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:

Digging Deep

Published 7/13/2011 5:36 p.m. EDT

Optimism about the progress of global equity firms and fear of the consequences of global debt problems have created a perfect storm for precious metals miners and the owners of funds like the Market Vectors Junior Gold Miners ETF ( GDXJ) and the Global X Silver Miners ETF ( SIL).

While popular, equity-backed ETFs like GDXJ, the Market Vectors Gold Miners ETF ( GDX) and SIL do not employ any actual leverage to enhance returns, the funds tend to take on a leveraged-like quality as the prices of precious metals fluctuate. As noted by Morningstar analyst Abraham Bailin in his report on GDX:

"This fund's exposure exhibits significantly greater leverage to gold prices than direct physical ownership. Keep in mind, however, that leverage can cut both ways. If gold prices fail to rise, or if the costs of mining outpaces the rise of bullion prices, these companies will suffer. Alternatively, if the underlying drivers of physical gold remain strong as mining operations expand, this offering should benefit in spades."

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On days like today, when both equity markets and precious metal prices advance, investors who tap into miners (as opposed to physical gold) often have the edge. The physically backed SPDR Gold Shares ETF ( GLD) advanced just 0.9% today, even as headlines proclaimed the physical metal's new highs. Meanwhile, GDXJ, a riskier pick that tracks more speculative "junior" miners, jumped 4.63%.

Bernanke's comments today seemed to reflect this confusing mixture of fear and relief. The Federal Reserve chairman used the phrases "catastrophic," "self-defeating" and "dire" when describing the possible consequences if Congress does not raise the debt ceiling. At the same time, however, planting hopes of a possible additional stimulus and fuel for the U.S. economy.

Global investors are being bombarded by a complicated set of emotions right now, and I believe that this climate will continue to be beneficial to precious metal miners in the near term. While I don't advocate the selling of long-term exposure to physical gold, I am bullish on the idea of adding exposure to more stable, large-cap gold miners, such as Barrick Gold ( ABX), Goldcorp ( GG) and Newmont Mining ( NEM) via the liquid GDX.

At the time of publication, Dion Money Management held no positions in any securities mentioned.

A New ETF Rises in Japan

Published 7/12/2011 2:53 p.m. EDT

In the wake of a series of devastating natural disasters, some investors are understandably uneasy about the Japanese economy. Much of Japan's data, however, have been better than expected in recent months. So the release of a new Japan fund tomorrow, from a new ETF issuer, could help to inspire a renewed interest in Japanese equities.

The success of a new ETF by a new issuer can be predicted by a few factors. Next ETFs LLC, the issuer who will launch the MAXIS Nikkei 225 Index Fund, which will trade under the ticker NKY on Wednesday, won't be totally unknown to investors. We know Next ETFs as the group that worked with Rydex and JPMorgan to create CurrencyShares ETFs such as the CurrencyShares Japanese Yen Trust ( FXY) and the CurrencyShares Swiss Franc Trust ( FXF).

Recognition is important for ETF investors (who like to know that fund issuers have experience), and if they are able to make the connection to CurrencyShares tomorrow, there could be a higher level of confidence and interest.

Another important factor in a successful launch is the development of an ETF that covers new territory or offers exposure to existing indices at lower prices. NKY falls into the first category: It will be the first ETF to track the well-known Nikkei 225 Index. The Nikkei 225 Index includes the 225 most liquid stocks on the "First section of the Tokyo Stock Exchange," according to the fund's issuer.

The liquidity of underlying components is important in ETF development, as is its methodology. NKY will use an equal-weight strategy in which components of the underlying index are given an equal weighting based on a par value of 50 Japanese yen per share. This equal-weight strategy should help to create a well-balanced fund that tracks liquid stocks, which are two key factors.

Investor interest and viability are the biggest factors of all, however, and they are somewhat unpredictable and beyond the control of the issuer. Since ETFs are traded on secondary markets, the presence of buyers and sellers is important in determining how liquid the ETF itself will be, and subsequently, how tradeable. ETFs that have low average daily trading volumes often die out over time or become extremely illiquid due to lack of investor interest -- no matter how liquid underlying portfolios may be.

NKY will certainly be an interesting launch to follow tomorrow, especially in light of recent events in Japan. There really isn't anything like it out there, so it could attract an entirely new group of investors who have been looking for ways to tap into liquid Japanese companies.

For now, I would watch from the sidelines and keep an eye on the fund's trading volume for a couple weeks. It will also be important to keep an eye on how currency impacts the fund, as the prospectus notes that the underlying index could potentially include both Tokyo-traded "ordinaries" and receipts.

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

Test Some Techs

Published 7/12/2011 12:37 p.m. EDT

Embrace today's midday rally and the message that it conveys about some of our short-term fears. Both the Dow and S&P are back in positive territory after a rebound in international stocks and renewed enthusiasm about the upcoming meeting of European leaders later this week.

Yet again, a few comments from European leaders -- in today's case, Luxembourg Finance Minister Luc Frieden and European Union Economic and Monetary Affairs Commissioner Olli Rehn -- have helped to restore some faith in the stability of the international equity market.

Fears about U.S. and European debts wax and wane, but U.S. companies continue to be strong

With big players like Google ( GOOG), JPMorgan ( JPM) and Citigroup ( C) expected to report this week, I'm hopeful that this latest wave of fear will pass and earnings demonstrate an economic recovery.

But instead of chasing Dow and S&P stocks higher via funds like the SPDR S&P 500 ETF ( SPY) and the SPDR DJIA ETF ( DIA), I'd focus on gaining exposure to weaker sectors like tech.

The tech sector took a beating in recent weeks. I've been surprised about the tech industry weakness, especially at a time when a new round of Internet IPOs is helping to breathe some new life into the sector. The tech industry is growing across the globe and products like smartphones and iPads are helping to tie consumers to each other and the global community. I'm hopeful that earnings reports in the weeks ahead will reflect this growth.

Ahead of the bulk of earnings season, while Nasdaq stocks are still fighting to rebound, today is a good opportunity to gain exposure to Internet firms like Google via the First Trust Internet ETF ( FDN). If you're looking to get bullish on top Nasdaq firms in a more broad, balanced, long-term-friendly way, consider the First Trust NASDAQ-100-Tech ETF ( QTEC), a liquid, equal-weight pick that helps to reduce stock-specific exposure.

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

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