The Big Picture for the Week of September 13, 2009

A few random items this morning.

IndexUniverse posted an excerpt from the July issue of ETF Report about thematic investing that includes a few comments from yours truly. Being from the ETF Report it is obviously focused on ETFs.

The themes isolated in the article were alternative energy, coal, nuclear, commodities, infrastructure, transportation and green. I'm not sure those are all themes and I am surprised water wasn't included especially since that was the one I talked about.

Rick Ferri was quoted in the article as well saying that they are gimmicky, make for sales pitches by brokers and that “we don’t use any thematic funds in our management here.” The thing about themes is that often money must be spent on them. Like with infrastructure, the money is going to be spent. This we know. From that we may infer that the stocks involved have visibility for doing well, maybe even outperforming the sector they are apart of.

If you look at the industrial sector it is very likely that every theme in the sector has outperformed every large cap sector fund for the simple reason that large cap sector funds all have heavy exposure to General Electric (GE). Note that I am saying themes in the sector not thematic ETFs in the sector because many of the funds are new and for the short term anything goes but over the entire decade GE has not done well.

One thing that the excerpt did not capture (I did not see the entire article) is how to use thematic products. I have been writing about this for a while now. But themes fall in as being part of a sector or two. So a thematic ETF that is 70% industrial stocks can be thought of as a proxy for the industrial sector. Depending on the size of the portfolio the theme fund could be the entire sector allocation or one of several things. For example with energy a portfolio could have 4-5% of the portfolio in a coal ETF, 2% in a service company and 5% in the big oil company from some foreign country and you're in the vicinity of equal weight versus the S&P 500.

Obviously this could be done entirely with individual stocks but the point is that this is becoming more and more doable with ETFs.


Last weekend Nassim Nicholas Taleb was on WealthTrack with Consuelo Mack and he had a great one-liner. He said that "you would not invest a penny in the stock market if you understood the risks." He went on to say that people do not take these risks because of courage but because of "ignorance." Ouch.

Underneath that I would note that proper understanding of risk is a never ending pursuit.

Last night early on during the Red Sox raindelay NESN reran a documentary called Yard Work about whiffle ball. Adults play, the pitching is crazy, the ball almost unhittable and the game is similar to Over The Line played on the beach in Southern California and a game I played as a kid (back east) called Left Field except those games are played with normal equipment (OTL has a slightly different version of a baseball).

Also during the rain delay was the story of Ken The Hawk Harrelson. I had no idea.

The picture is from a call for a cat up a tree yesterday. Click on it to see what is really going on there. Joellyn and I met another couple at the cat owner's house. He (not an internet person and probably would not want his name mentioned) climbed up to the top of the tree which I would say was 60-70 feet high. The cat scratched up him pretty good. He handed the cat off to me at the top of the ladder and I got him the rest of the way down. Shockingly the cat was not pleased to see either one of us.