Feature Article #1
Signs of an ETF Backlash
At first, exchange-traded funds were a genuine innovation. Then, ETFs became a fad, the butt of Wall Street jokes as ETF after ETF sliced and diced the stock market in ridiculously specific ways. Now, it seems an ETF backlash is afoot.
ETFs have popped up for everything from timber to nanotechnology to water. ETF providers pull together a basket of equities that purport to benefit from some trend, then create an ETF based on those stocks.
I don’t doubt that there are some benefits to individual investors from the ETF concept. Jim Wiandt makes the case for the ETF concept here, arguing ETF’s popularity will eventually surpass that of traditional mutual funds. For one thing, fees are often quite low on ETFs compared to mutual funds, and even exotic ETFs have their uses, by giving U.S. investors access to stocks they might not easily buy otherwise.
However, the ETF craze has led to a whole industry whose entire goal is apparently to just think up new ETFs. With ETFs chasing the latest hot investment idea, you end up with a fad (the ETF concept) chasing more fads. That puts investors in some dangerous territory.
This week, XShares Advisors said it will close 15 of its 19 HealthShares ETFs. Apparently investors decided they could live without an ophthalmology ETF; a “dermatology and wound care” ETF; or an ETF focused on orthopedic repair. (I am not making those up.)
As Paul Justice at Morningstar pointed out, some thematic ETFs often don’t even do a good job reflecting their themes in their stock holdings. One wind power ETF includes firms like BP (BP). He writes:
Wind power is about as important to their overall returns as frog legs are to a balanced diet. In fact, a $1 change in the long-term average price of natural gas will have more impact on these companies than will doubling their wind power capacity.
Greg Newton of NakedShorts had an interesting take on the Morningstar article in a post titled “Morningstar gets an ETF clue. Huzzah!” He adds, however: “The good thing is that, last I checked, nobody’s forcing anybody to buy this stuff.”
And that’s true. Wall Street has a way of producing lots of silly products, and the only harm is done when people actually buy them.
Investing Insights | August 26th, 2008 | Continued
Feature Article #2
One Approach to Value Investing
This idea, “The 8 Stock Portfolio,” has some promise.
The web site’s author pointed out earlier this month that while major indexes are off about 20%, “many individual stocks have been absolutely taken to the woodshed.” Many brand-name stocks are down “50%, 70%, 90% or more from their 52 week highs.”
He or she writes:
This past week, I remembered another time not too long ago that felt similar. The year was 2003. Priceline was trading for less than the cash on its balance sheet, and the company wasn’t even burning cash. Apple was trading for a few dollars above cash and no one saw anything special about this company with 4% of the PC market and a few fringe products. A funny sounding company called Research in Motion slipped below $2 per share. There are more, but you probably get the picture.
So the web site’s creator has chosen eight beaten-down stocks to buy hold. The site and blog will track their performance.
I’ll find this interesting to watch. It related to the current debate over value investing. (I wrote “The Plight of the Value Investor” on Aug. 4. Another wrinkle is this debate over whether value guru Benjamin Graham would be buying bank stocks.) Certainly there are plenty of cheap stocks in the stock market right now, but are they good deals or value traps?
Three weeks after it was created, the eight stock portfolio is up 13.6%. Impressive, but the creator has the right idea in planning to hold onto these stocks for “3 to 5 years through thick and thin,” adding: “Likely some will work out and some will fail, but on the balance I’m hoping for some shocking outperformance.”
Investing Insights | August 26th, 2008 | Continued
Feature Article #3
Morningstar tells remaining investors to dump Schwab YieldPlus
Charles Schwab’s money management unit was hardly the only shop burned by putting dangerous subprime-backed investments in supposedly conservative short-term bond mutual funds. Fidelity, Evergreen and others also had losses when the subprime market blew up starting last summer. But the experience of investors in the once almost $14 billion Schwab YieldPlus Fund (SWYPX), who have now lost over 30% of their money, is by far the worst, Morningstar notes in a recent write-up. Once shareholders started heading for the exits, Schwab managers had to sell illiquid assets at the worst possible time, magnifying the damage and making it impossible for the fund to recover if the market ever bounced back.
Still, the fund had over $500 million in assets at the end of last month. Morningstar analyst Miriam Sjoblom has a simple message for those remaining folks:
Shareholders have been effectively liquidating the fund already: It has experienced the greatest amount of net outflows of any mutual fund this year, with net assets dropping to $524 million at the end of July from $6.5 billion at the start of 2008. Remaining shareholders would be better off following suit.
Former shareholders should also watch the headlines for developments about the class action lawsuits filed against Schwab over the fund’s losses. U.S. District Judge William Alsup in San Francisco consolidated nine suits and appointed lead plaintiffs attorneys last month.
Investing Insights | August 26th, 2008 | Continued
Feature Article #4
AP Financial, Inc. Opens Another Office in San Diego, California
SAN DIEGO, Calif., Aug. 26 (SEND2PRESS NEWSWIRE) — AP Financial, also known as American Premier Financial, announced today the opening of their ninth office in San Diego, California. ‘With the opening of the San Diego office,’ Ken C. Perrin, Senior Partner at AP Financial says, ‘we now have offices on both the east and west coast and are now positioned to grow everywhere in-between.’
Send2Press Newswire | August 26th, 2008 | Continued
Feature Article #5
Business, and Startups, in Second Life
BusinessWeek.com -- Small Business | August 22nd, 2008 | Continued
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