failed to develop much of a following. For instance, Grail Advisers, viewed as a pioneer in the industry, has seven different active ETFs currently available, but has only managed to accumulate a combined total of $25 million in assets.

Grail’s meager following leads one to wonder why so many of these newcomers are still confident that active instruments are a sure-fire way to gain a presence in the ETF industry.

Of course, not all active fund launches have been as unsuccessful. Pimco’s PIMCO Enhanced Short Maturity (MINT) stands out as an actively managed product that has actually managed to gather some steam. Since its launch in late 2009, the fund now boasts $136 million in assets.

As I highlighted in my RealMoney blog earlier this week, what sets MINT apart from its struggling competitors could be the fund’s inherent “angle.” When investors think of Pimco, the first things that come to mind are bonds and Bill Gross. The fact that the Pimco name is synonymous with this specific market slice and active management provides the company with an ideal opportunity to parlay that notoriety into the actively managed ETF realm.

The true test of this theory, however, will be if the firm’s other two actively managed instruments, the PIMCO Short Term Muni Strategy (SMMU) and PIMCO Intermediate Muni (MUNI) can garner the same following. Currently, like other actively managed instruments, the two funds have struggled to attract assets.

As evidenced by Pimco’s MINT, active ETFs, when properly marketed, can prove to be successful and attractive investing vehicles. However, for now, it would be in the best interest for newcomers who do not have the same well-defined “angle” as Pimco to stick to continuing the passive ETF tradition.

Of course, it’s possible that companies may not be jumping into actively managed instruments to get a jump on the next wave in ETF products. Instead, the focus on actively managed ETFs may be due to the fact that the passive ETF market is becoming saturated.

This week we saw a number of new instruments that simply mimic other funds already available. The SPDR S&P Russia ETF (RBL) will compete directly with the Market Vectors Russia ETF (RSX), while the Claymore Wilshire 5000 Index ETF (WFVK) will follow an index similar to that of the SPDR Dow Jones Total Market ETF (TMW). Active management may just be the one slice of the ETF realm that still has lots of space for new products.

Disclaimer

On Wednesday Forbes’ famous list of the world’s billionaires was revealed. This year, the directory included prominent names in business including No. 6, Oracle’s(ORCL) Larry Ellison and No. 24, Google’s(GOOG) (GOOG) Sergey Brin.

Investors such as George Soros and John Paulson also found themselves positioned among the top 50.

However, this year the list of the world’s super affluent was headed by America Movil’s(AMX) Carlos Slim.

This is only the second time since 2001 that the top two spots were not held by the dynamic duo of Bill Gates and Warren Buffett. Instead, the Microsoft(MSFT) founder, who saw his net wealth increase by $13 billion last year, had to settle for second place, while Buffett, who saw his fortune increase by $10 billion thanks to his impressive bets on firms like Goldman Sachs(GS) and BYD, placed third.

Holding regular positions at the top of the Forbes’ billionaires list are just one of the many experiences these world famous businessmen have shared.

The two men first met in 1991 when Gates was urged by his mother to attend a meeting where the Nebraska investor was present. Although the two hailed from different backgrounds, they still managed to hit it off immediately. Since the initial meeting, the two have developed a close-knit friendship based on a love for philanthropy, the game of bridge and, more recently, trash.

The most notable connection these two men have shared over the course of their nearly 20-year friendship has been their desire to help the world’s poor and less fortunate.

Although Buffett heads his own charitable efforts, including the Susan Thompson Buffett Foundation, the financier made waves when in 2006 when he announced that he would donate the vast majority of his Berkshire Hathaway(BRK.A) shares to the Bill and Melinda Gates Foundation. At the time of the offer, this gift was valued at more than $30 billion.

The aim of the Bill and Melinda Gates Foundation is to battle global disease and poverty as well as fund U.S. education projects.

While Buffett has assisted Gates through his generous charitable gifts, Gates has provided Buffett with a number of investment ideas. The most recent example of Gates’ influence was seen when the Oracle of Omaha’s quarterly 13-F filing was unveiled last month.
In surveying Buffett’s legendary portfolio, Warren watchers discovered that the investor had dramatically increased his position in the waste company, Republic Services Group(RSG).

Coincidentally, Gates previously made his own substantial investment in Allied Waste, a firm which has since merged with RSG. Today, Gates is the largest shareholder of Republic Services.

Buffett also appeared to follow Gates when it came to his all-in bet on Burlington Northern Santa Fe(BNI) in late 2009. Prior to this deal, Gates had accumulated his own substantial position in another railroad, Canadian National Railway(CNI). Buffett has respectfully admitted that he wished he had gotten into railroads when Gates first ventured into the industry.

Outside the world of philanthropy and business, the two men are famous bridge partners and have shared the podium at a number of speaking events. In November 2009, the two came together to discuss the topic of capitalism in the wake of the recent economic crisis by appearing in front of 700 Columbia University students at a town hall-style event. Both expressed their optimism for the U.S. economy to the enthusiastic crowd.

Although Gates, 25 years Buffett’s junior, has in the past insisted that he views the Oracle of Omaha as the teacher in the relationship, it is apparent that there’s ample wisdom flowing from both parties.

What do you think of Carlos Slim’s rise to the top? Does he have a shot at holding the top spot for many years, or do you think Gates or Buffett will reclaim the title as the world’s richest?

Disclaimer

While retail earnings have diverged this week, the SPDR S&P Retail ETF(XRT) continued to perform well because of its balanced approach.

The relatively affordable ETF, with a 0.35% gross expense ratio, has holdings in 64 companies in the retail sector. The fund does not allocate a heavily weighted portion of its net assets to any individual company. For example, the largest holding, HSN(HSNI), the home shopping retailer, accounts for only 2.3% of the fund.

A positive or negative report from a company is not capable of significantly moving the entire fund. That’s good because there have been some mixed reports this week.

For instance, the shares of two mid-priced fashionable clothing retailers diverged in Wednesday trading after they sent investors mixed messages this week. The shares of J. Crew(JCG) fell 4.3% after the markets reacted negatively to its earnings and a Citi analyst’s downgrade of the company.

On the other hand, the markets were more optimistic about American Eagle Outfitters’(AEO) report and sent its shares up 6.1%.

Meanwhile, shares of XRT reached a new 52-week high yesterday despite some misses here and there. Its balanced approach has insulated investors from the few misses such as J. Crew while reflecting the overall recovery in retail.

In addition to JCG and AEO, several other XRT holdings reported this week including Kroger(KR), Children’s Place(PLCE), Men’s Warehouse(MW), Jo-Ann’s(JAS) and Gymboree(GYMB).

On Tuesday, shares of Kroger fell after it reported a 27% drop in profit in the fourth quarter.

Yesterday, PLCE reported its fourth-quarter profits dropped 12%, while MW also reported a loss for the quarter. However, the shares of both companies advanced on the day.

After the bell yesterday, JAS, a craft and textiles retailer, reported a strong fourth quarter and full year, while GYMB, a competitor of PLCE in the children’s retail industry, beat analysts’ fourth-quarter profit expectations and supplied strong guidance for the first quarter. Shares of JAS were down slightly this morning, while shares of GYMB were up more than 10%.

Two other holdings in XRT have yet to deliver their results. Aeropostale(ARO) reports after today’s close and Ann Taylor(ANN) reports tomorrow.

In total, the retailers in XRT that have already reported this week account for 11.7% of the fund. If all of these companies had reported positively or negatively, it could have made a significant impact on the fund, but the reports were mixed, allowing XRT to continue its bullish trend.

Due to the mixed reports, however, XRT was up only 0.9% through Wednesday, while the S&P 500 increased by 0.6%. Shares of XRT were losing ground this morning, along with the broader market.

If investors are bullish on retail, they can confidently go with XRT. Its balance approach means that no single company will lead the ETF by the nose and since the start of 2010, XRT has increased by about 11% while the S&P 500 is up only 3%.

It has also outperformed its two main retail ETF rivals: Retail HOLDRS(RTH), up 4%, and PowerShares Dynamic Retail(PMR), up 9%.

Until the recovery strengthens and the earnings reports turn more generally positive, XRT remains the best way to play retail.

Disclaimer

Networking stocks and the two networking ETFs have enjoyed a nice run recently as they have outperformed the rest of the technology sector.

The two networking ETFs are PowerShares Dynamic Networking(PXQ)  and iShares S&P North American Networking(IGN).

PXQ is the smaller and less traded of the two, with volume low enough to be considered mildly illiquid. That said, its 19,000 share-per-day average volume has been trending higher as investor interest in the sector picks up. PXQ is the better of two in terms of short- and long-term outperformance.

PXQ tracks the Dynamic Networking Intellidex Index, a passive index that uses screening criteria based on growth, valuation, timeliness and risk to determine which stocks to hold. Four of PXQ’s top 10 holdings were not even in this ETF in the fourth quarter of 2007 as allocations shift over time to match the underlying index.

IGN uses a modified market capitalization index that caps a stock at 8.5% of the index. While the underlying index is more stable, the fund’s definition of networking is much broader than PXQ’s. The top holding is Research in Motion(RIMM), Qualcomm(QCOM) ranks fifth and Motorola(MOT) ranks seventh.

The difference in allocation is why PXQ’s return has been doubled that of IGN this year. Big winners include Oclaro(OCLR), up nearly 50%. The optical component maker accounts for 2.8% of PXQ, but is not present in IGN.

Another winner is PXQ top holding VMWare(VMW), up more than 25% in 2010. It is not held by IGN.

One winner in both portfolios has been JDS Uniphase(JDSU) (JDSU), up 40%. The firm accounts for 2.8% of PXQ and 4.3% of IGN.

Over the same period, Qualcomm and Motorola have declined by more than 10%. At nearly a combined 11% of assets, the large underperformance of these two stocks relative to the networking sector has cost IGN dearly.

Since inception, the story has been often the same. PXQ has beaten IGN in four out of the five years both have traded. The three-year annualized return for IGN is -3.9%, while PXQ returned 4.4%. This suggests that PXQ’s indexing strategy is more effective, even in 2008, when the fund lost 38% to IGN’s 50%.

While the returns of networking stocks are impressive so far in 2010, it remains to be seen whether they can continue. As the Internet continues to play a greater role in commerce and leisure, there’s a good fundamental reason for the sector to continue to recover.

Still, in the near term, networking stocks have pulled away from their technology peers. Most tech ETFs are actually losing long-term relative momentum even as the networking ETFs gain momentum. Performance wise, PXQ is up 12% this year while the Technology Select Sector SPDR(XLK)  is still underwater.

It’s more likely that the return of PXQ and other technology ETFs will converge. Whether that’s resolved to the upside or downside, chances are PXQ and IGN will underperform tech ETFs such as XLK and PowerShares QQQ (QQQQ) in the short term.

Disclaimer

As evidenced by February’s ETF flows, droves of investors have been piling into plain vanilla exchange traded funds. Given this preference, Claymore could not have picked a better time to launch its family of Wilshire 5000-focused exchange traded funds.

On Tuesday, the company launched three funds designed to track different slices of the Wilshire 5000 Index: the Claymore Wilshire 5000 Total Market ETF(WFVK), the Claymore Wilshire 4500 Completion ETF(WXSP), and the Claymore Wilshire U.S. REIT ETF(WREI).

Broad-based funds such as these are a throwback to the roots of the exchange traded fund industry. Today, ETF investors can track everything from TIPS to biotech to natural gas, but the very first exchange traded fund was designed as a simple catch-all for investors looking for cheap exposure to the broad S&P 500.

Broad index funds like the SPDR S&P 500 ETF(SPY), the PowerShares QQQ(QQQQ), and the SPDR Dow Jones Industrial Average ETF(DIA) remain some of the largest, most liquid instruments in the industry.

In the past, Claymore has been known for niche products that have provided investors with the first pure plays on unique market slices such as Chinese real estate via the Claymore/AlphaShares China Real Estate ETF(TAO), shipping with the Claymore/Delta Global Shipping Index ETF(SEA), airlines using the Claymore/NYSE Arca Airline ETF(FAA), and solar power with the Claymore/MAC Global Solar Energy Index ETF(TAN).

With the launch of three funds to track different slices of the Wilshire index, it appears that the Claymore is making an effort to ride the broad equity index wave.

Established in 1974, the Wilshire 5000 Index, like the S&P 500 and Dow Jones Industrial Average, is used as a barometer for the U.S. economy. Setting this index apart from the others, however, is the sheer depth of its holdings. Unlike the S&P and Dow, which track a representative sample of U.S. based companies, the Wilshire is a market cap- weighted basket of every stock traded in the United States.

Despite the fact that the index is called the Wilshire 5000, the total number of constituents varies. According to the Claymore Website, the index currently underlying WFVK includes slightly more than 4,000 companies. The product has 1,197 holdings, with top constituents such as Exxon Mobil(XOM), Microsoft(MSFT), Apple(AAPL), Procter & Gamble(PG) and Johnson & Johnson(JNJ).

The Claymore Wilshire 4500 Completion Index, which is designed to follow the performance of the Wilshire 4500, tracks all companies trading in the United States that are not included in the S&P 500. The WREI is designed to be a pure play for investors seeking a play on all available REITs trading in the U.S.

While WXSP and WREI are the first of their kind, this is not the first time an ETF or mutual fund has attempted to copy the performance of the all-encompassing Wilshire 5000. The SPDR Dow Jones Total Market ETF(TMW)  tracks the same index as WFVK, although its basket is made up of considerably fewer positions.

Additionally, while they track the MSCI US Broad Market Index today, the Vanguard Total Market ETF(VTI) and Vanguard Total Stock Market Index Fund(VTSMX) originally tracked the Wilshire 5000.

Aiding the appeal of Claymore’s new instrument is an attractive 0.12% expense ratio. By comparison, TWM, which will suffer from greater tracking error due to its more concentrated exposure, charges 0.21%.

WXSP will cost investors 0.18% while WREI charges 0.32%.

Although WFVK is a great fund for investors looking for the ultimate equity catch-all, in the end, the largest hurdle standing in this fund’s way will be volume. Despite the fact that investors are returning to broad equity index funds, the Wilshire 5000 has not traditionally been as appealing to investors as the S&P and Dow. As a result, TWM has typically been an illiquid fund.

Claymore’s new instrument will have to rely on its more diverse holdings and cheap expense ratio to pull in investors. If it fails on those scores, this fund will most likely falter.

Disclaimer