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Now What? ETF Investors Can Either Chase Performance or Exercise Discipline

NEW YORK ( TheStreet) -- In a "Then and Now" piece, The Wall Street Journal published a number of fascinating statistics. "Then" represented October of 2007, the last time that the Dow Jones Industrial Average notched nominal highs. "Now" represents March 2013, the first time that the price-weighted index ever closed at more than 14,250.

Household income has slipped 5.6% since October 2007. In reality, the "pinch" is more like a wallop because the median dollar values are not adjusted for inflation. Equally challenging for families is the 33% jump in the cost of education at public universities in the last 5 and a half years.

What about jobs? The Bureau of Labor Statistics broadest measure of unemployment is the U-6 data. It was 8.4% then, and it is 14.4% today. (Note: We might want to recognize that U-6 has gradually improved from 17% since late 2009; however, the trend toward 14.4% is hardly indicative of a robust recovery.)

One statistical comparison that goes a long way toward explaining the Dow's journey from 14,167 to 6600 and back is the rate on 12-month CDs. In October 2007, you could park your money in a CD for a year and earn a relatively risk-free return of 4.0%. Now, in March 2013, the same 12-month CD gets a paltry 0.3%.

As the president of a Registered Investment Adviser with the SEC, I regularly receive inquiries from risk-averse seniors who wonder how they might get 4%-5% today. The answer is, they must move up the risk ladder to some form of bond, loan or preferred vehicle ... and they may require some help in managing the downside risk associated with individual securities or diversified ETFs.

One of my core holdings for these income investors has been iShares Preferred (PFF). While I will not buy and hold this ETF for seniors, I do use it. Not only is the 6% annualized yield venerable, but the price appreciation has been beneficial for several years.

Of course, the biggest statistical "side-by-side" of them all, the one that explains why iShares 7-10 Year Treasury (IEF) only offers a distribution yield of 1.5%, is the expansion of the Federal Reserve's balance sheet. In 2007, the Fed held nearly $890 billion in its coffers; today, that value has skyrocketed to $3,100 billion, or $3.1 trillion.

In essence, the central bank of the U.S. has been buying hundreds upon hundreds of billions of dollars of U.S. debt obligations with electronically created money that did not exist previously. With poor yield prospects for investment-grade debt (e.g., CDs, Treasuries, agency bonds, etc.), and with homebuyers able to finance or refinance real estate at record low rates that are tethered to Treasury yields, money found its way back into stocks.
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