H-P Scandal Reaffirms ETF Effectiveness

The portfolio of iShares Dow Jones US Technology hardly budged compared to the steep slide in H-P shares.
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NEW YORK (TheStreet) -- A recent scandal in the high echelons of Hewlett-Packard (HPQ) - Get Report led to a noticeable slide in the company's stock, and clarifies the advantage of ETFs over individual stocks in insulating your portfolio against fluke depreciation.

According to H-P's released statement, CEO Mark Hurd was asked to resign for embezzling company funds to pay for a relationship, as well as defrauding H-P in an effort to hide his scandalous behavior.

H-P representatives claimed Hurd had been found culpable of "numerous instances where

his mistress received compensation and/or expense reimbursement where there was not a legitimate business purpose, as well as numerous instances where inaccurate expense reports were submitted by Mark or on his behalf that intended to or had the effect of concealing Mark's personal relationship with the contractor."

During Hurd's reign as CEO of H-P, the company steadily improved. H-P devoted upwards of $20 billion to acquisitions in a push to redefine its business model. Shifting away from a dependence on printer ink sales, the company expanded its product line, offering a broader selection of hardware and business services.

H-P's market value nearly doubled during his five year stint as CEO.Meanwhile, in the midst of scandal, the company stands at a turning point as it integrates some of its acquisitions, most recently smartphone maker Palm, which was acquired in June for $1.4 billion.

While the company may stabilize in the long run, it suffered considerably as the negative news broke. H-P's stock dropped nearly 10% to $41.85 in after-hours trading, as news of the scandal hit the press following Friday's market-close.

In cases like this, an ETF helps protect investors against the harsh losses incurred by a single company by holding a basket of stocks, carefully picked to represent a specific sector or portfolio goal.

On top of this, ETFs hold several distinct advantages over mutual funds, an alternative diversity-based investment tool. ETFs are generally much more tax-efficient than mutual funds; they can be traded at a dynamic price throughout the day (as opposed to solely trading based on daily closing prices); and they are more ideal for short-selling, since ETFs do not punish investors fees for short-term trading.

In sum, ETFs combine the transparency, liquidity and sophisticated investing techniques of stocks with the one-stop diversity and low costs of an index fund.

Consider the

iShares Dow Jones US Technology

(IYW) - Get Report

. The fund offers some exposure to H-P, but its diverse portfolio acts as a cushion to help minimize investment losses from fluke devaluations such as this recent scandal.

Top holdings for the fund include tech heavy-hitters such as

Apple

(AAPL) - Get Report

, accounting for 9.37% of the portfolio's assets;

Cisco Systems

(CSCO) - Get Report

, 6.97%;

Google

(GOOG) - Get Report

, 7.46%; H-P, 4.78%) and

Intel

(INTC) - Get Report

, 4.78%.

H-P suffered a 9.7% drop on Friday when the news was announced. By comparison, IYW fell 0.3%, while the

Nasdaq

was down 0.2%.

H-P's recent floundering speaks volumes for the effectiveness of ETFs in terms of damage control and portfolio stability. In this recovering economy, investors shouldn't have to worry about salacious CEOs hamstringing their investments. Funds such as IYW offer you this much-needed peace of mind.

-- Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management was not long any of the equities mentioned.

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.