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 commented on three ETFs that could benefit from government infrastructure spending, how to profit from the shakeout from the health care vote, and an ETF that was crippled by contango.
Three ETFs for Government Infrastructure Spending
Posted 03/18/2010 4:06 p.m. EDT
President Obama continues to pledge funds toward infrastructure projects, signing a $17.6 billion jobs bill this morning that subsidizes state and local construction bonds and allocates $19.5 billion for a highway construction program. Even before setting foot into office, Obama outlined his plan to make the "single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s," so this trend in spending is certainly worth betting on.
These following three ETFs offer exposure to government-sponsored infrastructure projects.
iShares S&P Global Infrastructure Index
While there still isn't a broad U.S. infrastructure ETF, IGF devotes 22.98% of its underlying portfolio to U.S.-based firms. IGF's underlying index includes companies involved in utilities, energy and transportation infrastructure, airport services, highways and marine ports. Top components include
> > Bull or Bear? Vote in Our Poll
PowerShares Dynamic Networking ETF
Earlier this week the Federal Communications Commission released its "
broadband plan ," designed to bring broadband Internet access to nine out of 10 Americans. The American Recovery and Reinvestment Act has pledged $7.2 billion toward high-speed Internet expansion, prompting the drafting of the comprehensive national strategy.
PXQ tracks networking companies that are screened for various investment criteria such as risk and timeliness. Top PXQ components include
PowerShares Water Resources ETF
In a post yesterday, I mentioned how
increased water allocations in California would strain an increasingly insufficient infrastructure. Obama administration officials are working on solutions to improve or replace existing infrastructure.
Across the country firms are working to protect our clean water supply. Many of the companies represented in PHO's portfolio -- such as
-- already have lucrative government partnerships. As Obama moves to increase infrastructure spending, contracts should continue to increase.
While health care reform and financial reform loom large on the federal agenda, unemployment remains a top issue for many Americans. Job creation through infrastructure projects -- a theme that Obama has emphasized since his campaign -- should continue to boost funds like PHO, PXQ and IGF in the months ahead.
ETFs for the Health Care Vote
Posted 03/18/2010 1:20 p.m. EDT
ETF investors can cash in no matter how the health care vote goes. No matter which side of the political fence you're on, health care subsector ETFs can help you bet on the president's bill.
Convinced that health care reform will pass? Investors looking to bet that the bill will pass can position themselves with
iShares' Dow Jones U.S. Pharmaceuticals ETF
. Packed with drug companies ready to spend millions on pro-reform advertising, IHE should benefit from passage. Top IHE holdings include
Johnson & Johnson
Another upside to owning IHE -- it probably won't suffer much if the bill fails.
Looking for a health care ETF that should prosper either way? The best-performing health care sector has been biotechnology, pushed higher by mergers and successful drug trials.
First Trust NYSE Biotechnology
has led the pack with a nearly 30% rally, and the sector could continue to lead health care no matter how the reform vote goes.
Looking to bet against the passage of health care reform? The
iShares Dow Jones U.S. Healthcare Providers
is chock-full of insurance and health management companies that could see a surge if the bill is killed. If health care reform is not passed, top IHF holdings such as
will have the weight of reform lifted off of them.
The medical device companies tracked by the
iShares Dow Jones U.S. Medical Devices ETF
could also rally from relief if the health care bill is not passed. Firms like
Thermo Fisher Scientific
could face pricing curbs if the bill passes.
Don't forget: America is aging. While there are many unknowns in our economic future, we do know one thing for sure: Aging baby boomers will create a bubble in our health care system, driving up demand for services. Over the long haul, health care companies will benefit from this increased demand, so sector weakness is a good opportunity to put on a long-term position.
Volatility ETN Crushed by Contango
Posted 03/16/2010 08:11 a.m. EDT
iPath S&P 500 VIX Short-Term Futures ETN
is so far off track that not even its issuer knows if it's worth saving. Investors should completely avoid this ETN, which has been crippled by contango.
On March 8,
, creator of the iPath line of exchange traded notes, alerted investors that the closing indicative value of VXX fell below $25.00 on March 5, 2010. The fine print of the ETN's prospectus states that "if the closing indicative value of the Notes is below $25.00 on any business day, Barclays Bank PLC has the right (but not the obligation) to initiate a 1 for 4 reverse split of the Notes."
Barclays' March 8 press release stated that even though VXX's indicative value was below $25, the bank is not "currently planning" to initiate a reverse split. The issuer did state, however, that it would be kind enough to alert investors to a future reverse split through another press release. VXX closed last night at $23.90. Barclays is not budging ... yet.
So what's the danger in this seemingly innocuous press release? This little note to investors should be a giant red flag. It should draw investors' attention to this fund's inability to track its underlying objective. VXX, which was designed to let investors bet on an increase in market volatility, is a case of false advertising.
CBOE Volatility Index
(VIX) offers exposure to a daily rolling long position in the first- and second-month VIX futures contracts. At the height of the financial crisis, the VIX spiked above 80 in November of 2008. Looking to take advantage of increased interest in market volatility, Barclays launched VXX in January 2009.
Since then, the VIX has dropped approximately 55% while VXX has dropped 75%.
Now that doesn't look like a good way to track volatility.
What's crushing VXX? Investors familiar with the
drama in the
United States Natural Gas
will not be surprised. The slope of the VIX curve is extremely steep, and front-month futures have been trading at a premium to spot prices. Contango is crushing this volatility ETN, but you don't have to be an expert on commodities or futures to read the writing on this wall.
Ostensibly, VXX is a way to bet on increasing market volatility (VIX). Due to its structure, VXX has had a dramatically different track record than its underlying value (VIX).
Barclays has a system in place that allows the firm to execute a reverse split in VXX if the fund drops below a certain level ($25). Barclays' March 8 press release admits that the firm doesn't know yet how it's going to deal with this dramatic divergence.
You want your fund's issuer to have a plan. You want an ETF/ETN to track its underlying objective. Barclays doesn't have a plan (yet), and this fund is off course.
It's never good to hear a fund manager admit that a fund has breached a certain threshold and then hear the same fund manager express uncertainty about how the situation will be handled.
ETF investors shouldn't wait for Barclays' next press release to find out what's happening with VXX. They should avoid this fund altogether until it gets back on track.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion was long IHF, IHE, IHI.
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.