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 an alternative ag ETF play, what one ETF is doing to ward off the threat of hyperinflation in Japan, and growing investor interest in platinum.
Bumper Crops Could Dent an Agriculture ETF
Posted 03/31/2010 2:30 p.m. EDT
The Agriculture Department announced that expects 2010 to be another record year of production, triggering a selloff in grains trading. The latest report notes that stockpiles of beans are larger than expected and that farmers are intending on planting a record 78.1 million acres of soybeans this year.
The latest report could be caustic for investors in the
PowerShares DB Agriculture ETF
, which tracks a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities, such as soybeans, wheat and corn.
The report will probably not have then same impact, however, on the
Market Vectors Agribusiness ETF
, which tracks agribusiness firms such as
. While the fate of MOO is certainly tied to the market for produce such as soybeans, as farmers plan to plant record crops, they will actually need more of the services offered by MOO's underlying portfolio in the short term.
If filled warehouses and overproduction burn farmers at the end of this growing season, along with dropping soybeans prices, it is likely that they will trim costs in 2011 by selling Deere tractors and buying less of Mosaic's fertilizer. In the meantime, however, plans for increased production will likely continue to drive up these stocks.
Understanding the difference between two seemingly similar funds like MOO and DBA will be increasingly important in the months ahead. As the Obama administration readies to attack the issue of financial reform, the
Securities and Exchange Commission
and Commodity Futures Trading Commission have already begun
funds such as DBA, which accomplish their objectives through derivative contracts.
Previous efforts by the CFTC to institute position limits in commodities futures trading have already affected the way DBA tracks commodities. On Aug. 20 2009, the CFTC repealed a provision that had exempted funds such as DBA from certain position limits. In response to this change in regulation, DBA
to reduce exposure to individual commodities.
There no saying, however, what the impact of the latest regulatory effort will be on funds like DBA. So even if investors are bullish on agriculture, they should consider a fund that tracks producers -- like MOO -- until this regulatory storm blows over.
So we have two good reasons to choose MOO. First, demand for agribusiness should continue to rebound as farmers prepare for record crops. Second, investors looking to gain exposure to agriculture through an ETF should avoid derivative-based products like DBA until traders gain some clarity on the future of futures trading.
An ETF to Hedge Against Japanese Hyperinflation
Posted 03/30/2010 11:20 a.m. EDT
On April 1, ETF investors will have access to a new investment strategy for Japan when the
WisdomTree Japan Total Dividend Fund
begins hedging its yen exposure.
At a time when the
Securities and Exchange Commission
is increasing its scrutiny on ETFs that make use of derivatives, mainly because many ETFs allow investors to increase their risk, WisdomTree's new offering reminds investors that derivatives can also be used to reduce risk.
When investors buy an ETF that holds stocks priced in domestic currency, they are taking on equity market risk. They benefit if the price of those assets increases, and they lose if the price of those assets decreases. While many factors determine whether those assets rise or fall in price, the direct risk is the price.
When investors buy an ETF that holds stocks priced in foreign currency, they take on an additional risk. In addition to the risk of equity prices rising and falling, there is also the risk of the currency value rising or falling in relation to the investor's home currency. This opens up four possible scenarios, in which both equities and the currency rise, both fall, or there is a combination.
In the case of Japan, year to date,
iShares MSCI Japan
is up 7.9%, while
CurrencyShares Japanese Yen
is up 0.6%. In the past month, however, FXY is down 3.9% and EWJ is up 5.7%. Priced in yen, the MSCI Japan index gained 8.2% in the past month. As I
in a post yesterday, EWJ currently faces headwinds due to its currency exposure.
Starting April 1, DXJ will hold a portfolio of Japanese stocks but will offset the currency risk to Japanese yen by selling forward contracts. If DXJ had been using this strategy in the past month, it would have returned something closer to the MSCI Japan index, instead of its 4.4% return.
Currently, DXJ has a low three-month average daily trading volume of 18,000, but the new strategy could attract an influx of investors.
For investors who worry about currency devaluation in Japan in the long run but who expect Japanese stocks to rally, DXJ is the ETF to consider. Watch for improvements in liquidity, however, before you venture into this strategy.
The Platinum Standard
Posted 03/29/2010 04:59 p.m. EDT
America's first physically-backed platinum ETF, ETF Securities'
ETFS Physical Platinum ETF
(PPLT), is nearing half a billion dollars in assets, signaling demand for this scarce resource. With debt concerns plaguing countries around the globe, I continue to encourage investors to seek exposure to precious metals through the low-cost structure of physically backed precious-metal funds.
While derivative-based commodity ETFs face ongoing
pressure from regulatory agencies, bullion-backed precious-metal funds like PPLT and
SPDR Gold Shares
don't rely on derivatives trading to execute their strategies.
Rather than measuring the supply and demand for metals futures contracts, physically backed precious-metal ETFs give investors exposure to a stockpile of the commodity. To see a stack of the gold bars held by HSBC for GLD investors click
As of Friday, Mar. 26, PPLT had $494 million in assets under management. PPLT jumped more than 2% during trading today. The fund was launched along with the
ETFS Physical Palladium ETF
on Jan. 8. PALL has also struck a chord with ETF investors, and that ETF had grown to $245 million in assets as of Mar. 26.
GLD, the largest U.S.-listed physically backed gold ETF, was also the second-largest U.S. traded ETF, measured by assets, as of Feb. 28, 2010, according to data from the National Stock Exchange.
Despite economic recovery, both in the U.S. and abroad, GLD grew from $31.5 billion in assets at the end of February 2009 to nearly $39.5 billion in assets as of the end of February 2010.
The growth in PPLT and GLD reflects not only an increasing interest in precious metals, but also an increase in investors adding bullion-backed ETFs for long-term diversification. Out of the reach of government policy, physical metals hold enormous appeal for investors weary of currency manipulation and equity-market crisis.
PPLT should continue to see a boost from this demand in the short term, and investors should feel comfortable betting on this physically backed fund, even as other derivative-backed commodity ETFs face regulatory headwinds.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion was long MOO, PPLT.
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.