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 gold ETFs, consumer staples and investing in Japan.
Is Your Gold ETF Safe? Part 1
5/17/2010 12:14 p.m. EDT
ETFs have become an increasingly popular way to gain exposure to gold, helping to transform this precious metal into an asset class in its own right. As more and more investors allocate assets to ETFs such as
SPDR Gold Shares
iShares Comex Gold
, isn't it time to take a look at how safe these funds are?
In Part 1 of this two-part blog, we'll take a look at the risks associated with physically backed gold ETFs. Part 2 will explore potential dangers in trading other gold ETFs available in the market today.
Physically backed ETFs, which essentially offer investors exposure to a stockpile of physical metal, are the best-known of the bunch. SPDR Gold, the largest U.S.-listed physically-backed gold fund, also has the distinction of being the second-largest U.S. ETF. With over $48 billion in assets as of May 14, GLD is second only to the
SPDR S&P 500 ETF
-- an index fund that has a more-than-11-year head start.
SPDR Gold, launched in 2004, tracks a physical stockpile of gold held for the fund in the form of allocated 400-ounce London Good Delivery Bars in the London vaults of HSBC Bank USA. Investors can visit the fund's
to see pictures of gold bars and view FAQs.
According to the fund's site, "agreements among the Trustee, Bank of New York and the Custodian, HSBC USA NA allow for the Trustees to visit and inspect the Trust's holdings of gold held by the custodian twice a year. In addition, The Trust's independent auditors may audit the Gold holdings in the vault as part of their audit of the Financial Statements of the Trust."
While "allow" and "require" are two very different words, investors should feel secure in allocating assets to this large, well-monitored fund. GLD's Web site allows investors to track the "gold bar list" of assets held for the fund, and the gold's central location may be comforting to some investors. The site also points out that the gold held for the fund is insured.
GLD is the largest physically backed gold fund trading in the U.S. today, but it isn't the only one. iShares Comex Gold and the newer
ETFS Physical Swiss Gold Shares
are also notable for their size and popularity with investors. IAU has $3.2 billion in assets, and SGOL has $419 million.
IAU, launched in 2005, offers exposure to physical gold held by custodians for the trust in approved facilities in the New York City area, London, Montreal or Toronto. As with GLD, investors in IAU can take comfort in knowing that their investments are backed by physical gold, not gold derivatives.
While SGOL may be the newest physically-backed gold fund listed in the U.S. marketplace, ETF Securities -- the fund's issuer -- has a long history in the world of gold ETFs. The chairman of ETF Securities Ltd., Graham Tuckwell, developed the world's first Gold ETF in Australia and London in 2003.
ETF Securities, perhaps knowing SGOL would be competing with two established physically backed gold products in the U.S., has tried to differentiate its product through location and auditing procedures. The physical gold held for the fund is kept in Switzerland, allowing for gold investors to diversify geographically. ETF Securities also has a third-party auditor inspect the vault holding SGOL's gold twice a year, a safeguard not required by managers of GLD and IAU.
While IAU, GLD and SGOL are all slightly different, all three fund managers go to lengths to reassure investors that the funds track physical gold that is held safely and securely. iShares,
and ETF Securities all offer extensive information about the funds on their respective Web sites.
Since physically backed gold funds are taxed like collectibles, these ETFs are better used in conjunction with a long-term portfolio strategy.
IAU, GLD and SGOL are some of the safest and easiest ways to gain exposure to gold today, but not all ETFs are created equal. Check back soon for the second part of this article to learn about the risks -- both trading and regulatory risks -- facing other types of gold investments.
At the time of publication, Dion Money Management owned IAU.
Safety in Consumer Staples
5/17/2010 3:35 p.m. EDT
Consumer-staples stocks like
Procter & Gamble
grab the spotlight on days like today, when broader market uncertainty drives investors to defensive positions.
And while these household names may not be the most glamorous in terms of investment ideas, there's a good argument as to why you should keep the strongest of the bunch stocked in your long-term portfolio.
If you want to look to ETFs for defensive positions, funds like
SPDR Gold Shares
iShares Barclays TIPs
are popular options. However, while gold and inflation-protection securities are both solid, long-term portfolio holdings, investors shouldn't forget about defensive equity options, which can be a good option. Consumer-staples firms like Proctor & Gamble are not just good defensive stocks, they are also mature firms with competitive advantages.
One of my favorite consumer-staples picks is the
iShares Dow Jones US Consumer Goods
, a liquid ETF with a reasonable expense ratio of 0.48%. In addition to Proctor & Gamble, IYK's top five holdings include
IYK isn't the only option in the ETF universe, but this fund has one distinct advantage over rivals like
Consumer Staples Select Sector SPDR ETF
Consumer Staples ETF
. Unlike XLP and VDC, IYK does not include non-discretionary retailers in its underlying portfolio. You won't find
Readers of this blog will know that I'm certainly not anti-retailer. I've been a fan of
SPDR S&P Retail ETF
, which has a great cross-section of retail names. I like keeping retail separate from consumer staples in my portfolio, however, and gain exposure to the consumer staples names through a non-cyclical fund like IYK.
It's important to have defensive positions in a well-rounded long-term portfolio, even if you're bullish for the short term. On days like today, when uncertainty reigns, it's good to have a fund like IYK stashed in your portfolio's pantry.
At the time of publication, Dion Money Management was long IYK.
Pick Up a Piece of Japan
5/21/2010 8:29 a.m. EDT
Corrects holding information show Dion Money Management is long EWJ.
Earlier this week, I gave investors an assessment of two Asia-Pacific ETFs that could be used for international exposure as an alternative to funds from China or Europe. Those were
iShares MSCI Korea Index
iShares MSCI Singapore Index
I think another strong bet in the region is Japan, and investors can access it through the
iShares MSCI Japan Index Fund
Japan is in a position to benefit from strong demand for its exports from fast-growing countries in Asia. Its largest export destination is China, which took that title from the United States last year.
Japan also sees strong demand for exports from countries like India and Vietnam, so it is not entirely reliant on a Chinese economy that many see as due for an economic slowdown.
Japan also remains a strong exporter to the U.S., so it will be well positioned to benefit from a continued recovery here. As
, I think the current round of selling in the world markets is overdone.
The recent correction is based more on fear than any sort of realistic projection that the global economic recovery will halt in its tracks and reverse.
Japan is likely to see less demand for its exports from Europe going forward, though, as the euro has weakened by about 15% against the yen so far this year.
Increasing demand from Asia should help compensate for this loss, however. Asian destinations receive 55% of Japan's exports as opposed to 50% a year ago.
The yen's performance against the dollar this year also indicates that there is a great deal of confidence in the currency in times of crisis. This suggests that although Japan has a hefty fiscal deficit, its government debt problems do not seem to concern the markets as much as the fiscal problems in Europe.
In the latest bout of deterioration in the value of the euro against the dollar, the yen actually gained ground against the dollar, showing that in certain situations, it even outweighs the dollar as a currency that commands confidence.
These means that EWJ is unlikely to be eroded on currency concerns, as a sharp or prolonged slide in the value of the yen against the dollar is not expected at this time. Japan also released GDP figures recently that confirm its growth is on track. First-quarter GDP increased by 4.9% at an annualized pace, compared with 3.2% for the U.S. and 0.8% for the European Union.
Japan is not relying entirely on exports either, as its own domestic consumers are starting to spend more. Household spending increased at an annualized rate of 1.3% in the first quarter.
Year to date, EWJ has fallen off by 0.9%, while the
is down 3.1%.
As much of the market is panicking, I would advise investors to take this opportunity to rebalance the international aspects of a diversified portfolio. Investors should do so by carefully choosing the strongest national economies and picking up funds like EWJ when others are caught up in the selling hysteria.
At the time of publication, Dion Money Management was long EWJ.
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.