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:


A Pure Play on Cloud Computing

Published 7/6/2011 03:11 p.m. EDT

First Trust hit a home run today with the launch of the first ETF that's a pure play on cloud computing, the ISE Cloud Computing Index ETF ( SKYY). Even though trading is relatively choppy and weak, and many traders are taking extended vacations this week, more than 260,000 shares of SKYY had crossed the tape before 2:30 p.m. EDT this afternoon.

In an industry that some commentators have labeled oversaturated, First Trust has once again proven that you don't have to be the biggest player to succeed -- just nimble. SKYY may not rely on fancy contracts or swaps to deliver its message, but it does manage to capture one of the most under-represented areas of U.S. tech: cloud computing. Consider the power that companies such as Netflix ( NFLX) and Google ( GOOG) wield with so much "cloud computing space." In today's digital world, it's all about storage and management.

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Pop the hood on SKYY and you'll find the roster of companies that you would probably expect. Top holdings include Netflix, Aruba Networks ( ARUN), Teradata (TDC), Amazon ( AMZN) and Salesforce ( CRM). The best part? Since the fund relies on an equal-weight methodology, industry leaders including Apple ( AAPL) and Google ( GOOG) don't suck up an outsized amount of space in SKYY's underlying portfolio.

If you're starting to think that this fund has a lot in common with First Trust's Internet ETF ( FDN), well, it does and it doesn't. Some of the hottest Internet firms -- Netflix, Salesforce, Google -- are also well known for their well-developed cloud computing capabilities. The biggest difference is with firms like Apple - which is included in SKYY but not in FDN -- that do not generate the vast majority of their revenue online. For example, some of SKYY's components provide goods and services in support of the cloud computing space.

These similarities and differences considered, I think there is space in the ETF industry for both SKYY and FDN to flourish. SKYY's instant success (as measured by investor interest on its first day of trading) is just one more example of how a fund doesn't have to be laced with derivatives or triple-leveraged to capture the trading public' s attention.

At the time of publication, Dion Money Management was long FDN.

Rare-Earth ETF on Shaky Ground

Published 7/05/2011 5:24 p.m. EDT

When Van Eck launched the Market Vectors Rare Earth/Strategic Metals ETF ( REMX) in October 2010, the timing was impeccable. In an industry where shrewdly launched, narrowly focused funds can help small issuers compete with ETF giants, a fund like REMX is a shining star. REMX's rapid ascent -- the net asset value of the equity-backed ETF gained more than 8% year to date -- may soon become another example of a fund whose success hinges on politics.

Today, more than 18 months after the World Trade Organization agreed to investigate China's quotas, export duties and license requirements, a panel ruled that the country's restrictions on exports of nine raw materials violate global rules. As the largest producer of the so-called rare-earths metals, China has been putting the squeeze on foreign manufacturers while giving domestic manufacturers an edge.

Not to be left out, the ETF industry looked for an angle, and Van Eck responded with REMX, a global equity fund designed to track publicly traded companies that are primarily engaged in a variety of activities that are related to the mining, refining and manufacturing of rare-earth and strategic metals. The largest two countries represented in REMX's underlying portfolio are the U.S. and Canada, whose firms have been affected by the restrictions.

If and when enforcement of WTO rulings aid producers outside of China, some REMX firms in the U.S. and Canada may be able to ramp up manufacturing. Today, the ruling seemed to provide for choppy trading: Molycorp ( MCP) closed more than 1% lower but bounced in after-hours trading. After a choppy session, another REMX component, RTI International Metals ( RTI), ended higher. REMX itself had an extremely volatile opening and barely finished the day in positive territory.

More than 11% of REMX's holdings are Chinese firms that have been benefiting from trade restrictions, and Van Eck certainly seemed aware of potential hang-ups. The small type at the bottom of REMX's fact sheet states, "Investors should be willing to accept a high degree of volatility and the potential of significant loss. China is currently the primary source of rare earth/ strategic metals; a ban on the export of rare earth metals, or alternatively a reversal of China's policies on export limits, could have a significant impact on industries around the globe."

For now, ETF investors should keep a close eye on REMX's composition -- and on any subsequent changes -- to see how the latest WTO ruling affects the ETF.

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

Stock Up on Staples

Published 7/06/2011 4:45 p.m. EDT

Investors seem more willing to put the temporary issues facing the global economy behind them and concentrate on the recent equity upswing. While concerns about Portugal's downgrade, European debt problems and Chinese inflation certainly made headlines, these short-term fears weren't enough to sink consumer-driven stocks today.

Leaders in today's market included stocks like Union Pacific ( UNP), Costco ( COST), DuPont ( DD), Intel ( INTC) and Caterpillar ( CAT). While some of these firms market consumer necessities, others -- like INTC and CAT -- mirror economic growth.

In the short term, particularly during this holiday-shortened trading week, investors are going to have to keep dealing with the economic concerns abroad that are making headlines. Watching equity performance, however, it's easy to see that consumers are stronger than many analysts imagine and are looking ahead to a longer-term recovery.

I continue to be bullish on well-balanced consumer-driven funds like the SPDR S&P Retail ETF ( XRT), staple ETFs like the SPDR Consumer Staples ( XLP), and even consumer discretionary aimed funds like the PowerShares Leisure and Entertainment ETF ( PEJ).

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

At the time of publication, Dion Money Management was long FDN.

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