Sunday Morning Coffee

Barron's had an ETF Palooza this week with a special report consisting of seven articles plus an introduction. I thought I might offer a couple of observations on the coverage.

The first article is a very generic where the industry is now piece but there is one important quote (maybe I think so just because it echoes a point I've made repeatedly) from Anthony Rochte from SPDR who says that ETFs are "access vehicles." Yes! Where the simple funds just owning baskets of stocks are concerned they just provide indexed access. The Peru fund is not good or bad it simply is exposure to a country that, like any other country, has has pluses and minuses that must be weighed out leading to decision one way or the other. If the Peru market goes up a lot then the Peru fund will capture that and likewise if the Peru market goes down a lot. The bigger decision is whether to invest in Peru not whether the fund is the single best way to own the country because again if Peru goes up a 100% the fund will be pretty close either way.

One oddity about the first article was that in a what's next part of the article there was talk of "bundled strategies" as being important a little down the road. About a month ago I mentioned something called Alpha Bundles (a term I made up) being the next thing. Hmmmmmm.

There was an article about why the rich like ETFs; complete throwaway piece.

Next up fixed income ETFs. This should the space where we see the most innovation come and although it has been slow I do think it will come. However I am not so giddy as the people interviewed in the article that I would put all fixed income money into ETFs. There is a tax argument to be made for using TIPS ETFs and foreign ETFs allow otherwise difficult access. Remember though that during market spasms the illiquid nature of some of the holdings can cause market price/indicative value distortions. This happened a year ago and will happen again. This was a point made this week in the Current Yield column.

I own some short term corporates for LLY, UPS and HPQ. The yields are low but are not zero. If you are really just looking to hold to maturity (I am) then most of the work becomes assessing how likely it will be that a company defaults. If rates normalize I'd be more interested in longer maturities but going out for 20 years now seems crazy to me.

To my pleasant surprise there was an article about sector ETFs. In accounts were going heavy individual stocks is not ideal I use sector ETFs to build the portfolio. There was a little (but not enough) about overweighting or underweighting the various sectors which is of course very important; ask anyone who underweighted financials last year.

Not covered at all in this article were things like choosing foreign over domestic for some sectors, blending in thematic or sub-sector funds in building a sector like a coal fund as part of the energy allocation or the SPDR Infrastructure ETF (GII) as a proxy for utilities or any other of a zillion examples to choose from. I've been writing about this from the time I started writing, it is very worthy of exploring if you have not done so before.

What about emerging market ETFs? They were not left out of the coverage but there was no meat on the bone here at all. Too bad. Aside from Peru we have seen Vietnam come to the market along with some specialized funds targeting themes in emerging markets and also EG Shares has started rolling out its sector funds. There are various filings out there that are also interesting like sectors in China and an Egypt fund.

The article on small cap ETFs was little more than a list of funds.

Insuring Against Economic Calamity was about gold ETFs. For short term external shocks defense (not defensive) stocks can work for certain types of events. For longer term calamity other commodities, inverse ETFs (in small doses) and currency funds can also work.

Ok, jerk time; I would think that by now Barron's would have moved beyond basic introductory articles about the product but that is what half the articles were. More than half the articles on the ETF tab at Seeking Alpha are news stories as opposed to analytical pieces but the rest are analytical pieces. I do my best to provide analytical pieces (here and at theStreet) but it would be nice if there was more meaty content.

My brother Larry posted a look back at the Earthquake World Series game from 20 years ago. I'm not sure if I've mentioned this before or not but I was at the game when the quake hit. My buddy Russell got tickets, things started shaking at 5:04, then there was a lot of confusion but when someone with a portable TV shared the news that the Bay Bridge "collapsed" we knew there would be no baseball. Amazing memories and an amazing time. In the days shortly after, in order to make a phone call you had to pick up the phone and then wait (like an hour) for a dial tone.

Yesterday we spent the morning at Best Friends Animal Sanctuary volunteering. "Volunteering" can mean quite a few different things but in our case it meant walking dogs for a half an hour at a time for three hours. The dog in the shadow picture above was by far the liveliest of the dogs we met, his name is Screech. We walked some older dogs, a short corgi and one dog named Rose who is "part feral." Turned out Rose did not feel like being walked. The other pictures are scenic shots from the property and the last picture is one of the Michael Vick dogs (his name is Ray). Pretty amazing that Ray is still alive.

The scenery in general here, if you couldn't tell, is simply amazing. This is absolutely a place to be visited; national parks and national monuments galore.