According to Wikipedia, alternative energy sources include biomass, geothermal, solar energy, wind energy, and wave power.

In late April, Glaymore Securities launched a Solar Energy exchange-traded fund, TAN, which lets investors in solar energy providers as well as solar energy related equipment and material suppliers. Early this month, PowerShares introduced its own alternative energy ETF, the PowerShares Global Wind Energy Portfolio (PWND), giving investors an option to invest in another fast-growing alternative energy source.

PWND tracks the NASDAQ OMX Clean Edge Global Wind Energy Index (QWND) (PDF file). The index, which was created on June 26, 2008, is modified market-cap based index that includes 32 companies with market capitalization between $201 million and $279 billion traded in Belgium, Canada, Denmark, France, Germany, Greece, Hong Kong, Japan, Spain, Switzerland, the United Kingdom and the U.S.

Currently, the fund holds the following stocks (and their weights):

• Gamesa Corporacion Tecnologica S.A. (10.44%)
• Iberdrola Renovables S.A. (10.10%)
• Vestas Wind Systems A/S (10.07%)
• Nordex AG (6.71%)
• Hansen Transmissions International N.V. (5.03%)
• EDF Energies Nouvelles S.A. (4.35%)
• American Superconductor Corp. (4.22%)
• China High Speed Transmission Equipment Group Co. Ltd. (4.18%)
• Theolia S.A. (4.12%)
• Clipper Windpower PLC (4.05%)
• Greentech Energy Systems A/S (3.90%)
• Canadian Hydro Developers Inc. (3.74%)
• Zoltek Cos. (3.34%)
• REpower Systems AG (2.48%)
• Gurit Holding AG (2.34%)
• Fersa Energias Renovables S.A. (2.01%)
• Composite Technology Corp. (1.81%)
• C. Rokas S.A. (1.75%)
• E.ON AG (1.62%)
• Siemens AG (1.60%)
• General Electric Co. (1.57%)
• ABB Ltd. (ADS) (1.45%)
• Renewable Energy Generation Ltd. (1.42%)
• Japan Wind Development Co. Ltd. (1.32%)
• FPL Group Inc. (1.23%)
• Plambeck Neue Energien AG (1.15%)
• China WindPower Group Ltd. (1.15%)
• Centrica PLC (0.97%)
• Mitsubishi Heavy Industries Ltd. (0.66%)
• AES Corp. (0.52%)
• Xcel Energy Inc. (0.41%)
• Acciona S.A. (0.26%)

PWND has an annual operating expense ratio of 0.75% and dividend, if any, is paid on an annual basis.

The underlying index, QWND, is rebalanced every quarter.

photo credit: tellmewhat2

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Add Wind to Your Portfolio with PowerShares Global Wind Energy ETF

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In a little over a month, this crisis will be one year old. In the past year, the Dow lost 10.8%, the S&P dropped 11.9%, and the NASDAQ did a little better, downing 6.4%. Looking around the world, where’s the place for U.S. investors to put their money? The following table has performances of iShares MSCI individual country ETFs of the past 1 year, 3 years, and so-far this year.

Brazil, whose economy is boosted by the booming commodity markets, is the clear winner here in all three periods. Biggest lowers are China and Hong Kong.

Are you investing in any individual country? I have PowerShares Gloden Dragon Halter USX China (PGJ) and for once, it was a great ETF to own, riding high with Chinese stocks. While investing in single county (the right country of course) can have tremendous result, it can also be very volatile. A better choice could be investing in a block of countries such as BRIC instead.

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International ETFs Suffer as US Stocks Plunge

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Mutual fund giant Vanguard, which is also becoming a major player in ETF, announced yesterday that it plans to make a 2-1 split on three of its most popular ETFs on June 17:

• Vanguard Total Stock Market (VTI)
• Vanguard Emerging Markets (VWO)
• Vanguard Extended Market (VXF)

The reason for the split is to make these funds, which are all traded above $100 now, “more affordable” for small investors. The splits will cut the price of each of the three ETFs in half, so investors with small funds can buy more shares, one way to attract more investors.

Then again, ETFs are actually mutual funds, but I never heard of mutual fund splits. The reason for that is, as I can think of, that we can buy fractional shares of a mutual fund. If I only have $50, then I can buy 0.5 shares of a fund. That’s not the case for ETFs, though.

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Vanguard to Split Three ETFs

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Early last month, State Street Global Advisors launched yet another global real estate ETF. The SPDR DJ Wilshire Global Real Estate ETF (RWO) is the third REIT exchange-traded fund introduced by SSgA (the other two are DJ Wilshire REIT ETF (RWR) and DJ Wilshire REIT ETF (RWR)), focusing on global commercial and residential real estate markets. In addition to RWO, there are several international REIT ETFs being offered to investors in the past couple of years after the real estate boom in the early part of this decade. In the long-term, investing in real estate helps investors diversify their portfolio and, thus, reduce risk. Diversifying away from the U.S. markets makes even more sense after the collapse of the U.S. housing market.

RWO tracks the Dow Jones Wilshire Global Real Estate Securities Index (RESI), which was incepted on March 1, 2006. The RESI is a float adjusted market capitalization index. Among 25 countries/regions that make up the RESI, the U.S. market has the heaviest weight, at 43.51%, followed by Japan at 11.11%. The breakdown of the rest country weights is as follows:

• Australia: 10.24%
• United Kingdom: 7.29%
• Canada: 5.60%
• Hong Kong: 5.54%
• France: 5.30%
• Singapore: 4.33%
• Austria: 2.42%
• Sweden: 0.69%
• Switzerland: 0.69%
• Belgium: 0.48%
• New Zealand: 0.37%
• Germany: 0.35%
• South Africa: 0.32%
• Italy: 0.17%
• Spain: 0.05%
• China: 0.04%

RWO currently has 223 stock holdings and has an expense ratio of 0.50%. RESI is rebalanced annually.

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State Street Launched Global Real Estate ETF (RWO)

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I don’t know how much impact this new proposal will have on the nation’s oil consumption, especially when the net standard won’t take effect until 2015. As an investor, one way we can save our planet is investing in companies that are in the business of exploring renewable energy such as solar power. For that, the newly incepted Claymore/MAC Global Solar Energy Index ETF (TAN) comes handy.

TAN, which was launched on April 15th, is a passive exchange-traded fund (as oppose to active ETF) that uses MAC Global Solar Energy Index (ticker SUNIDX) as benchmark. The index mainly tracks companies that either manufacture solar power related equipment or supply materials used in solar power system, or provide consulting, integration, or financing for solar power industry. Currently, the fund currently invested in 25 stocks, including many popular Chinese solar power players such as JA Solar and LKD Solar, etc. Companies covered by SUNIDX have market caps from $300 million to nearly $18 billion. Specifically, 42.65% of the components are small-cap stocks, 29.67% mid-cap, and 27.68% large-cap. According to the fund’s prospectus, the index is rebalanced on a quarterly basis.

The complete list of TAN’s components and their respective weightings in the index are as following:

• First Solar (FSLR): 8.87%
• Renewable Energy: 8.25%
• Q-Cells: 6.65%
• Suntech Power (STP): 6.32%
• Solarworld: 5.51%
• JA Solar (JASO): 5.39%
• Yingli Green Energy (YGE): 4.81%
• Sunpower (SPWR): 4.73%
• LDK Solar (LDK): 4.55%
• Memc Electronic Materials (WFR):4.45%
• Solaria Energia Y Medio Ambiente: 3.63%
• Centrotherm Photovoltaics: 3.44%
• Trina Solar (TSL): 3.27%
• Energy Conversion Devices (ENER): 3.25%
• Ersol Solar Energy: 3.14%
• Solarfun Power (SOLF): 3.03%
• Canadian Solar (CSIQ): 2.85%
• Solon Ag Fuer Solartechnik: 2.78%
• Evergreen Solar (ESLR): 2.75%
• Meyer Burger Technology: 2.43%
• Roth & Rau: 2.17%
• Conergy: 2.09%
• Manz Automation: 2.09%
• China Sunergy (CSUN): 1.94%
• Emcore (EMKR): 1.60%

The fund has an expense ratio of 0.65%.

Note: Claymore has also created some exotic ETFs in the past, but had to shut them down early this year after the funds failed to get investors attention. Hope this new offering can avoid that fate. The average daily volume of TAN, 530K, is indeed much higher than those funds that have been closed.

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photo credit: Powerhouse Museum

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Green Your Portfolio with Claymore’s Solar Energy ETF

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• PowerShares Active AlphaQ Fund (PQY)
• PowerShares Active Alpha Multi-Cap Fund (PQZ)
• PowerShares Active Mega Cap Fund (PMA)
• PowerShares Active Low Duration Fund (PLK)

Following are brief summaries of the new funds.
The Active AlphaQ Fund invests in companies, both domestic and international traded in the U.S., with more than $400 million market cap. Currently PQY consists of 50 stocks listed on NASDAQ. The fund’s investment objective is to seek long-term capital appreciation. PQY has an expense ratio (ER) of 0.75%.

The Active Alpha Multi-Cap Fund seeks long-term growth of capital. Similar to PQY, PQZ also invests in domestic companies as well as foreign companies listed on U.S. exchanges. It has 50 stocks with 35.76% in large-cap, 46.1% in mid-cap and 16.22% in small-cap. The fund’s ER is 0.75%.

The Active Mega Cap Fund holds stocks in the Russell Top 200 Index and other mega-cap stocks. Therefore, nearly 99% of the fund’s investments are in large-cap companies. PMA’s top five holdings are Exxon Mobil (XOM), Pfizer (PFE), Merck (MRK), Intel (INTC) and Verizon (VZ). PMA also has an ER of 0.75%.

The Active Low Duration Fund is a fixed income ETF that invests 80% of its assets in U.S. government, corporate, and agency debt securities. Nearly 98% of the fund’s investments have a maturity between 0 and 5 years, with a weighted average effective maturity of less than 3 years. As a fixed income investment, PLK has a low ER of 0.29%.

Before the introduction of active ETFs, all exchange-traded funds are passive investments, tracking their respective indices. Now we have the first actively managed stock ETF and more are expected to come, I am wondering if someday ETFs can completely replace mutual funds, given their advantages in trading and costs.

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PowerShares Launched Four Active ETFs

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According to the article, Mr. Clements is a firm believer of investing in low-cost index funds, which can essentially be simplified to a three-fund portfolio: a US equity fund, a world equity fund, and a bond fund. While these three funds can, and should, be the core investments for any investor who wants to build a diversified portfolio, adding new elements, especially specialty funds offerings in the form of exchange-traded funds (ETFs), to the mix properly can reduce investment risk, which will in turn reward investors with healthy long-term performance.

But new, exotic ETFs are be introduced every day and some disappeared as quickly as they came out, how should regular investors embrace the flood of new investments? Mr. Clements offered his rules in the article that I think are quite useful:

• Stick with specialized index funds that you can see holding for the long-term. WisdomTree International Real Estate Fund makes the cut. WisdomTree International Consumer Non-Cyclical Sector Fund doesn’t.
• Add specialized funds in quantities that won’t leave you desperately unhappy if the market goes against you. Given that we’re talking here about volatile sectors like emerging markets and REITs, earmarking maybe 5% of your stock portfolio for each is probably plenty. As you add funds, write down your new target portfolio, spelling out what percentage of your money will be invested in each.
• Look to rebalance regularly, adding to those funds that have fallen below their designated percentage and lightening up on highflying funds that are above your written targets.
• When everyone’s ebullient, build your new fund positions slowly. You don’t want to be making short-term market predictions. But you also don’t want to be throwing great wads of money at overheated sectors.
• So when should you add new funds? That brings me to my final rule. Purchase new funds not for their return potential, but because they will reduce risk.

What do you think?

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Jonathan Clements’ Rules of “Getting Going”

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Spot silver surpassed the psychological $20 an ounce today to its highest level since October 17, 1980. Currently, silver is traded at $20.80/ounce (Kitco.com). So far this year, silver has gained more than 39%.

Then, there’s platinum which is also on fire since the beginning of 2008. Yesterday, platinum traded above $2300 an ounce in New York. Year to date, spot platinum has surged more than $750 an ounce.

As hot as platinum has been so far, I am wondering why there isn’t any platinum exchange traded fund (ETF) available. I searched in the past several times, but didn’t find any. There’s gold ETFs (GLD and IAU) and silver ETFs (SLV and DBS) (check out a list of precious metal ETFs), but nothing for platinum even after the metal keeps breaking record highs.

Then I read an article on ETFtrends today which explains why there’s no platinum ETF in US. According to Kevin Rich, CEO of DB Commodity Services:

“[Platinum] is not liquid enough to support an ETF,” is the simple answer. “There are not enough players transacting it.”

The last thing anyone would want, Rich says, is for a fund to take money in but find that it couldn’t buy the underlying asset. Platinum is scarce enough that it’s possible for an investment product to take away the supply. “When you bring in an ETF, you make sure the supply and demand of the commodity are still driving the market,” Rich says.

Gold, on the other hand, is in a different situation. For gold ETF such as StreetTracks’ GLD, the shares are backed buy the metal itself. The trust holds gold bars in bank vaults to support the shares issued to its clients (currently the trust holds 647.73 tonnes of gold, according to StreetTracksGoldShares.com). So by investing in GLD, investors owns gold without having to hold and store the precious metal themselves.

There probably isn’t such a large amount of platinum available for a company to create a platinum ETF without disrupting the market

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Platinum is Surging, but Why no Platinum ETF?

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State Street Global Advisors on February 12th launched a new dividend-oriented exchange-traded fund, S&P International Dividend ETF (DWX). The new fund tracks the S&P International Dividend Opportunities Index, which was introduced a month ago on January 25, 2008. According to the fund prospectus, the benchmark consists of 100 highest dividend-paying stocks and American Depositary Receipts (ADRs) listed in stock exchanges included in the S&P/Citigroup Broad Market Index. The 5-year backtested performance of the index, which is measured by a 31% return, is showing in the following plot.

To be included in the index, a stock must have at least $1.5 billion in market capitalization, three-month daily trading value at least $5 million, and average monthly trading volume of 300,000 shares for six months. The index is rebalanced semi-annually in January and July.

The breakdown of new dividend ETF’s top 10 country weights is as follows.

• United Kingdom: 24.91%
• Canada: 18.29%
• Australia: 8.79%
• Sweden: 8.21%
• Italy: 7.69%
• Finland: 6.47%
• Norway: 3.69%
• Belgium: 3.66%
• Hong Kong: 3.65%
• Indonesia: 2.88%

Currently, DWX holds 98 stocks and has a gross expense ratio of 0.45%.

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State Street Launched S&P International Dividend ETF (DWX)

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Apparently, there are. The latest evidence came from Claymore Securities Inc, one of the major issuers of exchange-traded funds (ETFs), which in an announcement last week says it will close 11 of its 37 ETFs on February 20th and liquid assets in these funds on February 28th.

The following is a table of those Claymore ETFs to be closed, together with each fund’s inception data and daily trading volume (volume data from XTF). Except one, all the other10 funds are less than one year old with very thin volume.

A product that nobody wants will be pulled off the shelf and that’s the same for a ETF that nobody trades.

In 2007, the total number of ETF offerings almost doubled, growing from 359 in 2006 to 613. However, many new, exotic ETFs failed to attract investors attention. If you take a look at Morningstar’s ETF page, you will be surprised to see many ETFs are barely traded at all. The closure of those Claymore funds reminds us that when researching which ETF to invest, we should also pay attention to the fund’s trading volume. After all, we don’t want to be in a situation that we are forced to sell our positions.

As ETFs gaining popularity among investors, I wonder whether the ETF industry has reached a point that they roll out new products just for the sake of rolling out new products to collect more fees from investors. Like John Bogle, founder of Vanguard, previously described in his book The Little Book of Common Sense Investing,

ETFs are clearly a dream come true for entrepreneurs, stock brokers, and fund manager.

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Just Too Many ETFs out There: Claymore to Close 11 Funds that Nobody Wants

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I made a few bucks when Chinese stocks were the hottest on the street, but not lately. As a matter of fact, not just that I didn’t make any money from my investments in Chinese stocks, my brokerage account has been hit pretty hard since last November after some once high flying Chinese stocks fell like a rock

There is, however, a way of making money when many people are abandoning Chinese stocks, as long as you own the right ETF, ProShares’ Ultrashort FTSE/Xinhua China 25 (FXP), at the right time. FXP was launched in early November, shortly after Hong Kong’s Hang Seng Index (^HSI) reaching its all-time high of 31,638. Since then, the index has been in a freefall, losing nearly a third of its value in less than three months to close at 21,757 on January 22nd. And many Chinese ADRs, which are also listed in Hong Kong Stock Exchange, suffered huge losses during the same period of time. That set the stage for FXP to prosper because, as it was designed, FXP should gain about twice as much as any decline in the FTSE/Xinhua China 25 Index on any given day when the index drops.

So how has FXP been doing since its inception?

Quite well so far, I have to say, especially since the new year comparing to the turns of FXI and PGJ, two leading China ETFs.

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Did You Make Money from Falling Chinese Stocks?

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One of the selling points of exchange-traded funds (ETFs) is they are tax efficient because they funds themselves almost don’t generate any capital gain distribution, which can be taxed at a rate as high as 35%, comparing to their mutual fund counterparts. ETF capital gains are usually realized when investors sell the fund at profit.

This perception, however, is quietly changing to investors disadvantage.

Yesterday, an article in The Wall Street Journal revealed, based on data compiled by Morningstar, that in 2007, 95 out of a total of 613 ETFs made capital gain distributions, with 47 funds giving investors 1% or more of the assets.

As ETFs gaining popularity among investors because of the advantages they hold over mutual funds, such low cost, flexible pricing and trading, and tax benefits, new ETF products have been rolled out almost on a daily basis in the past year. According to a USAToday story early this month, the total number of ETFs in 2007 is 613, up from 359 in 2006. While the newly launched ETFs give investors exposures to sectors that were not covered by ETFs before, many of those new comers sliced and diced the market so thin that they offer investors little diversification as the fund only hold a handful of securities. And most of them failed to get much of investors’ attention as well. Of the 672 domestic equity and bond ETFs currently listed on Morningstar.com, only 219 have a daily trading volume larger than 10,000 shares and 331 ETFs have fewer than 1,000 share changing hand every day. Not only the lack of trading volume makes those ETFs expensive to own (the larger bid/ask spread), but also cost investors as they intended to incur capital gains, noted in the WSJ article:

Newer funds — those launched in 2006 or 2007, after the ETF business began to explode in size — were three times more likely to pass along capital gains than older funds, data from Morningstar show.

So it seems that when choosing which ETF to invest, we do have to look beyond the usual criteria such as cost and return (XTF’s ETF tool provides bid/ask ratio information)

Did you receive any ETF capital gain distribution last year.

Note: Why is ETF tax efficient? According to an article on Yahoo Finance:

Through a regulatory loophole, ETFs are considered to be created by trading equivalent certificates (the ETF for the many stocks that make up the basket) in what is called an in-kind trade. This exchange of essentially identical items does not trigger capital gains, according to the IRS. Traditional mutual funds must go into the open market and exchange cash for stocks and vice versa, which trigger realization of gains. It’s a subtle difference, admittedly, but which results in an advantage for the ETF investor.

*Photo from Craftzine.com

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Surprise! Here’s Your ETF Capital Gain Distribution!!

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• Vanguard Mega Cap 300 ETF (MGC): Track MSCI Large-Cap US 300 Index
• Vanguard Mega Cap 300 Growth ETF (MGK): Track MSCI US Large-Cap Growth Index
• Vanguard Mid-Cap Value ETF (VOE): Track MSCI US Large-Cap Value Index

All three funds have an expense ratio (ER) of 0.17%. According to MSCI, the Large-Cap 300 Index

represents the universe of large capitalization companies in the US equity market. This index targets for inclusion 300 companies and represents, as of October 29, 2004, approximately 71% of the capitalization of the US equity market.

And both the Growth and Value Indices are subsets of the 300 Index.

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Vanguard Launched New Mega ETFs

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Early last week, First Trust launched a new global dividend ETF, the Dow Jones Global Select Dividend Index Fund, joining other international dividend-paying ETFs. The fund started trading on November 27th under ticker symbol FGD. The underlying index of FGD is the Dow Jones Global Select Dividend Index (PDF) which is defined by component companies of the 24 developed-market country indexes in the Dow Jones Global Indexes (DJGI) family.

The index applies strict dividend standard on what companies can be considered to join the index. Particularly, to be eligible for inclusion, according to the index’s screening procedure, a company must

• Pay a current dividend.
• Have a current-year dividend-per-share ratio that is greater than or equal to its five-year average annual dividend-per-share ratio.
• Have a five-year average payout ratio of less than or equal to 60% for U.S. and European companies; or less than or equal to 80% for all other countries.
• Have a minimum three-month daily average trading volume of $3 million.

Currently, FGD holds top 100 dividend-paying stocks, all members of the Dow Jones Global Select Dividend Index (DJGSDT). Companies in the index are weighted by their annual dividend yields, with an upper limit of 10% to prevent the index from being dominated by a single high-yield stock. The fund’s country breakdown is as following:

• Australia: 28.41%
• Great Britain: 22.14%
• United States: 20.08%
• Canada: 8.01%
• Singapore: 5.27%
• Hong Kong: 4.03%
• Italy: 3.39%
• Netherlands: 2.11%
• New Zealand: 1.89%
• Finland: 1.37%
• France: 1.18%
• Other: 2.12%

FGD has an expense ratio of 0.60% and dividend yield 4.95%, which is quite high compared to other dividend ETFs. Dividends are distributed on a quarterly basis and the index is rebalanced once a year in December.

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First Trust Introduces New Dividend ETF: Dow Jones Global Select Dividend Index Fund

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• Hang Seng Index (^HSI) is currently at 27,588, down more than 4,000 points from the peak of 31,638 reached on October 30th. That’s a loss of more than 12%.
• Shanghai Composite Index (^SSEC) dropped 973 points from the record high of 6,092 on October 16th, enough for a decline of 16% in less than a month.
• iShares FTSE/Xinhua China 25 Index (FXI) plunged nearly 17% since it reached $218.52 on October 31st.

Of course, the crisis in the US financial markets has ignited the sell-off around the world, the stock markets in Hong Kong and China were hit particularly hard, compared to the 7+% loss of the Dow and the S&P from their respective peaks on October 9th. One of the reasons contributed to the steep decline of Chinese stocks is that China decided to postpone indefinitely the plan to let its citizens to invest directly in stocks listed on Hong Kong Stock Exchange, fearing that the flood of money could further inflate the Hang Seng index, which has been pushed higher and higher since such plan was announced in the summer.

If you are an investor with a significant portion in Chinese stocks and want to protect your investments, or if you are one of those who believe that the Chinese stock market is a bubble waiting to burst (I am neither), you may profit from it if that theory turns out to be true.

Last week, ProShares launched a ETF that allows investors to make money if Chinese stocks tumble as many have anticipated. The new ETF, ProShares UltraShort FTSE/Xinhua China 25 (FXP), seeks daily investment results that correspond to twice the inverse of the daily performance of the FTSE/Xinhua China 25 Index. According to the fund’s prospectus (PDF):

If UltraShort FTSE/Xinhua China 25 ProShares is successful in meeting its objective, its value (before fees and expenses) should gain approximately twice as much, on a percentage basis, as any decrease in the FTSE/Xinhua China 25 Index when the Index declines on a given day. Conversely, its value (before fees and expenses) should lose approximately twice as much, on a percentage basis, as any increase in the Index when the index rises on a given day.

The fund started trading on November 8th and has an expense ratio of 0.90%.

Sounds like a neat idea to make some quick money? Maybe in the short term.

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FXP: Make Money if Chinese Stocks Crush

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Looking at my current holdings (ADVDX, PID, BAC, MO, PG, PGN), I have about 63% in US stocks and 36% in foreign equities from two funds, ADVDX and PID. The reason to have foreign dividend-paying stocks is for income and growth from economies outside the US, especially in an environment that features weakening US dollar.

While searching for domestic stocks that pay good dividends is easy, it’s not always straightforward to identify dividend-paying stocks from other countries. Plus, US investors may not have direct access to those foreign stocks. In this case, the simplest way to add international exposures in dividend investment is using mutual funds and ETFs.

After going through Morningstar’s ETF section, I picked up 4 international dividend players:

• First Trust DJ STOXX Select Dividend 30 (FDD): Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and UK;
  
• iShares Dow Jones EPAC Select Dividend (IDV): Australia, UK, Hong Kong, New Zealand, Canada, Singapore, Italy, Netherlands, Greece, France, Denmark, Sweden, Norway, and Japan;
• WisdomTree Europe Total Dividend (DEB): UK, France, Germany, Italy, Spain, Netherlands, Switzerland, Sweden, Finland, Belgium, Norway, Greece, Portugal, Denmark, Austria, and Ireland;
• PowerShares International Dividend Achievers (PID): UK, Canada, Spain, Bermuda, Australia, Sweden, Ireland, Japan, China, and others;

Except PID, which is the oldest and largest international dividend ETF, all the other three funds only have a few months of history, making them difficult to evaluate in terms of performance. It’s clear from the above country diversification, that both FDD and DEB focus mainly on developed European markets, while IDV and PID also have Asia exposures, which help PID’s return so far this year. The following is the performance comparison between PID and iShares MSCI EAFE Index Fund (EFA) in the past two years. As the plot shows, PID’s performance is very close to that of EFA, but with a higher dividend yield (EFA has a yield of 1.79%).

Key data of the four funds is shown in the following table (as of November 2).

a

Dividend Beyond the Border

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As we know, a well diversified portfolio can lower the risk because with different asset classes that don’t move in the same direction at the same time, the chance of either sharp rise or steep decline of the portfolio can be reduced. How well two asset classes (or securities) move in relation to each other is measured statistically by the correlation between the two. A correlation of 1 means the two asset classes move, either up or down, at the same time. To minimize the risk, we want asset classes in a portfolio to have weak correlations (it would be perfect if two asset classes have 0 correction, but that’s unlikely in real life).

The above table shows how the US real estate market correlates with other markets. With many correlations below 0.50 (the correlations could be even weaker if developing markets are included), the benefits of investing in global real estate markets are clear, as pointed out by the article:

Investing in global REIT structures offers investors the benefit of diversification. Real estate markets around the globe are affected by supply and demand factors that are highly localized. Because the correlations of returns between international markets are relatively low, even lower than for global equities, there are significant diversification advantages of investing in REITs on a global basis.

Currently, there are several exchange-traded funds (ETFs) that invest in global real estate markets. Among them, FFR, which I have covered before, has the largest portion in the US market, while other funds invest mainly in overseas markets.

First Trust FTSE EPRA/NAREIT Global Real Estate Index Fund (FFR, ER: 0.60%):

1. United States: 37.92%
2. Japan: 12.72%
3. Australia: 11.96%
4. Hong Kong: 9.52%
5. United Kingdom: 9.45%
6. France: 3.77%
7. Canada: 3.54%
8. Singapore: 2.75%
9. Austria: 2.02%
10. Netherlands: 2.01%
11. Other: 4.34%

SPDR Dow Jones Wilshire International Real Estate ETF (RWX. ER: 0.60%)

1. Australia: 20.46%
2. Japan: 18.76%
3. United Kingdom: 16.17%
4. Canada: 7.57%
5. Singapore: 7.00%
6. Hong Kong: 6.98%
7. France: 6.90%
8. Austria: 4.99%
9. Netherlands: 4.70%
10. Sweden: 1.29%
11. Switzerland: 0.91%
12. Germany: 0.84%

WisdomTree International Real Estate Fund (DRW, ER: 0.58%)

1. Australia: 35.64%
2. Hong Kong: 24.12%
3. Japan: 10.46%
4. Singapore: 7.66%
5. United Kingdom: 6.54%
6. France: 6.15%
7. Sweden: 2.60%
8. Spain: 1.64%
9. Italy: 1.27%
10. Netherlands: 0.93%

iShares S&P World ex-U.S. Property Index Fund (WPS, ER: 0.48%)

1. Japan: 22.48%
2. Australia: 19.99%
3. Hong Kong: 15.28%
4. United Kingdom: 12.49%
5. Singapore: 6.47%
6. France: 5.63%
7. Austria: 4.50%
8. Canada: 3.49%
9. Netherlands: 1.89%
10. Germany: 1.59%
11. Sweden: 1.53%

The following chart shows the year-to-date performances of these four funds. So far in 2007, the Dow Jones Equity All REIT Index (^DJR) declined 8.26% and the iShares Dow Jones US Real Estate (IYR) dropped 11.05%.

a

Weak Correlation: Another Reason to Have Global REIT

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• Investment Choice: REIT

I am not a big fan of lifecycle funds as I only use one in my entire investments, including both regular and retirement accounts. The reason is the lack of flexibility of such funds. However, lifecycle funds are getting popular among investors who opt to choose a fund of funds to simplify their investments. Among the benefits of lifecycle funds, also known as target-date funds, the most talked about are:

1. Automatic asset allocation: Asset allocation is adjusted based on the time span of the target date of the fund;
2. Automatic diversification: Since it’s a fund of funds, the lifecycle fund has exposures in a wide range of asset classes.

With these features, lifecycle funds become an ideal choice retirement accounts since these funds require the minimum amount of management (however, one size doesn’t always fit all). If you like lifecycle funds, then you may find lifecycle ETFs evenly attractive, if not more.

Early this month, XShares Advisors teamed up with Amerivest Investment Management, a subsidiary of TD Ameritrade, to offer the industry’s first batch lifecycle ETFs. Currently, five funds are available for investors:

• TDAX Independence 2010 ETF (TDD)
• TDAX Independence 2020 ETF (TDH)
• TDAX Independence 2030 ETF (TDN)
• TDAX Independence 2040 ETF (TDV)
• TDAX Independence In-Target ETF (TDX)

All the funds have an expense ratio (ER) of 0.65% and they track respective lifecycle indices developed by Zacks Investment Research (here’s an article on Forbes on Zacks lifecycle indices). Since these funds are very new, no detailed data can’t be found on Morningstar and the funds’ website doesn’t have detailed information such as the fund’s asset allocation either, only a sketchy description on how the fund (TDV) invests:

At inception, TDV has an aggressive allocation to risk-based securities, such as domestic and international equities. Balances move automatically down the risk glide path to arrive at a conservative allocation in the year 2040. As an aggressive fund, the initial allocation will be approximately 24% in international equities, 73% in domestic equities and 3% in fixed income. Balances then follow a glide path, from an estimated 97% equity exposure to 10% in the year 2040. In the five years after the target date, TDV gradually increases its risk exposure to match that of the Lipper Conservative Funds Index. TDV then replicates the Lipper equity allocation (currently 33%) on a static basis, to perpetuity.

As more and more people are using lifecycle mutual funds, the offering of lifecycle ETFs is likely to pick up steam because lifecycle ETFs enjoy the advantages of both worlds: asset allocation and diversification of lifecycle funds and low cost and flexible pricing of ETFs.

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There are Lifecycle Funds. Then There are Lifecycle ETFs

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