Dion's Weekly ETF Blog Wrap

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 blog posts from the past week:

An Opportunity in Natural Gas

Published 4/7/2011 2:50 p.m. EDT

Look past today's natural gas supply report and toward new legislation that could rapidly transform the industry. If you don't have exposure to natural gas companies such as Noble Energy ( NBL), PetroQuest ( PQ) and Stone Energy ( SGY), today is the day to pick up the First Trust ISE-Revere Natural Gas Index Fund ( FCG).

While higher-than-expected supply levels have sent natural gas prices plunging in the short-term, $108-per-barrel oil is still a force to be reckoned with. The pressure of prices at the pump is causing politicians and investors alike to look for alternatives. According to NewsOK (a news source in Oklahoma) a bipartisan effort is under way to get the gears turning on a bill that would increase the nation's supply of vehicles fueled by natural gas. This short-term supply blip is a good entry point for a longer-term natural gas run if the bill keeps gaining momentum.

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FCG offers exposure to a well-balanced portfolio of natural gas companies that would benefit from the natural gas initiatives that continue to be pushed forward by certain politicians. While the idea of these new vehicles may seem far-flung to some, gas prices are roaring and it's a good idea to get early exposure to tomorrow's alternative.

A Better Biotech ETF

Published 4/7/2011 1:19 p.m. EDT

Recent M&A activity and promising product development is helping to make biotechnology a promising sub-sector of the health care industry. While many investors gain exposure to the health care industry through broad funds such as Health Care Select Sector SPDR ( XLV), it's easy to gain further exposure to the biotech subsector through funds such as the SPDR S&P Biotech ETF ( XBI), the iShares Nasdaq Biotechnology Index Fund ( IBB) and the First Trust NYSE Arca Biotechnology Index Fund ( FBT).

Why Use An ETF?

Biotech investing can be a hit-or-miss area of the market. Small, relatively unknown companies can become blockbuster buys overnight through product development or acquisition. Promising upstarts can quickly fall flat, leaving investors' heads spinning. In short, security-specific risk is high, and individual biotech holdings can prove to be very volatile.

By using an ETF to gain exposure to biotech, security-specific risk is lower from the outset. A basket-approach to biotech investing makes sense: Reduce the risk of picking a flop, and gain exposure to a broader selection of names with potential. Even within the biotech ETF space, however, there are big differences between different funds.

Important Differences

If you're a longer-term investor looking to increase your exposure to biotech, the best option is a well-balanced fund that offers exposure to a variety of names. Both FBT and XBI offer equal-weight exposure, a methodology that keeps their underlying portfolios from becoming top-heavy. The average market cap of holdings in XBI's portfolio is slightly lower than the average market cap of holdings in FBT's portfolio ($3 billion vs. $4 billion).

IBB is also a popular fund, but it's cap-weighted, Nasdaq-related methodology means that the fund is limited to tracking the 126 biotech companies listed on the Nasdaq with market caps of at least $200 million. The downside? You're not going to get exposure to names such as Johnson & Johnson ( JNJ) (JNJ) or Pfizer ( PFE). One IBB positive, however, is that this fund's methodology helps to provide investors exposure to some of the small-cap names plying innovative techniques to research, develop and commercialize various drugs targeting certain diseases or therapeutic niches.

At the time of publication, Dion Money Management had no positions in the stocks mentioned.

Which Semi ETF Is Right for You?

Published 4/5/2011 1:02 p.m. EDT

Texas Instruments ( TXN) announced yesterday that it planned to buy National Semiconductor ( NSM), and news of the purchase has pushed the semiconductor group squarely into the spotlight. While semiconductor firms are an important part of the tech industry, many top tech ETFs dedicate only a small portion of their underlying portfolios to the semiconductor subsector. While it is a highly cyclical group, a balanced semi fund can be a profitable portion of a longer-term portfolio.

If you're looking to add semis to your portfolio, there are four ETFs that you should get to know. Here's a quick rundown of the similarities and differences among these four big funds.

  • The Semiconductor HOLDRS (SMH) is the largest and most liquid of the group, but it has a few drawbacks. As with all HOLDRS funds, investors face a minimum investment size of 100 shares. So, in the case of SMH, the minimum investment today would be approximately $3,500. SMH is also a very top-heavy fund, with Texas Instruments, Applied Materials (AMAT) and Intel (INTC) accounting for 21.8%, 11.58% and 16.97% of the underlying portfolio, respectively. Over time, this top-heavy weighting methodology translates into greater security-specific risk.
  • The Semiconductor SPDR (XSD) is more expensive than SMH (XSD has a 0.35% expense ratio vs. SMH's 0.02%). XSD employs an equal-weight methodology to offer exposure to 27 stocks. XSD is unique from the rest of the group in that it does not hold semiconductor capital equipment companies like Applied Materials or Novellus Systems (NVLS), whereas all three other semiconductor funds do. Because of its structure, XSD is a good way for investors with a very long time horizon to reduce security-specific risk.
  • The iShares PHLX SOX Semiconductor Sector ETF (SOXX) is a cap-weighted ETF that also concentrates most of the fund's assets among its large top holdings. The top three holdings -- Texas Instruments, Applied Materials and Broadcom (BRCM) -- comprise 8.17%, 7.99% and 7.88% of SOXX's underlying portfolio, respectively. At the same time, this cap-weighted fund isn't extremely top-heavy, so SOXX may be appropriate for investors looking for exposure to the largest semiconductor firms.
  • The PowerShares Dynamic Semiconductors ETF (PSI) is the final option, and it offers an interesting spin on the semiconductor sector. Rather than using a cap-weighted methodology, PSI relies on a combination of factors like fundamental growth, stock valuation, investment timeliness and risk factors. The result is a more equal-weighted portfolio that highlights some stocks that appear in small quantities -- or not at all -- in other semiconductor ETFs. As I mentioned in my post yesterday, PSI has decent exposure to National Semiconductor, helping this ETF to outperform every other semi ETF during today's session. This ETF is also a good pick for long-term investors. Its high expense ratio is worth it over time for investors looking to reduce risk and add balance.

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