Here's a look at some of what Don Dion blogged about on RealMoney this week. Topics include a new mutual fund for distressed debt exposure, a Canadian natural gas fund and new FINRA margin rules for leveraged ETFs.
New Mutual Fund Offers Distressed Debt Exposure
Posted 9/4/2009, 1:42 p.m. EDT
On Aug. 31, Martin Whitman's
Third Avenue Management
announced the launch of a new fund called the
Third Avenue Focused Credit Fund
. It has a $2,500 minimum investment and an annual operating fee of 1.71%. The fund, Third Avenue's first new offering in almost eight years, is one to watch as it provides investors with significant exposure to distressed debt.
Distressed debt is loosely defined as the debt of companies that have filed for bankruptcy or are likely to file for bankruptcy.
Traditionally the market for distressed debt has been largely dominated by the hedge fund industry. However, with Third Avenue's newest offering, investors have the same opportunity to expose themselves to the risky holdings in mutual fund form. Interestingly, the fact that this instrument is a mutual fund rather than a hedge fund also means investors are given a higher level of protection and complete liquidity.
The strategy behind TFCVX harkens back to Whitman's investment style, which involves looking for undervalued assets. The ratings issued to the fund's underlying holdings span the spectrum from AAA to unrated. Third Avenue Focused Credit invests in below-investment-grade credits including junk bonds, bank loans and convertible bonds or preferred stock in hopes of finding big returns.
GAS: UNG's Canadian Cousin
Posted 9/2/2009, 6:15 a.m. EDT
I've warned time and time again that the
U.S. Natural Gas
is an awful way to gain exposure to the commodity and, as I predicted, the fund has been spiraling ever since. At last check, the fund is now trading at a nearly 18% premium.
To save investors from this dangerous instrument, I have suggested a number of other options that provide the desired exposure to the commodity without all the risk.
First Trust ISE-Revere Natural Gas Index Fund
tracks the performance of companies that are heavily exposed to the sector and
JPMorgan Alerian MLP Index ETN
plays the companies that transport and store natural gas. I feel that these options are safer than funds that track actual natural gas futures contracts.
While UNG may be the poster child for natural gas ETFs in the U.S.,
Canada's Claymore Natural Gas Commodity ETF
uses an identical strategy for investors to the north of us. However, the fund's 1.19% premium is significantly smaller than the bloated UNG's.
GAS currently charges a 0.80% fee and high trading volume of over 800,000. Interestingly, GAS's volume has been up since mid-August. This is right around the time that UNG suspended new share issuance. Comparing the two funds' one-year charts tells the same chilling story. Both funds are down over 70% for a one year period
Investors should be aware that by using the same strategy, GAS is highly susceptible to the issues that UNG has faced. Although the Canadian government has not intervened with GAS yet, this does not mean that it is a safe investment. As GAS continues to attract volume, it will be interesting to see if the fund will gain the infamy of its U.S. cousin.
FINRA Lays Down Law for Leveraged Funds
Posted 9/1/2009, 5:11 p.m. EDT
Although it enjoyed double-digit gains today, leveraged funds such as
Direxion 3X Daily Financials Bear
could see reduced trading after new margin rules take effect in December.
FINRA sent out a "special alert" today about increased margin requirements for leveraged ETFs. This could serve as an additional blow to the popular "ultra-long" and "ultra-short" strategies that have grown tremendously in popularity in 2009. New margin requirements will stipulate that investors have margin "commensurate" with the funds' strategies.
The most recent blow to leveraged funds comes after a summer of trouble for issuers like Direxion, Rydex and ProShares. In June, FINRA released a statement to caution brokers about the funds. The September release recalls that: "FINRA recently reminded firms of their sales practice obligations with respect to leveraged and inverse ETFs, including the risks caused by the fact that most of these funds are designed to achieve their stated performance on a daily basis."
New regulations are a positive step to distinguish traditional and nontraditional ETF products. ETFs, traditionally known for their transparency and low cost, have taken new forms as the industry grows. Leveraged, futures-based commodity and currency funds differ from traditional ETFs in their structure. Regulatory requirements, like the most recent from FINRA, will help investors to determine suitability. For a more detailed look at the new rules,
from the free site.
Investors weren't looking to long-term Treasury bonds today for safety --
iShares Barclays 20+ Year Treasury
fell -- instead finding it in
PowerShares DB U.S. Dollar Bullish Fund
, which was up 0.6%, and an assortment of inverse ETFs.
Commodities fell along with equities today, with oil and natural gas down again.
U.S. Natural Gas
fell less than its net assets and now sports a premium approaching 18%.
Emerging markets were a mixed bag.
managed a 0.3% gain on the day, while
Market Vectors Vietnam
Market Vectors Indonesia
managed to beat the S&P 500 with losses of 1.8% and 1.7%, respectively.
Recent highfliers such as
and energy-related countries such as
Market Vectors Russia
suffered larger losses, as did
, possibly due to the banking-related declines in the market. Sweden is highly tied to the deeply indebted Baltic states.
At the time of publication, Dion was long EWD and TUR.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.