2009 is shaping up to be a boffo year in equities, real estate and commodities markets.

Yeah, and my aunt would be my uncle if she had, uh, some of the sorts of things uncles have.

Really, it's hard to know what to make of the tea leaves of consumer confidence and macroeconomic numbers. I do get the feeling, though, that the world will survive, and that businesses will come out better—more sensible, more efficient, more competitive—on the other side. So, big picture, I actually like all of this, assuming unemployment doesn't soar to 15% or something. It's sort of like we're going to economic boot camp, getting in shape and cutting out the Doritos.

On the fixed-income thing, Matt—well, I'm 40, so I should have 40% in bonds now, right? I just cannot see that happening any time soon. The TYPES of bonds? Uh, well, you've got to love those zero-yielding Treasuries

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I'm surprised you're just now considering a fixed-income allocation in your portfolio, Jim.

You must be tougher than I am. I'm eight years your junior, and I've had a small investment in bonds for some time. I know that it might cost me some incremental return, but the reduced portfolio volatility is worth it for me. What's more, I figure I'm already highly leveraged to the equity markets through my career, so the extra added cushion is particularly attractive.

I'd be interested to hear about how and why you decided now, at 40, was the time to jump into the great fixed-income market. Also, where are you looking on the fixed-income scale? We've been in an extraordinary moment in the fixed-income market, with potentially very interesting opportunities on the corporate side, but also high risks. As a newcomer to the space, where are you heading in your portfolio?

Beyond that, though, I'm mostly in

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Fuzzy Math

The Wall Street Journal has another article taking off from an original piece done nearly two weeks ago at TheStreet.com  on how leveraged exchange-traded funds don't always provide the perfect mathmatical returns that would seem readily apparent.

It's a fairly routine story that has been re-reported several times since the original popped up online. These re-examinations for investors of how inverse and leveraged ETFs work -- and how their returns are calculated on a daily basis -- have been showing up lately coming on the heels of huge distribution projections by Rydex and later ProShares for their leveraged ETFs. 

You can read the WSJ's version here.

 

Year In Review

An update of the Dow Jones Newswires' review of 2008 ETF performance can be found here.

 

Famed Vanguard Manager Neff Buying Stocks

It's always an interesting game keeping up with the more renowned active fund managers. In this piece from Fortune,

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You're absolutely right that we should keep the big picture in mind when we're dealing with capital gains.

ETFs---at least, traditional equity and fixed-income ETFs---remain extremely tax-efficient.

I've been pulling together the data on capital gains distributions for equity and fixed-income ETFs in 2008.  By my count (and my numbers are rough), 54 out of 684 relevant funds paid short- or long-term capital gains distributions this year.  That's 7.9% of the ETFs, which is way up from last year's level of just 0.3% of all funds.

The culprit, as discussed, is the inverse and leveraged funds.  They account for 42 of the 54 recorded distributions.  And more importantly, they account for ALL of the major distributions: Among the other 12 ETFs that paid distributions, none paid out more than 1% of the fund's net asset value.

Holders of traditional equity and fixed-income ETFs can rest assured, then, that ETFs remain as tax-efficient as ever.  But

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I agree that there are real issues with some of the ETF gains being paid out, but let's put this in perspective.

The tone of Matt's blog from yesterday was that while distributions have been issues in the mutual fund business, they're REALLY issues in the ETF business.  I think it's time (as we sometimes find with Matt) for a reality check.  For long-only asset-allocation-focused investors, ETFs have been a BOON, almost NEVER paying out distributions even as traditional mutual funds shower their investors with the unwanted prizes.

The reason is that by and large, ETFs ARE a better mousetrap in terms of tax efficiency. The creation and exchange mechanism makes it so that these products generally benefit from rather than being hurt by trading activity in a fund, enabling the underlying portfolio to continually raise its cost basis

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ETF Securities, a leading provider of commodity-based exchange-traded products in Europe, is entering the U.S. market.

 

ETF Securities, a leading provider of commodity-based exchange-traded products in Europe, is entering the U.S. market.

The London-based company has more than $6.5 billion in assets under management and more than 100 different products trading in Europe. It has resolutely stayed away from the U.S. market, however, until now: On December 19, the company filed papers with the Securities and Exchange Commission for the right to launch a silver bullion exchange-traded fund in the U.S.

The fund itself appears to be unremarkable. It will hold silver bullion as its sole asset, in much the same way as the iShares Silver Trust (NYSEArca: SLV). SLV currently has $2.2 billion in assets, and is well-established in the space. It's unclear how ETF Securities will position the new ETF against SLV. ETF Securities declined to

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The huge distributions at ProShares and Rydex are a reminder that the old rules on cap-gains distributions must change.

 

(If you haven't read my articles on the distributions at ProShares and Rydex, they are available here and here.)

Capital gains distributions from mutual funds are inherently unfair. Fund companies pay out a full year's gains on a single day, and the impact on shareholders is almost arbitrary:

If you happen to sell a fund one day before it pays a distribution, you avoid that distribution altogether; If you happen to buy a fund one day before it pays a distribution, you get hit with the distribution in full.

With traditional mutual funds, this situation is unfortunate but tolerable. The majority of investors hold their mutual funds for many years. Therefore, the majority of shareholders receiving a distribution will have held the fund in question during the period in which the

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The January/February 2009 issue of the Journal of Indexes is now available, for free, online.

The January/February 2009 issue of the Journal of Indexes is now available, for free, online.

The issue focuses on the impact of the market crisis on the indexing, index fund and exchange-traded fund industries.

Check out the table of contents, and access full articles, today. 

Jim Cramer's view that ETFs are the root of all evil in today's markets is as misinformed as it is ill-advised.

For those of you who are not avid Mad Money watchers, Cramer wants to ban some ETFs, namely the ultra-short funds.  Let's take a look and see if this makes any sense.

First of all, I should say that I am prejudiced against Jim Cramer...mostly because watching his show gives me a headache. I think his ranting and frantic pumping and dumping is pretty much the epitome of what is wrong with investing media these days. Too much noise and panic and greed and not enough measured substance and sensible wisdom. That, and from the limited comments on ETFs others have sent to me in the past, it's been extremely evident that he had no idea what

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CME Group (CME) has lost more than half of its market value over the past three months and the stock price has cratered by nearly three-quarters in the past year. As illustrated in the accompanying three-month chart and table of valuation parameters [click to enlarge] for the major U.S.-listed exchanges, CME is extremely oversold and trades at less than two-thirds of book value (0.66) despite its position as the world's largest futures exchange with a major new source of revenue in the form of central counterparty clearing for credit default swaps [CDS] – which represents an estimated $45-$60 trillion market. I have initiated a long position in CME around 183 ...