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Don Dion's Weekly ETF Blog Wrap

Here is some of what Don Dion was blogging about this week on <I>RealMoney</I>.
Author:

NEW YORK (

TheStreet

) -- Don Dion posts his current insights on the stock, bond, commodity and currency markets in his

RealMoney

blog, anticipating which ETFs will be in play next. Among his blogs this week were the following, in which he wrote about emerging-market ETFs, the state of biotech ETFs, and China's huge investments in commodity funds.

Emerging-Market ETFs Show Resilience

Posted 02/08/2010 10:33 a.m. EST

While Europe and many emerging markets are generally in decline, some emerging-market ETFs are showing relative strength, such as the

Market Vectors Indonesia

(IDX) - Get Report

fund.

One of the best European country funds last Thursday and Friday was

iShares Switzerland

(EWL) - Get Report

, which lost 5.8%, the same as Market Vectors Indonesia. Volatile emerging markets such as

iShares Turkey

(TUR) - Get Report

fell 10.0%, while

iShares MSCI Emerging Markets

(EEM) - Get Report

lost 5.6%. The

iShares MSCI EMU Index

(EZU) - Get Report

fund fell 7.0% over the same period.

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

Portfolio composition also reiterates the strength in IDX. Despite 25% in financial services, 24% in materials and 15% in energy -- all sectors that underperformed globally -- IDX held up relatively well. Furthermore, those energy and materials sectors export to China, and worries over Chinese growth derailed funds such as

iShares Brazil

(EWZ) - Get Report

, but not Market Vectors Indonesia.

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

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

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

Besides IDX, other emerging-market ETFs that did well on Thursday and Friday were

iShares Malaysia

(EWM) - Get Report

, which was down 2.9% over two days,

Market Vectors Vietnam

(VNM) - Get Report

, which was down 2.1%, and

iShares Israel

(EIS) - Get Report

, which was down 3.4%.

iShares Israel has been climbing in long-term momentum, aided by its huge 22.4% allocation to

Teva Pharmaceuticals

(TEVA) - Get Report

, which is up 1.0% in 2010. iShares Malaysia does not have impressive momentum, while Market Vectors Vietnam is more than 20% below its October peak, making it the more speculative but potentially more rewarding play, should recent performance indicate a more long-term reversal of fortune.

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

Biotech ETFs Are Looking Healthy

Posted 02/08/2010 4:50 p.m. EST

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

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

There are three main biotech ETFs worth considering here, in my view:

SPDR S&P Biotech

(XBI) - Get Report

,

iShares Nasdaq Biotech

(IBB) - Get Report

and

First Trust NYSE Arca Biotech

TheStreet Recommends

(FBT) - Get Report

. All of the funds have adequate volume and assets, though the leader in both areas is IBB.

In portfolio terms, the three cover slightly different slices of the biotech market. IBB has assets weighted towards the largest companies in the industry, with

Amgen

(AMGN) - Get Report

in the top spot, at 10.2% of assets, followed by

Gilead

(GILD) - Get Report

at 8.1% and

Teva Pharmaceutical

(TEVA) - Get Report

at 7.9%.

FBT uses an equal-weight strategy across 20 holdings and has 5.9% in its largest holding,

Affymetrix

(AFFX)

, and 4.5% in

Celera

(CRA)

, the smallest holding.

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

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

Human Genome Sciences

(HGSI)

.

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

China Makes Huge Investments in Commodity Funds

Posted 02/12/2010 8:41 a.m. EST

"China" has been both the spoken and unspoken word in every conversation that investors have had about shipping, coal and raw materials (just to name a few), so the plan by China's central bank to raise its reserve requirement ratio will weigh heavily on many sectors of the market today. Everything from

Market Vectors Steel

(SLX) - Get Report

to

iShares FTSE/Xinhua China 25 Index

(FXI) - Get Report

could take a beating.

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

In a recent filing,

China Investment Corp.

(CIC)

, the nation's sovereign wealth fund, disclosed that it not only invested in

U.S. Oil

(USO) - Get Report

for the first time, but it was now the fourth-largest holder of the fund with 3.48% of outstanding units. (

Goldman Sachs

(GS) - Get Report

is currently the largest holder of USO shares, owning 5.3% of the fund.)

Another interesting disclosure was CIC's 1.45-million-share stake in State Street's

SPDR Gold

(GLD) - Get Report

. This investment amounts to 145,000 ounces of bullion.

As I mentioned in my earlier blog,

GLD is now the second-largest ETF (when measured by assets) in the market today.

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

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

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion owned iShares Israel, iShares Brazil.

Don Dion is president and founder of

Dion Money Management

, 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.