Dion Money Management Blog   Money Management for Retirees and Their Families

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

Here are three of his blogs from the past week.

Are Homebuilders Near a Bottom?
Published 7/19/2010 1:19 PM EDT
In the three-month period ended July 16, the iShares Dow Jones US Home Construction ETF(ITB) fell a precipitous 21%. Much can be attributed to the expiration of the government stimulus program for new homebuilders. In the wake of this drop, homebuilders’ confidence in the housing market has fallen to the lowest level in more than a year, according to the National Association of Home Builders.

In its report today, the NAHB noted that its seasonally adjusted housing market index fell to 14 in July, making it the lowest level since March 2009. I have been watching the fall of ITB carefully in this blog, and have advised investors to stick with more well-rounded real estate ETFs like iShares Cohen & Steers Realty Majors ETF (ICF) and iShares Dow Jones US Real Estate ETF (IYR).

Is homebuilder sentiment, like consumer sentiment, enough to base the strength of a recovery on? Every time one of these reports comes out, investors are forced to reassess how they really feel about economic recovery in light of the new confidence numbers, etc.

Rates are at record lows, but low rates aren’t enough to get people to buy new homes. Here in Williamstown, Mass., where real estate signs used to be a rarity, you see a house for sale on every corner. Infinite stimulus certainly isn’t the solution, but what is? It seems like home prices will have to fall in order to get new buyers involved.

I think that we are near the bottom — at least everywhere outside of the “sand states” of Arizona, Florida, California, etc. And it might be about time to actually considering buying ITB. When things get bad enough, we’re usually due for a turnaround, and I believe that falling prices and low rates will eventually get people involved.

The state of the housing market is a sticky situation, and here’s what I’d recommend for most investors — longer-term diversified holdings like ICF and IYR. Unless you feel confident enough to call the bottom, avoid ITB — and the homebuilders — for a bit longer.

Don’t Bet Against the Net
Published 7/20/2010 4:54 PM EDT
Plenty of trends are up for debate this earnings season, but here’s one you can’t bet against: the power of the Internet. While I’ve been bullish on the First Trust Dow Jones Internet Index ETF(FDN) for some time now, news today only has me more convinced.

As readers of this blog will know, FDN tracks companies that derive at least 50% of revenue from Internet sales. As consumers tighten their purse strings, the Internet has become an even more powerful tool: Rather than rushing to the closest store to buy a product, consumers are comparison-shopping online. FDN tracks top search engines such as Google(GOOG) and Yahoo!(YHOO), along with bargain sites such as eBay(EBAY) and Priceline(PCLN).

Even with high unemployment, we can’t seem to fight the urge to be connected or own the latest gadget: Witness the rise of Facebook and the incredible success of Apple’s(AAPL) iPhone and other smartphones. Today, investors learned that Amazon’s(AMZN) Kindle e-books are outselling hardcover books. Amazon is the second-largest component in FDN’s portfolio.

FDN’s fourth-largest component, Yahoo!, missed revenue estimates today, but earnings were up a solid 51%. Growth in advertising bodes well for a recovering economy. With firms having to do more with less, the Internet is a great place for advertisers and consumers to connect.

iPhones and Kindles aren’t cheap, but cash-strapped consumers are still shelling out the bucks to stay connected and have the latest products. With the worst of the financial crisis behind us, there’s only one way for FDN to go in the long-haul: up.

Transports Should Chug Higher
Published 7/21/2010 2:40 PM EDT
While volatility and mixed earnings make blogging about short-term ETF trades a tough task, some results today from the airline industry give me an excuse to return to a longer-term theme I’ve been watching: transports.

On July 13, after CSX Corp.(CSX) steamrolled analyst expectations, I urged investors to “Hitch a Ride on Transports” with the iShares Dow Jones Transportation Average ETF(IYT). If you’re looking for well-balanced exposure to a broad range of transports, IYT is a strong pick — it tracks everything from railroads and delivery services to marine transportation and airlines.

While top component FedEx(FDX) has weighed on the fund’s performance, I believe that strong earnings from other sector giants will help give IYT a strong shorter-term boost. UPS(UPS), also an IYT holding, is scheduled to report results Thursday, and earnings estimates have been creeping up. Positive results from Delta Airlines(DAL) and U.S. Airways(LCC) have helped to paint a brighter picture for the sector as well.

With earnings in the transports sector largely exceeding expectations, upcoming reports from IYT components like Continental Airlines(CAL), Union Pacific(UNP) and Southwest Airlines(LUV) should help IYT push higher.

I continue to think that a slow, steady economic recovery will continue to fuel transports and make IYT an attractive option in both the medium and longer term.

Disclaimer

Winners

Market Vectors Steel ETF (SLX) +12.9%
This week, basic materials ETFs climbed on news that Chinese regulators were mulling the possibility of paring back aggressive efforts to rein in the nation’s overheating housing market.  SLX, Market Vectors Coal ETF(KOL), SPDR S&P Metals & Mining ETF(XME) and iPath Copper Total Return Subindex ETN(JJC) were among the biggest gainers this week.

iShares MSCI Brazil Index Fund (EWZ) +8.3%
The Brazil ETF and a collection of other Latin America-focused ETFs such as iShares S&P Latin America 40 Index Fund(ILF) and iShares MSCI Chile Investable Market Index Fund(ECH) earned top spots this week.

On Thursday, many Latin American nations received a boost after the U.N.’s Economic Commission for Latin America and the Caribbean announced expected growth in the region is 5% this year. Brazil is forecast to lead this upward trend, at 7.6% growth.

Strong earnings and the threat of tropical storm Bonnie helped lift crude prices this week, providing IEZ with an opportunity to head higher. This week, IEZ’s top two holdings, Schlumberger(SLB) and Halliburton(HAL)  released their quarterly earnings reports. Halliburton managed to surpass analyst expectations while SLB’s numbers were in line with what analysts had been expecting.

Claymore/AlphaShares China Small Cap Index ETF (HAO) +7.1%
The Chinese markets at last found some strength this week after reports that regulators were planning to scale back policies aimed at cooling the nation’s economy.

Smaller Chinese companies saw some of the largest gains, leading HAO to outperform large-cap China ETFs such as iShares FTSE/Xinhua China 25 Index Fund(FXI).

Losers

iPath S&P 500 VIX Short Term Futures ETN (VXX) -13.9%
On Wednesday, Fed chairman Ben Bernanke offered concern testimony to Congress that sent markets reeling. However, this drop was short-lived as investors staged an equally impressive comeback the following day.

Despite these wild swings, the volatility index-tracking ETN failed to capitalize, finishing the week with heavy losses.

iShares Dow Jones U.S. Healthcare Providers Index Fund (IHF) -2.9%
Most facets of the U.S. markets benefited this week as company after company reported strong quarterly earnings. Health care providers, however, struggled during this period, and ended the week on a low note.

Three top 10 holdings dragged on the fund: Medco Health Solutions(MHS), Express Scripts(ESRX) and Quest Diagnostics(DGS). Each of these firms dipped around 10% for the week.

PowerShares DB Agriculture ETF(DBA) -0.6%
Agriculture was another decliner this week. DBA’s index of futures tumbled thanks to weakness from both cocoa and coffee. Together these two commodities account for 22% of the fund’s total portfolio. But on the other side of the coin, sugar, which makes up 12% of the portfolio, rallied this week, earning iPath Dow Jones-UBS Sugar Total Return Subindex ETN (SGG) some of the strongest returns of all exchange-traded products.

Disclaimer

Welcome to Don Dion’s Daily ETF Winners and Losers. Be sure to stop by each day to get a feel of who’s winning and who’s losing when it comes to ETFs.

Winners

ETFS Physical Palladium Shares(PALL) 3%
A strong report from Autoliv(ALV) and Ford(F) are providing the U.S. automotive industry with a welcomed dose of confidence.

Two beneficiaries to a strong auto industry are platinum and palladium which are used extensively in the production of catalytic converters. Appropriately, PALL and ETFS Physical Platinum Shares(PPLT) are both jumping today.

SPDR S&P Homebuilders ETF(XHB) 2.1%
For the second day in a row the homebuilders are scoring strong gains and earning a spot among the ETF industry’s biggest winners. On Friday, XHB’s top holding, A.O. Smith(AOS) jumped more than 2% after announcing that it was preparing to raise its quarterly dividend by 8%.

iShares MSCI All Peru Capped Index Fund(EPU) 1.3%
Peru’s markets are moving today due to broad strength in the materials industry as well as an optimistic outlook for the Latin American region.

EPU’s index is designed to track a basket of companies which are representative of the broad Peruvian markets. Cia de Minas Buenaventura(BVN) and Southern Copper(SCCO) together represent more than 30% of the fund, making it an interesting global materials proxy.

Other materials-heavy ETFs moving higher today include Materials Select Sector SPDR(XLB) and iShares MSCI Australia Index Fund(EWA).

Losers

iPath S&P 500 VIX Short Term Futures ETN(VXX) -1.8%
The overall impact of revealing the results of the EU’s stress tests was minimal and investors appear to again be focused on the slew of optimistic earnings results coming from strong companies.

Interestingly, while VXX is taking a hit today, iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) is avoiding negative territory.

iShares MSCI Israel Investable Market Index Fund(EIS) 1.5%
Weakness from generic drug giant Teva Pharmaceuticals(TEVA) is EIS lower into the end of the week. The drug maker is reeling after competitor Novartis(NVS) received approval to produce a generic version of Sanofi Aventis’ blood thinner, Lovenox. Teva is also working on a generic version of the drug.

iShares MSCI Turkey Investable Market Index Fund(TUR) -0.5%
Shares of TUR have staged an impressive rally since the start of July and are currently nearing previous 2010 highs. However, on Friday, the upward momentum hit a roadblock, sending the ETF lower.

Turkey remains an interesting nation to watch due to the fact that its markets don’t typically move in lock step with those of the rest of the global economy.

iShares MSCI Sweden Index Fund(EWD) -0.4%
The EU announced the results of its sweeping stress test and the Swedish markets are feeling some of the greatest pressure. Pushing EWD lower is top holding Ericsson(ERIC), down more than 5% today after coming up short on its second-quarter earnings report.

ERIC accounts for 13% of the fund’s total portfolio.

Disclaimer

Earnings season is off to a strong start this quarter, but the results so far have failed to keep the stock market from stalling. Although the majority of companies are expected to post positive results and beat analysts’ expectations, investors are watching revenue numbers closely because they want to see positive guidance for upcoming quarters. So even if business leaders remain confident—the Conference Board CEO Confidence Index remains positive with a reading of 62—not all CEOs are putting their money where their mouths are and upgrading their outlooks, nor are they quick to hire new employees. This split most likely reflects the severity of the recession and anxiety over such unknowns as pending regulatory changes and this week’s European bank stress tests.

One of the weakest segments has been small business sentiment. A separate survey, the NFIB Small Business Optimism Index, fell to 89 in June from 92.2, reversing two month’s of gains. The survey reflects the reality of small businesses continuing to bear the brunt of the recession and being affected more than other enterprises by enduring aspects of the credit crunch. Small businesses create the bulk of new jobs, yet hiring expectations of small businesses have declined the most since October 2008.

Overall, the details from companies reporting thus far have been decent. During the first week of earnings, 47 companies had reported and 72 percent were better than expected. Among the positive results were bellwethers such as Alcoa (AA), Intel (INTC) and CSX (CSX), but only Intel was rewarded for beating analysts’ expectations, reflecting investors’ thirst for positive guidance. This week, after 25 percent of firms had reported results, the technology sector looks the strongest; 16 firms have beaten consensus estimates by 2.9 percent. These are the firms that have been guiding higher over the past two months, and this is one of the top sectors for actually improving its year-end guidance. Other sectors providing broad upward guidance include consumer discretionary and industrials.

However, it would appear that investors are reluctant to rely on the rear-view mirror, so to speak, and the progress made to date. Rather than focus on Q2 results, investors are focused on the road ahead or, in this case, the profit outlook for the second half of 2010 and the guidance for 2011. So far, guidance has been declining for the first time in several quarters. Yet with the economy still expected to grow 2.5 percent in 2010, the severity of this soft patch remains the key question.

Although leading economic indicators have peaked in the short term and economists have reduced their expectations for 2010 output—softer retail sales, slower inventory growth, and a larger trade deficit are part of the reason for the economic downgrade—there is little evidence that we are headed for another recession. In fact, industrial surveys performed by UBS Research Department, a leader in proprietary company research, show end-markets in various stages of recovery. Businesses tied to industrial activity and inventory restocking have shown the most improvement, while late-cycle industries such as aerospace or gas pipelines that rely on capital investment have been slow to turn around. More important, these surveys have shown improvements in credit and financing for manufacturers and suppliers.

Disclaimer

The thinly traded Global X China Technology ETF(CHIB)  is not a spectacular pick for investors, given the lack of interest in its shares, but its portfolio has solid exposure to companies that will cash in on smartphones running Google’s (GOOG) Android operating system and benefitting from a more accessible Internet.

CHIB launched roughly the same time as Claymore/AlphaShares China Technology(CQQQ). While I continue to favor CQQQ as a pure technology ETF, CHIB’s large telecom exposure, previously a handicap, is now a strength thanks to the emerging smartphone market.

China announced a telecom restructuring in 2008, which shook up the industry and created a third wireless competitor to China Unicom(CHU) and China Mobile(CHL). The industry was hammered by the associated costs of restructuring and new regulations, and the stock prices of the companies involved declined.

Overall, this episode highlighted risks inherent of investing in state-owned enterprises (SOE); such risk is one reason why I have consistently favored Claymore/AlphaShares China Small Cap(HAO) over iShares FTSE/Xinhua China 25(FXI). The government can step in at any time and change the rules on an industry, something that has hit the other sectors before. However, with SOEs, the government can also change the management and the company’s assets and business lines.

Assuming investors opt for HAO over FXI to satiate their China exposure needs, the former is notably low on telecom exposure. Additionally, although HAO maintains some technology exposure at 12% of assets, I feel that a Chinese ETF should cover this fast-growing sector to a greater degree. With telecom restructuring in the rearview mirror, investors can focus on the future: smartphones.

Here’s what’s developing in the China smartphone market. Taiwanese chip maker Mediatek, a top 10 holding in iShares MSCI Taiwan(EWT), is targeting the low end of the consumer market in China with a new Android chipset. Whereas iPhone 4 will cost a Chinese consumer more than $1,000 dollars (The minimum wage in Shanghai, China’s richest city, comes to about $2,000 per year), the Mediatek chips will be in phones that cost one-tenth that amount, yet carry nearly all the same functions and applications.

Android is an open-source operating system, and China Mobile has worked on making the Android operating system more hospitable to China’s market, dubbing the operating system OPhone. Lenovo is already selling a device called the OPhone in China and Motorola(MOT) has also launched a phone using this software.

China Mobile hopes that these phones will lead to revenue from its apps store, where it takes 50% of sales. However, whether China’s users pay for content via the app store or download it elsewhere is an open question, which hardly makes this a slam dunk for China Mobile.

Not to be left in the dust, China Unicom is planning a uPhone operating system and a Unistore for applications.

The latest news is that Baidu(BIDU) is looking to push Google search off Chinese phones running Google’s operating system. Baidu has also teamed to integrate search capabilities with the Symbian operating system, used on many phones from Nokia and currently running on many smartphones in China.

CHIB has hefty, but balanced, exposure to the aforementioned firms. Number-one holding CHU has 5.7% of assets; BIDU accounts for 5.5%, Lenovo 5%, China Mobile 4.7% and ZTE, a maker of Android phones and network equipment, accounts for 3.6% of assets. Combined exposure comes to nearly 25% of assets.

In addition to these firms, CHIB also holds several Internet companies such as Sina(SINA) and Sohu(SOHU) that will benefit as smartphones make the Internet more accessible in China.

Unfortunately, this fund is thinly traded and unpopular with investors right now. China ETFs have performed poorly in the past six to nine months. The Shanghai index of A-shares peaked in Aug. 2009 and in Jan. 2010, HAO was the last of the broad China funds to peak. That performance has made China sector investing relatively unpopular, with a couple of exceptions.

In this situation, CHIB needs three things to happen. To begin with, the Chinese share market must pick up across the board. Secondly, the smart phone story needs to turn into profits for these companies. Finally, investors need to be attracted to the fund in order for an increase in trader volume.

Due to CHIB’s dangerously low volume, investors need to watch the NAV of the fund and use limit orders when buying. Also, realize that it may be difficult to pull out of the investment if liquidity doesn’t increase and you want to quickly exit a position. As of 11:30 this morning, volume was 0 shares.

The catch here is that if things go well for the underlying companies, liquidity won’t be a problem. If they go poorly, then the liquidity will remain a problem.

There are a couple of ways around this dilemma, though. Since several of these firms trade in the U.S., one way around the situation is to obtain exposure through individual holdings.

Another option is to buy Claymore/AlphaShares China Technology(CQQQ), which maintains volume about six times larger than CHIB’s (although it is still considered rather low, as compared with other funds). CQQQ has 9.7% in BIDU, 4.4% in Lenovo and 3.7% in ZTE. Since CHU and CHL are heavily traded shares on the NYSE, adding a small position in one or both of them could round out a position that would be similar to holding CHIB.

Also, since CQQQ is already the volume leader between these two ETFs, should both funds start performing well, investors may gravitate to CQQQ.

Depending on the amount of money to be invested, splitting it between several purchases could end up becoming more expensive than the cost of a single trade plus the 0.65% annual fee for CHIB or the 0.70% fee for CQQQ, so investors need to pay attention to their total cost.

ETFs have opened new markets to investors, but sometimes even solid indices with good performance or a unique portfolio fail to attract investor capital. I like the story here and CHIB is the one ETF best positioned for it, but ultimately it’s up to individual investors to decide how best to play it.

Disclaimer

This week, two of Berkshire Hathaway’s(BRK.A) largest holdings, Coca-Cola(KO) and Wells Fargo(WFC)), lived up to Warren Buffett’s expectations, releasing strong earnings reports that beat analyst expectations. The financier has held stock in both KO and WFC since the late 1980s.

Warren Buffett is both a diehard proponent and major beneficiary of the buy-and-hold investing strategy. Although not as exciting or fast paced as trading, Buffett’s ability to pick out and buy companies such as Coca-Cola, Wells Fargo, and American Express(AXP) on the cheap and allow them to increase in value over years and decades has been essential to the creation of his $40 billion fortune.

Buffett has explained in the past that his favorite time period for holding shares of a company is “forever.” Living up to this creed, when the investor purchased Burlington Northern Santa Fe Railroad in late 2009, he explained that the deal would provide Berkshire Hathaway(BRK.A) with stable returns for 100 years.

Although this technique has paid off for the Oracle of Omaha, critics of buy and hold often point to the fact that the famous financier took advantage of this method during a time that was very unlike the one we live in now. In today’s volatile global marketplace, opponents feel that investors can no longer buy shares of a company, sit back, and watch those shares grow in value.

To that critique I note that, with the introduction of ETFs, the buy-and-hold method has been able to evolve over the years to accommodate these changes to both the investing landscape and the retail investor mindset.

With the exception of leveraged ETFs, which are designed to be held for short periods of time by market professionals and day traders, the recent dramatic growth of the exchange traded fund industry was fueled in large part by funds designed to be bought and held for the long run, rather than traded in and out of quickly.

The growing field of active and pseudo active funds, such as First Trust’s line of AlphaDex funds and PowerShares’ Dynamic suite of products, employs an active manager or a “smart” indexing strategy to screen for outperforming companies and sectors, allowing investors to put their money into a fund and over time watch that money grow.

Others funds such as iShares Dow Jones Select Dividend Index Fund(DVY) seek to provide investors with a consistent yield that is paid out over the course of the year.

Additionally, a number of fund companies have taken to introducing target-date fixed income products structured to be held until a designated time period.

Although ETFs are generally designed for long-term investing, they also boast a number of specific traits that make them attractive for today’s well-educated and heavily involved investor.

Thanks to the internet and main stream media, investors are constantly bombarded with a staggering amount of information each day. With all of this data and news, staying on top of every day market action has become an easy task, and investors have become increasingly involved in the development of their personal investing portfolios.

Because ETFs trade throughout the day similar to stocks, investors have the ability to move quickly and freely in and out of holdings to avoid risky areas of the market. Additionally, investors can easily access a fund’s index from the respective fund provider’s Website. This way, it is easy to keep up to date with current positions and changes in their portfolio.

Although economic headwinds facing Europe and China have stirred fears in the hearts of investors around the world, I still believe we are in the midst of a global economic recovery. The path ahead will not be as smooth as we may like, but I’m confident that strength will prevail.

Given this outlook, like Buffett, I will continue to rely on traditional, albeit constantly evolving long-term, buy-and-hold investing strategies when designing portfolios to build wealth for both newsletter subscribers and money management clients.

Disclaimer

Welcome to Don Dion’s Daily ETF Winners and Losers. Be sure to stop by each day to get a feel of who’s winning and who’s losing when it comes to ETFs.

Winners

iShares MSCI Spain Index Fund(EWP) 4.9%
European markets are surging today after optimistic industrial order data in the euro zone provided a welcomed boost in investor confidence. EWP lead the single nation European ETFs higher, with other big gainers including iShares MSCI Italy Index Fund(EWI), iShares MSCI Germany Index Fund(EWG) and iShares MSCI Netherlands Investable Market Index Fund(EWN).

iShares MSCI South Africa Index Fund(EZA) 4.5%
After Wednesday’s steep market sell-off, investors are once again returning to the game, powering a broad selection of ETFs higher. EZA, which is structured to track the broad South African markets, is gaining with the help of a broad materials rally. Fellow hard asset-focused funds such as Market Vectors Coal(KOL), iShares MSCI Australia Index Fund(EWA) and Market Vectors Steel ETF(SLX) are also treading skyward.

iShares Dow Jones Transportation Average Index Fund(IYT) 4.1%
Strong earnings reports from UPS, Union Pacific(UNP) and Continental Airlines(CAL) are helping to power the transportation ETF higher today. As explained in this morning’s feature, I am cautiously optimistic that strong earnings numbers from these and other index constituents will pave the way for future IYT gains.

SPDR S&P Homebuilders ETF(XHB) 3.3%
The National Association of Realtors today announced that existing home sales dipped 5% in June. Despite this drop, homebuilders surged, driving XHB and the iShares Dow Jones U.S. Home Construction Index Fund(ITB) to impressive gains.

Real estate continues to be a tricky industry to play. Investors looking to try their luck should keep exposure small and maintain a close watch on positions.

Losers

iPath S&P 500 VIX Short Term Futures ETN(VXX) -5.5%
Investors have had the chance to sleep on Bernanke’s words and are returning once more to the market. As all three major indices trade near or above 2% in early afternoon trading, the VIX is taking it on the chin. In response, ETNs designed to track this fear-based index are tumbling hard.

iShares Barclays 20+ Year Treasury Bond Fund(TLT) -1.1%
While today’s broad market strength has been a boon for the global equities market, bonds and the U.S. dollar, as tracked by the PowerShares DB U.S. Dollar Index Bullish(UUP) , are taking hits.

Because they tend to perform opposite to the stock market, I urge investors to hold onto funds such as TLT in times of turmoil.

Disclaimer

Telecom bulls were treated Thursday to an analyst-beating earnings report from AT&T(T). In the report, AT&T pointed to continued strength in demand for wireless devices, in particular Apple’s(AAPL) iPhone. Following up its strong second-quarter numbers, AT&T raised its full-year outlook.

On Friday, investors will have their ears to the ground again as Verizon(VZ) reports its own second-quarter performance prior to the opening bell.

With the most recent wave of smartphones hitting markets over the past few days, lines have been drawn and sides picked — smartphone giant Apple and technology titan Google(GOOG) have paired up with AT&T and Verizon, respectively, as the iPhone 4 and Droid X viciously compete for consumer attention. In the midst of this battle, the broad telecommunications industry has been brought into the limelight.

The iPhone had the distinct advantage of hitting markets before Droid X, but the iPhone has been plagued by poorly resolved reception issues. Additionally, AT&T has been the iPhone’s exclusive cellphone carrier since 2007, effectively initiating the “team picking” we have seen manifest as these products emerge.

Meanwhile, the Droid — a joint effort of Verizon, Motorola(MOT) and Google — only minimally suffered from technical road bumps as the companies promptly addressed a rare screen malfunction. Curiously, despite the allure of past iPhones, Verizon has managed to steadily increase its share of the smartphone market, to 26% in May from 20% in late 2008. Over this same time frame, AT&T’s market share slipped to 40%, down from roughly 45% (although these statistics do not take the iPhone 4’s release into account).

As Verizon reported, its brand new product suffered a brief technical hiccup, albeit on a much smaller scale than AT&T’s featured competitor. Verizon Wireless and Motorola recently acknowledged that less than a tenth of 1% of their new Droid X smartphones have malfunctioning display units, resulting in what many express as a “flickering” of the LCD.

However, as opposed to denying the problem, only to later hand out phone accessories, the companies quickly resolved the technical issue, offering to completely replace the small fraction of defective units. With this fix coming into fast effect (the problem was identified immediately after sales began), the Droid X continues to enjoy high demand since its initial launch last Thursday.

In comparison, Apple took over three weeks to “fix” its reception issues; CEO Steve Jobs waited for a solid 22 days before offering customers a complementary case for the iPhone 4 to address shoddy antenna engineering.

Because of the relative rarity of the Droid’s problems and the near fanatical loyalty of Apple fans, I am confident that neither technological malfunction will make a lasting dent in either company’s stock or sales.

As I have noted in past articles, one of the best ways to play this burgeoning market is to distance oneself from the emotion of heated brand competition, instead opting for investment strategies that cover the broader telecom sector as a whole.

The iShares Dow Jones U.S Telecom Sector Index Fund (IYZ) and the Vanguard Telecom Services ETF (VOX) both provide ample exchange-traded fund exposure to the sector, while those with an inkling for mutual funds can look to the Fidelity Select Telecom Portfolio (FSTCX).

All three of the funds are heavily dependent on their top positions, dedicating a respective 65%, 74%, and 66% of their assets to their top 10 holdings.

When comparing the two ETFs, both funds’ top holdings tend to largely overlap. However, if investors do their homework, they will notice small variations in their weightings.

IYZ’s top five holdings include AT&T (15.2%), Verizon (11.9%), American Tower (AMT) (7%), Sprint Nextel (S) (5.6%), and Centurylink(CTL) (5.1%), and it trades with an expense ratio of 0.48%. Although the fund has incurred year-to-date losses of 0.72%, it has been gradually gaining momentum since a rebound in early 2009.

Meanwhile, VOX’s top 10 holdings are largely similar, varying only by weighting and order of holding percentage. The fund’s top portfolio components include Verizon (22.8%), AT&T (21.9%), American Tower (5.2%), Sprint (4.4%) and Crown Castle International (CCI) (4.3%). VOX has performed slightly poorer than IYZ on a year-to-date basis, incurring losses of 1.73%. The fund is also smaller, with total net assets at $220.3 million, as compared with IYZ’s $522.69 million. VOX trades with a notably lower 0.25% expense ratio.

Although more expensive, I consider IYZ, being larger and less dependent on the performance of AT&T and Verizon, to be the stronger of these two ETF products.

Relative to its ETF cousins, FSTCX has landed itself between the two funds, with a year-to-date net asset value loss of 1.09%. Telecom bulls wary of using ETFs would have no problem satisfying their thirst for wireless with this fund. Similar to IYZ and VOX, this mutual fund option boasts heavy exposure to firms including AT&T, Verizon, Sprint, and American Tower.

It is important to keep in mind, however, that this fund charges investors a 0.75% redemption fee on shares held less than 30 days.

Although these products may have suffered on a year-to-date level, it is nonetheless important to note an underlying positive trend since early 2009. Hopefully, the latest wave of smartphones may be the push that telecom funds need to reverse recent short-term trends and perform positively.

Disclaimer

I’m cautiously optimistic that gains are more likely in the near future for the iShares Dow Jones Transportation Average Index Fund(IYT) and other popular transportation products.

Since the start of May, IYT has been stuck in a downward trend, leaving some investors with reason for alarm. According to Dow Theory, a decline below February’s low would confirm the Dow’s decline below February’s low (at the start of July) and signal a resumption of the bear market.

The recent lag in IYT, however, can largely be attributed to weak performance from top holding FedEx(FDX), which represents 10% of the fund’s total portfolio.

Over the past three months, shares of the shipping goliath have fallen over 17%, causing it to carve out new 2010 lows. The recent dismal performance is in large part due to the company’s poor first-quarter earnings report and negative guidance.

FedEx continued to pull the transportation ETF to the downside Wednesday, as shares of FDX slipped 2.5%, but IYT fell only 1.6% and Claymore/Arca Airlines ETF(FAA) slid just 1.9%.

Still, FedEx’s poor second-quarter performance is not a bellwether for other major players in the transportation industry. According to a report from Barclay’s, the headwinds that face FedEx are not based on the global economy. Rather, FedEx’s poor quarterly earnings report was attributed to company-specific costs including the reinstatement of employee perks, including pension and medical benefits.

Fellow shipping giant UPS is scheduled to report its second-quarter earnings before today’s bell and it does not appear the firm is destined to deliver a FedEx-like disappointment. On the contrary, the company’s prospects appear promising. Earnings estimates for the previous quarter and the fiscal year have been consistently rising over the past three months.

A strong report from UPS would add to an already positive season for the transportation industry. In recent weeks, companies including CSX, Delta Airlines(DAL), and US Airways(LCC) have stepped up to the plate and announced an analyst beating performance. Delta’s numbers were particularly optimistic, with the firm turning out its best quarter in a decade.

I feel that strong earnings performance from these firms and others in the near future will be a far stronger driver for IYT in the near future than the weakness in FedEx.

Aside from UPS, Continental Airlines(CAL), and Union Pacific(UNP) are scheduled to report their quarterly results on Thursday. Southwest Airlines(LUV)  is scheduled to release its own numbers late next week. Optimistic reports from these firms should provide IYT with enough fuel to propel it higher.

The prospects for the broad transportation industry appear optimistic. There are, however, a number of options for investors to consider when looking for ways to play the industry. IYT provides investors with ample exposure to the companies responsible for moving consumers and goods from point A to point B. However for some, its heavy exposure to the rail industry may make it too conservative.

Investors looking for more pop may want to focus on a subsector transportation ETF such as Claymore/Arca Airlines ETF(FAA). It is important to keep in mind, however, that a concentrated product like FAA will be more volatile than IYT. Exposure to FAA and other subsector ETFs should be kept small and watched closely.

Investors wary of ETFs should turn to the Fidelity Select Transportation Fund(FSRFX).

With an active manager, this traditional mutual fund option will be able to adapt to shifting trends in the transportation industry. I’ve previously recommended it because the airlines have been performing better and FSRFX has greater exposure to airlines.

It also has far less in FedEx, less than 2% at the end of May according to Fidelity. FSRFX has made up for its higher fee with better performance, but there is a 1% short-term trading fee if investors hold the shares for fewer than 30 days.

Disclaimer

Welcome to Don Dion’s Daily ETF Winners and Losers. Be sure to stop by each day to get a feel of who’s winning and who’s losing when it comes to ETFs.

Winners

iShares MSCI Chile Investable Market Index Fund(ECH) 2.0%
Chile’s markets treading higher today, sending ECH to all-time highs. This fund has been roaring higher since bouncing off its 50-day moving average at the start of July.

Latin America remains an attractive region of the globe as Europe and Asia continue to face their own respective economic headwinds.

PowerShares DB Base Metals ETF(DBB) 1.1%
Base metals are scoring their second consecutive day of gains with copper leading the way. Investors looking for exposure to this red metal should check out iPath Dow Jones-UBS Copper Total Return Subindex ETN(JJC), which is up 1.6%.

Other base metal and materials funds heading higher include SPDR S&P Metals & Mining ETF(XME), Market Vectors Steel ETF(SLX) and Market Vectors Coal ETF(KOL).

Investors playing this industry should continue to keep a close watch on China. This nation represents a large portion of the world’s base material demand and will likely influence these commodities’ direction.

SPDR S&P Emerging Europe ETF(GUR) 0.2%
While developed Europe remains embattled in its own debt issues, the emerging region of the continent is managing to find some strength, pushing GUR higher. This fund appears to be heading higher on upward trajectory since hitting 2010 lows at the end of May.

GUR tracks a basket of companies in five Eastern European nations. However, Russia is the main driver of the fund, representing 61% of its portfolio.

Losers

iShares MSCI Spain Index Fund(EWP) -3.7%
As I explained in my comments on GUR, developed Europe continues to face headwinds thanks to debt issues facing Spain, Greece and other EU constituents.

EWP has spent plenty of time on the winners and losers list over the past few months indicating the volatile nature of the fund. Investors should avoid playing these troubled nations until clearer skies prevail.

SPDR Regional Banking ETF(KRE) -3.7%
The regional banking ETF is taking a big hit today as Obama signs Washington’s sweeping financial reform bill into law. KRE’s top holding, Fulton Financial(FULT), is down more than 10% today after failing to beat analyst expectations with its second-quarter earnings report.

iShares Dow Jones U.S. Medical Devices Index Fund(IHI) -3.2%
The medical devices industry is taking a heavy hit today, led lower by top holdings including Stryker(SYK) and Boston Scientific(BSX) which are down 9.0% and 3.5% respectively. Together, these two firms account for 7% and 5% of the fund respectively.

Top holding Medtronic(MDT), which represents a 13% position in IHI, is not holding up much better. It’s down 3.3%.

Disclaimer