NEW YORK (
) -- Don Dion posts his current insights on the stock, bond, commodity and currency markets in his
blog, anticipating which ETFs will be in play next.
In the following three blogs from the past week Don offered cautionary advice on a new closed-end ETF, explained why gold-backed ETFs are good to hold for the long term, and advised investors to keep a certain bellwether agriculture ETF in their long-term holdings.
Wait for This Closed-End ETF to Prove Itself
Posted 02/19/2009 12:09 p.m. EST
Today, PowerShares launched the first exchange-traded fund of closed-end funds (CEFs), the
PowerShares CEF Income Composite Portfolio ETF
On paper, PCEF looks like an innovative, tax-efficient income option for investors looking to gain exposure to a broad spectrum of CEFs. Where the rubber hits the road, however, this fund may not have the goods to appeal to ETF investors.
Since CEF's have "pass-through" tax structures, like open-end mutual funds, they do not pay taxes at the fund level on amounts distributed to investors. The taxation is said to "pass through" to the shareholders.
Shareholders of PCEF will receive this income and tax benefit in the form of dividends. PCEF consists of CEFs across three income categories: taxable investment-grade fixed-income, taxable high-yield fixed-income and equity option writing (selling).
PCEF's methodology is also designed to screen and weight funds according to their discount to NAV. Funds trading at a discount have a higher potential for yield.
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The top five holdings in PCEF are currently the
Eaton Vance Limited Duration Income Fund
NFJ Dividend & Premium Strategy Fund
AllianceBernstein Income Fund
Eaton Vance Tax-Managed Diversified Equity Income Fund
BlackRock Global Opportunities Equity Trust
Sounds good, right?
The problems arise, however, when you examine PCEF in light of the three characteristics of ETFs listed above.
Fees: Since PCEF is a fund of funds, investors have to pay both the ETF expense ratio (0.50%) as well as "acquired fund fees and expenses" (1.31%) due to the underlying CEFs. So, rather than buying a low-cost portfolio, investors have to choke down total annual operating expenses of 1.81% for PCEF.
Transparency: While a list of underlying components is readily available on the PowerShares Web site, this is just one level of transparency. Since PCEF is a fund of funds, and the underlying CEF's are actively managed, ETF investors can't see all the way to the bottom of the well. PCEF's performance is dictated not just by how well the ETF itself tracks its net asset value but by the fluctuations in NAV of the underlying components. This adds an additional level of complexity.
Liquidity: This measure of success is yet to be determined, but prospective investors should pay close attention.
Since fund-of-fund ETFs rack up the fees, many of the existing funds that attempt this strategy have failed to gain traction with investors. PowerShares, in fact, has three fund-of-fund ETFs already: the
PowerShares Autonomic Balanced Growth NFA Global Asset Portfolio
PowerShares Autonomic Balanced NFA Global Asset Portfolio
PowerShares Autonomic Growth NFA Global Asset Portfolio
All three funds, which are "ETFs of ETFs," suffer from anemic daily trading volume and erratic trading.
Since PowerShares is the first mover in the "ETF of CEF" space, PCEF has the potential to attract more volume than its PowerShares fund-of-fund predecessors.
Income ETFs have been gaining traction with investors as the baby boomer generation ages and more long-term investors enter the ETF space. PCEF could be a good pick for a long-term investor looking for income.
Before you dive into PCEF, however, wait to see if anyone else is hovering around the pool. As of 11:30 a.m. today, not a single share of PCEF had changed hands. PCEF must prove itself before becoming a suitable investment. This fund is one to watch from the sidelines.
Gold ETF Holders Should Ignore the Frenzy
Posted 02/18/2010 11:45 a.m. EST
Investors who have purchased bullion-backed funds -- such as
SPDR Gold Shares
iShares Comex Gold
ETFS Gold Trust ETF
-- for the right reasons will have to sit on their hands during days like today.
News that the International Monetary Fund will start selling gold on the open market (as part of an already-announced plan) rocked futures earlier this morning, but GLD moved higher after the open as the broader market rallied.
These kinds of mixed messages can trigger emotional responses in ETF investors, and gold-backed ETF holders can end up selling the right investment for the wrong reasons.
What are the right reasons to buy a bullion-backed gold ETF? Adding physical gold to your investment mix helps to protect your portfolio against panic. Whether the threat of the day is inflation, deflation or Armageddon, physical gold is a solid investment for the long term.
The very characteristics that make GLD an easy, efficient way to access gold, however, are the same characteristics that cause investors to buy and sell these gold-backed funds at the wrong times.
While adding physical gold to your portfolio is a good move for the long term, trying to time your purchase of the asset is a nearly impossible task. As was evident this morning, gold prices are notoriously difficult to predict, and any purchase should be made with an eye toward the long term.
This would be an easy rule to follow if you were buying gold bars to bury under the doghouse for a rainy day. Buying the gold is a major investment, digging the hole takes time, and once Fido is moved back in, you'll be hesitant to unearth your investment at the slightest movement in the gold market.
Funds such as GLD, even though they offer exposure to physical gold, are, in some ways, a trickier proposition. At $109 a share, GLD is far more affordable than gold bars, and you'll save yourself a lot of trouble about reseeding the lawn.
On the flip side, however, easy access to GLD shares throughout the trading day tends to spark an emotional response to market stimuli. Anyone with a computer can sit and watch GLD move tick by tick, and when the market is volatile, it's easy to forget that your purchase was a long-term investment.
The IMF is selling gold? Sell! Soros' biggest position is GLD? Buy!
Needless to say, this approach can poison your portfolio over time. GLD is taxed like collectibles (baseball cards, etc.) -- it is subject to rates of up to 25%. Not something you want to be buying and selling incessantly.
Gold-backed ETFs are good long-term portfolio additions, and if you don't already have exposure to physical gold, it is worth checking out one of these funds.
On volatile days like today, just remember to sit back on your hands and watch the Olympics.
Deere Gives Agriculture ETF an Added Boost
Posted 02/17/2010 8:50 a.m. EST
, a top component of the
Market Vectors Agribusiness ETF
and a bellwether of the agriculture industry, reported a 19% jump in quarterly earnings, surprising analysts and confirming the strength of the sector.
for adding MOO to your portfolio because of the positive news from the agriculture sector. Yara's bid for
helped to lift MOO components such as
Today's "surprise" report from Deere should continue to push MOO higher during the trading day today.
Rather than making MOO a short-time trade, however, I still recommend adding this well-balanced ETF to a diversified portfolio for the long term.
At the time of publication, Dion owned iShares Comex Gold, Deere and Market Vectors Agribusiness ETF.
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.