Don Dion's Weekly ETF Blog Wrap

Find out what Don Dion was blogging about this past week on <I>RealMoney</I>.
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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.

Here are three of his blogs from the past week.

Reacting to Jobs

Published 6/04/2010 10:35 a.m. EDT

Today's jobs data and the reaction of the trading public are disappointing but not a surprise. In my blog yesterday, "

Hold Tight and Hang On," I mentioned that market movement would hinge on economic data and that investors would likely see a lot of volatility in the short term. Over the course of the week, I have written a number of blogs talking about how to use ETFs to reduce portfolio volatility ("

Use ETFs to Avoid Volatility" and "

Coping With Volatility").

European currency drama, oil spill worries and post-traumatic market crash syndrome have all got traders in an emotional state. With the gloomy headlines we've been seeing this week, it's no surprise that investors are reacting to the jobs number with such gusto.

I encourage you to take a step back and focus on the bigger picture. Jobs data are just one piece of the puzzle, a piece that hasn't been instrumental in the strides that the U.S. market has taken since the 2008 meltdown. The recovery so far has been led by companies that got lean fast and increased productivity. That's another positive piece of news that came out yesterday -- productivity is up.

Rather than getting bullish or defensive today -- we have a weekend ahead where things could change fast -- I'd recommend that you use today to find balance. Overweight in equities? Pick up longer-term defensive positions such as the physically-backed

SPDR Gold Shares

(GLD) - Get Report

or

iShares COMEX Gold Trust

(IAU) - Get Report

. As I

mentioned earlier, U.S. inflation will become a bigger theme later this month (as the

Fed

meeting approaches), so picking up shares of

iShares Barclays TIPS Bond

(TIP) - Get Report

now could help to give you a leg up on inflation fears down the road.

The economy has been improving, but people aren't hiring. How can you reconcile these two factors? Consider the fact that small business, which accounts for much of the job market, has been hit by a wave of new health care costs. The cost of hiring people and employing them keeps growing.

In the meantime, as productivity numbers show, businesses have been leaner and meaner than ever. Instead of hiring full-time employees, contract workers are getting picked up along with part-time employees. One play that I like on this theme is the

First Trust Dow Jones Internet Index

(FDN) - Get Report

, which includes

Salesforce.com

(CRM) - Get Report

and other Internet-based companies.

Rather than hiring a marketing department, small businesses are turning to solutions such as Salesforce.com to bulk up marketing without bulking up hiring costs. I think that this trend will continue until the recovery is really roaring. Many of the tasks that used to require additional staff can now be achieved through online firms. I'm bullish on FDN in the months ahead.

While all investors should be looking to achieve balance, short-term investors might be looking for a more aggressive play on the jobs trend. Either way, ETFs are there for you, providing exposure while mitigating risk.

At the time of publication, Dion Money Management was long IAU and TIP.

The Mr. X Files

Published 6/03/2010 3:50 p.m. EDT

As I was putting together data for my blog on the

SPDR Gold Shares ETF

(GLD) - Get Report

earlier, a truly disturbing portfolio crossed my desk and commanded my attention. I had just started to feel confident that all of the information out there, warning investors about leveraged ETFs, was beginning to sink in. I guess I was wrong.

In an effort to promote investor education and portfolio diversification, my firm offers complimentary asset-management reviews. This has been a great way for me to get a feel for how investors are thinking and what the latest trends are in investing. Sometimes, I see some pretty strange things.

Today I reviewed the portfolio of an older gentleman, who I will call "Mr. X". He owns

exclusively

leveraged ETFs in an account that he hopes to use to generate income. I imagine most investors subscribed to

RealMoney

are already feeling woozy at the mere thought.

Like many investors, Mr. X reached retirement and took over the reins of his portfolio to keep busy. During the 2008 meltdown, Mr. X was slow to believe in the bear market and ended up hemorrhaging savings. Also slow to react to the economic recovery, Mr. X has now poured funds into leveraged ETFs in an attempt to make up quickly for lost time.

This is the wrong way to approach the leveraged ETF industry -- or any type of investing, for that matter. Leveraged ETFs, like

Direxion's Daily Financial Bull 3X

(FAS) - Get Report

, or the

ProShares UltraShort S&P 500 ETF

(SDS) - Get Report

are designed for sophisticated investors making short-term trades. In some portfolio strategies, they have been very effective. Unfortunately, many investors, like Mr. X, use leveraged ETFs to gamble on market movement, hoping to double or triple returns.

As

RealMoney

investors know, most leveraged ETFs have daily tracking strategies, so compounding error can cause serious portfolio damage over time, especially in volatile markets. Frustrated that funds like

Direxion Daily Small Cap Bear

(TZA) - Get Report

didn't appear to be tracking their objectives over longer periods, Mr. X finally realized that things were getting out of hand.

I'm sure that many of you know investors like Mr. X, or know of people who have felt "duped" by complex investments they don't understand. I'm here to tell you that ETF products will become even more complex, not less, and that doubling down on market movements isn't the only way to make money at a decent pace.

Owning five different leveraged ETF funds certainly doesn't make your portfolio diversified, safe or well balanced. The best way to build a portfolio is by starting at the core, with equity funds like the

SPDR S&P 500 ETF

(SPY) - Get Report

, long-term commodity holdings like GLD, fixed-income funds like

iShares Barclays TIPs

(TIP) - Get Report

and income-generating picks like the

iShares Dow Jones Select Dividend ETF

(DVY) - Get Report

.

Then, if you're looking to target specific market themes, pick highly liquid sector or theme-specific funds. By picking funds with

high trading volume, you'll make it easier to enter and exit positions and to own funds that closely track their objectives.

Themes I've recently been tracking in my

ETF Action portfolio include gold miners, Internet investing and high-yield bonds. By using liquid funds like

Market Vectors Gold Miners

(GDX) - Get Report

, the

First Trust Dow Jones Internet Index ETF

(FDN) - Get Report

and the

iShares iBoxx High Yield ETF

(HYG) - Get Report

you can make very specific investments without having to stock pick.

Mr. X has me very worried that there are still many investors out there who think that there's an easy way out. There isn't. While some people get incredibly lucky, well rounded portfolios and cool heads prevail.

The modern marketplace pits expert traders and market makers at firms like

Goldman Sachs

(GS) - Get Report

against everyday investors trying to get by. While some leveraged ETFs are appropriate in the context of some trading strategies, you're better off sticking with a good mix of traditionally indexed, liquid ETFs.

Don't get caught in the Mr. X trap. If a strategy seems too good to be true, it probably is.

At the time of publication, Dion Money Management was long TIP, DVY, GDX, FDN and HYG.

Gold ETF Gained $4 Billion in May

Published 6/03/2010 2:40 p.m. EDT

While investors ETFs were hesitant in May, nothing could stop the gold rush.

After steady gains in February, March and April, the ETF industry saw outflows during the month of May as investors fled to the sidelines. Particularly hard hit were the

PowerShares QQQ ETF

(QQQQ)

,

iPath S&P 500 VIX Short Term Futures ETN

(VXX) - Get Report

and the

Vanguard Morgan Stanley REIT ETF

(VNQ) - Get Report

, which saw outflows of $2.4 billion, $1 billion and $568 million respectively.

Where did the money entering ETFs go to? With the exception of State Street's

SPDR S&P 500 ETF

(SPY) - Get Report

and Direxion's

Daily Financial Bull 3X

(FAS) - Get Report

, the top 10 funds for net inflows during May all revolve around the themes of emerging markets, bonds and commodities.

It comes as no surprise to this blogger that

SPDR Gold Shares

(GLD) - Get Report

topped the list, with net inflows of $4.2 billion, and that

Market Vectors Gold Miners

(GDX) - Get Report

didn't trail far behind. As investors fretted over currency conditions in Europe, they sought out investments in gold and the companies that mine it.

Gold is the currency of panic, and physically backed ETFs like GLD and

iShares Comex Gold

(IAU) - Get Report

have made it into an asset class all to itself. GDX, which tracks gold miners including

Barrick Gold

(ABX)

,

Goldcorp

(GG)

and

Newmont Mining

(NEM) - Get Report

, can be even more responsive to fluctuations in gold prices, so it's no surprise that this fund was singled out.

Throughout May, I was constantly asked about gold ETFs, which have become the subject of conspiracy theories and timing questions. I've addressed the issue many times, here, in this blog. So what's the deal with gold? Should you buy? Should you sell? Are you too late?

The first rule of gold investing is also the simplest: Gold investments are notoriously difficult to time. Trying to buy and sell physical gold for short-term profit is a messy proposition, and these physically backed funds are great but not tax-friendly.

As readers of the

ETF Action

newsletter will know, that doesn't mean that you have to ignore gold ETFs altogether. Currently, both IAU and GDX play a role in the

ETF Action

portfolio, and I believe that gold ETFs can be useful in both the long and short term.

I've

mentioned this before

, but it is certainly worth repeating: Make sure you add gold for the right reasons. While physically backed funds like GLD are causing a splash right now, they are better off used for long-term exposure. Add them to diversify your portfolio or build in long-term panic protection. Equity-based gold funds like GDX are better for shorter-term buyers looking to capture a surge in gold.

I believe that GLD, along with other physically backed precious metals ETFs such as

ETFS Physical Platinum Shares

(PPLT) - Get Report

and

ETFS Physical Palladium Shares

(PALL) - Get Report

, will continue to be hot topics in June. Much will depend on investor sentiment, and how the broader market reacts.

Don't forget that Europe's issues haven't been resolved. As long as fear of default hangs over European banks and the currency is called into question, gold will be an investor haven. Expect the theme of European debt to keep arising in the months ahead.

Gold ETFs are great tools for gaining exposure to the precious metal, but make sure you're not just following the crowd. Investors need to continue to seek out the right gold ETFs at the right time for the right reasons.

At the time of publication, Dion Money Management owned IAU and GDX.

A special note from Don: Put simply, I want to help you profit from ETFs.

You don't have to be an expert trader -- there are potential profits for investors at every level. And I think there's no better way to jump into the world of ETFs than through my brand-new service,

TheStreet ETF Action by Don Dion

.

Membership is limited, so click here to get in on the action!

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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.