The FTSE Group is making several changes to its family of indexes. Early on Thursday morning, the firm said it was promoting two key markets and demoting a third.

The countries most directly impacted will be:

• The United Arab Emirates will be upgraded to secondary emerging market status.

• Malta will be promoted to frontier market status.

• Argentina will be demoted to frontier market status.

In addition, FTSE is putting several countries on its watch list for the next 12-months. That's considered the first step in changing designations and movement into different indexes. Those include (including possible changes):

• Czech Republic, from secondary to advanced emerging markets.

• Malaysia, from secondary to advanced emerging markets.

• Turkey,  from secondary to advanced emerging markets.

The other major announcement is that the following will remain on 12-month watch lists:

• China "A" shares for possible inclusion as a secondary emerging market.

• Colombia to possbily shift to frontier status from secondary emerging markets.

• Greece for possible change to advance emerging markets status from developed.

• Kazakhstan for potential inclusion as a frontier market.

• Kuwait for possible inclusion as a secondary emerging market.

• Taiwan for possible change to developed market status from advanced emerging markets status.

• Ukraine for possible inclusion as a frontier market.

The next FTSE update is scheduled for March 2010.

Harry Dent is founder and chief executive of Tampa, Fla.-based HS Dent Investment Management LLC. He is a best-selling author and money manager who has developed quantitative investment models based on demographic research.

He took time on Tuesday to discuss his latest views on the market with IndexUniverse.com Editor Murray Coleman. They also discussed Dent's new exchange-traded fund, the AdvisorShares Dent Tactical ETF (NYSEArca: DENT). It's scheduled to begin trading on Wednesday. Below are excerpts of that conversation.

IU.com: You’re fairly pessimistic about the market now, aren’t you?

Dent: We do think we’re at the end of this rally. This isn’t like past recessions. Consumer spending by baby boomers is peaking. It’s the end of a long surge that began in the 1980s. Clearly, baby boomers are going to start saving more and spending less over the next decade. That’s going to deflate the whole economy. The next generation should start to pick up consumer spending levels again -- roughly around 2020. That’s when we’re expecting the start of another long-term boom.

IU.com: In the meantime, do you see many short-term opportunities for investors?

Dent: Right now, we’re still seeing a lot of hope priced into stocks for a prolonged recovery. But in 2010, we think markets are going to start falling again and people will become very disappointed. Our expectation is that stocks are heading towards an extended period, which will be marked largely by downturns and sideways movements. From late 2010 through around 2020, we’re expecting stock markets around the world to remain in a trading range with a lot of volatility. We’re expecting the S&P 500 to show a lot of ups and downs over the next decade, moving anywhere from around 300 to 1,100 as markets remain in flux throughout the period.

IU.com: That’s quite a range, isn’t it?

Dent: Yes, that is. The point is that we’re going to see a lot of volatility in the next 10 years. Under these conditions, we think you’ve got to play momentum – there’s not going to be another prolonged boom for awhile. But we do expect some markets to do better than others. When times are better, we expect places like India to roar a little more than most developed markets. Emerging markets, though, will remain extremely volatile. Eventually, somewhere around 2020, I can see us coming out with another ETF that plays strictly in emerging markets. But in the shorter-term, emerging markets are still very dependent on developed markets. And Europe, as well as Japan, are practically dead at this point for investors looking for the best relative growth opportunities.

You’ve also got to remember that emerging markets have just been through one of the biggest bubbles in the past several years. So, there’s going to be a shakeout in the shorter-term in Asia and Latin America. The positive is that even in a sideways-moving global market, emerging markets will see bigger bounces than developed markets. Our model for the new ETF will likely lean towards countries like China and India and other emerging markets when momentum is moving up. We feel like that’s how you’ve got to play global markets in the next decade – with a lot of flexibility to take advantage of movements up while remaining cautious on the downside.

IU.com: In your latest book, you show different demographic trends favoring emerging markets over the next several years, don’t you?

Dent: The strongest demographic trends – countries with growing workforces and growing consumer patterns – are going to be in the emerging markets. Latin America and much of Asia is largely urbanized: India is a little over 30 percent; China is just under 50 percent but Brazil is over 80 percent. So, emerging markets' growth is very tied to this move towards greater urbanization.

IU.com: What regions or countries are behind the curve in terms of urbanization?

Dent: If you take away oil, the Middle East is largely a third-world region. And most of Africa is still struggling to become more urban. So, they’re more frontier markets now. But our new ETF is only interested in investing in countries clearly on the way up.

IU.com: What is your favorite country on a longer-term basis at this point?

Dent: If I had to pick one country for the next 30 to 40 years, it’d be India. It wouldn’t be China. Their demographics are going to work against them. After 2020, urbanization will come at a slower rate since younger people generally are the ones to move the fastest out of rural areas. China’s policy of one child per family, which started in the early 1970s, will begin to catch up with them between 2015-2020. Someone said China is going to get old before they get rich, and we agree with that. By contrast, India’s demographics won’t peak until about 50 years after those of China.

IU.com: Does the new ETF follow your basic investment process?

Dent: It is simply a momentum model we’ve tracked for years. But it’s different than what we’ve done in the 1980s and 1990s – the methodology we tried to use in the past with some of our separate accounts and the old AIM mutual fund.  We were subadviser to that fund and AIM just didn’t listen to us. The fund was supposed to be a blend of our models and those developed by AIM. But when markets crashed in 2000-2002 and our models were very cautious, the AIM models were favored and the fund remained quite more aggressive in stocks than our models preferred. That fund ended up getting merged into another one and we learned a valuable lesson: Joint ventures aren’t the best way to go with fund portfolios. We’ve got well-tested, momentum-based models and it’s either got to be our way or the highway in terms of working with fund portfolios.

IU.com: Is that why you decided to go with an ETF structure?

Dent: The ETF structure is very low-cost compared to similar hedge fund and mutual fund strategies. And they’re more widely available compared to hedge funds and mutual funds. Anybody can add our ETF to their portfolio. And we’ve got control over it and nobody else can tell us how to manage our investment model.

IU.com: Can you explain the process that this model follows?

Dent: This is a quantitative-based model. It looks at the universe of developed and emerging markets. It also includes commodities. So it has latitude to go anywhere. The key is how it decides to pull out of sectors and countries. The advantage of any momentum model is that when things are going well, the model does, too. But, of course, the difficulty is moving out of an area of the market, or back in, when things aren’t going so well. There’s always going to be a lag – you’d have to be a genius to time markets perfectly.

But this ETF’s model isn’t going to act like an actively managed hedge fund or mutual fund. This ETF will be on a monthly rebalancing schedule, so there’s going to be a lag time between shifts. So the key is going to be to get the general trends right. We’re not trying to time exact tops and exact bottoms. The model has some technical factors built into its methodology. But technical analysis isn’t always right. So, it also includes elements of fundamental analysis. We believe this is the best model for a market that’s heading towards an extended winter.

(Editor’s Note: The following is an excerpt from an article in the Exchange-Traded Funds Report in July. Subscribers to ETFR can read the complete piece here.)

Specialty-sector ETFs—also called “thematic” ETFs—have emerged as a major force in the ETF industry.

These ETFs run the gamut of investment possibilities, but have one thing in common: They look past traditional size and sector designations to carve out new investment areas, often driven by a single investment thesis.

Clean energy, infrastructure, nuclear power—by our count, there are now more than 40 of these unique ETFs on the market, with more than $10 billion in assets under management.

Investment manager Van Eck Global has been one of the most successful companies in carving out a foothold among specialty ETFs. Its Market Vectors Gold Miners ETF (NYSE Arca: GDX) is the largest specialty ETF of all, with almost $5 billion in assets.

“We’re looking for compelling investment themes that we believe in for the long term, where the ETF basket approach can be a great tool for market participants,” said Adam Phillips, managing director of Market Vectors, “whether that be for the buy-and-hold investors or the trading community.”

Of course, some investors see things differently.

Rick Ferri, founder of the advisory firm Portfolio Solutions and author of “The ETF Book,” calls thematic ETFs “gimmicky.”

“We don’t use any thematic funds in our management here,” said Ferri. Ferri, a former broker himself, believes thematic ETFs are less popular with independent advisers than they are with brokers for a simple reason: story. He says they are an easy sale to clients who can relate to specific areas like clean water or other environmentally motivated ETFs.

“They come out when they happen to be popular in the news,” Ferri said. He believes they do well as brokers buy them up (sometimes driving the actual price of the ETF up) but that they tend to fall off six to 18 months later.

Roger Nusbaum, portfolio manager and chief investment officer for financial planner Your Source Financial, disagrees.

“In terms of long-term investing and the context of diversified portfolios, I absolutely think there’s utility [in them],” he said. Nusbaum uses them, as well as individual stocks, in his sector-based approach to portfolio construction. He has used the PowerShares Water Resources Portfolio (NYSE Arca: PHO) in client accounts since its launch, for instance, saying he tends to incorporate it as part of the allocation to industrials.

With regard to price run-ups, Nusbaum says some specialty sectors can be “faddish” in their behavior. If a fund covering solar energy jumps by 50%, and you know the industry is not going to fully develop for years to come, he suggests it might be time to reduce your exposure until the price becomes more reasonable.

Slicing & Dicing Themes

One of the most common questions asked by investors is, “Which ETF covers this?” Indeed, it’s often hard to even know what specialty-sector ETFs are available, as by definition they fall into narrow categories unlikely to be highlighted as an “asset class” in the pages of the Wall Street Journal. With so many fund launches, it can be a challenge to simply keep up with what products are on the market.

With that in mind, we have compiled an overview.

Alternative Energy

Last year’s run-up in energy prices and rising concerns about peak oil have combined to dramatically increase investor interest in energy alternatives. From relatively diversified funds to those targeting just solar or wind, investors can now use ETFs to access energy alternatives in practically any flavor they like.

Largest ETF: The PowerShares WilderHill Clean Energy Portfolio (NYSE Arca: PBW) was the first and is still the largest of these ETFs, with $743 million in assets under management. Some consider its exclusive focus on U.S.-listed names limiting, as much of the alternative energy industry is focused abroad. But the fund gains some exposure to these markets via ADRs.

Coal

Coal is the cheapest source of BTUs on the planet, easily beating oil, gas, wind, solar, hydro and nuclear. In addition, both China and the U.S. have huge domestic supplies of coal, and spiking oil prices are encouraging further development of the resource.

Largest ETF: The largest coal ETF by far is the Market Vectors Coal ETF (NYSE Arca: KOL), with $277 million in assets under management. The ETF holds a global portfolio of coal companies, primarily focused on the mid-cap miner space. It is 49% exposed to U.S. companies, with other significant positions in China (23%) and Indonesia (15%).

Nuclear

The long-term case for nuclear energy is clear and clean: The underlying fuel is so plentiful that we will never run out of it, and, when operating safely, nuclear power plants produce zero emissions. Once built, nuclear power is also the cheapest kind of energy on the planet.

Largest ETF: Three ETF companies offer nuclear energy ETFs. The largest is the Market Vectors Nuclear Energy ETF (NYSE Arca: NLR), with $166 million in assets. The fund has a large position in uranium miners (40% of the portfolio), with other concentrations in power generators and plant construction companies.

Commodities

The commodities boom raised the profile of “stuff” as an investment, and ETFs have made the area more accessible. Specialty-sector funds often focus on companies that produce commodities, like water or steel, that do not have liquid futures contracts.

Largest ETF: The largest hard assets ETF is the Market Vectors Agribusiness ETF (MOO), with nearly $1.5 billion in assets under management. Close behind is the PowerShares Water Resources ETF (NYSE Arca: PHO), with $1.2 billion in assets. Other areas of the market include steel, timber and broad-based commodity stocks.

Infrastructure

The term infrastructure is nearly as sweeping as commodities; it covers everything from companies involved in the construction and repair of roads and bridges to those that build and maintain power grids, telecommunications networks, and sewage systems. There’s no denying that infrastructure is a big deal these days: Developed countries desperately need to restore aging systems, and emerging markets need to actually build theirs. As with alternative energy, government stimulus funds can only add to the attraction of this sector.

Largest ETF: The iShares S&P Global Infrastructure Index Fund (NYSE Arca: IGF) is the largest infrastructure ETF available today, with $267 million in assets. See Murray Coleman’s feature on page 6 of this issue for a complete review of the infrastructure ETFs.

Transportation

If oil is the lifeblood of the industrialized world, transportation is the circulatory system. It’s no accident that the world’s (arguably) first stock index was the Dow Jones Transportation Average. And it’s also no surprise that there are a few ETFs focused on transportation.

Largest ETF: The Claymore/Delta Global Shipping ETF (NYSE Arca: SEA) is the largest transportation ETF, with more than $70 million in assets. SEA is sometimes seen as a leading indicator both of economic activity and commodities demand, since rising rates for ships mean incipient increases in industrial production on the receiving end of those shipments.

Green

Not only are there clean energy ETFs, but there are also ETFs that take environmentally friendly approaches in other ways. Two funds and an ETN—the only one in this survey—focus on ecological innovation, such as combating global warming.

Largest ETF: The largest ETF of the bunch is the PowerShares Cleantech Portfolio (NYSE Arca: PZD), which invests in a variety of companies whose products help improve productivity while minimizing the consumption of natural resources. PZD has $123 million in assets.

Miscellaneous

And finally, there’s the “miscellaneous” catch-all category. The funds falling into this category include the only available gaming ETF, a fund covering luxury items and another tracking the Chinese real estate market.

Largest ETF: The largest ETF of the bunch is the Market Vectors Gaming ETF (NYSE Arca: BJK), which invests in gaming (read: gambling) companies around the world. It has roughly $108 million in assets.

Just as gold is showing its strongest performance in a year, exchange-traded fund provider ETF Securities is set to launch its first bullion-backed gold fund. The ETFS Physical Swiss Gold Shares, backed by one-tenth of an ounce of Swiss-stored physical bullion per share, is set to begin trading on Wednesday through the NYSEArca exchange under the ticker SGOL.

ETFS Physical Swiss Gold Shares will go head-to-head in competition with existing bullion-backed ETFs such as SPDR Gold Trust (NYSEArca: GLD) and iShares COMEX Gold Trust (NYSEArca: IAU), both of which have hit 52-week highs this week on a surging gold price.

Gold ETF holdings have risen 42 percent, or 16 million ounces year-to-date. Bullion-backed ETFs hold 54.23 million ounces of gold, more than many central banks and around the levels of last year’s total production amount. (See Wall Street Journal story here.)

The ETFS Physical Swiss Gold Shares is ETF Securities’ second commodity-based fund to launch in the past three months. In July, the provider launched ETFS Silver Trust (NYSEArca: SIVR), which has risen 18% since then. The new ETF is the firm’s third to date, following London Stock Exchange Traded Gold Bullion Securities (LSE: GBS.L) and ETFS Physical Gold (LSE: PHAU.L).

“We think the U.S. equity ETF market is very competitive and arguably very saturated. But we feel that the U.S. commodities marketplace is under-served,” said William Rhind, head of London-based ETF Securities’ U.S. marketing unit in a recent interview with IndexUniverse.com. (See story here.)

In Asia trading Wednesday, gold was selling for around $1,002 an-ounce in Singapore. However, technical traders were advising hedge funds to use the high gold price as an opportunity to sell the commodity short, for a quick dip to around $940 an ounce. (See story here.)

Gold ETFs were volatile in Tuesday trading, rising initially and falling back to end the day around 1.1 percent lower.

The Financial Industry Regulatory Authority  is imposing increased margin limits on purchases of leveraged and inverse exchange-traded funds in an attempt to curtail the volatility such products impose on retail investors.

Starting on Dec. 1, the maintenance margin requirement for leveraged long- and short-ETFs will be increased by a percentage commensurate with the leverage employed by the ETF.

This amount will not be allowed to exceed 100% of the value of the ETF. For example, on an ETF leveraged by 200%, the new margin maintenance requirement will be 75% of the value of the ETF.

FINRA also is increasing the maintenance margin requirements for listed and over the-counter uncovered options on leveraged ETFs.

Currently, the maintenance margin requirement for leveraged long ETFs is 25%, while the maintenance margin requirement for leveraged short ETFs is 30%. (Read the FINRA press release here.)

The change in regulations comes on the heels of a lawsuit filed at the end of last month against ProShares by Pearson, Simon, Warshaw & Penny LLP and Tydings & Rosenberg LLP on behalf of investors who lost money in one its leveraged inverse ETF products.

Investors allege that they were not informed that shares in the UltraShort Financials ProShares Fund (NYSE Arca:SKF) should not be held more than a single trading day and were not an appropriate hedge against a decline in U.S.-based financial stocks.

As a result, they claim that ProShares made materially false and misleading registration statements when it filed its application for the product with the Securities and Exchange Commission , and are seeking to recover the losses incurred.

ETF Securities said Monday that its three gold exchange-traded products increased their bullion holdings by 6.1% in the previous week, according to Reuters. The U.K.-listed funds, including Gold Bullion Securities and ETFS Physical Gold, held 7.989 million ounces of bullion on Friday vs. 7.53 million ounces on Aug. 21.

The increased holdings are a result of record capital inflows: In the past week, ETFS Physical Gold received new investments of $646 million, the company said last week.

The company also said last week that its U.S.-traded ETFS Silver Trust (NYSEArca: SIVR) product has expanded its assets under management to over $100 million since listing on July this year. The fund is up 5.8% since inception. “Investors are becoming increasingly bullish towards silver,” the company said.

The increase in bullion holdings of ETF Securities’ gold funds and the expanding AUM of SIVR come at a time when regulators are looking to clamp down on commodity ETFs. In recent weeks, commodity ETFs that use futures contracts have stopped creating new shares in fear of hitting position limits imposed on them by the Commodity Futures Trading Commission, forcing them to trade like closed-end funds. (See related story here.)

While gold ETFs have not undergone the same kind of scrutiny as their commodity peers since they hold physical assets, some investors fear that their expanding dominance in the hard assets sector may make them vulnerable to future scrutiny by the Securities and Exchange Commission and possibly the CFTC. (See related story here.)

The expanding popularity of commodity ETFs is evinced by ETF Securities’ rapidly widening net AUM, which have risen 85% in 2009, to $13.1 billion.

-- This report was submitted by IndexUniverse.com's Daniel Harrison.

Pimco is set to launch its second exchange-traded fund on Monday, again sticking with short-term Treasuries.

This time, however, the world’s biggest bond fund manager is moving into Treasury Inflation-Protected Securities. It’s a market with two entrenched competitors already vying for investment dollars. But TIPS have been hot attractions so far this year, and if inflation hawks are correct, could heat up even more in coming years.

New Competition

The Pimco 1-5 Year U.S. TIPS Index Fund (NYSE Arca: STPZ) will be the first to focus on the short-end of the yield curve. The two others already on the market take an intermediate tilt: the iShares Barclays TIPS Bond Fund (NYSEArca: TIP) and the SPDR Barclays Capital TIPS ETF (NYSEArca: IPE).

State Street Global Advisors also sponsors a global TIPS ETF, the SPDR DB International Government Inflation-Protected Bond ETF (NYSEArca: WIP). It has a longer duration than TIPS and IPE, which are hovering around eight years right now; WIP is listed with an average adjusted rate of slightly more than nine years.

The average duration of STPZ is about three years, according to Tammie Arnold, head of Pimco’s global wealth management group. She noted that short-term TIPS have produced higher correlations to inflation in the past five years (about 27% for STPZ’s underlying index and 6% for the broader TIPS market).

“Our short-term TIPS ETF is designed to be a more pure-play inflation-protection investment. It should expose investors to fewer of the risks associated with rising interest rates than longer-term TIPS funds,” Arnold added in an interview from the firm’s headquarters in Newport Beach, Calif.

All three U.S. TIPS ETFs are priced similarly: STPZ and TIP at 0.20% each with IPE at 0.18%. On the international side, WIP is charging 0.50%. Also, the 30-day SEC yields for TIP and IPE are around 1.50% while WIP’s is at 1.82%.

Different Index, Same TIPS Focus

The new STPZ will follow a Merrill Lynch index rather than the Barclays benchmark preferred by TIP and IPE.

Pimco’s John Cavalieri, however, downplays the significance of using a different index considering the rather limited number of U.S. TIPS issues actually available—roughly around 30 at any given time.

“The real key is the maturity segmentation of our index,” said Cavalieri, a Pimco senior vice president and real return product manager. “The other TIPS ETFs on the market cover the broader spectrum of TIPS available, including intermediate- and long-term issues.”

Despite deflation remaining a force in the U.S. economy, investors are still concerned about rising oil and commodities prices and looming federal budget deficits. A common investment theme has been to buy TIPS, with their built-in inflation protection, when the cost of such insurance is relatively low.

As a result, TIP has had the largest cash inflows into any fixed-income ETF this year. (See related research here.)

“We think this [STPZ] is a real sweet-spot type of product right now,” said Cavalieri. “By focusing on the short end of the maturity curve, we’re addressing the two main concerns we’ve heard from investors.”

Those are: inflation protection and protection against the risk of rising interest rates, he added. While other ETFs can provide the former, Cavalieri points out that STPZ is uniquely positioned to fight the latter.

“It boils down to this ETF providing exposure to the short end of the maturity curve, which limits interest rate sensitivity, which is commonly referred to as a fund’s duration,” he noted.

Two More TIPS ETFs Coming From Pimco

Pimco, the world’s largest bond fund manager by assets, is also planning to come out with two other TIPS ETFs. By early next month, it’s expecting to fill out the firm’s U.S.-focused TIPS lineup with: The Pimco Broad U.S. TIPS Index Fund (TIPZ) and the Pimco 15+ Year U.S. TIPS Index Fund (LTPZ). Both will also be tied to Merrill Lynch benchmarks.

In early June, the firm managing more fixed-income assets than anyone else came out with its first ETF, the Pimco 1-3 Year U.S. Treasury Index Fund (NYSEArca: TUZ). That was a change of pace for Pimco, which had planned to make an intermediate-termed bond ETF its first entry into the market. But with interest rates still at historically low levels, it shifted tactics and decided to introduce TUZ instead. (See related story here.)

Fidelity Investments already has its toe into the exchange-traded funds market. Apparently, that's about as far as it's willing to go, at least for now.

The president of the Boston-based mutual funds giant, known for its star manager system, let it be known last week that he was seeking a replacement. In the course of giving interviews to papers and news wires, the executive -- Rodger Lawson -- also made it clear that the firm was never interested in ETF's dominant player, Barclays Global Investors, when it was put on the market.

That led Sue Asci of InvestmentNews to ask Fidelity representative directly if the company wasn't going to pursue expanding its ETF presence. “We have no current plans to expand proprietary ETFs,” Fidelity spokesman Vin Loporchio told the magazine. (You can read the full story here.)

In 2003, the firm introduced its lone ETF, the Fidelity Nasdaq Composite Index ETF (NasdaqGM: ONEQ). With the explosive growth of ETFs and last year's record outflows from mutual funds, Fidelity has become increasingly tied to smaller ETF sponsors such as WisdomTree Investments.

Earlier this month, IndexUniverse.com reported that sources familiar with the situation had placed a team of Fidelity executives meeting with Wall Street investment bankers and key brokerage houses exploring the possibility of making a full-scale move into ETFs. (See story here.)

At the time, IU.com also talked to knowledgeable industry veterans who questioned whether Fidelity could overcome the expected objections from some of its star managers about the increased transparency issues presented by ETFs. It seemed unlikely, according to our sources, that Fidelity would be interested in a strictly passive, index-based family of ETFs.

Competitive obstacles were also a big reason why many analysts questioned how much of a force active ETFs would prove to be in the market. The partnership between Grail Advisors and American Beacon earlier this year touted the creation of the industry's first qualitative active mutual fund (i.e., one that feels and acts like a traditional fundamental-based mutual fund).

But it utilizes a team management approach, something that would go against the Fidelity style (although there are certainly some exceptions to that rule).

Did transparency kill the deal with Fidelity? Other issues also appeared to loom on the horizon, but the current regulatory environment and competitive landscape would also seem to figure into the equation.

At the time of our last report, we also heard that if Fidelity moved forward it would probably have to push for advancement of so-called "black-box" formulas. Those methodologies essentially ask the Securities and Exchange Commission to relax guidelines on daily reporting of holdings to let managers provide a sample portfolio -- not the whole enchilada.

So far, we haven't heard of any advancement in the SEC's green-lighting of such practices. So the next big issue facing Fidelity might come down to whether its decision is permanent. Or, if regulators wind-up approving some sort of actively managed process that allows for partial non-disclosure, will Fidelity reconsider its decision to stick with traditional mutual funds?

News Corp. is considering selling the venerable Dow Jones indexing business, including the Dow Jones Industrial Average, according to reports posted on the Wall Street Journal’s Web site on Friday afternoon.

The Journal says that Goldman Sachs is leading the sales process, which is in the early stages and is, at this point, exploratory in nature.

Many have wondered what would become of the indexing business following News Corp.’s 2007 acquisition of Dow Jones & Co. News Corp. paid more than $5 billion for Dow Jones and its crown jewel, the Wall Street Journal. The indexing piece always appeared to be an odd fit within the News Corp. structure.

According to the Journal, the indexing unit had revenues of $101 million for the nine months ending September 2007.

Dow Jones refused to comment on what it called “market rumors.”

The Wall Street Journal story is available here.

Sponsors of the United States Natural Gas Fund (NYSEArca: UNG) took baby steps toward restoring the fund’s ability to issue new shares yesterday.

UNG is an exchange-traded fund that invests in the natural gas futures market. The fund stopped issuing new shares on Aug. 12, citing regulatory uncertainty in the commodities marketplace. The Commodity Futures Trading Commission is investigating the role of ETFs in the commodities market and is expected to announce strict position limits for such funds. Many expect the $4 billion UNG ETF to exceed the allowable limits, as it controls a significant portion of the front-month natural gas futures market.

Since halting the issuance of new shares, UNG has traded at a sharp premium to its underlying net asset value, as demand for the fund has outstripped supply. As of 2:32 p.m. ET, Aug. 21, it was trading at a 16% premium to NAV.

The sponsors of UNG have been looking for ways to maintain exposure to the natural gas market while reducing the number of futures contracts they hold. Yesterday, UNG secured a $500 million total return swap that could help.

Total return swaps are privately negotiated agreements between two parties to exchange cash flows based on the performance of a target index. In this case, UNG entered into an agreement with a bank to exchange cash flows based on the performance of a front-month natural gas futures contract. Because swap contracts are privately negotiated and not linked to any underlying holding, they should not count toward any new CFTC limits.

The $500 million agreement is the second natural gas swap contract negotiated by UNG, joining an earlier deal for $200 million. The deals allow UNG to reduce its positions in natural gas futures while still tracking the performance of the natural gas market.

“We indicated in a recent filing that we are seeking to obtain natural gas-based total return swaps as part of our strategy to reduce our holdings in listed futures contracts,” said John Hyland, manager of UNG. “This is an attempt by UNG to deal with whatever new regulations may be introduced by the CFTC and to allow us to permit creations of new units. Our actions today, and the natural gas-based swap we entered into a few weeks ago, are not enough by themselves to yet allow us to either meet what we think such potential CFTC levels might be, or to permit us to prudently allow new creations. Still, we are making very good progress.”

If UNG can cobble together enough swaps, it could potentially start issuing new shares of the fund again. If that happens, the premium on UNG should collapse back toward zero.

This report was submitted by IndexUniverse.com's Matt Hougan.

Barclays Capital announced today that it is halting the issuance of new shares in the iPath Dow Jones-AIG Natural Gas ETN (NYSEArca: GAZ).

GAZ is the third commodity-focused exchange-traded product to stop issuing shares in the past few weeks, joining the United States Natural Gas Fund (NYSEArca: UNG) and the PowerShares DB Crude Oil Double Long ETN (NYSEArca: DXO).

GAZ saw significant inflows after the sponsors of UNG (the only competing natural gas product) announced on August 12 that they were suspending issuance of new shares. GAZ ended July with $127 million in assets, but closed yesterday with $187 million, nearly a 50% increase.

Investors turned to GAZ following the announcement because UNG started trading at a large premium to its net asset value; it closed yesterday at a 12.4% premium to NAV. Investors may have been playing that premium, taking a long position in GAZ and a short position in UNG, anticipating that UNG’s premium would eventually disappear.

ETF and ETN issues are worried that the CFTC will impose strict position limits on commodity holders, making it difficult or impossible for these products to track their benchmarks. They are halting issuance of new shares to cap the size of these funds. Issuers do not want to be in a position where they are forced to redeem shareholder positions to meet new CFTC caps.

In the filing announcing the move, Barclays warned that more iPath ETNs may join GAZ in the near future.

“In light of current market dynamics and ongoing regulatory review, the factors underlying the temporary suspension of the Notes may impact other commodity-linked iPath ETNs in the future.”

ProShares has launched its third inverse exchange-traded fund designed to short longer-term Treasuries.

The ProShares Short 20+ Year Treasury (NYSE Arca: TBF) is expected to charge an annual expense ratio of 0.95.

Along with a pair offered by rival Direxion, the new offering represents the fifth ETF on the market taking short positions in the typically highly liquid government-backed fixed income market.

But the newest is different from the rest. It offers less juice than others already on the market.

TBF seeks to provide 100% inverse exposure to the daily performance of its underlying Barclays Capital index.

ProShares has two other inverse ETFs aimed at providing 200% inverse coverage: The UltraShort 7-10 Year Treasury (NYSE Arca: PST) and the UltraShort 20+ Year Treasury (NYSE Arca: TBT).

Direxion also has a pair of inverse Treasury ETFs: The Daily 10-Year Treasury Bear 3x Shares (NYSE Arca: TYO) and the Daily 30-Year Treasury Bear 3x Shares (NYSE Arca: TMV). Both provide 300% inverse exposure to their underlying indexes and charge expense ratios of 0.95% each.

The average dollar invested in an actively managed equity mutual fund over the past one, three and five years outperformed its benchmark index through June 30, according to a new report released by Standard & Poor’s on Thursday.

The so-called Midyear 2009 S&P Indices Versus Active Funds Scorecard, or SPIVA, compared the returns of active funds vs. S&P benchmarks in a variety of different asset classes. The data takes into account survivorship bias, which eliminates funds that go under or merge into other funds.

Historically, the results of the SPIVA analyses heavily favor the indexes. That’s what happened with the last report, covering year-end 2008, when indexes won in a landslide.

But the Midyear 2009 report contains a surprise. While the average actively managed funds trailed their benchmarks on an equal-weighted basis, when measured on an asset-weighted basis, the active funds won.

For instance, as the table below shows, nearly 63% of all actively managed large-cap funds trailed the S&P 500 over the past five years. But the average dollar invested in those large cap funds actually beat the index by 0.21%. That’s all the more impressive considering that the indexes do not have any expenses associated with them, while the active funds are measured post expenses.

The same or similar results carry through multiple subasset classes on the domestic equity side, such as the growth and value subsegments of the various capitalization benchmarks.

On the international equity side, however, the results were more mixed. For the global category, the active funds won in a cakewalk: The average dollar invested in a global fund outperformed the S&P Global 1200 by 2.07% per year over the past five years. But the indexes won for international funds and emerging market funds.

Full details are available from S&P here.

Interestingly, the story is almost perfectly reversed in the bond space. For fixed-income, the average dollar invested in an actively managed bond fund trailed its benchmark on a one,- three- and five-year basis in every domestic bond category. For global and emerging market debt, the active funds outperformed on a five-year basis, although they still lagged on a one-year and three-year basis.

There is no single explanation in the S&P report for why actively managed funds had this turn of good fortune. In the year-end 2008 report, active funds trailed the indexes on both an equal- and asset-weighted basis in virtually every category. Somehow, the six-month shift has pushed the results in favor of the active funds. It may have to do with strong performance over the first six months of 2009, or it could be attributable to the new starting point of the study (the last six months of 2004).

Either way, the data suggest that investors are putting more money to work in the better-performing actively managed funds, and those funds are doing OK.

Law Firms Threatening Action Against Leveraged ETF Providers

At least two law firms say they're talking to clients who use leveraged exchange-traded funds about potential lawsuits against the funds' providers.

The list is large and includes ETFs sponsored by ProShares, PowerShares, Direxion and ETF Securities, which recently entered the U.S. (see story here.)

How do we know this? The law firms, of course, put out a press release. You can read it here.

Two Deutsche Bank Funds Hit By CTFC Ruling

A pair of PowerShares-DB commodity ETFs will be curtailed in how much they can buy in soybeans, wheat and corn due to a decision by the Commodity Futures Trading Commission.

You can read this Bloomberg News report for more details. Also, check Matt Hougan's blog here.

SSgA's Hoguet: Sovereign Wealth Funds To Buy SDRs

Special drawing rights, or SDRs, are what the International Monetary Fund uses internally as currency markers to traverse its global reach. China has nominated SDRs as a natural new world currency, replacing—or complementing—the de facto U.S. dollar.

When the suggestion was made, critics voiced their displeasure at the notion. But now, according to this interesting Reuters report, several big sovereign wealth funds are considering buying SDRs.

The report is based on information supplied by George Hoguet, a State Street Global Advisors emerging markets expert. (His work has been profiled at IndexUniverse.com several times in the past few years, including a Q&A earlier this year.)

You can read the Reuters story here.

Fidelity President Looking For Successor

Rodger Lawson, who took over as president of Fidelity Investments in 2007, tells Bloomberg News he's looking for a replacement. The position has been a bit of a revolving door at the mutual funds giant in recent years.

The story addresses that issue and also includes Lawson's rebuttal of Morningstar data showing the company is lagging its peers in performance, particularly compared with arch rival Vanguard. (For more about the battle between Vanguard and its competitors, see related story here.)

You can read the Bloomberg interview with Lawson here.

In related news, Fidelity says its assets rose to $2.8 trillion. See a Wall Street Journal story on the firm's finances here.

Hedge Fund Bets Big On Natural Gas Prices

It might be interesting to note that with all of the furor going on over UNG and commodities markets, a hedge fund has apparently made a rather large bet that natural gas prices will triple by winter.

The Financial Times story also gets into the most recent forecasts for the market from analysts and their reaction to the unusual play.

You can read the story here.

ETF Securities made a big splash with its new silver fund, SIVR. Next up on its wish list are funds focusing on gold, platinum and palladium.

William Rhind is head of sales and marketing at ETFS Marketing LLC, the U.S. arm of London-based ETF Securities. The U.S. unit opened operations in July with the launch of its first exchange-traded fund, the ETFS Silver Trust (NYSEArca: SIVR).

The former iShares executive for Barclays Global Investors’ European operations recently discussed with IndexUniverse.com’s Murray Coleman plans by ETFS to expand in the U.S. marketplace.

IU: Has a move into the U.S. been something that ETFS has been considering for awhile?

Rhind: Our chairman, Graham Tuckwell, invented the gold ETF in 2003 and launched the first gold ETF in Australia. The first ETF in the U.S., the SPDR Gold Shares (NYSEArca: GLD), was made possible by the structure invented by Graham. After launching the first gold product, ETF Securities was established in 2005, and we built the largest exchange-traded commodities business in Europe.

IU: And that led you to the U.S.?

Rhind: Yes. When you get to the size we are now, we feel very strongly that we want to be the leading provider of exchange-traded commodities products in the world. The natural extension to our franchise in Europe is to expand into the U.S.

We think the U.S. equity ETF market is very competitive and arguably very saturated. But we feel that the U.S. commodities marketplace is under-served. We want to set new standards for transparency and education and service in the U.S. commodity ETF market and see ample opportunities for future expansion.

IU: What areas could those expansion plans lead to in terms of new types of products?

Rhind: At the moment, if you look at our filings with the SEC, you can see that we’re initially planning on launching precious metals products in the U.S. (See full story here.) In Europe, we essentially offer all types of commodities products from single commodities to baskets and indices. In the U.S., we’d like to at least offer a subset of those products here initially.

IU: Specifically, what else is in your U.S. pipeline?

Rhind: We recently launched the ETFS Silver Trust. (See related story here.) SIVR is designed to track the price of silver, less the associated expenses. SIVR has been very well received in the U.S. and now has assets under management of over $85 million. We have also filed for gold, platinum and palladium. The palladium exchange-traded product would be the first of its kind in the U.S.

That would be true with the platinum as well. The gold product will compete against GLD. We’re still in the registration period, so I can’t say too much other than what is publically available, but the key difference is that the gold will be stored in Switzerland rather than the U.S. or London, as GLD does. By having a product vaulted in Switzerland, it removes concerns about the nationalization of gold as a product in the U.S. In 1933, the U.S. government confiscated personal holdings of gold through a special presidential order.

IU: Isn’t your existing European gold ETF stored in London?

Rhind: Yes, by providing two separate gold ETFs, we’re allowing for more diversification on the part of investors worldwide.

IU: The gold ETF is going to use J.P. Morgan as the head custodian. Why not appoint a Swiss custodian directly?

Rhind: Essentially, they’re a large precious metals custodian with tremendous resources to handle a large-scale global business. So we believe that scalability is going to be important. We want to work with someone who can facilitate the business as it grows, and J.P. Morgan is a partner who can provide that.

IU: How do you view the regulatory environment for commodities investing in the U.S.?

Rhind: The CFTC is investigating behavior in certain futures markets. But the commodity market as a whole continues to function the way it always has. When it comes to commodity ETFs, there has been some scrutiny on some of the energy products that utilize futures contracts. However, the SEC just approved issuance of additional shares for UNG [U.S. Natural Gas Fund] which is a positive step for the industry.

I think the majority of people recognize that ETF or index investors are generally long-term investors by nature. They want transparency, liquidity and stability in markets. Overall, we feel there is a positive regulatory environment in the U.S. for new commodity ETFs. People accept and understand physical asset-backed commodities funds like gold or silver, and the return profile is easy to understand. After all, gold funds actually physically hold bullion and silver funds like SIVR actually holds silver bullion.

IU: Commodities are still just a small portion of most investment portfolios, aren’t they?

Rhind: Correct, but they’ve been becoming ever larger, especially during the past 12 months. Traditionally, people have been allocating 2-3% to commodities. But we’ve been seeing in some places that now up to 5-8%. That’s one area of growth in the U.S. market for us. And naturally, there are going to be more products as we broaden our fund offerings. People will be able to allocate to different commodities in different sectors. A pension fund, for example, probably wants to hold a broadly diversified commodities ETF.

As we build our business, we’re certainly going to have more than just precious metal funds. We want to develop a one-stop shop where investors can come and find any type of commodity investment they’d like. That’s what we have in Europe, with about $12.5 billion in assets under management. We’ve got more than 130 ETFs worldwide. We firmly believe the U.S. business could be bigger than the European business.

IU: In Europe, you’re mainly focused on commodities. But you’ve also been branching into different asset classes, haven’t you?

Rhind: Yes, and it has only been within the past several months. That’s a very new business for us and represents about $200 million of our total assets. But we want to build the biggest and best business in the U.S. Right now, we’re just focused on building our commodity business in the U.S. However, we reserve the right to expand into other asset classes at some point. But for right now, we want to become the No. 1 provider of commodity ETFs in this market.

(Editor's note: This story also appears on IndexUniverse.com's sister European site here.)

In May, Invesco PowerShares announced the closing of 19 different exchange-traded funds. One of those was a fund investing strictly in foreign private-equity players, apparently due to low asset levels.

Now, PowerShares is proposing changes to its existing private-equity ETF. It has filed a request with the Securities and Exchange Commission for approval to what appears to be a conversion of the U.S.-focused PowerShares Listed Private Equity ETF (NYSE Arca: PSP) into a global portfolio.

In 2006, PSP came out as the first ETF of its kind. At the time, the market for public private-equity firms was somewhat limited, causing some investors to grouse that PSP had to stretch its portfolio a bit and include companies that shouldn't be considered pure private equity plays.

But in late 2007, the PowerShares International Listed Private Equity Portfolio (NYSE Arca: PFP) was launched. It came out just as credit markets were tanking and valuations of once-booming private equity firms began tumbling.

By the time PowerShares decided to pull the plug earlier this year, PFP had just $12.6 million in assets. (See related story here.)

Presumably, a switch to a more global portfolio would combine the top names in the existing holdings of PSP and the former PFP using a modified market-cap size weighting methodology.

No details of a new index were given in the filing, however. It might be worth noting that PSP currently charges an expense ratio of 0.60%.

After the changes, PSP will include some 40-60 different companies involved in lending or investing in privately held companies throughout the world.

PSP is certainly having a banner year after suffering a huge fall in 2008. The domestic-minded ETF lost more than 64% last year, but has gained 22%-plus so far in 2009.

You can read the filing here.

Vanguard seeks to expand its bond index fund lineup with seven funds and ETFs.

Vanguard has filed a registration statement with the Securities and Exchange Commission for seven new bond index funds. Each will have a corresponding exchange-traded funds share class, according to the Valley Forge, Pa.-based firm.

The new offerings will bring the total number of Vanguard bond index funds to 12. The funds will come with expected expense ratios of 0.15%; institutional shares will charge about 0.09% annually.

The funds are expected to be available late this year, according to a company statement.

Vanguard came out with what it bills as the industry’s first no-load bond index fund, the Vanguard Total Bond Market Index Fund (VBMFX), in 1986. It followed with three additional bond index funds in 1994, and launched bond ETFs in 2007.

“Financial advisors and institutions want to construct broadly diversified fixed income portfolios, while retaining the ability to emphasize particular sectors or durations," said Bill McNabb, Vanguard's chief executive, in the statement.

The new funds are:

As a service to our readers, IndexUniverse.com is switching publication of its popular ETF Watch feature each week to Monday.

The content won't change. But now readers can catch-up on all of the latest news at the start of each week instead of at the end. Also, a Monday publishing date will enable IU.com's staff to deliver even more in-depth categorization and coverage of all the latest exchange-traded funds filing information and past data.

Please look for this feature to start appearing in its new slot on Aug. 10 exclusively at IndexUniverse.com.

How broad-based of an audience can an exchange-traded fund focused solely on companies based in Peru attract?

Since launching a little more than a month ago, the seemingly narrow-focused iShares MSCI All Peru Capped Index Fund (NYSEArca: EPU) has seen its assets top $33 million. That’s actually down a bit from a week ago when that number surpassed $35 million. (See related story here.)

So what’s driving such growth? Performance is one factor. In the past month, EPU’s returns have shot up by nearly 4 percentage points. More significantly to longer-term investors, the country has produced the best gross domestic product growth rate in the region—or near the top, depending on periods studied and data used—for more than a decade now.

And even more assets figure to start flowing EPU’s way. Shortly after coming out on June 22 (see related story here), iShares’ parent Barclays Global Investors announced that Peru’s pension fund manager has decided to invest some $300 million into the ETF over the next several months as a way to create more liquid and diversified portfolios for their investors.

It’s a theme that Daniel Gamba, BGI’s executive director of Latin American operations, says he’s seeing spread throughout the region.

IndexUniverse.com Editor Murray Coleman caught up with him at BGI’s headquarters in San Francisco on Thursday for a discussion of the growth of ETFs in Latin America. Below are excerpts from that conversation.

IU:  How much growth are you seeing in single-country Latin American ETFs?

Gamba: The asset base for EPU since it launched in June has been growing. It was actually seeded with about $1.2 million in assets. The markets have come down in the past few days a little, but the fact that it has been growing by about $2 million a day make us fairly optimistic. The expectation is that EPU will continue to grow at least at that pace in the future. And Peru is within the top two Latin American markets currently being recommended by U.S. analysts.

IU: In the U.S., a single-country ETF like EPU might seem like a niche product. But last year, Peru’s GDP grew at a 9% rate and it’s still Latin America’s fastest-growing economy, isn’t it?

Gamba: Yes, and we’ve seen strong relative growth in that country for several years. Between 2002 through 2008, its GDP growth averaged 6.8%. That was larger than Brazil or any other country in Latin America. And the inflation rate in Peru continues to be one of the lowest in the region.

IU: Do you see more pension managers in other countries investing in ETFs?

Gamba: In Latin America, pension plans are starting to use ETFs more these days. In Chile, pension plans have about $100 billion in assets, of which around $5 billion are invested through ETFs. Our market share represents roughly 80% of those pension ETF assets. In Mexico, the total pension system is about $100 billion, with ETF pension plan assets of around $7 billion. And Peru’s pension portfolios have close to $25 billion total assets, with about $1 billion in ETFs. As a whole, our ETF market share is about 80-90% throughout Latin America.

IU: How about Brazil?

Gamba: We just listed local ETFs in Brazil at the end of last year. We currently have about $1.5 billion in assets through the local exchange. But across Latin America, there’s a big trend of pension plans moving into ETFs as a more liquid way to diversify their existing portfolios.

IU: Isn’t the Latin American pension plan model being used in other parts of the world?

Gamba: Yes, and as a result, we’re seeing ETFs being embraced in regions such as eastern Europe. Those countries are using a similar type of pension system to the one in Chile. That’s also the case in Latin America, which has also closely followed the model pioneered in Chile.

IU: What similarities do these pension systems share?

Gamba: Basically, we’re talking about a shared view that pension systems should obligate employees to contribute at least a certain percentage of their salaries. Then a group of select pension fund managers handle those assets. It’s similar to the U.S. 401(k) system, except in Latin America and eastern Europe, contributions are mandatory. The ETF structure is being viewed as a favorite with regulators in both of those regions as a means to diversify and add more transparency into the pension systems.

IU: What do you expect for ETF growth rates in pension plans in the future?

Gamba: We expect pension plan assets in Latin America to grow at an average annual rate of around 15% over the next five years. The big majority of that growth will be driven by inflows from employees, who average 28-30 years of age across the region. And again, they’re obligated to contribute.

By contrast, in developed markets around the world, we’re seeing pension plans growing in single digits, less than 10% a year.

XShares Advisors LLC has announced that it plans to close the AirShares EU Carbon Allowances Fund (NYSE Arca: ASO).

Entering July, the exchange-traded product had just $4 million in assets. ASO launched in December 2008 with nearly $5 million in seed money as an asset base.

ASO is actually a commodity pool that tracks a basket of exchange-traded futures contracts for European Union allowances (EUAs). Each contract provides for delivery of 1,000 EUAs at a specified price.

The ETF-like product, as AirShares refers to ASO, invests in futures contracts that expire each December beginning in 2009 and extending through 2012. As contracts approach their December expiration, the fund sells expiring contracts and replaces them with contracts of later expirations.

Since the commodities involved aren't physically deliverable, ASO can't be considered an ETF. But it acts like many exchange-traded commodities products that are popular in Europe.

Carbon exchange-traded products began appearing in the second half of last year to much hoopla. But their role in a diversified investment portfolio remains in debate since little in the way of research is out on how investing in such a niche corner of the market can impact long-term portfolios.

That has led to speculation that only traders well-versed in carbon emissions markets would trade such futures contracts through an exchange-traded product.

ASO was actually the second such fund of its type. Another type of fund, referred to as an exchange-traded note, was first to market in the carbon field. Last June, Barclays Capital gained first-mover status into the U.S. exchange-traded products market for carbon emissions with its iPath Global Carbon ETN (NYSE Arca: GRN).

Just like ASO, it trades throughout the day along an exchange. But GRN is priced a bit cheaper at 0.75%. As an ETN, however, GRN carries counterparty risk since it actually represents an investment in unsecured debt notes.

Interestingly, GRN isn't doing any better than ASO. It has less than $3 million in total assets.

In announcing the shuttering of ASO, XShares said that it "has considered the current market conditions and the growth prospects of the small fund in the foreseeable future and decided that liquidation was in the best interests of the fund and its shareholders."

The fund is eligible to de-register because it has fewer than 300 common stock shareholders of record.

Shareholders may sell their shares without transaction fees on or before July 31, the firm added in its statement. All shareholders of record remaining on that day will receive cash equivalent to the net asset value of their shares as of the same date, including any capital gains and dividends.

-- This article was submitted by IndexUniverse.com's Murray Coleman.

The third emerging markets sector exchange-traded funds launched on Wednesday, this time adding top stocks from a composite index of 10 sectors spanning 15 countries.

The name of the new ETF is a mouthful – the Emerging Global Shares Dow Jones Emerging Markets Titans Composite Index Fund (NYSE Arca: EEG).  Its sponsor is Emerging Global Advisors, which is responsible for coming to market in May with the first sector-focused emerging markets ETFs so far.

Those are: the Emerging Global Shares Dow Jones Emerging Markets Energy Fund (NYSE Arca: EEO); and the Emerging Global Shares Dow Jones Emerging Markets Metals & Mining Titans Index Fund (NYSE Arca: EMT).  You can read more about those ETFs here.

EEG is designed to track the Dow Jones Emerging Markets Titans Composite Index. That benchmark includes the 100 top names by market capitalization sizes in major sectors across the developing marketplace. The sector weightings are modified in that no one name can have more than a 10% exposure in the fund.

The ETF will charge an annual expense ratio of 0.75%.

EEG differs in both its geographical complexion as well as its sector exposures in several subtle, yet possibly significant ways, from broader-based emerging markets ETFs.  For example, take the iShares MSCI Emerging Markets Index (NYSE: EEM). It has roughly the same in financials (23.89%) as EEG’s benchmark had at the end of the second quarter (22.35%).

But financials are the second-biggest sector in EEG, whereas it’s No. 1 in EEM. Oil and gas was the Dow Jones index’s largest sector weighting at slightly more than 29% (again, through June).  EEM has less than 16% in energy right now.

“Since we don’t include Taiwan, Korea and Israel – we don’t consider them emerging markets – our fund will have a little bit more exposure to the BRICs. That means we’ll have less in areas like telecom and a little more in resource-related sectors,” said Richard Kang, EGA’s research director.

Kang and the firm’s chief executive, Bob Holderith, discussed in detail how a composite sector emerging markets ETF might work – along with the company’s other plans to launch 10-plus related sector ETFs – in this Q&A story which ran at IndexUniverse.com in June.)

Entering the third quarter, the underlying benchmark for EEG had the following country makeup:

• China Offshore: 20.43%

• Brazil: 20.29%

• India : 18.15%

• Russia: 14.24%

• Mexico: 10.07%

• South Africa: 8.30%

• Chile: 2.74%

• Malaysia: 1.85%

• Indonesia: 1.53%

• Kuwait: 1.04%

The fund’s sector weightings of its underlying benchmark showed the following breakdown:

• Oil & Gas: 29.02%

• Financials: 22.35%

• Basic Materials: 11.36%

• Telecommunications: 10.70%

• Industrials: 5.55%

• Consumer Goods: 5.20%

• Technology: 4.93%

• Consumer Services: 4.80%

• Utilities: 4.25%

• Health Care: 1.84%

In a widely anticipated move, the Nasdaq OMX Group told investors and analysts on Tuesday that Magnus Bocker would be stepping down soon as the company's president.

In a brief statement, the Nasdaq (Nasdaq: NDAQ) said that Bocker will be joining the Singapore Exchange Limited as chief executive beginning in December. His last day in his current role is expected to be Sept. 2.

"We are grateful for his valuable contributions over the last 18 months, including executing on our successful integration as well as his achievements in moving our listings and market technology business forward," said Bob Greifeld, the Nasdaq's CEO, in the statement.

Bocker was named president of Nasdaq after it merged with the OMX Group last February. He was responsible for listings, corporate services and market technology at the Nasdaq OMX Group.

His responsibilities will be assumed by two current Nasdaq managers: Bruce Aust, executive vice president of the firm's global corporate client group; and Anna Ewing, executive vice president and chief information officer, who will focus on market technology.

"I have enjoyed my time in New York and take great satisfaction in having seen through the very successful integration of Nasdaq OMX, with synergies achieved seamlessly and ahead of schedule," said Mr. Bocker in the same statement.

Brad Durham is co-founder and managing director at EPFR Global. The Cambridge, Mass.-based research firm tracks global fund flows, both institutional as well as retail for financial institutions. It tracks an estimated $10 trillion in sector, country and asset class flows on a daily, weekly and monthly basis for both fixed income and equities.

Before helping to start EPFR 14 years ago, Durham was editor of publications focused on the economics and politics of emerging markets. That included launching and operating several Russian financial publications, including Kommersant and a joint venture with Hearst Corp. and Izvestia. Durham has earned a doctorate from Suffolk University Law School and a master’s degree in journalism from Boston University.

On Monday, IndexUniverse.com Editor Murray Coleman caught up with the analyst for his views on changes in the landscape of exchange-traded funds around the world.

IndexUniverse: Money has been flowing into ETFs consistently through good times and bad, haven’t they?

Durham: Yes, and we’re seeing a definite increase in activity over the past several months. Since early March, net inflows into bond ETFs have reached about $16 billion. At the same time, equity ETFs have shown about $4.6 billion inflows through July 15. Non-ETFs are a different story, though. We’ve seen some pretty big outflows in mutual funds investing predominately in developed markets and U.S. equities. Those types of open-end mutual funds have lost $2.6 billion in net outflows since March 4. On the other hand, bond mutual funds have produced inflows of $25 billion.

Interestingly, the inflows into bond ETFs amount to about 25% of their assets. That’s a pretty eye-popping number. For example, the iShares Barclays 1-3 Year Credit Bond Index (NYSE:CSJ) has taken in $111.2 million in assets during the past 12 weeks. That’s the second-biggest; the iShares  Barclays TIPS Bond (NYSE: TIP) has attracted $139.9 million in that period.

By contrast, the biggest inflows among equity ETFs has been the SPDR S&P 500 ETF (NYSE: SPY) with $649 million. The next biggest was Energy Select Sector SPDR ETF (NYSE: XLE) with $600.4 million followed by the Vanguard Emerging Markets ETF (NYSE: VWO) with $233.3 million.

IndexUniverse: So emerging markets inflow is still very strong?

Durham: It has definitely been tapering off in the past few weeks. For example, we’ve seen about $29.1 billion in net inflow into all EM market stock funds from the beginning of 2009 through the first week of March. That included  both mutual funds and ETFs. Since then – the first week of March through July 15 – about $28.3 billion has flown into all types of EM stock funds. But a majority of those most recent inflows came at the start of the current rally.

IndexUniverse: How does that breakdown in terms of ETFs?

Durham: Of the $28.3 billion net inflows into EM stock funds since March, some $13.4 billion has gone into EM stock ETFs. And year-to-date, EM ETFs have taken in $14.5 billion. So that’s more confirmation that the bulk of the latest activity took place in early March. But if you look at this year compared to 2008, at least flows into EM stock funds are moving into the same direction – both mutual funds and ETFs are experiencing inflows.

In terms of total assets, EM ETFs have been increasing their market share rather dramatically over the past 18 months. Total assets for all EM stock funds now stand at about $356 billion. Of that total, EM stock ETF assets are currently at around $106 billion. That compares with EM stock ETFs comprising about 16% of the total EM stock fund assets as of February 2008.

IndexUniverse: Is that due to greater trading flexibility of ETFs, or more choices in terms of single country and regional emerging market ETFs?

Durham: You’ve still got plenty of choices in emerging markets with open-end mutual funds. But the ease of investing, greater flexibility and much lower fees are attracting more investors to ETFs. In developed markets, sector asset allocation is considered more significant for driving returns. But in emerging markets, investors tend to take a more top-down approach. In the U.S., it’s pretty well-known that actively managed funds don’t typically outperform index funds. So in emerging markets, where institutions are even more important in driving money flows, the natural inclination is to drive costs down through ETFs.

IndexUniverse: What are you seeing in commodities?

Durham: We had been seeing inflows, but now it’s going in the opposite direction. Commodities funds were the big magnet in the first part of the year.  Those have taken in about $8.2 billion year-to-date through July 15. ETF-only commodity funds have dominated with about $5.3 billion in net inflows. The biggest gainer in 2009 has been the Market Vectors Gold Miners ETF (NYSE: GDX) with $1.2 billion. The next was the iShares S&P GSCI Commodity Indexed Trust (NYSE: GSG) at $860.2 million.

Lately, though, both commodity mutual fund and ETF flows have been slowing. Flows peaked on June 24^th and have lost about $500 million since then. Of that total, about $180 million in net outflows have come from commodity ETFs –- although energy has seen slight inflows during that time.

Brad Durham is co-founder and managing director at EPFR Global. The Cambridge, Mass.-based research firm tracks global fund flows, both institutional as well as retail, for financial institutions. It tracks an estimated $10 trillion in sector, country and asset class flows on a daily, weekly and monthly basis both for fixed income and equities.

Before helping to start EPFR 14 years ago, Durham was editor of publications focused on the economics and politics of emerging markets. That included launching and operating several Russian financial publications, including Kommersant and a joint venture with Hearst Corp. and Izvestia. Durham has earned a doctorate from Suffolk University Law School and a master’s degree in journalism from Boston University.

On Monday, IndexUniverse.com Editor Murray Coleman caught up with the analyst for his views on changes in the landscape of exchange-traded funds around the world.

IndexUniverse: Money has been flowing into ETFs consistently through good times and bad, haven’t they?

Durham: Yes, and we’re seeing a definite increase in activity over the past several months. Since early March, net inflows into bond ETFs have reached about $16 billion. At the same time, equity ETFs have shown about $4.6 billion inflows through July 15. Non-ETFs are a different story, though. We’ve seen some pretty big outflows in mutual funds investing predominantly in developed markets and U.S. equities. Those types of open-end mutual funds have lost $2.6 billion in net outflows since March 4. On the other hand, bond mutual funds have produced inflows of $25 billion.

Interestingly, the inflows into bond ETFs amount to about 25% of their assets. That’s a pretty eye-popping number. For example, the iShares Barclays 1-3 Year Credit Bond Index (NYSE: CSJ) has taken in $111.2 million in assets during the past 12 weeks. That’s the second-biggest; the iShares Barclays TIPS Bond (NYSE: TIP) has attracted $139.9 million in that period.

By contrast, the biggest inflows among equity ETFs has been the SPDR S&P 500 ETF (NYSE: SPY), with $649 million. The next biggest was Energy Select Sector SPDR ETF (NYSE: XLE), with $600.4 million, followed by the Vanguard Emerging Markets ETF (NYSE: VWO), with $233.3 million.

IndexUniverse: So emerging markets inflow is still very strong?

Durham: It has definitely been tapering off in the past few weeks. For example, we’ve seen about $29.1 billion in net inflow into all emerging market stock funds from the beginning of 2009 through the first week of March. That included mutual funds and ETFs. Since then—the first week of March through July 15—about $28.3 billion has flown into all types of emerging market stock funds. But a majority of those most recent inflows came at the start of the current rally.

IndexUniverse: How does that break down in terms of ETFs?

Durham: Of the $28.3 billion net inflows into EM stock funds since March, some $13.4 billion has gone into EM stock ETFs. And year-to-date, EM ETFs have taken in $14.5 billion. So that’s more confirmation that the bulk of the latest activity took place in early March. But if you look at this year compared to 2008, at least flows into EM stock funds are moving into the same direction—both mutual funds and ETFs are experiencing inflows.

In terms of total assets, EM ETFs have been increasing their market share rather dramatically over the past 18 months. Total assets for all EM stock funds now stand at about $356 billion. Of that total, EM stock ETF assets are currently at around $106 billion. That compares with EM stock ETFs comprising about 16% of the total EM stock fund assets as of February 2008.

IndexUniverse: Is that due to greater trading flexibility of ETFs, or more choices in terms of single country and regional emerging market ETFs?

Durham: You’ve still got plenty of choices in emerging markets with open-end mutual funds. But the ease of investing, greater flexibility and much lower fees are attracting more investors to ETFs. In developed markets, sector asset allocation is considered more significant for driving returns. But in emerging markets, investors tend to take a more top-down approach. In the U.S., it’s pretty well known that actively managed funds don’t typically outperform index funds. So in emerging markets, where institutions are even more important in driving money flows, the natural inclination is to drive costs down through ETFs.

IndexUniverse: What are you seeing in commodities?

Durham: We had been seeing inflows, but now it’s going in the opposite direction. Commodities funds were the big magnet in the first part of the year. Those have taken in about $8.2 billion year-to-date through July 15. ETF-only commodity funds have dominated with about $5.3 billion in net inflows. The biggest gainer in 2009 has been the Market Vectors Gold Miners ETF (NYSE: GDX), with $1.2 billion. The next was the iShares S&P GSCI Commodity Indexed Trust (NYSE: GSG), at $860.2 million.

Lately, though, commodity mutual fund and ETF flows have been slowing. Flows peaked on June 24 and have lost about $500 million since then. Of that total, about $180 million in net outflows have come from commodity ETFs—although energy has seen slight inflows during that time.

Once seen as a fringe asset class, emerging markets today are powering economic growth and providing a critical source of returns for investor portfolios. In this one-hour webinar, IndexUniverse.com's Matt Hougan examines the case for increasing a portfolio's baseline exposure to emerging markets, and argues that most investors systematically underweight emerging markets.

Click here for a full replay of the webinar

Click here to view Hougan's PowerPoint presentation in PDF format

Click here for a full replay of the webinar. (Coming soon.)

Click here to view Hougan's PowerPoint presentation in PDF format. (Coming soon.)

Earlier this year, as reported on IndexUniverse.com, ETF Securities made filings to the SEC to launch ETFs tracking gold, silver, platinum and palladium, called the ETFS Gold, Silver, Platinum and Palladium Trusts, respectively. The platinum and palladium funds will be the first of their type available in the US market.

On 2 July the ETFS Gold Trust filed with the SEC to issue up to US$1 billion in ETFS Physical Swiss Gold Shares. The custodian will be JP Morgan Chase Bank NA, who will, in turn, select a sub-custodian in Zurich to hold the trust’s allocated gold.

The existing physically-backed gold trackers run by ETF Securities in Europe, Gold Bullion Securities (LSE: GBS.L) and ETFS Physical Gold (LSE: PHAU.L), both have HSBC Bank USA as their custodian. HSBC was named as the custodian in the original US registration for the ETFS Gold Trust.

In recent months gold ETFs run by Swiss banks ZKB and Julius Baer have gained market share amongst bullion trackers, with many observers citing the location of the funds’ gold custody in Switzerland as a key selling point.

The ETFS Physical Swiss Gold shares will trade on NYSE ARCA under the symbol “SGOL”. The management fees to be levied on the shares have not yet been determined, a spokesman for ETF Securities said.

ETF Securities’ new filing comes at a time of intensifying competition in the gold tracker market. Last week Source, the London-based issuer of exchange-traded products, launched the Source Physical Gold ETC, whose management charge, at 0.29% per annum, undercuts competing products by at least 10 basis points.

The US-based SPDR Gold Trust (NYSEArca: GLD) remains the largest gold exchange-traded product in the world by some margin, with over US$33 billion under management.

Another big name is targeting the ETF industry: Russell Investments has filed for sweeping exemptions with the Securities and Exchange Commission that would allow it to create actively managed as well as index-based ETFs.

The July 2 filing designates Russell Investment Management Company as the adviser to the funds and Russell Financial Services as the distributor. It makes several requests, beyond the basic operation of ETFs, such as allowing funds of funds operated by Russell to buy shares of the ETFs in amounts beyond what is normally allowed under SEC guidelines and allowing ETFs launched by Russell to use the firm’s own indexes.

The filing specifies that the funds could cover domestic stocks, international stocks or fixed income. It also says that the holdings of each fund for the prior day, whether passive or actively managed, will be made available on a daily basis. No individual funds were actually described in the filing.

A subsidiary of Northwestern Mutual, Russell Investments has a total of $136 billion under management, no small sum by any means. Given that the firm already has its own family of well-known indexes (some of which already underlie ETFs from other providers) in addition to operating traditional mutual funds, entry into the ETF arena seems a natural fit.

The field is seeing quite a few newcomers looking to break into ETFs, with Pimco rolling out its first fund and Old Mutual filing for its own funds. With Russell’s involvement in institutional management, there could be a bigger push for wider inclusion of ETFs in 401(k)s.

A 40-APP filing is one of the first filings a fund company must make before it can offer ETFs. Once the exemptions are granted by the SEC, the issuer can then file prospectuses for new funds.

You can read Russell’s 40-APP filing here.

--Contributed by Heather Bell

It looks like the Russell Top 200 Index might finally be the subject of not one, but three, different ETFs. Recent filings from Barclays Global Investors indicate that the firm is looking to launch three iShares funds that will track the Russell Top 200 Index, Russell Top 200 Growth Index and Russell Top 200 Value Index, respectively.

The Russell Top 200 is an index that, rather unsurprisingly, includes the top 200 companies by market capitalization in the Russell 3000 Index. One of the filings notes that as of the end of May, it represented 66% of the total market cap of the broad benchmark. That may have changed during the recent Russell rebalance at the end of June, but likely not by much.

The growth fund will track an index that represents roughly 74% of the Russell Top 200; meanwhile, the value fund’s underlying index is about 64% of the Russell Top 200. There is significant component overlap between the two indexes. Growth and value are determined by price-to-book ratio and projected growth: A stock with a high P/B and high projected growth is more likely to be designated as a growth stock, while stocks with lower P/Bs and projected growth are more likely to be classified as value stocks.

The filings say that the funds will utilize a “representative sampling indexing strategy” instead of full replication. No fees are listed in the filings.

The appeal of such funds could be mixed. The index is fairly well-known, and could serve as an appealing “mega-cap” alternative, but there are already several funds on the market tracking indexes like the S&P 100 and Russell Top 50. In particular, Vanguard offers “Mega-Cap” ETFs that track the MSCI U.S. Large-Cap Index and its growth and value subindexes. Those funds charge just 13 basis points, while the iShares fund tracking the S&P 100 charges 20 basis points, which raises the question of how competitive the pending funds would be in terms of pricing.

Read the filing for the iShares Russell 200 Index Fund here.

Read the filing for the iShares Russell 200 Growth Index Fund here.

Read the filing for the iShares Russell 200 Value Index Fund here.

--Contributed by Heather Bell

Direxion will execute a reverse split of its leveraged and inverse financial ETFs on July 9th, after the two funds’ share prices fell so much that they became overly costly for investors to trade.

The Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) will execute a 1-for-5 reverse split, meaning shareholders will receive 1 share of the new FAS for every 5 shares they own today. For the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ), the ratio will be 1-for-10.

Investors won’t lose any money on the deal of course, because each share will become more valuable. Based on yesterday’s closing prices, the reverse splits will raise the per-share cost of FAZ from $5.12/share to $51.20/share and boost the price of FAS from $8.34/share to $41.70/share.

The reason for the reverse split is simple: With the share price so low, FAZ and FAS had become uneconomic to trade.

Both funds trade at the minimum possible spread of one penny per share, which means investors lose two cents on a round-trip trade due to spreads. That may not sound like much, but with the share price of FAS at $5/share, two cents is 0.39% of the fund.

Moreover, many brokers charge investors a fixed per-share fee to buy and sell securities: sometimes one penny, but sometimes 2, 3 or even 4 cents per share traded. If you paid two cents per share on each trade, that means a roundtrip trade cost you 4 cents per share.  Add in the two cents worth of spreads and you’re talking six cents a share to trade the fund.  Again, that may not sound like much, but six cents per share works out to a 1.17% fee to buy and sell FAS at current prices. That’s more than the fund’s annual 0.95% expense ratio!

By executing a reverse stock split and raising the per-share price, the cost to trade will be reduced: six cents on a $51.12/share stock price is only 0.117%. To put it another way, the cost of buying and selling $50,000 of FAZ will drop from approximately $117/trade to just $11.70/trade.

The idea was proposed by Matt Hougan on the IndexUniverse.eu blog in early June.

Direxion will execute a reverse split of its leveraged and inverse financial ETFs on July 9, after the two funds’ share prices fell so much that they became overly costly for investors to trade.

The Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) will execute a 1-for-5 reverse split, meaning shareholders will receive one share of the new FAS for every five shares they own today. For the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ), the ratio will be 1-for-10.

Investors won’t lose any money on the deal of course, because each share will become more valuable. Based on yesterday’s closing prices, the reverse splits will raise the per-share cost of FAZ from $5.12/share to $51.20/share and boost the price of FAS from $8.34/share to $41.70/share.

The reason for the reverse split is simple: With the share price so low, FAZ and FAS had become uneconomic to trade.

Both funds trade at the minimum possible spread of one penny per share, which means investors lose 2 cents on a round-trip trade due to spreads. That may not sound like much, but with the share price of FAS at $5/share, 2 cents is 0.39% of the fund.

Moreover, many brokers charge investors a fixed per-share fee to buy and sell securities: sometimes one penny, but sometimes 2, 3 or even 4 cents per share traded. If you paid two cents per share on each trade, that means a round-trip trade cost you 4 cents per share. Add in the 2 cents' worth of spreads and you’re talking 6 cents a share to trade the fund. Again, that may not sound like much, but 6 cents per share works out to a 1.17% fee to buy and sell FAS at current prices. That’s more than the fund’s annual 0.95% expense ratio!

By executing a reverse stock split and raising the per-share price, the cost to trade will be reduced: 6 cents on a $51.12/share stock price is only 0.117%. To put it another way, the cost of buying and selling $50,000 of FAZ will drop from approximately $117/trade to just $11.70/trade.

The idea was proposed by Matt Hougan on the IndexUniverse.eu blog in early June.

The back-office securities servicing arm of Bank of New York Mellon says it has topped the $100 billion mark in exchange-traded fund assets. At that level, BNY Mellon Asset Servicing claims to be the largest U.S. custodian for ETFs in terms of funds serviced.

In a statement released Tuesday morning, the firm says that it now provides services to more than 350 separate funds. BNY Mellon's ETF services business has grown from a single portfolio with less than $1 billion in assets in the past decade, according to Joseph Keenan, managing director of BNY Mellon Asset Servicing.

He credited the group's climb to the top at least in part to the market's recent upswing. Longer term, Keenan noted the explosive growth in ETF popularity over the past several years. ETF services include custody, accounting and administration as well as transfer agency servicing.

"We will continue to invest in all aspects of this business from technology to client service so we can meet the growing needs of investment managers and contribute to the continuing success of our clients," said Keenan in a statement.

First Trust Advisors on Friday announced plans to launch its new exchange-traded fund focused on community banks on July 1.

The firm had previously filed for Securities and Exchange Commission approval to offer the fund. (See related story here.)

But the press splash is the company's first comments after completing the required regulatory process. It also provided full details of the ticker and made official the new ETF's name: The First Trust Nasdaq ABA Community Bank Fund (NASDAQ: QABA).

First Trust will serve as the investment adviser for the fund. It will come with an expense ratio of 0.60%, according to the ETF's prospectus.

Community banks follow a different economic paradigm than the New York-centered financial giants; they’re even quite different from the regional banking companies captured by ETFs such as the SPDR KBW Regional Banking ETF (NYSE Arca: KRE). When well-run, they tend to be steady, low-risk performers, with limited upside but similarly limited volatility.

"There has been little distinction made between the stress-tested megabanks and the nearly 8,000 community banks throughout the country," said Robert Carey, First Trust's chief investment officer, in a statement.

"Because these banks tend to practice more conservative banking strategies and have tended to stay away from subprime lending and exotic financial instruments, they have recently shown higher capital levels and healthier balances sheets as compared to larger financial institutions."

As reported previously by IU.com, the ETF's underlying index has a variety of exclusion criteria designed to maintain a pure-play focus on the community banking sector. Companies entering the index, for example, cannot be among the 50 largest banks or thrifts based on asset size; cannot focus on international servicing; cannot specialize in credit cards; etc. In other words, they are supposed to be local banks.

Bob Holderith is chief executive of Emerging Global Advisors. Richard Kang is chief investment officer for the New York-based company, which recently launched the first exchange-traded funds focused on specific sectors in emerging markets. (See related story here.)

EGA is expected to launch soon a third ETF that will act as a composite of the 10 underlying sectors in the Dow Jones emerging markets indexing series it’s using for current and upcoming funds.

The company says that nine more are in the works focusing on emerging markets sectors. Those will join the May launches of the EGS Emerging Markets Energy Fund (NYSE Arca: EEO) and the  EGS Emerging Markets Metals & Mining Fund (NYSE Arca: EMT).

IndexUniverse.com’s Murray Coleman caught up with Holderith and Kang late Thursday to discuss the future of sector investing in developing markets.

IU: What is available for U.S.-based investors in terms of foreign sector ETFs now?

Holderith: The family of Select Sector SPDRs is the dominant ETF line providing sector-based exposures.  They’ve got a long history. But those ETFs only focus on U.S. companies. For pure international exposure to foreign sectors, we’ve only seen two-  to three- years worth of actual performance history. And that’s through the iShares’ global sector family of funds as well as those of State Street Global Advisors. The SSgA  family is purely international sector ETFs.

IU: Then your firm’s line-up of international sector ETFs will compete most directly against those of SSgA?

Kang: No, since the SSgA ETFs are focused predominately on developed markets. For example, take the SPDR S&P International Financial Sector (NYSE: IPF). The top weighted countries are (in order): Japan, Canada, Australia, the U.K., Spain and Switzerland. The SSgA international sector ETFs do allow for some emerging markets exposure. But as cap-weighted indexes, they’re heavily skewed to developed countries.

IU: Why is your company going with pure emerging markets exposure rather than a mix of developed and emerging markets?

Holderith: There’s more than enough coverage of developed international markets now in the ETF marketplace. In terms of emerging markets, we’ve seen broad, regional and country specific funds. But we’re first to market with sector-specific ETFs for developing countries. The EMT and EEO ETFs are the first of a series we’re preparing to launch.

IU: What others are planned?

Holderith: We’ve got in the pipeline 10 ETFs still left to bring-to-market. Those will all use Dow Jones indexes, similar to those used by EMT and EEO. Dow Jones uses a classification system for sectors called the ICB (or industry classification benchmark) system. The other sector-specific ETFs in various stages of planning we’re working on launching cover: basic materials; consumer goods; consumer services; financials; health care; industrials; technology; telecom and utilities.

IU: You’ve also got a broader ETF that has received regulatory approval, don’t you?

Holderith: Yes, we’ve got a composite ETF that’s due to launch within the next few weeks.  That’s an ETF tracking a Dow Jones index that takes the top 10 names from each of the 10 major emerging markets sectors. (It won’t include metals and mining, which is a subsector of basic materials.)  So that will leave 100 names in the underlying composite index. And as in all of our ETFs, we have a rule that caps individual weightings at no more than 10%.

IU: In the composite index for such an emerging markets fund, what would the sector weightings look like then?

Holderith: Oil and gas along with financials are the dominant sectors in the composite index.

IU: What type of performance have you seen through back-tested data for emerging markets sector indexes compared to developed markets sector indexes?

Kang: We have data going back many years for the underlying benchmarks. The data for emerging markets, however, isn’t as robust as that for developed markets. So we really focus on data going back to December 2005 when comparing the Dow Jones composite benchmark we’re using for our emerging markets sector funds.

IU: What do those comparisons show?

Kang: Going back to 2005, returns were generally spectacular up through 2007 for emerging markets vs. developed markets. In the latter half of 2008, we saw greater volatility and bigger losses in emerging markets. As with any more volatile asset class, emerging markets offers the potential for greater long-term gains as a result. Clearly, some sectors performed better in relative terms during the periods when markets were going up versus others.  The same is true in the bear market of 2008.  That is the essence of the popularity of sector funds -- their selection during different stages of the market cycle.

IU: How correlated are emerging markets sectors to developed markets sectors?

Kang: That’s a tricky question. It depends on your timeframe. In statistical terms, there’s just not a lot of data. But you can draw some general conclusions. There are times, like in the bull market from 2005-2007, when many sectors in emerging markets and developed markets were highly correlated. Commodity stocks were highly correlated during the commodities boon regardless of location. On the other hand during the credit crisis, financials haven’t been as highly correlated because banks in the U.K, for example, have been exposed to more toxic assets than banks in places like China, Brazil and India.

IU: What do you see as the biggest benefits of breaking emerging markets into sectors?

Kang: A lot of investors managing their emerging markets exposures are doing so by allocating between countries. The question we asked at the very beginning of creating our ETFs is how much overlap there is between sectors and geography.

Let’s say you’re an American investor with heavy exposure to the S&P 500 index. Maybe you’ve tilted your  portfolio a little to commodities through funds such as the SPDR Gold Shares (NYSE: GLD) and the iPath Dow Jones-AIG Commodity Index ETN (NYSE: DJP). If you’ve got that portfolio, you look more like a Canadian or an Aussie – both of those countries are heavily influenced by movements in natural resources prices.

IU: In other words, broader-based ETFs don’t add a lot in those situations?

Kang: The inclusion of broad emerging market ETFs as well as many of the country specific ETFs to this kind of portfolio would not provide diversification as correlations would be surprisingly high.  For true diversification, the inclusion of certain sectors would likely provide more optimal risk-return characteristics to the overall portfolio.

Furthermore, many investors who invest in emerging markets country ETFs do so based on a sector-type of rationale. For example, let’s say someone wants to invest in Russia. The question I would ask is: Do you want to invest in that country to be more richly compensated with some sort of political risk associated with that country? Or, are you investing in Russia to make an oil and gas bet? If that’s the case, do you want to put all your eggs in one basket – Russia. Or, would you prefer to invest in a basket focused on oil and gas but with companies from Russia, India, China, Brazil and several others?

IU: Those are the top countries in EEO, aren’t they?

Kang: Yes. Those four countries comprise roughly two-thirds of the fund. And with EMT, the top countries are: South Africa, Brazil, China and Russia. Those take up more than three-quarters of the fund.

Bob Holderith is chief executive of Emerging Global Advisors. Richard Kang is chief investment officer for the New York-based company, which recently launched the first exchange-traded funds focused on specific sectors in emerging markets. (See related story here.)

EGA is expected to launch soon a third ETF that will act as a composite of the 10 underlying sectors in the Dow Jones emerging markets indexing series it’s using for current and upcoming funds.

The company says that nine more are in the works focusing on emerging markets sectors. Those will join the May launches of the EGS Emerging Markets Energy Fund (NYSE Arca: EEO) and the  EGS Emerging Markets Metals & Mining Fund (NYSE Arca: EMT).

IndexUniverse.com’s Murray Coleman caught up with Holderith and Kang late Thursday to discuss the future of sector investing in developing markets.

IU: What is available for U.S.-based investors in terms of foreign sector ETFs now?

Holderith: The family of Select Sector SPDRs is the dominant ETF line providing sector-based exposures.  They’ve got a long history. But those ETFs only focus on U.S. companies. For pure international exposure to foreign sectors, we’ve only seen two-  to three- years worth of actual performance history. And that’s through the iShares’ global sector family of funds as well as those of State Street Global Advisors. The SSgA  family is purely international sector ETFs.

IU: Then your firm’s line-up of international sector ETFs will compete most directly against those of SSgA?

Kang: No, since the SSgA ETFs are focused predominately on developed markets. For example, take the SPDR S&P International Financial Sector (NYSE: IPF). The top weighted countries are (in order): Japan, Canada, Australia, the U.K., Spain and Switzerland. The SSgA international sector ETFs do allow for some emerging markets exposure. But as cap-weighted indexes, they’re heavily skewed to developed countries.

IU: Why is your company going with pure emerging markets exposure rather than a mix of developed and emerging markets?

Holderith: There’s more than enough coverage of developed international markets now in the ETF marketplace. In terms of emerging markets, we’ve seen broad, regional and country specific funds. But we’re first to market with sector-specific ETFs for developing countries. The EMT and EEO ETFs are the first of a series we’re preparing to launch.

IU: What others are planned?

Holderith: We’ve got in the pipeline 10 ETFs still left to bring-to-market. Those will all use Dow Jones indexes, similar to those used by EMT and EEO. Dow Jones uses a classification system for sectors called the ICB (or industry classification benchmark) system. The other sector-specific ETFs in various stages of planning we’re working on launching cover: basic materials; consumer goods; consumer services; financials; health care; industrials; technology; telecom and utilities.

IU: You’ve also got a broader ETF that has received regulatory approval, don’t you?

Holderith: Yes, we’ve got a composite ETF that’s due to launch within the next few weeks.  That’s an ETF tracking a Dow Jones index that takes the top 10 names from each of the 10 major emerging markets sectors. (It won’t include metals and mining, which is a subsector of basic materials.)  So that will leave 100 names in the underlying composite index. And as in all of our ETFs, we have a rule that caps individual weightings at no more than 10%.

IU: In the composite index for such an emerging markets fund, what would the sector weightings look like then?

Holderith: Oil and gas along with financials are the dominant sectors in the composite index.

IU: What type of performance have you seen through back-tested data for emerging markets sector indexes compared to developed markets sector indexes?

Kang: We have data going back many years for the underlying benchmarks. The data for emerging markets, however, isn’t as robust as that for developed markets. So we really focus on data going back to December 2005 when comparing the Dow Jones composite benchmark we’re using for our emerging markets sector funds.

IU: What do those comparisons show?

Kang: Going back to 2005, returns were generally spectacular up through 2007 for emerging markets vs. developed markets. In the latter half of 2008, we saw greater volatility and bigger losses in emerging markets. As with any more volatile asset class, emerging markets offers the potential for greater long-term gains as a result. Clearly, some sectors performed better in relative terms during the periods when markets were going up versus others.  The same is true in the bear market of 2008.  That is the essence of the popularity of sector funds -- their selection during different stages of the market cycle.

IU: How correlated are emerging markets sectors to developed markets sectors?

Kang: That’s a tricky question. It depends on your timeframe. In statistical terms, there’s just not a lot of data. But you can draw some general conclusions. There are times, like in the bull market from 2005-2007, when many sectors in emerging markets and developed markets were highly correlated. Commodity stocks were highly correlated during the commodities boon regardless of location. On the other hand during the credit crisis, financials haven’t been as highly correlated because banks in the U.K, for example, have been exposed to more toxic assets than banks in places like China, Brazil and India.

IU: What do you see as the biggest benefits of breaking emerging markets into sectors?

Kang: A lot of investors managing their emerging markets exposures are doing so by allocating between countries. The question we asked at the very beginning of creating our ETFs is how much overlap there is between sectors and geography.

Let’s say you’re an American investor with heavy exposure to the S&P 500 index. Maybe you’ve tilted your  portfolio a little to commodities through funds such as the SPDR Gold Shares (NYSE: GLD) and the iPath Dow Jones-AIG Commodity Index ETN (NYSE: DJP). If you’ve got that portfolio, you look more like a Canadian or an Aussie – both of those countries are heavily influenced by movements in natural resources prices.

IU: In other words, broader-based ETFs don’t add a lot in those situations?

Kang: The inclusion of broad emerging market ETFs as well as many of the country specific ETFs to this kind of portfolio would not provide diversification as correlations would be surprisingly high.  For true diversification, the inclusion of certain sectors would likely provide more optimal risk-return characteristics to the overall portfolio.

Furthermore, many investors who invest in emerging markets country ETFs do so based on a sector-type of rationale. For example, let’s say someone wants to invest in Russia. The question I would ask is: Do you want to invest in that country to be more richly compensated with some sort of political risk associated with that country? Or, are you investing in Russia to make an oil and gas bet? If that’s the case, do you want to put all your eggs in one basket – Russia. Or, would you prefer to invest in a basket focused on oil and gas but with companies from Russia, India, China, Brazil and several others?

IU: Those are the top countries in EEO, aren’t they?

Kang: Yes. Those four countries comprise roughly two-thirds of the fund. And with EMT, the top countries are: South Africa, Brazil, China and Russia. Those take up more than three-quarters of the fund.

Bob Holderith is chief executive of Emerging Global Advisors. Richard Kang is chief investment officer for the New York-based company, which recently launched the first exchange-traded funds focused on specific sectors in emerging markets. (See related story here.)

EGA is expected to launch soon a third ETF that will act as a composite of the 10 underlying sectors in the Dow Jones emerging markets indexing series it’s using for current and upcoming funds.

The company says that nine more are in the works focusing on emerging markets sectors. Those will join the May launches of the EGS Emerging Markets Energy Fund (NYSE Arca: EEO) and the EGS Emerging Markets Metals & Mining Fund (NYSE Arca: EMT).

IndexUniverse.com’s Murray Coleman caught up with Holderith and Kang late Thursday to discuss the future of sector investing in developing markets.

IU: What is available for U.S.-based investors in terms of foreign sector ETFs now?

Holderith: The family of Select Sector SPDRs is the dominant ETF line providing sector-based exposures. They’ve got a long history. But those ETFs only focus on U.S. companies. For pure international exposure to foreign sectors, we’ve only seen two- to three- years worth of actual performance history. And that’s through the iShares’ global sector family of funds as well as those of State Street Global Advisors. The SSgA family is purely international sector ETFs.

IU: Then your firm’s line-up of international sector ETFs will compete most directly against those of SSgA?

Kang: No, since the SSgA ETFs are focused predominately on developed markets. For example, take the SPDR S&P International Financial Sector (NYSE: IPF). The top weighted countries are (in order): Japan, Canada, Australia, the U.K., Spain and Switzerland. The SSgA international sector ETFs do allow for some emerging markets exposure. But as cap-weighted indexes, they’re heavily skewed to developed countries.

IU: Why is your company going with pure emerging markets exposure rather than a mix of developed and emerging markets?

Holderith: There’s more than enough coverage of developed international markets now in the ETF marketplace. In terms of emerging markets, we’ve seen broad, regional and country specific funds. But we’re first to market with sector-specific ETFs for developing countries. The EMT and EEO ETFs are the first of a series we’re preparing to launch.

IU: What others are planned?

Holderith: We’ve got in the pipeline 10 ETFs still left to bring-to-market. Those will all use Dow Jones indexes, similar to those used by EMT and EEO. Dow Jones uses a classification system for sectors called the ICB (or industry classification benchmark) system. The other sector-specific ETFs in various stages of planning we’re working on launching cover: basic materials; consumer goods; consumer services; financials; health care; industrials; technology; telecom and utilities.

IU: You’ve also got a broader ETF that has received regulatory approval, don’t you?

Holderith: Yes, we’ve got a composite ETF that’s due to launch within the next few weeks. That’s an ETF tracking a Dow Jones index that takes the top 10 names from each of the 10 major emerging markets sectors. (It won’t include metals and mining, which is a subsector of basic materials.) So that will leave 100 names in the underlying composite index. And as in all of our ETFs, we have a rule that caps individual weightings at no more than 10%.

IU: In the composite index for such an emerging markets fund, what would the sector weightings look like then?

Holderith: Oil and gas along with financials are the dominant sectors in the composite index.

IU: What type of performance have you seen through back-tested data for emerging markets sector indexes compared to developed markets sector indexes?

Kang: We have data going back many years for the underlying benchmarks. The data for emerging markets, however, isn’t as robust as that for developed markets. So we really focus on data going back to December 2005 when comparing the Dow Jones composite benchmark we’re using for our emerging markets sector funds.

IU: What do those comparisons show?

Kang: Going back to 2005, returns were generally spectacular up through 2007 for emerging markets vs. developed markets. In the latter half of 2008, we saw greater volatility and bigger losses in emerging markets. As with any more volatile asset class, emerging markets offers the potential for greater long-term gains as a result. Clearly, some sectors performed better in relative terms during the periods when markets were going up versus others. The same is true in the bear market of 2008. That is the essence of the popularity of sector funds -- their selection during different stages of the market cycle.

IU: How correlated are emerging markets sectors to developed markets sectors?

Kang: That’s a tricky question. It depends on your timeframe. In statistical terms, there’s just not a lot of data. But you can draw some general conclusions. There are times, like in the bull market from 2005-2007, when many sectors in emerging markets and developed markets were highly correlated. Commodity stocks were highly correlated during the commodities boon regardless of location. On the other hand during the credit crisis, financials haven’t been as highly correlated because banks in the U.K, for example, have been exposed to more toxic assets than banks in places like China, Brazil and India.

IU: What do you see as the biggest benefits of breaking emerging markets into sectors?

Kang: A lot of investors managing their emerging markets exposures are doing so by allocating between countries. The question we asked at the very beginning of creating our ETFs is how much overlap there is between sectors and geography.

Let’s say you’re an American investor with heavy exposure to the S&P 500 index. Maybe you’ve tilted your portfolio a little to commodities through funds such as the SPDR Gold Shares (NYSE: GLD) and the iPath Dow Jones-AIG Commodity Index ETN (NYSE: DJP). If you’ve got that portfolio, you look more like a Canadian or an Aussie – both of those countries are heavily influenced by movements in natural resources prices.

IU: In other words, broader-based ETFs don’t add a lot in those situations?

Kang: The inclusion of broad emerging market ETFs as well as many of the country specific ETFs to this kind of portfolio would not provide diversification as correlations would be surprisingly high. For true diversification, the inclusion of certain sectors would likely provide more optimal risk-return characteristics to the overall portfolio.

Furthermore, many investors who invest in emerging markets country ETFs do so based on a sector-type of rationale. For example, let’s say someone wants to invest in Russia. The question I would ask is: Do you want to invest in that country to be more richly compensated with some sort of political risk associated with that country? Or, are you investing in Russia to make an oil and gas bet? If that’s the case, do you want to put all your eggs in one basket – Russia. Or, would you prefer to invest in a basket focused on oil and gas but with companies from Russia, India, China, Brazil and several others?

IU: Those are the top countries in EEO, aren’t they?

Kang: Yes. Those four countries comprise roughly two-thirds of the fund. And with EMT, the top countries are: South Africa, Brazil, China and Russia. Those take up more than three-quarters of the fund.

ProShares has officially joined the exchange-traded funds 3x party.

The leader in leveraged ETFs launched Thursday a pair of portfolios that will put it into a different sort of niche market. Each of the new ETFs will aim at providing 300% exposure both inverse as well as leveraged to the S&P 500 index.

The new ETFs are the: ProShares UltraPro S&P 500 (NYSE Arca: UPRO) and ProShares UltraPro Short S&P 500 (NYSE Arca: SPXU).

ProShares has surged to become one of the most popular ETF families offering straight one-to-one leverage and inverse exposure to popular indexes. But in recent years it has also expaned into sponsoring ETFs that've upped the ante in leverage to 200% of various benchmarks.

In those so-called 2x funds, ProShares seek to match the daily returns of their underlying indexes with 200% leverage or inverse positions.

It's a field that has become increasingly popular and includes Rydex. But late last year, a relative newcomer joined the leveraged crowd with ETFs that provide even greater exposure 300% both in terms of taking short positions with indexes as well as others that go long.

The debut of Direxion's 3x family in November 2008 came just as the market's volatility was soaring. As a result, investors by and large traders and insitutions have jumped on the bandwagon of the firm's hyper-juiced funds. (See related story here.)

Since then, Direxion has rapidly climbed to No. 10 in terms of asset size among U.S. ETF players. (See related article with the latest industry data here.)

The launches follow a filing earlier this week of each fund's prospectus with the Securities and Exchange Commission. (Complete details about each fund, along with a link to the filing, can be found here.)

As noted in the previous story, the new 3x ETFs will be the first to provide such leverage to the S&P 500. But it also will put ProShares, which had $26.2 billion in assets through May, into a quickly growing and popular area of the leveraged ETF market.

As markets recover in coming years, will 3x leverage still find the groundswell of support it seems to currently hold? ProShares is obviously betting traders will continue to see these funds as important tools in their warchests as market cycles zig and zag.

The world's more recognized investable blue-chip index could be getting triple-leverage coverage for the first time.

ProShares has filed to launch an exchange-traded fund seeking to provide 300% of the daily returns of the S&P 500 index. It's also requesting approval from the Securities and Exchange Commission for a new ETF that would give investors 300% short exposure of the index.

Both would have expense ratios of 0.95% and trade on the NYSE exchange. Earlier this year, ProShares filed to offer 3X leverage with 94 new ETFs. But in that April filing, no mention was made of the S&P 500. (See related story here.)

Currently, ProShares offers the Ultra S&P 500 ETF (NYSE: SSO). But that provides 200%, or 2X, the daily returns of its benchmark. It also has the UltraShort S&P 500 ETF (NYSE: SDS), which again shoots for a 200% return—except on the inverse side.

Rival Direxion already has a pair of large-cap domestic-focused ETFs with 300% leveraged and inverse exposure. Those are the Daily Large Cap Bull 3x Shares (NYSE: BGU) and the Daily Large Cap Bear 3x Shares (NYSE: BGZ). The difference is that those both track the Russell 1000, a bit broader index than the S&P 500.

But both have performed in a very similar fashion over the longer term, although some slight differences have shown up at times. The SPDRs S&P 500 ETF (NYSE: SPY), for example, had returned in the past five years heading into Wednesday an average annualized -3%. By comparison, the iShares Russell 1000 (NYSE: IWB) was down 2.56% in that same period.

So far this year, SPY is slightly down this year, while IWB has gained more than 1.3%.

More to the point for anyone interested in the ProShares 3X filings, the bullish Direxion BGU has lost more than 14% so far this year, while the bearish has dropped more than 33%.

But as many investors have learned the hard way since they came onto the market last year, 3X leveraged and inverse ETFs don't always march in lockstep with their underlying benchmarks' daily returns.

The subject has been a sore point for many in the industry. (See our latest look at the situation in the blog "What's Wrong With ETFs.")

You can read the prospectuses for both proposed 3X ProShares funds here.

-- This report was submitted by IndexUniverse.com's Murray Coleman.

Dubai Exchange Benefits From Oil's Improved Fortunes

The exchange's chairman credited the uptick to positive market sentiment for oil and a move by the "Dubai Department of Petroleum Affairs to shift to a forward pricing model based on the DME Oman Crude Oil Futures Contract."

You can read the exchange's press release here.

Questions For BlackRock

Scott Burns of Morningstar has some interesting questions for BlackRock as it prepares to swallow Barclays Global Investors and its popular iShares brand.

Among them: What does it mean for iShares investors and what designs does the active management firm have for the ETF marketplace?

(He notes in the article that iPath ETNs aren't included in the deal. Wonder where he got that?)

You can read the story here.

BOX Going For The Gusto

The Wall Street Journal reports that the Boston Options Exchange is eliminating fees for three popular ETFs. It's the start of an effort by BOX to increase its market share in the expanding options business.

It's also a nod to the significant role of ETFs among investors using such strategies.

You can read the story here.

Changes To Money Market Funds

The Securities and Exchange Commission is expected today to announce its plans to reform money market funds. It'll be interesting to see how that might impact ETFs, which up to now haven't been able to designate themselves in such a fashion due to existing—and some would say outmoded—rules.

A MarketWatch.com account by Sam Mamudi previewing the news can be found here.

There’s another commodity fund in the works from the same firm that has brought to market such controversial funds as the U.S. Oil Fund (NYSE Arca: USO), the U.S. Gasoline Fund (NYSE Arca: UGA), the United States Natural Gas Fund (NYSE Arca: UNG) and the U.S. 12-Month Oil Fund (NYSE Arca: USL).

This time around, United States Commodity Funds LLC—formerly Victoria Bay Asset Management—is seeking approval for its second “12-month” commodities fund, except this one will invest in natural gas—or rather, the futures contracts that promise delivery of natural gas to Louisiana’s Henry Hub.

As with USL, the most recent filing indicates that the fund generally will hold a complete basket of the next 12 months’ futures contracts (as opposed to UNG, which simply holds the upcoming month—August 2009 at the moment.)

Two weeks before the expiration of the nearest-month contract, the fund will roll forward another month, picking up the then-12-months-out contract.

The investment purpose of such a strategy is to protect against contango, the bane of every futures investor.

When a commodity is in contango (which natural gas currently is), the cost of a near-month contract is cheaper than a far-month contract. That means every time an investor (or a fund in this case) has to roll forward a month, they take a hit—tomorrow is more expensive than today.

As such, contango can really eat into the returns of a fund investing exclusively in near-month contracts, even when the price of oil is rising, because it rolls forward into more-expensive contracts—essentially paying up again every month just to keep the holdings the same.

Contango had such an effect on USO, United States Commodity Funds’ first fund that the firm eventually followed it up with USL in December 2007.

Currently, natural gas is trading in contango, hurting the returns of UNG. Of course, the contango could disappear at any moment—as it did in oil not too long ago. (See more on UNG here and a recent IU.com blog about the challenges presented by contango here.)

But even if it does disappear before the proposed fund launches, investors will have a viable alternative to UNG for the next time.

The proposed fund will trade on the NYSE Arca and carry an expense ratio of 0.60%, according to the filing.

You can read the filing here.

-- This report was submitted by IndexUniverse.com's Heather Bell.

With a global start-up preparing to launch the first exchange-traded fund focused on Peru in coming weeks, industry giant Barclays Global Investors has sneaked to the finish line.

On Monday, the soon-to-be BlackRock Global Investors opened the iShares MSCI All Peru Capped Index (NYSE Arca: EPU). It follows an earlier announcement by fledgling Global X Management Co. of a similar ETF. But that fund hasn't come out yet, although it's expected to launch soon.

According to a BGI statement, Peru is Latin America's fastest-growing economy, with a gross domestic product growth rate of more than 9% last year. The firm added that in May, emerging markets net inflow of $14.9 billion into ETFs included some $6 billion from ETF investors.

“With the fastest growing economy in Latin America and one of the lowest inflation rates in the region, Peru’s essentially untapped market offers diversification benefits and poses an attractive opportunity to investors,” said Daniel Gamba, CEO of Latin America for iShares, in a statement.

The fund will track an MSCI index holding the top 25 Peruvian stocks by free-float adjusted market cap sizes. By contrast, Global X intends to use a FTSE index to track the country. In an interview with IndexUniverse.com late last year, the company's Chief Executive, Bruno del Ama, said that MSCI has been updating its indexes to overcome difficulties in smaller markets. By contrast, he says the FTSE benchmark for Global X's planned ETF was tailor-made to capture the most investable segments of Peru's marketplace. (See related story here.)

Whether that makes a whole lot of difference in terms of single-country ETFs over the longer term—and that the Global X ETF will actually hit the market soon —is open for debate. But at least investors appear to be close to having a choice in a market which up to now was difficult for all but the biggest institutions to find access to.

EPU comes with an expense ratio of 0.63%. Materials (65.16%) and financials (15.23%) dominate the new ETF’s sector breakdown. In the past five years through the first quarter, EPU’s benchmark has outperformed the S&P 500 index by slightly more than 30 percentage points on an average annualized basis, according to BGI.

Mike Bayer considers himself a contrarian investor.

In the past few months, as stock markets soared, that sort of go-against-the-grain approach has taken center stage.

The Toronto, Canada-based adviser and president of Strategic Analysis Capital Management says he prefers to buy exchange-traded funds and mutual funds from Dimensional Fund Advisors when they’re out of favor.

“The problem most investors have is that they tend to trade too frequently and make changes in the wrong direction. They’re buying high and selling low,” said Bayer, who works with individual and institutional clients in Canada and the United States.

Since early March, SACM has been taking advantage of the rally in stocks to rebalance client portfolios. Bayer has been trimming positions in the Vanguard Emerging Markets Stock ETF (NYSE: VWO).

“Emerging markets have had a big run-up in the past few months,” he said. “I’ve been carefully monitoring portfolios to make sure they stay within our asset allocation limits. In cases where VWO has exceeded those bands, we’ve sold positions and redeployed proceeds into mainly bond funds.”

The proceeds from selling VWO have been mainly going into buying more fixed-income ETFs and funds, says Bayer. Those include the iShares Barclays TIPS Bond ETF (NYSE: TIP) and the iShares Barclays 1-3 Year Credit Bond ETF (NYSE: CSJ). The firm has also been adding to positions in the DFA Five-Year Global Fixed-Income Fund (DFGBX).

Typically with fixed-income portfolios, Bayer will allocate about a third to DFGBX, another third to CSJ and the remainder in TIP.

“Usually, we’ll use a band of about 5% to determine when to make changes,” he said. “But that’s not a hard-and-fast rule. If someone’s in a taxable account, we’ll customize our rebalancing strategies so people can take advantage of tax-loss harvesting and reduce their overall tax liabilities.”

Taking A Cue From History

Bayer says he’s a big fan of simplicity in investing. He likes to stick with four to seven funds built around the long-term needs of each client. “The portfolios are built around broad diversification, but they don’t include commodities,” he added. “That asset class tends to add too much volatility. And over time, it doesn’t necessarily add any additional return.”

In a typical portfolio with 60% equities and 40% bonds, Bayer likes to keep around 45% of total stock assets in funds focused on the U.S. and Canada.

With a total stock market approach, he’ll use the Vanguard Total Stock Market ETF (NYSE: VTI) or the Vanguard Total World Stock ETF (NYSE: VT). In cases where VTI is implemented, at least 60% will go into that fund. Bayer also uses as core holdings the DFA U.S. Core Equity 1 (DFEOX) and the DFA U.S. Vector Equity Fund (DFVEX).

But with clients who don’t mind being a bit more aggressive, Bayer prefers to slice and dice allocations. He’ll put an equal percentage of U.S. stock allocations into the four corners of the market: large-cap value, large-cap blend as well as small-cap value and small-cap blend.

In a slice-and-dice portfolio, Bayer uses the iShares Russell 1000 Value Index (NYSE: IWD) and the Vanguard Value ETF (NYSE: VTV). He balances those with the iShares Russell 1000 (NYSE: IWB) or the Vanguard Total Stock Market ETF (NYSE: VTI).

“If you have a long time horizon and can handle the volatility, slicing and dicing the market can really provide some extra benefits,” said Bayer. “But a slice-and-dice strategy isn’t necessarily the easiest type of portfolio to hold. You need to remain very disciplined to make it work well over time.”

Nod To Small-Cap Value

Even with a more total-markets approach, the firm still likes to tilt allocations toward small-caps and value. On the small-cap side, it uses the iShares Russell 2000 Value Index (NYSE Arca: IWN) and the Vanguard Small Cap Value ETF (NYSE: VBR).

Whether slicing and dicing or total markets in design, Bayer says his portfolios avoid small-cap growth. “It just adds a lot of unneeded volatility and lower returns over time,” he said. “I’m a value investor. So even when a client is better-suited to a more total markets approach, I still like to tilt towards value.”

In those cases, he will add blended ETFs such as the iShares Russell 2000 Index (NYSE Arca: IWM) and the Vanguard Small Cap ETF (NYSE: VB).

“Usually, I’ll start by talking to clients about taking a total stock market fund and then adding IWN or VBR to tilt the portfolio a bit,” said Bayer. “Taking a total market approach appeals to a lot of people in terms of simplicity and slightly lower costs.”

A Global View Of Markets

In a global portfolio, Bayer leans toward about 55% in non-U.S. stocks. “I’m not trying to predict whether foreign markets are doing better than the U.S.,” he said. “But a 55% international tilt roughly follows the global market capitalization percentages of VT, which is a good barometer of the total world market.”

For international exposure, he’ll buy the iShares MSCI EAFE Index (NYSE: EFA) or the Vanguard Europe Pacific ETF (NYSE: VEA). Bayer also uses the Vanguard FTSE All-World ex-US ETF (NYSE: VEU) for some investors. In a standard portfolio, he’ll put about 10-15% into emerging markets of the stock portion of his global portfolios.

For international, Bayer also talks to clients about the DFA International Core Equity Fund (DFIEX) and the DFA Emerging Marktes Core Fund (DFVQX).

“In the U.S., DFA separates developed and emerging markets,” he added. “So if we use one of those funds, we’ll also include a dedicated emerging markets fund. In those cases, we like the DFA International Vector Equity Fund (DFCEX).”

His bent toward sticking with broad-based asset classes and a disciplined strategic allocation approach to investing has its roots in the tech boom. Bayer was managing accounts for a large technology distributor and watched investors rush into hot sectors and get crushed from 2000-2002.

“I’ve always been an index investor. But back then, there weren’t as many choices with ETFs, especially to gain international exposure. But I was an early adopter,” said Bayer, who began investing for himself as well as family and friends as a teenager.

He decided to work with individual investors in 2002 and joined a small local brokerage. “They were selling traditional high-fee mutual funds,” said Bayer. “My strong preference was to use ETFs and DFA funds, which are lower-costing and provide superior long-term risk-adjusted performance,” he said.

-- This report was submitted by IndexUniverse.com's Murray Coleman.

Institutional Investors Shifting To Index Funds

In an article titled: "Active Managers Get Cold Shoulder," Craig Karmin writes in Monday's Wall Street Journal that big institutional managers are increasingly shifting to index funds.

It quotes a director of the $9 billion Illinois State Board of Investment as saying that "active managers have not given us the added performance in a down market that we hoped for."

You can read the story here.

SEC Investigating Dark Pools

In an interesting story from the Financial Times, the Securities and Exchange Commission is reportedly looking into so-called "dark pools." In an interview with Mary Schapiro, the SEC's chairwoman, the paper is reporting that the trading systems set up for large investors to block trade with little outside transparency is a source of real concern for U.S. regulators.

You can read the story here.

Hedge Funds Redux?

In a look at the growth in exchange-traded funds using hedging strategies, MarketWatch's John Spence notes an ironic twist; namely the fact that even though hedge funds are falling in popularity, ETF providers are rushing to come out with their own versions.

The difference, of course, is that the ETF industry is able to provide similar products without taking 2% off the top and charges much more reasonable annual expense ratios.

You can read the story here.

ETFs Turn More Active

As the markets continue to show signs of volatility, this Boston Globe piece looks at the evolution of ETFs and notes developments in how they're inching toward more actively managed products.

You can read the story here.

iShares launched a new emerging markets infrastructure exchange-traded fund on Friday, June 19, with the debut of the iShares S&P Emerging Markets Infrastructure Index Fund (NASDAQ: EMIF).

EMIF holds a portfolio of 30 large-cap emerging market infrastructure companies focused in markets like China, Brazil and Argentina. As of March 30, those three countries held the largest weight in the index the fund tracks, at 33%, 14% and 9%, respectively, of the benchmark.

EMIF will go head-to-head with the PowerShares Emerging Markets Infrastructure Portfolio (NYSE Arca: PXR), which launched in October of this year and currently has $45.5 million in assets under management. Both funds charge management fees of 0.75%.

The two funds differ markedly in how they approach the market. EMIF breaks the emerging markets infrastructure field down into three subsectors: transportation, energy and utilities. At each semiannual rebalancing, it aims for a 20%, 40% and 40% weight in the three markets. It limits itself to the 30 most liquid, large-cap holdings in the field.

PXR holds a broader portfolio of 60 names and defines its market differently, looking for companies that fit one of seven categories: 1) construction and engineering; 2) construction machinery; 3) construction materials; 4) diversified metals and mining; 5) heavy electrical equipment; 6) industrial machinery; and 7) steel. It aims to diversify across the market capitalization spectrum, and indeed, has a large weight (49%) in mid-cap companies.

On a top-line basis, EMIF seems more focused on transportation and electrical utilities, while PXR has more exposure to mining and basic materials.

On a country basis, the two funds are very different. EMIF has more than twice the exposure to China as PXR, while PXR has much deeper exposure to Indonesia, Russia and South Africa.

As part of the festivities surrounding the 2009 Journal of Indexes editorial board meeting, IndexUniverse.com hosted a live webinar with Vanguard founder and index industry legend John Bogle.

During the one-hour presentation, Mr. Bogle unveiled new research regarding how successful (or not) investors are when trading exchange-traded funds, and took a big picture look at the state of American finance.

Moderated by JoI editor and IndexUniverse.com publisher Jim Wiandt, the webinar features an extensive audience Q&A session. A full transcript follows below.

Jim Wiandt, editor, Journal of Indexes (Wiandt): Good morning everyone, and welcome to a very special event that we have here today. We are actually at the NASDAQ market site and we have the Journal of Indexes editorial board meeting today.

We have a very special guest to present today at our webinar. John Bogle is a legend. He is an icon and is really the father of indexing and sensible asset allocation for average investors. We are delighted to have Mr. Bogle here today.

He is going to go through a series of slides, some of which are extremely interesting and very pertinent, which speak to the way the index industry has evolved in recent years.

The format for today will be first, Mr. Bogle will go through his slides, and then we are going to open things up for questions.

We have all of these slides posted to our Web site, IndexUniverse.com [available here]. Without any further ado, I will turn things over to Mr. Bogle. And, again, we are delighted to have you, Mr. Bogle, and look forward to the presentation.

[Editor’s Note: A replay of the webinar is available here.]

John Bogle, Bogle Financial Markets Center (Bogle): Thank you very much, Jim. And welcome, all you webinar listeners. I presume there are a few Bogle-heads there and I send a special welcome to them.

It’s fun to be with you this morning. I thought I would begin by giving you a report on the status of index funds in mid-2009. I guess the main point I would like to begin with is that we now know what we really suspected, or strongly believed, 25 or 35 years ago when I started the first index fund—that indexing would change the world of investing.

I believe it is now clear that indexing has changed the world of investing in some very remarkable ways. First and most notably, I think we’ve had an odd convergence of indexing in two different areas. Active fund management has become much more like passive fund management—for example, active managers are often quantitative, working off matching indexes or having enhanced index funds or closet index funds. Or when you look at brokerage recommendations, you see they overweight relative to the index or underweight rather than buy or sell. The way we look at investing has been changed by standard indexing.

But even as that has happened, passive indexing has gotten a lot more like active fund management. That is, we use index funds for rapid trading in some very remarkable ways, which I will discuss this morning.

We can go to the first slide there and just take a look at what I will call a triumph of indexing. You see the growth of indexing just in the last 15 years from $24 billion to $914 billion on the equity fund side. Throw in roughly $150 billion of bond fund indexing and you are over $1 trillion—about $1.60 trillion in index money in a long-term stock and bond mutual fund industry that has $6 trillion of assets. So indexing itself now accounts for one-sixth of all the mutual fund assets; quite a remarkable thing.

And so, it’s pretty nice to think that last year, 2008, is probably the best year indexing ever had in terms of performance. For the total stock market and the S&P 500—two good proxies for what is going on in the U.S. market—indexes of those two components put them in about the 65^th percentile [of overall fund performance], outperforming about two-thirds of all mutual fund managers. Sure, the decline was about 37%, but the typical U.S. manager went down about 40%; the typical developed market fund went down about 45 to 50%; and the typical emerging market fund went down 55 to 60%. So on the stock fund side, it was quite a triumph for indexing.

On the bond index fund side, it was even more of a triumph. The total bond market index was up 5% last year, outperforming about 85% of comparable bond funds, thanks largely to a big drop, as most of you may know, in Treasury yield.

So we’ve got this wonderful growth rate. We’ve got a dominant industry position. And yet, some unusual things are happening. We will take a look at what is driving the growth of indexing by looking first at ETFs—exchange-traded index funds. And as the next chart shows, I describe them as a truly great business model. Hear carefully when I say “business model.” We will talk about other kinds of models later on.

You can see in the next chart that ETFs have come from almost nowhere—back in the early 1990s, when the first exchange-traded fund was started—to the fact that they are now actually just a hair behind in terms of equity fund assets the traditional index funds, the kind of funds that Vanguard pretty much runs: $457 billion compared to $460 billion, or $456 billion plus. So the ETFs have proved great competition for the classic index funds, basically what I thought about all those years ago.

I’m often asked, “Who is going to win the war: mutual funds or exchange-traded funds?” That is not a good question, because exchange-traded funds are mutual funds. They are just mutual funds you can trade all day long in real time. We will talk a little bit about that. So what we have is, what is growing is index funds for people who want to trade or who believe that the opportunity to trade or the ability to trade is important, intraday trading; and equity mutual funds, which are more designed for long-term investors.

But going over to the next chart, you will see pretty much what has driven the growth of index funds even more clearly than the previous chart. Exchange-traded funds were about 2% of the index fund business back in about 1997, 1998. By 2000, they got up to about 11%. In 2008-2009, they are 11% of equity fund assets, just exactly the same, almost exactly the same as the 11% in traditional index funds.

So we have had a huge growth rate for ETFs. And in terms of market share, stability in a lot of ways, and maybe disappointing stability in the market share of traditional, classic index funds—old, broad market index funds. But for quite a few years, the cash flow went very much in favor of … active funds over index funds for years and years.

But in 2007, as you can see in this chart, the index funds took in about twice as much in the way of assets as actively managed funds. Last year, index funds took in $200 billion in assets. Active funds lost $250 billion. And this year, index funds are taking in a little bit of money so far. These are annualized numbers for 2009. And the active funds are, again, losing so far, on an annualized basis, about $150 billion this year. So clearly, the trends are there. The trends are also there for traditional index funds versus exchange-traded funds.

You can see on this chart the dominance of exchange-traded funds has really been quite remarkable these last three or four years. Where the traditional index funds were taking $40 or $50 billion a year in net cash flow—a good measure of success in the marketplace—the exchange-traded funds were taking somewhere between $140 billion to $150 billion a year and three or four or five times as much. Whether this is a trend or not is much too early to say.

That has been somewhat reversed here in 2009 with, on an annualized basis, the traditional index funds actually adding about $40 billion, expected to add about $40 million in cash flow—where for the first time ever, exchange-traded funds are actually having cash outflow roughly in the amount of $30 billion annualized this year so far. Whether that is a turn in the tide, only time will tell.

Now, if exchange-traded funds are a brilliant business model, are they a good investment model or, as this next slide asks, are they a flawed investment model? And we know they are a good business model. We know they are great for fund marketers. We know they are great for brokers. We know they are great for investment advisers. We know they are great for institutional speculators. But the question is, what are ETFs doing for individual investors?

That is an interesting question and we have done some research on it, which we are going to unveil here in a little bit for the first time. I come back now to the difference between an exchange-traded fund and a traditional index fund. An exchange-traded fund, to use the quotation from the original ad for the SPDR [NYSE Arca: SPY]: “And now you can trade the market all day long in real time.” That is what the original SPDR was advertised as doing. I’m not exactly sure why anybody would want to trade the market all day long in real time, but that is their slogan.

In many respects, as this chart shows, that idea of using ETFs, exchange-traded funds, for speculation has come true, come more than true, come true in spades. You can look at it any way you want, but look at those turnover rates for share turnover in the SPDRs there. And they are in second: 10,105% turnover last year. Just think of that. There are about 711 million shares outstanding of the SPDRS and they have 8 billion shares traded last year―8 billion shares of SPDRS traded.

And that doesn’t seem to be particularly good, even for those investors. Because while the SPDR had a five-year return of -1.9% a year—it’s been a difficult market—the average investor in SPDRs had a return of -8.2% a year. So you tell me whether all that trading is good for investors or is not good for investors. You can see what you would expect.

On the other more speculative side of the markets, the ETFs trades very heavily. Real estate funds have huge ups and downs. The turnover of the iShares real estate ETF we looked at was 23,977%—to put precision on a number that doesn’t need to be precise.

Obviously, Financial SPDRS were attractive both to buyers and sellers last year, with 9,600% turnover. The NASDAQ QQQs? 8,700%. These are remarkable numbers, suggesting that a great deal of what’s going on in ETFs is a business of very rapid trading among large, institutional investors.

Now, when you look at more normal share turnover, over on the right side of the chart—we just took out of a group of about 38 or 40 funds, the lowest turnover funds. More than about half of them seemed to be Vanguard funds, which have turnover in the range of about 200% per year, far lower than those high percentages. So there is a use for ETFs that doesn’t require the trading that seems to show up in the less speculative part of the market.

How high is a 200% turnover rate? Well, the average mutual fund last year happened to have one of the highest turnover rates in a long time—a 33% redemption rate last year. That’s high, very high as far as I’m concerned. So you can imagine what I think of 200% turnover.

What we are seeing here is the use of funds, of ETFs, for speculation. For the bigger ones and for the more traditional ones, in some sense at least, we have much lower turnover, but still high compared to mutual fund turnover.

If we go to the next chart, we can try to answer the question on the next two charts. Okay, we know how ETFs do. But only in recent years have we found out how the investors in mutual funds do. You can actually calculate these returns, what we call the fund returns or the time-weighted return, or typical rate of return. Something starts at $10 and goes to $11―that’s 10%, not very complicated there. But then we do a dollar-weighted return, an asset-weighted return, to show how investor cash flows influence that return delivered by fund. The reality of life in this business is that it is very rare that investors do as well as the funds themselves.

And that is the point I’m making on this chart with the ETFs. These are all exchange-traded fund groups. You will be familiar with the groups: large-cap blend, large-cap growth and value, same in the mid-caps, European, emerging markets, and so on. And you will see that in general, investors lag those returns, just glancing at those numbers, by 5% or 6% a year of return. [That is, they earn] 5% or 6% less than the fund, than the ETF itself earns, showing that the trading is done in an unfortunate way in terms of timing.

The numbers shown over on the right side of this chart are unbelievably consistent. For example, on that page there are 46 ETFs, and in 40 cases out of 46, the investor returns lag the funds return. This is not an aberration. This is a very consistent return, which you will see again if we will flip over to the next chart, which just shows some additional subsectors of the market, in the ETF form, with the investor return and the investor lag.

You can see in some cases―the financial case, for example―the fund’s return trail the index return by almost 11% per year over the last five years. The investors had a negative return of almost 29% over the last five years, a lag in return of almost 18% a year. It is hard to believe. And there, 100% of the funds lag the index. So when you put those two charts together and add them up, out of 79 exchange-traded funds that we covered, 68 of them had investor returns that were either substantially, significantly, or moderately at least short of the returns earned by the funds themselves.

So if you want to take some kind of a simplified average and say that fund returns were generally negative to about 1% a year, and the investor returns on average were negative about 3.5% a year—I’m sorry. The fund returns happened to be positive, thanks to energy and utilities and emerging markets and such segments as that, just a simple average of positive 1%. You find the ETF returns averaged about 6% on these charts, accumulated over five years. But investor returns, if you take -3.5% with negative compounding over five years, investor returns were about -12%.

So when you put plus 6% for the five-year total return for the fund and -12% for the five-year total return for the investor, you are talking about 18% of investor capital that has been lost by all this trading. Now, you can ask, “Don’t regular mutual funds have this same problem of investor returns lagging the returns of the indexes or returns of the funds they own?” Of course they do, but it is not nearly as bad.

To show that, we will introduce one more chart, which I think will be the last chart I will use, so we can open it to your discussion. We happen to have Vanguard mutual funds that have ETFs, exchange-traded funds, in each of these categories. And we have compared the returns on the Vanguard mutual fund returns on this chart, beginning with large-cap blended funds, large-cap growth, large-cap value, mid-cap blended, small-cap blended, emerging markets and real estate investment trusts. We have a regular fund in those areas, Vanguard does: a regular mutual fund. Those returns are shown near the center section of the chart. And the investor returns on the exchange-traded funds are shown on the right side.

You will see that while the investor lag on the exchange-traded funds and side on the left have remarkably large and significant lags, the actual mutual funds themselves lag here and there, but in general, come very close to the returns earned by the market standard that they are in. So we have evidence, strong evidence, that exchange traded funds―because of the timing that goes on―are not acting in the best interest of investors, or investors are not acting in their own best interest, might be a fairer way to put it. While mutual fund investors have similar problems, they are nowhere near so serious. They are not even in the same league.

So the question I raise is―I suppose a broad, philosophical question―how long can a great business model last if it doesn’t deliver good returns to the investors who rely on it? And that is a question we might chat about. But first, before that, I would like to open the meeting and try to answer any questions any of you might have who were kind enough to attend this morning.

Wiandt: Thank you, Mr. Bogle. We have a lot of good questions. Why don’t we start out with one which talks about your methodology? There are a few questions in this area about how these returns are calculated. I guess the focus of these questions is, is most of this turnover retail turnover? Is it institutional? Is it both? And how did you come up with these calculations in terms of looking at the flows and calculating these returns?

Bogle: Well, first it is very hard to separate out institutional turnover, the huge turnover where people are speculating on, for example, the SPDRs. Investment adviser turnover, how big is that? How much is individual turnover by those who intend to invest and that other component of individual behavior, which is those that intend to speculate. I don't know anybody that has unscrambled that egg. I am not privy to Vanguard data on this point.

I think even more important would be the data that someone like Barclays could provide. They are, of course, the largest firm, the most dominant firm in this business with the broadest base of business. So we are just going to have to ask them how they would divide this up. I did have a conversation with a representative of Barclays three or four years ago, and I was making the same point I am making this morning. He said, “Well, that just is not right. Seventy percent of our investors are long-term investors.” And I said, “How do you define long-term?” And he said, “Six months to a year and a half.” Well, that is not my idea of a long-term investor. That is just another example of the difficulty of getting through. It is a matter of definition.

Now, as to the methodology, we don’t do these ourselves. These are Morningstar data. My understanding of how that data is compiled, and I take some comfort by the way, in its consistency from one group to the other—which suggests that there are not a lot of problems with the data. Although I’m the first one to state and underscore that all data has problems. When you see really consistent data like this, however, it’s an eye-opener. It may not be precise, but it’s got to be giving us an indication of what we know to be true.

One of my rules has always been, take a look at some numbers and if it flies in the face of your intuition, do the numbers over and over and over again. But if the numbers confirm your intuition―which is essentially that ETF shareholders and mutual fund shareholders generally look back at past performance and buy the funds that have done well―it is sort of performance-chasing…

We know that happens. We can’t measure it with precision.

Now when you get funds with a lot of daily cash flow in and out―I’m sure real estate REITs are a good example of that, and I’m sure the SPDR is a very, very good example of that―I don’t see how we can be precise in these returns. What you do is take monthly cash flows and compare them with the price of the fund, the average price of the fund during the month, then you figure out eventually how many investor dollars earn what returns over time. Is that way of aggregating the data precise? No, it is not.

But I’m persuaded in the absence of compelling evidence on the other side that these data are telling us something that is worth knowing. And it suggests that mutual fund trading is about as valuable as trading individual stocks, which is to say, not valuable at all, and harmful to your returns.

Wiandt: Every year we hear from active managers that “this is the year of active management.” Do you believe that there are environments that are more favorable to active management than passive management and index investing? And if so, what do those times look like?

Bogle: There is no way that active managers can possibly have an advantage no matter what the circumstances are. Just think about this: Almost 75% almost of all stocks are owned by institutional investors now, and they are basically, by and large, professional investors. They are pension fund investors. They are pension money managers, they are pension trustees I should say, pension money managers, mutual fund managers, which also manage pension funds and endowment funds. And that’s 75% of all stocks, and only 75% of all stocks. It is just not possible that they can be taking the individual investor on the other side— the remaining part of the market—to the cleaners with every trade. There is no evidence of that.

So what we find is that institutional investors and individual investors basically each capture the market return and they each capture the market—and together they each capture the total market return. That is inevitable. And that’s before cost. So when you take out costs, which are high, you end up explaining almost all the reasons that active managers cannot and do not beat the funds, beat the market itself. It is just statistically, mathematically, tautologically impossible.

Wiandt: How do you see the Barclays-Black Rock merger affecting the investment landscape? What do you view as the implications of that merger?

Bogle: Well, that’s a good question. I have a couple of observations. First, they paid a pretty good-sized price. I think since Barclays kept 20% of the company, the price comes out to be something like $17 billion or $18 billion. That’s a lot of money to pay for a fairly low-margin business. Second, ultimately, I think they are going to have to reduce the cost of the funds, which will make it less attractive as an investment—because they are just a very high-cost outfit, compared to the low-cost provider, which is always Vanguard.

iShares has an average expense ratio of 41 basis points. And those are the ETFs run by Barclays. Vanguard has an average expense ratio in its ETFs of 15 basis points. Eventually the low cost wins. That’s all there is to it. So they are going to have to worry about whether they can be able to be competitive with high prices—which can be providing them with a lot of revenues and maybe a lot of money to do marketing and a lot of money to create one new index-based ETF after another, which they seem to be doing.

I think it is going to be a hard business then to build market share. And since they are around a 50% market share now, in my experience, most firms, when they get to 50% market shares, find it much more likely for that market share to shrink than to grow.

There is also another kind of a subtle thing, and I don’t mean to be unkind at all to BlackRock, but they have a real problem with active management. There is no question they must be interested in index funds because they are indexed and not actively managed. We took a look at 100 funds. They have 100 closed-end bond funds and we took a look at them last year, and 99 of them—you know, the bond market went up 5%—99 of them had negative returns. Fifty-four of them had negative returns of over 20%, including 24 of the Black-Rock-managed bond funds that had negative returns of 30%–60% last year.

I mean you’ve got to be struggling with the business when active management is producing those kinds of returns on their bond funds, their area of expertise. So I wish them well. I don’t particularly want to be in a position of criticizing them. But with their record last year, I’m sure they are every bit as disappointed and surprised as I am. I would think, to them, indexing looks like a pretty darn good business.

Wiandt: What do you think the impact of all these leveraged ETFs and all the trading activity that you outlined is? Do you think that all that trading activity and the size of ETF trading—which some days is over 40% of trading in the market—is making for more volatile markets, is actually affecting what is going on in stock markets?

Bogle: Well, I struggle a little bit with that. I’m not sure enough of the data. For example, when we say that SPDR has 10,000% turnover, if you have a buy and a sell at the same time or almost at the same time of, say, 100,000 shares of the SPDR, that’s a volume number that is counted but doesn’t result in any stock changing hands. You are just offsetting the buyer against the seller. So I haven’t been able to cut through that fog. You know, the people that are running those businesses, I think, have some kind of an obligation to report exactly how much trading goes on. And, beyond my expertise, they may actually be doing that. I just don’t know that. It is certainly something we should know.

But in general, I looked at index fund trading, oh, a few years back before these ETFs got so big, maybe three or four years ago. And index fund trading counted for about 0.4% of all securities trading on the various companies—General Electric, Microsoft and companies like that. So 0.4% can’t be looked at as something that is driving the mare here. It’s got to be smaller. It is something that ought to be investigated. But the evidence I have so far is that you can’t really place the responsibility for market volatility on index funds. Although the growth of ETFs in the last few years may have changed that conclusion.

Wiandt: We have a couple of macroeconomic-focused questions. So I will ask those. The term “systematic risk” has become a scare tactic that the government uses to justify bailouts and defraud taxpayers. What is your view of systematic risk? What is your view of the bailout and how the government has reacted to the financial crisis?

Bogle: Well, I think it is a little over the top for me to say that the government is defrauding taxpayers. I don’t know quite the context to put that in. I would strike that from anything I could possibly respond to. I just don’t believe it is true. The more relevant question is, I suppose, that when we had this enormous risk to the financial sector of the economy, primarily—we will talk about that first.

The federal government had to do something. And I think what they have done is moving in the right direction, and that is, these banks were out of liquidity. They had created banks and investment banks together. And insurance companies we now know too were part of it, including AIG, American International Group, which was probably the worst of the bunch—doing all kinds of investment… engaging in all kinds of speculative activities that led to the market meltdown we had and where credit actually froze.

And all developed economies operate on free credit. When the credit markets close down, the government can’t just say, “Too bad.” Almost every small business, many individuals, we all depend on credit one way or the other for maybe just a short time, maybe a longer time. So the government had to take action. And I think they took the right action. I think they took the right action in approximately the right dimension.

Although it’s interesting that the actions they have taken have really … they said (a) and the actions turned out to be (b). So if we talk about the troubled asset repurchase program, so-called “TARP,” —I call it the toxic asset repurchase program—that was passed by the Congress under great, great pressure on October 15. It became a campaign issue, you may recall. And they still haven’t made their first purchase of a troubled asset all this time later. What they did, despite the obvious intent of Congress but maybe not the words, is funded the equity capital positions of banks rather than buying the troubled assets.

I’m not sure how easy it is going to be, even with this new public-private investment partnership—the PPIP—how easy it is going to be for us to do trading or have liquidity among these troubled assets. Because as I understand it, bank A is very reluctant to sell one of its toxic assets at, say, 25 cents on the dollar because they’ve got a whole portfolio of toxic assets. And they are scared to death they are going to have to mark them all to 25 cents.

My understanding of what’s going on in the financial economy out there is that 25 cents, give or take, may even be a little bit high. It is roughly what these toxic assets are going to prove to be worth, or at least most of them are going to prove to be worth. So it’s going to be very hard to get them paid off. It is going to take a lot of time. But, obviously, we eventually have to reverse this tremendous leveraging. We have to de-leverage our financial economy—to say nothing of our individuals who have heavy credit card debt, enormous mortgage debt. And there is a decent amount of corporate debt, although not nearly that excessive out there, too.

I mean, debt in our economy, I think, used to run around 60% of our gross domestic product. I believe it got up to around 135% or 140% of late. So we have to do the de-leveraging. The government had to play a role in maintaining liquidity in the system. So, while I can’t defend the exact way they did it—I don’t think anybody knows exactly how to do it—I would defend the policy that calls for government intervention.

Wiandt: We have a lot of questions about ETFs. There are a couple of lines of questions. One basic line is, are ETFs a good investment for a buy-and-hold investor? If someone buys an ETF and holds it for a long time, is it a good investment? Is it potentially a better investment than a traditional mutual fund structure?

Bogle: Well, the answer to that is yes. Unequivocally, it’s a better investment than a traditional mutual fund. Is it better than a classic mutual fund that is indexed? Or to put it another way, is the SPDR a better bet than the Vanguard 500 Index bought directly from Vanguard? That all depends, like everything else in this world—I don’t see that there is a particular, in the abstract, a particular advantage one way or the other. I don’t think the SPDR is necessarily better. Its cost might be a little bit lower than, say, a brokerage commission. The Vanguard 500 Index’s cost is a hair higher, but there is no commission.

I believe, by the way, that the tax efficiency of the SPDR, to the extent that it exists, is going to be indifferent from the standard S&P 500 Index Fund of Vanguard. We have been able to manage that fund with almost no realized gains. Particularly with the market of recent years, we’ve had plenty of high cost of stock in that index fund. Now, when you start to fine-tune it a little bit for an investor accumulating money, it’s absurd to buy the exchange-traded fund because you have to pay a commission every time you buy it—when you reinvest dividends, all those kinds of things—where that is done automatically for you at a known asset value in the 500 index fund.

So for the periodic investor or the retirement plan investor, it would seem to me, just on the mathematics involved, and assuming the performance of the two is the same … I’ll come back to that in a moment … but you don’t have to worry about tax efficiency for retirement plans. I’d say the 500 index is clearly―just because of the math―the superior choice. So you can flip a coin one way or the other.

But in general, long-term investing in the right kinds of index funds, by which I mean, broad market index funds—whether it is S&P 500, total U.S. stock market, possibly the emerging markets, certainly the developed international markets, the total international as we call it—I think they are pretty even competitors. And that is a perfectly good way to invest, and you almost certainly over time substantially outpace, no matter which way you go―ETF or standard index fund―the results of actively managed funds in the same area.

Did I cover all of that, Jim?

Wiandt: I think you did a pretty good job on that one. A follow-up question is, all this trading activity that you outlined for ETFs―does that damage the long-term buy-and-hold investor who is in ETFs?

Bogle: Well, the ETF returns―a little bit surprisingly to me―come pretty close to their category returns. It doesn’t seem to be damaging. And that said, if you are, in fact, are a long-term investor, it should matter very little. Because they seem to be able to produce the return of the index, or emulate it. For the short-term investor, there are often serious variations between the net asset value of the ETF and the market price at which it is trading, particularly in the less liquid market. So you are just flipping one more coin when you get into that game and, therefore, I wouldn’t recommend it.

Wiandt: Another question on ETFs: What are the safeguards and diligence that should be taken by an investor who is looking at ETFs? What sorts of ETFs should we be looking at, and what are the issues about structure or index that we should be looking at?

Bogle: Well, I’m someone who believes in simplicity rather than complexity. And buying the index funds in any of these broad categories is, by far, the simplest way to do it. You don’t have to worry about capital gains. And there are an awful lot of funny things going on in some of the wild ETFs and a great deal of tax inefficiency and large capital gains, things like that, that don’t seem to apply to the bigger indexes, like the bigger index funds, the bigger ETF funds.

But I just go the simple route, because it is clear and nothing can get in your way. You are not in business with all these speculators. And if that starts to make a difference, you won’t be influenced by it. So I would go to the standard index fund just on the basis of simplicity. If you’ve got a tenth of a point return less—and I can’t imagine it can be much different from that, 0.01% per year—I would say that is probably a price worth paying not to have the risk.

There are also quite a few variations on this. Some of these ETFs—I don’t want to speak too strongly about it, but they verge—their concepts verge on insanity: triple leverage, up markets, down markets, new ways to beat the market—how about exchange-traded notes, which are ETFs [or ETNs]? That is basically a call or a promise to pay you the index return by an outside financial organization. And some of them have gone bankrupt, so the exchange-traded notes became worthless. You just be very careful that you are not into the note business. You can’t be sure, ever, what will happen.

So I would say, opt for simplicity. Remember Ockham’s razor. Our friend, Sir William of Ockham, says, “You know, if there are multiple solutions to a problem, choose the simplest one.”

Wiandt: It looks like we have got an active investor here with a question. I think you may enjoy this one. He says, “Jack, you continue to encourage individual investors to buy and hold. However, I challenge you to name one goal-oriented endeavor besides investing where an intelligent individual would select a passive approach over an active one. Can you name even one?” he says.

Bogle: I’m sorry. You are just going to have to explain the question. Name even one investor?

Wiandt: Some activity that you would want to do in life where you would choose to be passive instead of active as a way of succeeding.

Bogle: Oh, that is such a great question! And, you know, there is an answer to it. And this is why we get so messed up in the financial business. Would you go to an average doctor? No. Why would anyone go to an active doctor, to a passive doctor or not the best doctor around? The problem is, in the financial markets, they are different from any other endeavor in American life. And that is, there is a market out there and it has a certain value. And all of us together own that market.

So literally the only way to capture the market return is to own the market without cost. That cannot be done. But you can do it with a cost of as little as 0.1%, and you will, by definition, beat all these other investors who do it at a cost of maybe 2%–2.5%. There is really not any mystery about this. It is all what I’ve been willing to call or have been able to call the “relentless rules of humble arithmetic.” Get the croupiers’ take out and you capture the market return; you as a group of investors. Lave the croupiers’ take in—pay the croupier … pay Wall Street … pay the money managers … pay the brokers … pay the investment bankers … pay the investment advisers … and you get what’s left.

You know, you are sitting---you individual investor who has asked the question—you, pal, are sitting at the bottom of the food chain of investing. You know, everybody gets paid before you do. Where else is that true in American business? I don't know if it is true anywhere else at all. So, yes, unequivocally, it is different and it has to be different. And our failure to acknowledge that difference is what gets us into so much behavioral problem.

Wiandt: Is there a role for financial advisers in helping individual investors? And if there is, what is a reasonable sort of cost for a financial adviser?

Bogle: Well, I happen to believe the financial adviser serves a very useful purpose for many, certainly not all, but for many, and perhaps even most, investors. We put the stock market and the bond market and financial planning in this aura of great mystery. And if you have been around long enough, and I think I have been around long enough, although I have to be around a little bit longer—if you have been around long enough, you realize that there is not that much mystery about it. The idea is to capture the returns of the bond market and the stock market, essentially.

And that is all there is to it: to capitalize on the miracle of compounding returns and avoid the penalty of the tyranny of compounding costs. Because in the long run, the tyranny of compounding costs overwhelms the magic of compounding returns. If investors understand that much and are broadly diversified, they can really operate on their own. Now, not everybody can do that. There are motions that they don’t understand the system to begin with. They probably think they are a lot smarter than the system. They barely know a stock from a bond and don’t know what managers to trust and what managers not to trust.

So I think the investment adviser can play a very useful role, particularly in fund selection and in asset allocation and, in general, trying to help investors avoid the penalties of the behavioral kind of investing; of doing dumb things at dumb times. We may even need a financial adviser to, at times of crisis, have the courage to say to his clients or her clients, “Don’t do something. Just stand there. Stay the course.” It is generally better than moving your money around at times of crisis.

What is a fair price to pay for that? Obviously, it varies greatly. By the way, I should say much more than parenthetically, I don’t think we should rely on financial advisers to pick the best funds for us. They can pick intelligent funds. They can pick broadly diversified funds. They can pick funds with low turnover and funds with low cost. But picking funds that win is pretty much hazardous duty that nobody, now matter what their knowledge is, has really the ability to do. We rely too much on fast returns.

I think the idea is to have the adviser help you capture as much of the market returns as you can do. What’s a fair price to pay for that? Well, we talked. And in this funny, funny industry which I’m part of, we always talk about percentage turnover. I think we ought to be thinking more about dollars. And 1% is certainly not an excessive fee in terms of revenues it generates for an adviser who has got to be interested in taking care of you.

If you have $10,000 or $50,000 or $100,000 to invest, I would argue 1% might even be too low. But if you take any more of that, it is too big a hit out of your long-term compounded return. But once you get to a larger investment, I think that 1% should be scaled down somewhat—so the adviser is treated reasonably well, but not a flat percentage all the way up in the millions of dollars. I happen to believe that is just too much money for too many assets.

So the adviser has to be worthy of his hire. And then you’ve got to figure out what that worth is. And something in the range of 1% scaled down as the account grows is a reasonable place to start. I don’t think it is easy to go beyond that except to say that at some point, I would think, maybe advisers will start to work on a fee basis, like a lawyer might work, like a doctor might work, something like that. The amount of attention he gives you—the investor—is what you are paying for: his time and effort rather than an asset-based fee. That may come to develop over time.

Wiandt: An asset allocation question: One of the main reasons we use asset allocation and diversification in our portfolio is to balance the risk. So if one thing is going up, another thing is coming down. If one thing is coming down, you’ve got something else coming up. The problem is—and if you look to October you can see this—when things go bad, it seems like everything goes down. And so what can you say to that? Is there anything that people should do in that environment or do you just ride it out?

Bogle: To me, first, in general, the question is correct insofar as it applies to equities. And it’s been long said—many, many years ago, and it’s proved so true in every crisis since then—international diversification lets us down just when we need it the most. And truer words than that were never spoken. On the other hand, the fact is that bonds produce a very good countercyclical return.

I don't know exactly what they did in September. But I mentioned at the beginning of my remarks that the bond index fund went up 5% last year. That really was counter in direction, if not in amount, to the 35%, 37% decline in the U.S. stock market. Now I look at bonds as being the ultimate diversifier. I don’t look at diversification in equities [in terms of] being in different equity styles as being particularly helpful in the long run.

Look, we all know there are times when growth is doing better than value and vice versa, that large-cap is doing better than small-cap and vice versa. But they seem to come back. They seem to revert to the mean over long, long periods of time. And it’s very hard. Individual stocks, individual styles, have a very similar correlation with a stock market as a whole, a very similar correlation with one another and with the stock market as a whole—even down to the individual stock level and the style level and the manager level. So I think if you are looking for safety, the best instrument for safety is a high-grade bond portfolio, including Treasuries and high-grade corporates.

Wiandt: What are Jack’s thoughts on using inverse ETFs for short-term tactical hedges for those individuals who can’t stomach some of the rides for true long-run buy-and-hold theory? In other words, what role do these products have, if any?

Bogle: None. Did I make my position clear? No, the problem is, it is wonderful to buy a leveraged short ETF just before the market goes way down. I think to put the question in that way is to answer it. Who knows when the market is going to go way down? The time you are most likely to buy that kind of a fund is when the market has gone down. It’s a kind of inverse performance-chasing. I don’t like tricks. They require timing. They require more courage than I have. And they require a belief that you know more than the market.

In my very first book, one of my rules at the end, my principles, my 12 pillars of wisdom, was, “Never think you know more than the market. Nobody does.” Investing is putting money to work where it earns an internal rate of return: interest rates, dividend yields, earnings growth. It is not guessing what prices are going to do next. You know, we all ought to know by now that the stock market is the way we buy the returns of American business over time, the way we participate in the returns of American business over time.

But it also turns out that on any short-term basis, the stock market is a giant distraction to the business of investment. Of course it is. An inverse ETF is a bet on the market taking a certain direction and a bet that you are smart enough to do it, so you better double your bet on the way down. I don’t mean to be too tough on these kinds of funds, but I think anyone that does that is crazy. But I wish them well. I always wish them well.

Wiandt: Here is a bit of a technical question. Professor Jeremy Siegel has challenged the method of calculating the S&P 500. He believes that the calculation should be earnings-weighted as opposed to cap-weighted, capitalization-weighted by market weight. What are your thoughts on that?

Bogle: It just isn’t true. Can I make it clearer? The fact of the matter is, this issue arose earlier in the year. And by the way, the Wall Street Journal had a very powerful and accurate response from Standard & Poor’s as to why it was statistically unsound. It is just not a good statistical technique.

[The S&P response took the example of] one little company that had a great big dollar amount of earnings loss. And to think about it this way, supposing that little company, just before it announced the loss, had been bought by, let’s say, Exxon; the company was bought by Exxon. The loss would be exactly the same. It would be carried over to their balance sheet but it would be in a big company.

The index is already weighted by market cap. It is clearly weighted by dividends; each company’s dividends and each company’s aggregate earnings. When there is an aberration, you just have to live with it. Call it an aberration. Call it anything you want but don’t change the weightings of earnings because it just doesn’t make statistical sense. I’ll bet Jeremy Siegel has had second thoughts about his position, by the way.

Wiandt: Jack, are you planning to write another book, perhaps an opus of your life?

Bogle: Well, that’s a good question. I think when my life’s work is done I’m going to write the book, but I don't know when that will be. But I’m not planning it right now. As the last paragraph in “Enough” says, “One must wait until the evening to enjoy the splendor of the day.”

Wiandt: Where do you see dividend yields going forward? Conventional experts see much lower returns. What are your thoughts on this? What are your thoughts on forward market returns?

Bogle: Well, my theory, or my mathematical construct—which I’ve been using for a long, long, long time now, certainly decades—is that in the long run, market returns are 100% composed of what I call investment returns, dividend yields at time of entry into the market and the earnings growth that follows. That’s not a very complicated way to look at it. But it turns out that it is totally accurate when you look at the returns of the market over the long run.

You have this element of what I call speculative returns, which is changes in valuation. If the price earnings multiple of stocks goes from 10 times earnings to 20 times earnings, that doubling over 10 years adds 7% a year to the returns on stocks. And we actually had that. That happened twice, in the ’80s and again in the ’90s.

But it can’t happen forever. In the long run, 100% of market returns or investment returns and speculative returns come and go. But in the long run they amount to nothing. So investment returns in the future will probably drive the market. I don’t look for speculative returns to drive it up or down a great deal, certainly not by 7% a year.

Right now the dividend yield looks to me to be about 3.25%. I had it at 4% earlier this year but we had a big drop in dividends, one of the biggest cuts in dividends—around a 22% drop is forecast for the S&P 500, and I don’t see that drop is going to be repeated in the kind of economy I see. I think most of the drop is behind us. So using the current dividend yield, down 20% from last year’s, would give us around a 3.25% yield.

From this level—well, let me first say, when one spends just a moment of time on the simplicity of it, we know a lot about earnings growth. And that’s the other component of the investment return. We know that from the beginning of time, practically, corporate earnings grow at the same rate of our economy over the long term. And so if our GDP has been growing at 5%, then corporate earnings should be growing at 5% nominally. and they do.

And what is interesting about that is that they are in a very narrow channel. If you are looking at them a little bit differently, corporate earning generally account, after taxes, for 4%–8% of our gross domestic product. That is a very narrow channel and they average about 6% of GDP. So let’s assume from these depressed earnings levels, that instead of growing at 5% as the economy may grow—it may grow a little slower than that—the corporate earnings can grow at 6% or 7% from here. It is conceivable.

It’s a probability, I think, but certainly not a certainty. So if you are going to use 6%, that is a 9.25% return on stocks. Let’s assume that maybe that valuation comes down and takes a point of that return. You ought to be looking at 8%, perhaps 7% return on stocks, which is pretty good, if not very good. Because when we do the same mathematics for the bond market at today’s interest rate on a portfolio of governments and corporates roughly equally weighted at today’s interest rates—it is going to be 4.75% or 5%. So let’s call it 5% for simplicity.

If you compound over the next decade at 8% instead of 5%, you ought to be a pretty happy investor. So I’m optimistic, although I want to underscore that in these economic conditions, one has to look at not only the possibilities of what the future returns will be in the rough dimensions that I described here—but the consequences to you if they are not. And if you are too exposed to equities and things go wrong—and they can always go wrong—the stock market is a bad place for hope. You want to be conservative, even though the odds favor the stocks doing significantly better than bonds in the coming decade.

Wiandt: We have time for a couple more questions. The federal government has made a massive infusion of money into the market. What does this portend to the value of the U.S. dollar going forward, and is there anything that investors should be doing about that to protect themselves?

Bogle: Well, it should portend a rapid drop in the dollar. But the dollar is, of course, affected not only by the financial side but by the expectations of investors. So I’m not sure it’s a lead-pipe cinch that the dollar will be hugely weak. It came out about $1.17 relative to the euro all those years ago and it’s not all that far from it now. I don't know the current rate. Say maybe $1.40. I haven’t looked recently. That is not a huge change for a decade against the euro.

So predicting the dollar is like any other prediction. You can be right and you can be wrong. And if the dollar is, in fact, weak, I think everybody understands that will be great for international U.S. corporations. So it should help equity prices. I don’t think one should base an investment strategy on the fact that one thinks one knows what the dollar is going to do in the years ahead. Although I would be inclined to agree with the thrust of the question and that is, it’s hard to think that we can have a stronger dollar over the next four or five years.

Wiandt: This is another asset allocation-focused question: Given the almost unprecedented experience of 10 years with bond and equity prices—where you saw bonds really outperform equities over a very long time horizon—should investors be looking at how they do asset allocation between fixed income and equities in a different way?

Bogle: Well, it’s funny that after the previous 20 years ended in 1999 with bonds doing so much worse than stocks—although if you start at the beginning with very high interest rate yields, bonds did actually pretty well—the average return on bonds running through those years was probably about 6% or 7%. And the return on stocks was about 17% over 20 years. And everybody was saying, “Shouldn’t we have more stocks?”

And the answer is “No. You shouldn’t have more stocks.” They are selling at very high valuations and there is a lot of reversion to the mean. You know, high stock returns tend to be followed by low stock returns. Great booms are followed by great busts. Prices revert to kind-of normal valuations over time. So at this time, I don’t think that one should pay a lot of attention to what happened in the last 10 years. I think what happened in the last 10 years—particularly to the stock market, or entirely to the stock market---is very much a reversion of the mean of the excess, greatly excess return that we had in the two previous decades.

Don’t forget, as 1999 ended and 2000 began, stocks were selling at almost 40 times earnings. That can’t stay at 40 times earnings; it has to come down. Now, in this muddy situation that we have, they are probably selling about 20 times these depressed earnings. It’s hard to get a handle on that. But half as highly valued and could come down a little bit. But bond returns … people should understand very importantly about bond returns that today’s yields are the best possible approximation of what bonds will deliver in the next 10 years. Let’s call that a 5% return.

There happens to be, over time, a 91% correlation between the interest rate in which you go into the bond market at and the return that the bond market provides over the next 10 years. So we have a pretty good idea that bond returns would be about 4%–6%. You take your chances on stock returns, and if you think they are going to be much lower than that guess I gave—I suppose if you are a market timer, you should reallocate to bonds if you think stocks are going to return less than 5%. But I don’t think we know enough to do that with much confidence.

I would further say, to me, now—and I’m very conservator investor, extraordinarily conservative—that I believe your bond position should equal your age. And my bond position does equal my age. So I really had a good year last year. Sometimes it’s a blessing to be old, but only rarely.

So, I think one should look at one’s asset allocation in a certain way. Let’s say you decide, for a whole bunch of reasons, that you want to be, say 70%—you’re a younger investor—70% in stocks and 30% in bonds. If you think you can do some forecasting about the direction of the bond or stock market, particularly the stock market, and you think it is going to be down, don’t get out of stocks at 70%, maybe go to 60%. Don’t go below 50%—call it 20 percentage points below your allocation—any more than you should never go above that.

I don’t think that is a good strategy. But it is a much better strategy than thinking, “I’m either in the market or I’m out of it.” Those wholesale changes in equity ratio I think are going to destroy the retirement funds of countless investors that follow it.

Wiandt: We are moving toward wrapping up now. I just have a couple of things to note. We have all the slides up and a recording of the webinar up on the Web site, IndexUniverse.com.

With that, I just really want to thank you, Mr. Bogle, for taking the time with all the investors here. I think it was outstanding. And I’m sure that all the Bogleheads out there really enjoyed it. And thanks to all of you for attending as well.

Bogle: Well, I enjoyed being with all of you. I hope you will forgive my bluntness, but any of you who know me realize it is probably a little late to give up on that. Have a great day everybody.

Click here to view a full replay of the webinar.

Click here to view Bogle’s slides in PDF format.

Click here for a transcript of the presentation (coming soon).

Click here for IndexUniverse.com’s coverage of Bogle’s research.

On the heels of its move into international leveraged waters, ProShares Thursday doubled its lineup of exchange-traded funds providing -200% overseas exposure.

The four new ETFs launching this morning on the NYSE Arca exchange are the:

• ProShares UltraShort MSCI Europe (EPV)
• ProShares UltraShort MSCI Pacific ex-Japan (JPX)
• ProShares UltraShort MSCI Brazil (BZQ)
• ProShares UltraShort MSCI Mexico Investable Market (SMK)

Each will follow their corresponding indexes, taking 2X short positions in their respective benchmarks. They’ll expand the number of UltraShort ETFs that ProShares has on the market tracking MSCI indexes to a total of eight. The other previous launches cover developed international markets through the broad EAFE index, emerging markets as a whole, Japan and China.

Earlier this month, ProShares launched the first of its 200% leveraged international ETF series with four similar funds. (See related article here.)

The new ETFs will each charge an expense ratio of 0.95%. A breakdown of the individual indexes shows the following:

• For EPV, the United Kingdom dominated with about 32% of the underlying constituents as of the end of the first quarter. France was next at 16% followed by Switzerland (13%) and Germany (12%). The rest were in single digits. The underlying benchmark had 489 different companies listed.
• With 146 constituent names, JPX’s benchmark was dominated by BHP Billiton (10.69%). Trailing next were Westpac Banking (5.32%) and Commonwealth Bank (5.10%). The index is dominated by financials, weighted at around 45%. Materials was the second-biggest sector at 17%.
• The benchmark holdings for BZQ are dominated by different share classes of Petrobras, which combined, represented more than 11% of the ETF’s constituent holdings. The same situation occurs with Vale Do Rio Doce, which together leaves about a 6.60% weighting to the company. The leading sectors are: energy (31%), materials (25%) and financials (20%). The index had about 69 different names.
• An even slimmer SMK had a list of about 50 stocks which was heavily weighted to America Movil at more than 31%. Wal-Mart Mexico was next at 8.21%. In terms of sectors, the ETF was led by telecom (43%), consumer staples (21%) and consumer discretionary (13%).

An interesting side note for investors, ProShares’ Web site only provides data of the underlying indexes. Besides the prospectus for each, that’s the most recent detailed information available. And the benchmark data is only through March 31. Daily holdings are listed in totals of swaps held in the underlying index and cash.

A U.S. House of Representatives subcommittee on Wednesday passed two bills to overhaul the nation's 401(k) retirement plans. Included in the proposals was a requirement that employer plans offer at least one index fund in the mix.

The bills won by two separate 13-8 votes, according to reports by several news services. Interestingly, that count split along party lines in the House Health, Employment, Pensions and Labor subcommittee. Republicans opposed the proposals while Democrats voted in favor.

Now, the legislation moves to the full Hous Education and Labor committee. No schedule has been announced for that vote yet.

Also included in the measures were rules allowing advisers to conduct one-on-one meetings with plan participants. That provision follows earlier guidelines set up to open 401(k) plans to utilize professional advisers. This proposal would take the process a step further while making investment advice follow fiduciary guidelines.

The key to opening up the process, however, centers on the bills' making use of the Internet to provide more transparency about fees and other investment details to plan participants. They could then use those details to go to an adviser.

Fee disclosure would come in four areas, according to a Dow Jones Newswire article: administrative fees, investment management fees, transaction fees and other changes.

The inclusion of index funds into the bills was controversial, according to a report at Pensions & Investments magazine's Web site. Also, these bills likely will face competition. Other such proposals are in the works.

On Thursday, a joint hearing on changes to mutual funds by the Securities Exchange Commission and the Labor Department are slated. The topic is expected to focus on the role of mutual funds in defined-benefit contribution plans such as 401(k) platforms.

First Trust is making plans to launch a new exchange-traded fund tied to the community banking industry, according to new papers filed at the Securities & Exchange Commission.

The Wheaton, Ill.-based funds provider filed a prospectus for a new ETF that would track the NASDAQ ABA Community Bank Index, which captures small- and mid-cap community banks listed on the NASDAQ Stock Exchange.

The index has a variety of exclusion criteria designed to maintain a pure-play focus on the community banking sector. Companies entering the index, for example, cannot be among the 50 largest banks or thrifts based on asset size; cannot focus on international servicing; cannot specialize in credit cards; etc. In other words, they are supposed to be local banks.

Community banks follow a different economic paradigm than the New York-centered financial giants; they’re even quite different from the regional banking companies captured by ETFs such as the SPDR KBW Regional Banking ETF (NYSE Arca: KRE). When well-run, they tend to be steady, low-risk performers, with limited upside but similarly limited volatility.

The new ETF will charge 0.60 % in annual expenses.

The filing is available here.

Larry Swedroe is a principal and director of research for St. Louis-based Buckingham Asset Management. He has authored or co-authored seven books. Before joining Buckingham in 1996, he was a senior vice president at Citicorp and vice chairman of Residential Service Corp.

On Monday, IndexUniverse.com Managing Editor Murray Coleman caught up with Swedroe to discuss the plight of bonds and buy-and-hold investing, among other issues. (It should be noted that he and another Buckingham colleague, Joe Hempen, co-authored a book on bond investing in 2006.)

IndexUniverse: Did you recently suggest a portfolio of largely municipal bonds for investors?

Swedroe: That was a reference someone took from an example I was using concerning my own portfolio. I definitely wasn’t making a recommendation for everyone to use. There is no "right" asset allocation—or portfolio—for everyone. All of these cookie-cutter solutions people throw out are garbage. They’ve got about as much chance of being right as buying a lottery ticket.

It is important to note that my low-equity allocation does not reflect a negative view on stock returns. Instead, it reflects my own situation and that is that I have reached a point where my own marginal utility of wealth is very low. Therefore, I have little need to take risk.

IndexUniverse: What do you think about suggestions that bonds are now positioned as a less-risky asset class than equities over the long term?

Swedroe: People have recently conducted studies looking back at different longer-term periods and concluded that stocks aren’t likely to outperform bonds going forward. In my view, that’s nothing more than beta-mining. It’s just absolute trash.

IndexUniverse: Why is that?

Swedroe: Let’s start with Jeremy Siegel’s book, “Stocks For The Long Run.” It was a very dangerous book if people took the wrong message away, which many did. The book implied to some investors that stocks aren’t risky if your investment horizon is long enough. I don’t think that Siegel was trying to claim that as a fact. But clearly, that’s the message many people took out of that book.

If there’s no risk, then the expected returns of stocks over any extended period would be about the same as bonds. That’s insanity. Stocks have returned roughly 10% a year over the past 80 years. The average price-earnings ratio has been roughly 15. If people thought there were no risks in stocks, then the PE would be much higher. If the expected return over 40 years for stocks and Treasuries were the same, which would you buy? It’s just irrational to think that stocks and bonds over the longer term have the same risk profiles.

IndexUniverse: So such arguments about the outperformance of bonds are simply data mining?

Swedroe: What they were doing is going back to a period when bond yields were significantly higher and stock returns were significantly lower. From 1969 through 2008, both the S&P 500 and 20-year government bonds both earned 9% exactly. (And that's assuming someone would go back and repurchase the same types of 20-year government bonds as they expired.) We started that period with high stock prices and ended with stock prices at low levels.

On the other hand, you started that period with high bond yields and ended it with low bond yields. The 20-year bond at the end of 2008 was 3.05%. That meant the expected return over the next 20 years was about 3.05%. Do you think that stocks are going to give you a nominal return of less than 3% over the next 20 years? It can definitely happen. From the years of 1929-1948, stocks averaged a nominal return of 3.1%. That included the years of the Great Depression. But that period started with high stock prices. We’re starting this next period with relatively low PEs and low stock prices.

IndexUniverse: Do you think that the stock market is overbought right now?

Swedroe: Generally, I think the stock market is the best estimate of the right price. But we do know that high PEs predict low future returns. For example, when PEs were over 22, for the next 10 years stock returns were around 5%. On the other hand, when PEs were less than 10, stocks returned about 17%. When the PE was roughly between its average of 14-16, then stocks returned about 10%—their long-term average.

IndexUniverse: Where are PEs now?

Swedroe: Let’s look at the Vanguard Total Stock Market Index Fund (VTSMX). Its trailing PE is at around 12 right now. Then, let’s look at the Vanguard Total International Stock Index Fund (VGTSX), which is at 10.6. And Vanguard’s Emerging Markets Index (VEIEX), which is up almost 40% this year, is virtually the same. So stock PEs are below their long-term averages. That means stocks’ expected returns should be above their long-term averages. The equity risk premium is now greater than their long-term averages.

IndexUniverse: Is buy-and-hold investing dead?

Swedroe: Of course not. Buy-and-hold doesn’t mean you shouldn’t do anything at all, though. You need to buy, hold and rebalance. You’ve got to adhere to an investment plan. And that, by definition, means rebalancing it to adjust to the way markets flow. All along the way, you need to rebalance your portfolio. But time-based rebalancing doesn’t make any sense. You should do risk-based rebalancing. You set a band around each asset class.

IndexUniverse: What are your general thoughts about how people should rebalance their portfolios?

Swedroe: Each person has their own requirements. But any time you have new cash, you should rebalance. And people should remember that since time and costs are real considerations, you want to let your portfolio drift a little. But generally, I like to take a 5/25 approach. That means if an asset class has moved an absolute 5% or a relative 25%, you should probably rebalance.

IndexUniverse: How does that work?

Swedroe: You want to do a rebalancing test at three broad levels. The first is stocks vs. bonds. The second is domestic vs. international stock and then, thirdly, you’ve got to check by size and style as well as separate asset classes on the stock side. That applies to bonds, as well.

IndexUniverse: Can you provide an example of how that would work?

Swedroe: On the individual level, say you only want 4% in commodities. So I’d take 25% of 4%, which is 1%, and I’d rebalance once it goes beyond a 1% move—meaning below 3% or above 5%. But if you’ve got short-term capital gains taxes involved, then I’d wait to rebalance until you’d be triggering long-term capital gains. Or, you can use new money when it’s available to buy more of the under-performers.

Larry Swedroe is a principal and director of research for St. Louis-based Buckingham Asset Management. He has authored or co-authored seven books. Before joining Buckingham in 1996, he was a senior vice president at Citicorp and vice chairman of Residential Service Corp.

On Monday, IndexUniverse.com Managing Editor Murray Coleman caught up with Swedroe to discuss the plight of bonds and buy-and-hold investing, among other issues. (It should be noted that he and another Buckingham colleague, Joe Hempen, co-authored a book on bond investing in 2006.)

IndexUniverse: Did you recently suggest a portfolio of largely municipal bonds for investors?

Swedroe: That was a reference someone took from an example I was using concerning my own portfolio. I definitely wasn’t making a recommendation for everyone to use. There is no "right" asset allocation—or portfolio—for everyone. All of these cookie-cutter solutions people throw out are garbage. They’ve got about as much chance of being right as buying a lottery ticket.

It is important to note that my low-equity allocation does not reflect a negative view on stock returns. Instead, it reflects my own situation and that is that I have reached a point where my own marginal utility of wealth is very low. Therefore, I have little need to take risk.

IndexUniverse: What do you think about suggestions that bonds are now positioned as a less-risky asset class than equities over the long term?

Swedroe: People have recently conducted studies looking back at different longer-term periods and concluded that stocks aren’t likely to outperform bonds going forward. In my view, that’s nothing more than data-mining. It’s just absolute trash.

IndexUniverse: Why is that?

Swedroe: Let’s start with Jeremy Siegel’s book, “Stocks For The Long Run.” It was a very dangerous book if people took the wrong message away, which many did. The book implied to some investors that stocks aren’t risky if your investment horizon is long enough. I don’t think that Siegel was trying to claim that as a fact. But clearly, that’s the message many people took out of that book.

If there’s no risk, then the expected returns of stocks over any extended period would be about the same as bonds. That’s insanity. Stocks have returned roughly 10% a year over the past 80 years. The average price-earnings ratio has been roughly 15. If people thought there were no risks in stocks, then the PE would be much higher. If the expected return over 40 years for stocks and Treasuries were the same, which would you buy? It’s just irrational to think that stocks and bonds over the longer term have the same risk profiles.

IndexUniverse: So such arguments about the outperformance of bonds are simply data mining?

Swedroe: What they were doing is going back to a period when bond yields were significantly higher and stock returns were also significantly higher. From 1969 through 2008, both the S&P 500 and 20-year government bonds both earned 9% exactly. (And that's assuming someone would maintain a constant maturity of 20 years.) We started that period with high stock prices and ended with stock prices at low levels.

On the other hand, you started that period with high bond yields and ended it with low bond yields. The 20-year bond at the end of 2008 was 3.05%. That meant the expected return over the next 20 years was 3.05%. Do you think that stocks are going to give you a nominal return of less than 3% over the next 20 years? It can definitely happen. From the years of 1929-1948, stocks averaged a nominal return of 3.1%. That included the years of the Great Depression. But that period started with high stock prices. We’re starting this next period with relatively low PEs and low stock prices.

IndexUniverse: Do you think that the stock market is overbought right now?

Swedroe: Generally, I think the stock market is the best estimate of the right price. But we do know that high PEs predict low future returns. For example, when PEs were over 22, for the next 10 years stock returns were around 5%. On the other hand, when PEs were less than 10, stocks returned about 17%. When the PE was roughly between its average of 14-16, then stocks returned about 10%—their long-term average.

IndexUniverse: Where are PEs now?

Swedroe: Let’s look at the Vanguard Total Stock Market Index Fund (VTSMX). Its trailing PE is at around 12 right now. Then, let’s look at the Vanguard Total International Stock Index Fund (VGTSX), which is at 10.6. And Vanguard’s Emerging Markets Index (VEIEX), which is up almost 40% this year, is virtually the same. So stock PEs are below their long-term averages. That means stocks’ expected returns should be above their long-term averages. The equity risk premium is now greater than their long-term averages.

IndexUniverse: Is buy-and-hold investing dead?

Swedroe: Of course not. Buy-and-hold doesn’t mean you shouldn’t do anything at all, though. You need to buy, hold and rebalance. You’ve got to adhere to an investment plan. And that, by definition, means rebalancing it to adjust to the way markets flow. All along the way, you need to rebalance your portfolio. But time-based rebalancing doesn’t make any sense. You should do risk-based rebalancing. You set a band around each asset class.

IndexUniverse: What are your general thoughts about how people should rebalance their portfolios?

Swedroe: Each person has their own requirements. But any time you have new cash, you should rebalance. And people should remember that since time and costs are real considerations, you want to let your portfolio drift a little. But generally, I like to take a 5/25 approach. That means if an asset class has moved an absolute 5% or a relative 25%, you should probably rebalance.

IndexUniverse: How does that work?

Swedroe: You want to do a rebalancing test at three broad levels. The first is stocks vs. bonds. The second is domestic vs. international stock and then, thirdly, you’ve got to check by size and style as well as separate asset classes on the stock side. That applies to bonds, as well.

IndexUniverse: Can you provide an example of how that would work?

Swedroe: On the individual level, say you only want 4% in commodities. So I’d take 25% of 4%, which is 1%, and I’d rebalance once it goes beyond a 1% move—meaning below 3% or above 5%. But if you’ve got short-term capital gains taxes involved, then I’d wait to rebalance until you’d be triggering long-term capital gains. Or, you can use new money when it’s available to buy more of the under-performers.

In perhaps one of the worst-kept secrets in exchange-traded funds industry history, giant asset manager BlackRock Inc. said late Thursday it had finalized a $13.5 billion deal to buy Barclays Global Investors.

The combined company, to be called BlackRock Global Investors, will represent nearly $3 trillion in assets under management.

Interestingly, Barclays will keep about a 20% stake in the new BGI. BlackRock will only have to fork over about half of the estimated deal amount in cash; according to reports, BlackRock is exchanging shares of its common stock to complete roughly the other half of the mega-merger.

Officially, Barclays' original buyer (CVC Capital Partners ) has about a week to try to match BlackRock's offer. But the private equity firm would face a big upgrade in terms. CVC Capital  almost had a deal for all of BGI in early April. The price tag at the time was listed at $4.4 billion. But it also came with plenty of strings, including parent Barclays providing much of the financing and an escape clause for the seller if a better bid could be found by June 18. (See related story here.)

And that's just what happened. Nearly two weeks ago, reports started circulating that BlackRock had put together a package that made a deal trumping CVC Capital's highly likely. The stories even detailed Barclays maintaining a 20% stake in the new BGI and many other financing terms. (See related story here.)

Then, last week, reports emerged that pretty much stated Barclays had settled on BlackRock. (See related story here.)

What will be the combined impact on the growing ETF market? Analysts immediately afterwards are looking at the world's largest insitutional money management firm and beefed-up ETF provider as dominant in both marketplaces -- especially ETFs.

But others aren't so sure that such a merger will pay huge dividends, at least right away. Some industry veterans point to a shaky history for mega-mergers between asset managers and diversified financial services firms. (Going against that trend, of course, is the fact that BlackRock by most accounts has successfully integrated the former Merrill Lynch money management arm.)

Then again, a revamped BGI faces a number of internal changes cutting at the core of the ETF marketplace. Consolidation has been taking place in both funds as well as asset managers. And many industry veterans are seeing less differences between the types of customers providers service in coming years. (See related column here.)

Still to be resolved as well -- a $175 million buyout clause that CVC is reportedly owed for breaking its original agreement.

In any event, the deal isn't expected to close, barring any unforseen regulatory hurdles such a merger might raise, until late this year.

A little more than a month since coming out with the first traditional actively managed exchange-traded fund, Grail Advisors is making plans to launch four more.

In a filing dated June 8, the San Francisco-based asset manager says that it wants to complement the Grail American Beacon Large Cap Value ETF (NYSE Arca: GVT). That fund opened on May 4 and differs from others either currently on the market or in registration in that it implements a purely qualitative stock selection process. (See related article here.)

Each in the new group will do much the same. They'll be listed on the NYSE Arca exchange and charge expense ratios of 0.89% apiece. The proposed new ETFs are the:

• RP Growth ETF. According to the prospectus, RP uses a “fundamental research driven approach to identifying those industries and companies with the strongest growth prospects for revenue, earnings and/or cash flow over the medium- and long-term and seeks to buy stock in those companies at attractive valuations.”

Also, the ETF’s manager may invest in companies of any market capitalization and in any industry. The ETF expects to invest primarily in U.S. stocks, but it may also invest overseas.

• RP Focused Large Cap Growth ETF. This will use Wedgewood’s qualitative and quantitative analytical processes to pick 20-30 companies with $5 billion or more in market cap size. The manager will look for above-average growth prospects, and while focusing on domestic names, can also wander outside U.S. borders. According to the prospectus, “Wedgewood seeks investments in market leaders with dominant products or services that are irreplaceable or lack substitutes in today’s economy. Wedgewood invests for the long term, and expects to hold securities, in many cases, for more than five years.”

It adds that Wedgewood’s investment process “involves rigorous qualitative and quantitative inputs as well as a strict valuation and risk discipline.”

• RP Financials ETF. The subadviser plans to use fundamental research to pick financial services companies at attractive valuations. The ETF will primarily invest in companies with mid-to-large market capitalizations of between $2 billion and $150 billion. It will focus on U.S. markets but can also venture overseas.

• RP Technology ETF. Much the same in terms of looking for mid- and large-cap names, this ETF can also wander outside the U.S. It will focus on fundamental analysis and picking stocks with attractive valuations across almost every major sector of technology.

Unlike GVT, the new active ETFs will have a single subadviser. That will be RiverPark Advisors. One of the new ETFs, the RP Focused Large Cap Growth ETF, will have a secondary subadviser as well—Wedgewood Partners Inc.

But in an interview on Tuesday, Grail Chief Executive Bill Thomas said that RiverPark will serve as the primary adviser on that fund and handle running the portfolio.

RiverPark Advisors was founded by Morty Schaja, the former president of Ron Baron’s asset management firm. He opened RiverPark in 2006 with a long-short equity hedge fund. That has since closed and the firm is now specializing in long-only private accounts and ETFs.

“We believe the mutual fund model, which is almost 100 years old, is an outdated structure. In this 24/7 world, we’re very excited to be involved in ETFs,” said Schaja, from his New York City offices on Tuesday.

Grail's Thomas added that going with a single-adviser strategy is "the next step in the evolution of the ETF space.”

“Now, financial advisers and individual investors will have a broad choice of both team-managed and single-manager actively managed ETFs to choose from,” said Thomas.

He says that this will be the first in a series of ETFs Grail plans to offer with RiverPark, which is based in New York City.

In January, Grail filed to launch GVT. But it also included an international-focused ETF using the same sort of fundamental analysis and active management as the original. No word when that will appear, however. (See related story here.)

Vanguard has also filed to come out with an ETF that would mimic its actively managed mutual fund, the High Yield Corporate Bond Fund (VWEHX). And last month, Barclays Global Investors filed to launch its own set of actively managed ETFs. (See related story here.)

PowerShares was the first to bring active management to equity ETFs. But its family of funds relies largely on quantitative methodologies. Grail’s GVT opened the ETF universe to more traditional actively management, using bottom-up fundamental analysis that has been the domain of mutual funds in the past.

“Even though these are primarily managed by a single adviser, these are all continuing what we stated with GVT in bringing to the ETF market classic actively managed portfolios,” said Thomas. “Active management is the next wave and logical extension of the ETF marketplace. It’s going to be as big as index funds have been to ETFs up to this point.”

The filing for Grail's new ETFs can be found here.

-- This report was submitted by IndexUniverse.com's Murray Coleman.

The second exchange-traded fund aiming to deliver hedging strategies at bargain-basement prices is set to launch on Tuesday.

The IQ Hedge Macro Strategy Tracker ETF (NYSE Arca: MCRO) is expected to hit the market taking a more specialized approach. Its sister IQ Hedge Multi-Strategy Tracker ETF (NYSE Arca: QAI) set the table in March for using ETFs to mimic hedge funds. But it takes a broad approach across six different types of hedging strategies. (See related story here.)

The new ETF will focus on combining two hedging strategies—global macro and emerging markets. According to IndexIQ, which created MCRO’s underlying benchmarks and serves as its sponsor, the fund will start with about a 75% allocation to emerging markets and 25% to more diversified global markets.

Just as with QAI, the new fund will come with an expense ratio of 0.75%.

As with the original QAI, the index for MCRO will use ETFs rather than stocks or other securities as constituents. The reasoning is that such a methodology reduces portfolio costs and improves tracking efficiencies. It’s important to note that hedge funds focusing on global macro and emerging markets typically buy everything from stocks and bonds to commodities and currencies.

The top constituents in the Macro Tracker ETF’s index heading into May were:

That left the composition at:

• International equities (32.51%)

• Short-Term Bonds (28.69%)

• Corporate Bonds (14.27%)

• U.S. Equity (6.05%)

• Commodity (5.76%)

• International Bonds (5.11%)

• Currency (3.87%)

• Inverse Real Estate (3.74%)

IndexIQ says that over time, the MCRO’s index has shown less volatility and stronger results than the MSCI Emerging Market Index, which is a long-only and fully invested stock-only traditional market-cap-sized index.

MCRO figures to be the next in a much bigger lineup planned by IndexIQ. In April, the firm filed to offer 15 more ETFs based on specific hedging strategies, including the Hedge Macro Strategy Tracker. (See related article here.)

The second exchange-traded fund aiming to deliver hedging strategies at bargain-basement prices is set to launch on Tuesday.

The IQ Hedge Macro Strategy Tracker ETF (NYSE Arca: MCRO) is expected to hit the market taking a more specialized approach. Its sister IQ Hedge Multi-Strategy Tracker ETF (NYSE Arca: QAI) set the table in March for using ETFs to mimic hedge funds. But it takes a broad approach across six different types of hedging strategies. (See related story here.)

The new ETF will focus on combining two hedging strategies—global macro and emerging markets. According to IndexIQ, which created MCRO’s underlying benchmarks and serves as its sponsor, the fund will start with about a 75% allocation to emerging markets and 25% to more diversified global markets.

Just as with QAI, the new fund will come with an expense ratio of 0.75%.

As with the original QAI, the index for MCRO will use ETFs rather than stocks or other securities as constituents. The reasoning is that such a methodology reduces portfolio costs and improves tracking efficiencies. It’s important to note that hedge funds focusing on global macro and emerging markets typically buy everything from stocks and bonds to commodities and currencies.

The top constituents in the Macro Tracker ETF’s index heading into May were:

That left the composition at:

• International equities (32.51%)

• Short-Term Bonds (28.69%)

• Corporate Bonds (14.27%)

• U.S. Equity (6.05%)

• Commodity (5.76%)

• International Bonds (5.11%)

• Currency (3.87%)

• Inverse Real Estate (3.74%)

IndexIQ says that over time, the MCRO’s index has shown less volatility and stronger results than the MSCI Emerging Market Index, which is a long-only and fully invested stock-only traditional market-cap-sized index.

MCRO figures to be the next in a much bigger lineup planned by IndexIQ. In April, the firm filed to offer 15 more ETFs based on specific hedging strategies, including the Hedge Macro Strategy Tracker. (See related article here.)

Roger Nusbaum says he isn’t convinced that the current three-month-old stock rally is more than a brief respite from a longer-term secular bear market.

But that isn’t stopping the portfolio manager at Phoenix-based Your Source Financial from seizing opportunities when they present themselves. Nusbaum last week increased his clients’ exposure to the iShares Dow Jones U.S. Technology ETF (NYSE: IYW).

His client portfolios still generally have around 20% in cash. At one point last fall, that was up to 25% in cash. It was the largest amount on a percentage basis that Nusbaum has ever held out of circulation, he says.

“I’m skeptical for a whole host of reasons that a new cyclical bull market has started,” said Nusbaum. “The extent to which the Fed and Treasury have printed money, issued debt and are monetizing some of that debt makes for a very unattractive proposition.”

Also, he sees another enormous wave of repossessions coming. “That’s very scary,” said Nusbaum, who points to recent research by economist and fund manager John Hussman as evidence.

Playing For The Long Term

Despite his own rather stark short-term views, Nusbaum says he feels it’s important to stick to the facts when investing. For him, that means using all sorts of different fundamental factors to evaluate where markets are in any given economic cycle.

He also incorporates a broad technical indicator into his investing toolbox. Nusbaum watches where prices are at any given time for the S&P 500 relative to its 200-day moving average. When the blue chip benchmark is above that level, as it is now, he notes that market conditions are generally positive.

“Despite my concern over market fundamentals going forward, I’m sticking with a disciplined approach,” said Nusbaum. “Instead of trying to guess when markets will turn, I listen to what the market is telling me. And right now, the 200-day moving average on the S&P is indicating that demand is becoming healthier.”

So he’s lightening up on his cash positions in corners of the market that look most appealing to him. One of those is tech, which Nusbaum has been underweighting for quite awhile. “Tech usually has more volatility than the broader market,” he said. “So increasing our weightings there slightly actually will allow our clients to get more bang for their buck as markets turn around.”

Nusbaum added: “This current rally may be a head fake. But even by moving a bit more into tech, we’ve still got about a three-quarter weight [under] the S&P 500.”

And by moving from an extreme underweight to a slight underweight position, he says, “allows me to keep more in cash with the rest of the portfolio in case I’m wrong about a turnaround in the market.”

The point of such a move, says Nusbaum, is to remain flexible enough to retain long-term risk-reward profiles for his client portfolios and not resort to trying to outguess the market.

Taking A Top-Down Approach

Nusbaum starts by carving up the S&P 500. He underweights or equal-weights the 10 major sectors in the index. Those decisions are based on where he perceives markets are in terms of economic cycles and other geopolitical factors in the world.

“I believe in taking a top-down strategy. And the most important decision in that process is when to be in the market and when to be out of the market. For that decision, I rely on the 200-day moving average for the S&P 500,” said Nusbaum.

He then drills into each sector once an overall investment theme is formulated. For example, despite the recent comeback by financials, Nusbaum says he can’t build a very strong fundamental case for owning many banks. “So I own only individual stocks right now in financials. It’s a situation where unless you’re looking to make short-term trades, financial ETFs are just too broad right now,” he said.

Nusbaum has slight overweights in telecom, utilities and materials. He’s using funds such as the Vanguard Telecom Services ETF (NYSE: VOX), the iShares S&P Global Utilities Index (NYSE: JXI) and the iShares S&P Global Materials Index (NYSE: MXI) for part of those exposures. With commodities, his target weight is 4-5%. He’s using the SPDR Gold Shares (NYSE: GLD) and the PowerShares DB Agriculture ETF (NYSE: DBA) to cover that corner of the market.

“Over time, I can see inching our commodities exposure up an additional 2%. But in the near term, I have no plans to do so,” said Nusbaum. “And that’s not a technical decision, it’s a purely fundamental one.”

Despite the tremendous run by commodities in this decade, he says that equities still present the most potential for outperformance over the longer term. “Every 30-40 years, we have decades like this where equities really do poorly relative to other asset classes,” said Nusbaum. “We’ll probably run into another down period in 30-40 years.”

He believes that the U.S. economy is most of the way through its recovery process following the bear market that lasted from mid-2007 up to this March. “If we’re most of the way through the worst of the downturn, a long-term plan of owning a lot of commodities doesn’t make a whole lot of sense,” said Nusbaum.

He expects inflation to heat up, but not necessarily to hyper-levels as some pundits are suggesting. His own belief is that the U.S. will see prices rise on average of around 5-6% on an annualized basis in coming years.

“Although inflation might become more uncomfortable in the future, we’re not at the point where people need to worry. It’s likely that inflation rates will become a little uncomfortable – but not in the hyperinflation range,” said Nusbaum.

In addition to being underweight equities, he’s also underweight fixed income. Nusbaum believes prices on Treasuries are too high right now. “We don’t try to trade fixed income for capital gains. We try to use it to offset portfolio volatility. With that type of an approach, it makes sense for us to wait until prices come down,” said Nusbaum.

He’s also underweighting corporate issues. “Despite the bounce-back by stocks, the fixed-income market is still broken. So I’m not willing to make big bets on corporate issues in order to gain higher yields at this point,” said Nusbaum.

-- This report was submitted by IndexUniverse.com's Murray Coleman.

New reports put BlackRock's deal for BGI at $13 billion.

During the weekend, several new articles appeared in British papers reporting that BlackRock Inc. is closing in on a deal to acquire Barclays Global Investors, the parent company of iShares, in a transaction worth up to US$13 billion.

But not all the reports were as definitive as the one coming out of the US late last week. Pensions & Investments magazine, on its Web site, broke the news late Friday afternoon after markets had closed in the US. It quoted unnamed sources as saying that the groundwork for a deal was in place and that an announcement would be forthcoming.

The story also had estimates that a BlackRock purchase of BGI would surpass $10 billion. (See related story here.)

However, in a story over the weekend, a report out of London by the Financial Times said that Barclays isn't expected to reach a decision until early this week on who will purchase its asset management division.

Also, more details are leaking out about the complexity of such a transaction.

Barclays is expected to acquire a stake of 20% in BlackRock. Meanwhile, BlackRock is likely to rely on financing from Middle Eastern sovereign wealth funds. And Barclays’ president, Bob Diamond, is supposedly rumoured to be considering joining the board of the US-based BGI.

Larry Fink, BlackRock’s founder and chief executive, met the Kuwait and Qatar Investment Authorities last week to seek funding, according to the Financial Times.

The deal, if confirmed, would set a record for the acquisition of an asset management company, dwarfing the US$ 8.5 billion paid by BlackRock for Merrill Lynch’s fund arm in 2006.

It would also trigger a payout of US$ 585 million for the 200 employees of BGI with stakes in the company, with Diamond set to receive around US$ 30 million.

Although weekend press reports suggested that a new deal is close to being reached, Barclays has another 10 days until the June 18 deadline for seeking further bids for iShares and other related businesses.

This was set as part of the US$ 4.2 billion May agreement to sell iShares to CVC Capital Partners. CVC will receive a US$ 175 million break fee if Barclays concludes a transaction with a third party, as now seems likely.

A BlackRock acquisition of BGI would mean intensifying competition in the fixed-income ETF market, according to some observers. Last week Pimco, BlackRock’s biggest riva,l initiated its ETF range with a 1- to 3 -ear US Treasury bond tracker, undercutting the equivalent iShares fund with a 9 basis point annual fee.

-- IndexUniverse.eu's Paul Amery submitted this report. IU.com's Murray Coleman also contributed.

The story, by veteran journalist Douglas Appell, said that BlackRock is expected to announce shortly that it would be BGI's new owner. The article cited unnamed sources.

Someone not connected directly to the deal told Appell that word of an agreeement likely will come within days.

Sources also told P&I that CVC Capital Partners, which originally agreed to pay $4.5 billion for BGI's iShares exchange-traded funds business, would get an opportunity to raise its original bid.

The CVC deal had a window for BGI to shop itself unti June 18. A P&I source thought it was unlikely that CVC would be willing to top BlackRock's $10-billion plus offer for the combined BGI franchise.

P&I estimates that a joining of BGI and BlackRock would create the world's biggest instititutional money manager with more than $2.2 trillion in assets.

You can read the full story here.

In this sweeping look at the current trends and opportunities in real estate investing, Robert Steers of Cohen & Steers looks at the history and potential of the REIT market, while Robert Shiller of MacroMarkets examines the environment and opportunities for investors in retail housing. A lively panel discussion moderated by IndexUniverse.com's Jim Wiandt follows.

Note: Certified Financial Planners who preregistered and attended this event live are eligible to receive one CE credit. Information on receiving credit has been sent to all registered attendees by email.

If you think international markets are on the verge of a new leg up in the ongoing broad global rally, a few more tools via exchange-traded funds are now available to provide more leverage.

ProShares launched on Wednesday four ETFs taking 200% positions in four popular foreign indexes. Two are broad in geographic reach and each adds to existing ProShares ETFs that take inverse positions with the same benchmarks.

The new ProShares are the:

• ProShares Ultra MSCI EAFE (NYSE Arca: EFO)

• ProShares Ultra MSCI Emerging Markets (NYSE Arca: EET)

• ProShares Ultra FTSE/Xinhua China 25 (NYSE Arca: XPP)

• ProShares Ultra MSCI Japan (NYSE Arca: EZJ)

These ETFs each seek to capture 2 times the daily performance of their underlying benchmarks. That's something to consider since rival Direxion recently moved to introduce a series of leveraged ETFs that track monthly index performances. (See related article here.)

In theory, being able to track a longer return period should make the new Direxion ETFs better-suited for longer investing periods. That assumes, of course, investors hold the proposed ETFs at the beginning—rather than later—in any given month.

Two of the proposed Direxion leveraged ETFs tracking monthly performance would follow the same indexes as the new EFO and EET.

But leverage on a monthly performance basis has yet to come out. In the meantime, ProShares clearly has first-mover status in the international inverse ETF marketplace. Rydex still doesn't have any ETFs that leverage foreign markets. Direxion has two such funds, the Daily Developed Markets Bull 3x Shares ETF (NYSE: DZK) and the Daily Emerging Markets Bull 3x Shares ETF (NYSE: EDC). As their names imply, each ETF aims at 300% of the daily returns of their respective MSCI benchmarks.

The other ways to use leverage now available overseas is all through ProShares ETFs at the moment. But stay tuned ...

In May, one of the broadest commodities indexes—the S&P GSCI—produced its biggest one-month gain since Iraq invaded Kuwait in September 1990.

The S&P GSCI increased 19.67% in the month. That compared to a gain of 22.94% in September 1990, according to Standard & Poor's, which released the results on Tuesday. (See table below.)

"Solid commodity gains in May were attributed to most commodities accelerating the recovery process from the sharp declines experienced during the second half of 2008 and first quarter of 2009," said Michael McGlone, S&P's director of commodity indexing in a statement.

Year-to-date through May, the S&P GSCI had registered a total return of 5.95%, led by strength in the energy and agriculture sectors.

Sparked by price increases in unleaded gas and crude oil, the S&P GSCI Energy Index increased 25.44% on the month for a year-to-date gain through May of 4.38%. The S&P GSCI Agriculture Index was the second-best-sector performer last month, increasing