US Gets Sharia ETF

The United States will finally have a listed ETF whose investment strategy conforms to Islamic law. Such sharia funds are wildly popular elsewhere in the world, and are a rapidly growing niche product for major Western banks and asset mangers.

The JETS Dow Jones Islamic Market International Index Fund (JVS) will track a special version of the Dow Jones International Titans 100 index, which excludes businesses involved in alcohol, finance, gambling, pornography, defense, and anything pig-related. It is best thought of as an ex-US mega cap fund with a strong European focus, and may be of interest to investors who want to avoid banking and insurance stocks.

The fund started trading yesterday on the NYSE Arca and is issued by newcomer Javelin Exchange Traded Shares (JETS).

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New Short Oil Fund

US Commodity Funds, the same group behind the largest US listed oil ETFs – the USO and USL – will launch a new fund to short crude futures.pic543

Bloomberg reports that the United States Short Oil Fund (DNO) will begin trading in July on the NYSE Arca. It will be the only single leverage short fund offered in the US, competing against Powershares ETNs and ProShares 2x leveraged offerings.

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A One-Company ETF?

Japanese investors will have a unique ETF option coming in mid-July: a fund that invests only in one conglomerate. The fund will hold each of the 26 separately-listed Japanese companies owned or part-owned by the Mitsubishi Group, including Mitsubishi Motors (TYO:7211), Nippon Oil Corporation (TYO:5001), and Nikon (TYO:7731).pic54

This rare niche product is made possible by Japan’s unique cross-holding corporate structure, known as keiretsu, where large industrial businesses are affiliated through a common equity-holding lender.

The fund will be offered by Mitsubishi UFJ Financial Group.

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5 Patriotic ETFs for Your Portfolio

uncle-samThe global financial crisis started in the United States, and the US economy has consequently suffered more than most. Although total output has fallen less than the global average, the rise in America’s unemployment rate has been the steepest in the OECD. It has the world’s largest budget deficit as a percentage of GDP, save the UK. And although US shares didn’t fall as far in 2008, they have hardly risen in 2009 – left in the dust by recovering emerging markets. The economic landscape leaves little for America to celebrate this Independence Day weekend. And considering Thursday’s depressing jobs report, the US economy may remain in the doldrums for a long time to come.

Yet even amongst capital-raising entities that operate entirely in the America, there are opportunities. The insured municipal bond sector, for instance, looks like a good place to get high yields with relatively little credit risk. And several industries including home-building and community banking are so far off their highs that valuation alone may make them decent long term choices.

The following five funds aren’t necessarily “better” than foreign-focused funds, and may not even been good investments at this precise moment. They are simply the ETFs most dependent on the US economy, and with the most to gain from a strong American recovery:

5. iShares US Healthcare Providers Index (IHF) +5.46% ytd

The HMO industry is an entirely American creation, as most developed countries have more statist health care systems. The 45 companies in this fund, therefore, are almost entirely dependent on the US economy for their fortunes, and also carry heavy political risk related to proposed health care reforms. If the effort to change healthcare leaves health care operators with a profitable niche, the fund will profit.

4. Powershares Insured National Municipal Bond (PZA) +5.29% ytd

This fund invests in municipal bonds, debt securities issued by local governments and other regional public entities. The sector is seen as increasingly risky as real estate values fall and tax revenues plummet. Municipal defaults, however, are very rare and usually linked to strange one-off events (like when Orange County decided it was an expert derivatives trader), and not a poor economy. The PZA invests in insured municial bonds from issuers accross the country. Downgrades may hurt the capital appreciation, but it won’t hurt its safe, healthy, tax-exempt yield – currently above 5%.

3. iShares California Municipal Bonds (CMF) +0.39 ytd

If you’re looking for higher yield and higher risk, look no further than California. The state announced yesterday that it will henceforth be paying its debts with IOUs [sic], until it can pass a workable budget. The CMF consequently took a hit as investors begin to fret about a possible default, but a California default would be so shocking to global capital markets that it is unlikely to be allowed to occur. When California’s economy recovers, its bonds should rise. And meanwhile investors can enjoy the CMF’s yield, now nearing 7%.

2. FirstTrust Nasdaq ABA Community Banking Fund (QABA) n/a

One of the jewels of the American financial system is its network of small community banks and credit unions that make money the old-fashioned way; lending to burrowers they know and trust. Credit Unions are owned by their members, but the QABA tracks 98 small publicly traded banks that have largely avoided the excesses of their national and regional peers. Its a brand new fund with the consequent liquidity risk.

1. iShares US Home Construction Index (ITB) -0.42%ytd

No industry is more dependent on the fortunes the American economy than residential construction. Home building one of the few sectors still not off its November lows, and residential home prices are still in freefall. When home values begin to recover, however, and stocks of existing homes are depleted, the 28 names inthe ITB will benefit from the revival of the industry.

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Van Eck Vietnam Fund Launches

800px-Flag_of_Vietnam.svg-300x199Van Eck has launched the first US traded ETF to focus on the Vietnamese market, adding to its impressive lineup of emerging market single country funds. The Van Eck Market Vectors Vietnam (VNM) tracks a custom index of equities from firms that generate more than 50% of their revenues in Vietnam.

The current 28 holdings place a heavy weighting on energy, materials, and financial names, most of which have small or middling market caps.

The fund is expected to be in high demand as Vietnamese shares have been among the best performing in the world this year. The benchmark VN Index – which is broader than the one VNM tracks – is up 61% this year. Investors will pay a premium for access, however, as the fund carries a .99% expense ratio. By contrast, European investors pay only .85% for the db-x trackers FTSE Vietnam (XFVT).

The Vietnam fund is just the latest of Van Eck’s single country emerging offerings, and follows on the strong success of the Market Vectors Indonesia (IDX) and Market Vectors Brazil Small Cap (BRF)

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Game Over for USO, UNG

Commodity ETFs have been criticized from all corners. Investors have pilloried their inability to accurately track the price of their underlying asset. Industry watchdogs have assailed their inadequate disclosure of risks. And regulators have fretted over their ability to unduly manipulate futures markets.

Yet ETFs like the United States Natural Gas Fund (UNG) and the United States Oil Fund (USO) seem to have thus far gotten away high fees, poor disclosure, and disappointing returns, as investors are still buying them in droves. But regulators are less happy, and commodities-futures ETFs may not survive the coming regulatory onslaught.

Bloomberg is reporting today that the Commodity Futures Trading Commission (CFTC) will open hearings into expanding regulation of speculative trading in commodities. Although the hearings concern all speculators, the regulators are primarly concerned with USO and UNG’s ability to move the oil and natural gas markets higher, adding a speculative premium to energy prices. Trading in the UNG was breifly halted as the SEC denied its routine request to issue more shares.

Ironically, with the USO and UNG, investors get the worst of both worlds. The funds themselves don’t track the price of the commodity very well due to rollover, so investors don’t reap the rewards of higher prices. But many believe their trading nonetheless increases demand for the contracts, driving spot prices prices higher. Not only do the UNG and USO screw you out of your returns, they make filling up and heating your home more costly. The only people who benefit from this scheme are the ETF issuers who collect the fees, and the speculators who actually play the futures markets properly.

The CFTC is considering putting limits on holding futures contracts, which could take a variety of forms including limiting the number of trades or contracts any one market participant can hold.

Such a move would directly threaten commodity futures funds, and could force many of the largest ones to close up shop. It would be difficult to keep the size of any ETF down to a particular number of trades or contracts because ETFs are supposed to be open-ended, issuing new shares and aquiring new assets to match as investors put money in. Keeping a commodity ETF within regulatory limits, therefore, will essentially force it to become a closed-end fund that trades at a discount or premium to its net-asset value.

Such funds already exist, but are nowhere near as popular as their exchange traded peers precisely because their values fluctuate in such a seemingly random fashion. And the CEFs don’t solve the rollover problem found on ETFs, as the don’t have fixed end dates to match those of their underlying contracts.

In fact the UNG today entered such a closed-end situation as the CFTC failed to approve its request to issue additional shares pending the outcome of its hearings, meaning the fund that was already a messy way to play natural gas has become a downright terrible one.

Although Exchange Traded Funds are wonderful creations, they simply cannot invest in futures markets. There is an inherent and irreconcilable clash between an ETFs’ open-ended structure and the closed-end and fixed-date nature of futures contracts. An Exchange Traded Fund will never be able to accurately track the price of a commodity by investing in futures. Only those that invest in the physical asset – like the GLD, SLV, and several commodity ETFs traded in London are able to do that at the moment.

Yet funds like the USO and the UNG would have you believe otherwise. They attract assets with misleading marketing and fail to provide investors the product they expect. Its a hugely profitable business, but collecting fees on a mislabeled product is ethically dubious and investing in such funds can be investing suicide if you don’t know the risk. Greater regulation is needed and coming, the only question now is whether it leaves these ETFs simply out of luck or out of business.

If anyone can figure out an exchange traded investment product that can actually track commodity prices through futures, it’d be a wonderful tool to play the whole asset class. But the current class of commodity futures ETFs can be terrible intstuments which generate fees and little else. The investment industry as a whole needs to be more honest about these funds, but unfortunately most investment advisers seem clueless about the USO and UNG.

On the day before the CFTC announced it was investigating these dubious funds and trading in the UNG was halted, ETF “gurus” were on national television praising thier virtures; which is kinda like recommending Fairfield Greenwich on Dec. 9, 2008.

Its time for some honesty and integrety in the ETF marketplace. I’d rather have self-regulation, and if the government has to force disclouse and limits on these funds than so be it.

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10 Best ETFs for Decoupling 2.0

When in 2007 it became clear the recession in the rich word was inevitable, many economic commentators predicted that major emerging markets would “decouple” from their export markets and continue growing on the backs of increased domestic demand. By 2008 it was clear that decoupling wasn’t going as planned as exports, industrial production, output, and share prices collapsed all across the emerging world. The very idea of decoupling was thereafter ridiculed as a hypothesis proven wrong.

In the end, however, it may merely be seen as a prediction proven early. In 2009 emerging markets are clearly on their way to recovering faster than developed ones. Emerging sharemarkets are up spectacularly YTD. Output is expected to be above 5% in both China and India this year, and positive for most emerging economies by 2010.pic453

This phenomenon has been coined “Decoupling 2.0″ by The Economist. This new version of the decoupling thesis sees growth powering forward in big emerging economies such as China, India, and Brazil that have room to expand domestic demand and increase trade amongst themselves. It won’t happen everywhere. Mexico is too dependant upon the US. Emerging Europe is too indebted and too tied to the Eurozone. But most emerging economies will find a way to grow in the next few years even while America and Europe are mired in recession or stagnation.

Emerging markets aren’t only recovering earlier than their developed peers, but they are also recovering differently. Developed markets are likely to return to growth when consumer spending recovers. Emerging markets are driven more by investment spending, in both the government and private sectors. China’s stimulus programs are set to add to China’s already considerable infrastructure. And the Congress party’s election in India will set the stage for upgrading that country’s woefully insufficient roads, bridges, airports, ports, and trains. This demand will drive up prices for commodities and basic materials, spreading the growth to major natural resource producers. And maybe – just maybe – all this growth may begin to pull the West itself out of its morass by increasing demand for developed market exports.

This transfer of economic power away from the West won’t be without pain. But Westerners can profit by investing in the emerging market equities, emerging world currencies, and commodities.

These 10 funds are great ways to play the great global shift towards emerging markets over the next few years:

10. WisdomTree Drefuyss Emerging Currency Fund (CEW) —–

The CEW invests in a wide range of emerging market currencies that are likely to appreciate against the US dollar as decoupling unfolds. It includes holdings denominated in such currencies as the Chinese Yuan, Indian Rupee, Brazilian Real, and South African Rand. Currency ETFs like the CEW are best used to keep the smallest, most liquid part of your portfolio safe from a declining dollar.

9. Van Ecks Market Vectors Agribusiness (MOO) 8.16% YTD

A strong recovery in emerging markets will boost commodities off their recent lows. Agriculture is particularly sensitive to strong emerging market growth because increasing prosperity in those countries actually brings millions of people living on subsistance into the global food economy for the first time. The MOO invests in international agribusiness companies like PotashCorp (POT) and smaller developing market firms like Kuala Lumpur Kepong Bhd (PINK:KLKBF) that will benefit from this long term trend.

8. CurrencyShares Australian Dollar Trust (FXA) 9.22% YTD

If there is one developed market currency that will benefit from strong growth in the emerging world, it is the Australian Dollar. The AUD is a true commodity currency, as its value is highly dependant on Oz’s natural resource exports, which are in turn driven primarily by growth in emerging markets.

7. SGA Dow Jones Emerging Markets Energy Titans (EEO) —–

This brand new fund invests in 40 publicly traded energy firms in emerging markets. The fund is naturally weighted towards the Russian names, which make up about a third of the holdings. But it also hold the majors from other emerging nations including Petrobas (PBR), PetroChina (PTR), Reliance Industries (BOM:500325), and Sasoil (SSL). It faces liquidiy risk at the moment, but will likely become a widely held fund in the future.

6. iShares S&P Global Materials Index Fund (MXI) 19.62% YTD

Infrstructure development requires the proper materials, and the MXI tracks globally active firms in that business. It includes major mining players like BHP Biliton (BHP), chemical firms such as BASF (OTC:BASFY), and metals concerns like China Steel Corp (TPE:2002). It is heavily weighted towards firms headquartered in developed markets, but most are international conglomerates with strong operations in the emerging world

5. PowerShares Commodity Index Tracking Fund (DBC) 5.62% YTD

Strong economic growth in economies that represent 40% of the world’s population will assuredly firm up commodity prices. The DBC invests in the six most traded commodities- crude oil, heating oil, aluminum, wheat, gold, and corn- all of which will be winners when emerging markets dominate world growth.

4. Claymore/Delta Global Shipping Index (SEA) 16.62% YTD

The SEA invests in companies engaged in the global shipping industry, which will stage a strong recovery as global trade volumes recover and emerging to emerging exchanges rise. It holds almost exclusively maritime shipping companies like Navios Maritime (NM) , Cosco Corp Singapore (SIN:F83), and Euronav (EBR:EURN) . It aims to cover the complete breadth of the global shipping trade – everything from oil tankers to dry bulk. So if trading volumes go up on anything, this ETF should do well.

3. PowerShares Emerging Markets Infrastructure Portfolio (PXR) 38.52% YTD

The PXR is notable among infrastructure funds in that it invests almost exclusively in the firms that build infrastructure, and not in companies that operate and maintain infrastructure. That distinction is important as the action in the next few years will be in designing and building projects, not profiting for those already built. The fund holds mostly emerging market leaders, although it contains a few Western companies like ABB (ABB) and Ingersol-Rand (IN) that are deeply involved in emerging economies.

2. iShares MSCI BRIC Index Fund (BKF) 38.45% YTD

A broad emerging market equity fund should be the cornerstone of a decoupling portfolio. A true emerging market ETF- like VWO- would be an acceptable choice. But emerging market funds often include middle income economies like South Korea, Mexico, and Poland which may not decouple so easily. The BKF gives you broad, solid exposure to the four core emerging markets, and does so at a cheap .48% expense ratio. A buy for any diversfied portfolio.

1. First Trust ISE Global Engineering and Construction Index Fund (FLM) 10.67% YTD

Villagers in India don’t need iPods or hot new diabetes drugs. They need reliable electricity. And the boring firms that help build power lines in emerging countries will be the true winners in the new decoupled world economy. The FLM invests in firms that specialize in the relatively profitable business of designing and building infrastructure products. It includes big Western companies like Bouygues (EPA:EN) and URS (URS) as well as emerging gems like China Communication Construction Company (HKG:1800) and Orascom (CAI:OCIC). It differs with the PXR mostly with its greater inclusion of big-margin engineering and design firms, and a lesser focus on materials and equipment. Its underperformance YTD compared to the PXR is largely due to the fact that it fell much less during 2008. FLM a thinly traded fund, with real liquidity concerns. But its unique nature leaves big potential for upside, making it a risk worth taking for those comfortable with risk.

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Complete Guide to Emerging Market ETFs

If you’ve kept your money in the US this year, you’ve missed out. Despite the recent uptick in US equities, the major American averages are barely up for the year. Meanwhile emerging market shares have seen a heroic rally from the depths of last year, with the benchmark MSCI Emerging Market Index up 38% ytd. Many individual markets – Russia, Taiwan, China, Brazil and India – are up nearly 50% ytd. Even the idea of decoupling – ridiculed late last year – is making a comeback.pic32

Despite these gigantic gains, there is still time to profit from emerging markets. The major averages still aren’t anywhere near their 2008 highs. And the shift from the West to the emerging world is a long term trend that will take decades to unfold. With the US dollar steadily losing its value, and Europe and Japan in terminal demographic and economic decline, emerging markets are the logical place to invest for the future.

This guide will review all 16 US-listed ETFs that track multiple global emerging markets, including 13 equity funds, 2 fixed income funds, and 1 currency fund. Later guides will review regional, sector, individual country, leveraged, and short ETFs that also have emerging market exposure.

Broad Market

BLDRS Emerging Markets 50 ADR Index Fund (ADRE) +35.08% & .59 vol

Brazil 25% | China 12% | Taiwan 9% | Hong Kong 9% | South Korea 8%

The ADRE invests in the ADRs of about 50 widely traded emerging market companies. It is broadly diversified across sectors, but its index formulation allows for significant geographical concentration with Brazil currently above a 25% weighting. Because it invests only in ADRs the fund may miss out on stocks not listed in the US. And 50 stocks is hardly enough for a fund that aims to track 40% of the world’s economy. Its strategy does, however, lead to a very good expense ratio of just .30%.

iShares MSCI Emerging Markets Index (EEM) +34.43% & 67.82 vol

China 16% | Brazil 14% | South Korea 13% | Taiwan 12% | South Africa 9%

The EEM is one of the largest ETFs in the world, investing its 12 billion in assets in a broad emerging market index that is widely spread across countries and sectors. It would be a tempting choice, but the VWO tracks the same index, has a much lower expense ratio, and also has great liquidity.

Powershares FTSE RAFI Emerging Markets Portfolio (PXH) +30.43% & .14 vol

South Korea 25% | China 22% | Taiwan 11% | Brazil 11% | Russia 7%

The PXH tracks an emerging market index that is rebalanced annually to reflect a certain fundamentals-based formula. The prospectus doesn’t exactly spell out what that formula is, but it certainly hasn’t helped this index which has underperformed its peers year to date. Its high expense ratio and lack of good volume make this one an easy fund to look past. And who can justify South Korea as one quarter of an “emerging market” fund?

SPDR S&P Emerging Markets (GMM) +36.50% & .01 vol

China 21% | Brazil 17% | Taiwan 11% | South Africa 9% | India 9%

The GMM has one great advantage over its competitors: it excludes South Korea from its index. Despite MSCI’s insistence, South Korea is not really an emerging market. Its an OECD member, and has a per capita GDP higher than New Zealand. Its companies are large global conglomerates (Samsung, Hyundai, Kia) heavily exposed to developed markets, and its sharemarket has consequently underperformed its emerging peers. GMM’s wide geographic distribution, numerous holdings, and competitive expense ratio would make it a serious contender if its volume ever takes off. It is currently the least traded of any emerging market ETF, and thus has very serious liquidity concerns.

Vanguard Emerging Markets (VWO) +38.99% & 5.44 vol

China 18% | Brazil 15% | South Korea 14% | Taiwan 12% | South Africa 7%

Vanguard’s VWO is not only the best performing total emerging market fund to date, its also the cheapest. Its .29 percent expense ratio is a huge relief from the EEM’s .79%,. And not only does the VWO track the same index as the iShares offering, it also tracks it better with double the number of EEM’s holdings. The VWO is a fund that belongs in everyone’s portfolio.


Claymore BNY Mellon BRIC (EEB) +48.52% & .30 vol

Brazil 52% | China 36% | India 8% | Russia 4%

BRIC funds are popular investment vehicles that track the four largest emerging economies: Brazil, Russia, India, and China. These countries together make up 40 percent of the world’s population and just under 30 percent of global GDP. Over the last decade their economies have been among the fastest growing in the world. The EEB invests in 76 equities based in BRIC economies, with a majority weighting towards Brazil. It’s less diversified than the BKF, and more expensive than the BIK.

SPDR S&P BRIC 40 (BIK) +48.98% & .23 vol

China 45% | Brazil 25% | Russia 23% | India 7%

The three BRIC funds are remarkable in that despite their wide discrepancies in geographic distribution, they have performed nearly identically. Their volumes are very similar as well, making the choice between them doubly vexing. The BIK is the cheapest option available, with an expense ratio of just .5% compared to the .6 and .72 percent of its competitors. Although the fund holds only 43 stocks and is almost half devoted to the energy sector, its equal performance and expense ratio puts it on top.

iShares MSCI BRIC Index Fund (BKF) +49.18% & .14 vol

China 35% | Brazil 32% | India 13% | Russia 13% | Hong Kong 7%

iShares’ BRIC offering is the broadest and most expensive of the two. In both geographic and sectoral terms, the BKF is the more diverse choice and should be better poised for the future. But the bare fact that the BKF has performed equal to its peers means its extra expense can’t be justified. At least not yet.


Claymore/BNY Mellon Frontier Markets (FRN) +19.79% & .01 vol

Chile 24% | Poland 20% | Egypt 15% | Columbia 10%| Kazakhstan 6%

The FRN is a true frontier market play. The fact that Kazakhstan is in its top five holdings speaks volumes to the funds objective: to focus on a eclectic array of off the beaten track markets. Its nearly 50% weight to Chile and Poland is concerning, as is it’s small number of holdings and tiny volume. But if you’re looking for a fund to track frontier markets, this is the one.

iShares JPMorgan USD Emerging Markets Bond Fund (EMB) -0.83% & .05 vol

Russia 12% | Brazil 12% | Turkey 9% | Philippines 8%| Malaysia 7% 6.56% yield | BBB-

The EMB is an emerging market bond fund that invests in sovereign dollar denominated debt. Its mix of investment and speculative securities is more weighted towards the investment end than its PCY competitor, and has consequently missed the return of risk appetite in the past few months. Despite this, they both carry a BBB- average rating. It is important to note that because EMB’s debt holdings are dollar denominated, it is an imperfect hedge against a falling dollar.

PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) +16.33% & .12 vol &

Ukraine 7% | Venezuela 5% | Russia 5% | Peru 4%| Indonesia 4% 7.25% yield | BBB-

The PCY invests in a mix of investment grade and speculative emerging market sovereign dollar denominated debt, averaging out to a BBB- rating. Its speculative portfolio is up nicely ytd juicing returns north of 15% and giving the fund a healthy yield. Its 42 holdings average out to a medium term maturity of 7.64 years. Lending money to Ukraine and Venezuela is hardly a low-risk proposition, but PCY offers a good high yield play.

WisdomTree Dreyfus Emerging Currency Fund (CEW) N/A & .07 vol

Chile 24% | Poland 20% | Egypt 15% | Columbia 10%| Kazakhstan 6%

This fund invests in very short term securities (such as CDs and money market accounts) that aim to provide exposure to a broad range of emerging market currencies such as the Yuan, Real, and Rand. It seems to be actively managed to take advantage of the highest interest rates.


PowerShares DWA Emerging Markets Technical Leaders Portfolio (PIE) +23.53% & .02 vol

China 28% | South Korea 16% | Malaysia 10% | Brazil 9% | South Africa 8%

The PIE is a unique fund that uses an index that uses technical analysis to pick winners in the emerging market field. It’s an experiment that hasn’t worked. The PIE is the only fund listed here that has underperformed all its peers both ytd and year on year. The fund is thinly traded.

SPDR S&P Emerging Markets Small Cap (EWX) +47.93 % & .02 vol

Taiwan 28% | China 12% | Brazil 10% | South Africa 10% | India 10%

The EWX has been the better performer of the two emerging market small cap funds, and for good reason. The EWX avoids the South Korea trap, is very heavy on Greater China, and actually includes Brazil in its holdings. With the two expense ratios essentially the same, the EWX is a winner.

WisdomTree Emerging Markets High-Yielding Equity (DEM) +23.17% & .05 vol

Taiwan 30% | South Africa 12% | Malaysia 9% | Brazil 9% | Thailand 7%

DEM is the only emerging market fund that focuses on dividends, and currently carries a juicy yield of around 9%. It’s broadly diversified with a reasonable expense ratio for a specialty product. Its strong Taiwan weighting should help it benefit from the technology boom.

WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) +38.42% & .04 vol

Taiwan 28% | South Africa 16% | Malaysia 10% | Thailand 9% | South Korea 7%

The DGS predictably has a much higher dividend yield than the EWX, but is too severely underexposed to Brazil, India, and China to threaten that fund’s long term potential for capital gains. Because both funds are thinly traded, the choice becomes one of preference for dividends or gains.

ETFGrind Picks:

Broad: VWO or GMM (if you feel comfortable with the liquidity risk)


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Complete Guide to CleanTech ETFs

If there is one sure long-term sectoral bet, it should be cleantech. Governments around the world are determined to wean the world off of carbon based fuels, some of which will run out soon anyway. Many nations and most US states now require utilities to purchase a certain percentage of their energy from renewable sources, and nearly every country in the world is expected to have some sort of carbon cap or carbon tax enacted within the next 5 years.pic2

Yet cleantech is a risky play because despite all the investment in the field, most clean technologies are not profitable. Only wind energy can currently compete with fossil fuels without subsidies. But with carbon legislation now inevitable, technological advances bringing costs down, and market values depressed by the financial crisis, the future is looking brighter for cleantech shares.

For the long term investor, cleantech is one of the best sector plays out there. And the best way to play a sector is with a low-cost ETF. This guide will review all 16 cleantech ETFs traded in the US, and offer investors the information they need to add a slice of long term growth to their portfolio. Not all cleantech ETFs are made alike, and we’ll show you which funds are the best bets for future returns.

Broad CleanTech Indicies:

FirstTrust NASDAQ CleanEdge Green Energy Index Fund (QCLN)

This fund tracks the Green Energy Index created by cleantech research firm CleanEdge. It invests in about 50 publicly traded companies that specialize in green technologies, and is heavy on firms in the solar, energy efficiency and smart grid space. It isn’t a terribly diverse index, holding few utilities, transportation, storage, or wind names. But it contains some unique picks such as AVX Corporation (AVX) and GrafTech International (GTI). It’s best thought of as a solar ETF merged with a smart grid ETF. Not suitable as the broad cleantech fund in your portfolio , but an aggressive growth-oriented offering that is clearly the best way to play feed in tarriffs , should they come to the US.

Powershares CleanTech Protfolio (PZD)

The Powershares CleanTech Portfolio tracks the trademarked CleanTech Index. It is the broadest cleantech play available, with 80 stocks representing everything from algae producers and water treatment suppliers to established wind, solar, geothermal, and utility names. It covers batteries, advanced materials, smart grids, and even environmental consulting in an effort to reflect the total sector. Although much less traded than its PBW cousin, it offers decent liquidity and wider exposure to large cap clean energy players and non-energy cleantech firms.

WilderHill Clean Energy Portfolio (PBW)

This offering, also from Powershares, is the largest cleantech ETF by market cap. If offers broad exposure to the clean energy space, the core of the cleantech industry. Its 50 holdings are heavy on solar, storage, and geothermal, while light on wind. It also holds an number of biofuel names and even an ocean power producer. It’s composed almost exclusively of small and mid cap stocks, eschewing more established firms for growth opportunities. Its a great choice, but more conservative investors may prefer the PZD.

WilderHill Progressive Energy Portfolio (PUW)

The Progressive Energy Portfolio is distinctly different from its peers. Rather than focusing on the next generation of energy and other environmental technologies, it invests in 45 companies that help make current technologies cleaner. Its largest holdings include “clean coal” , nuclear services, and natural gas. It also has a decent mix of established battery companies. There are a few distinctly offbeat picks in the mix such as Canadian methanol producer Menthanex (MEOH) (methanol is a lucrative industrial gas, but also a left-field choice for an oil substitute). But overall it offers a diversified mix of bridge technologies that would certainly benefit from any carbon cap or carbon tax legislation.

Global CleanTech Incicies:

Powershares Global Clean Energy Portfolio (PBD)

The PBD is basically an internationally diversified version of the PBW. It 80 stocks represent most of the PBW’s holdings, plus similar picks traded on global markets. Its international investments, however, are mostly composed of stable large cap stocks such as Vestas (CPH: VWS) and Sharp (TYO:6753), so it offers a wider market cap mix. In terms of the most diverse cleantech ETF, it’s a close call between the PZD, which is more sectorally diverse, and the PBD which is broader geographically. Either would be a top pick for a diversified portfolio.

iShares S&P Global Clean Energy Index Fund (ICLN)

The ICLN is essentially a 30 stock hybrd solar/wind fund. It’s the purest play on renewable energy generation, leaving out any smart grid, materials, energy efficiency, or storage names. Its an interesting choice if you want to completely cut out firms such as battery producer Johnson Controls (JCI) that derive most of their revenue from outside the sector. But it leaves out many companies that will thrive in the new energy economy. Its low expense ratio (.48%), makes it the cheapest option available.

Market Vectors Global Alternitive Energy (GEX)

The GEX is like a top-heavy version of the PBD. Its index’s methodology leads to giant weightings by large cap stocks in its 30 picks. It’s largest holding, Vestas (CPH: VWS), comprises 20% of the index. It carries a marginally smaller expense ratio (.63 vs. .75), but with weightings like that it may be simpler and cheaper to just buy the individual stock.

Clean Transport ETF:

PowerShares Global Progressive Transportation Portfolio (PTRP)

This interesting ETF focuses on one particular aspect of the energy shift, that away from the use of petroleum products in transportation sector. It invests in 32 stocks including biofuel companies, railroads, batteries, and electric vehicles plus train and bus manufacturers. Is a good way to play policy choices that favor public transportation, high-speed rail investment or punish the automobile sector with higher fuel mileage or punitive petroleum taxes.

Environmental Services ETFs:

Market Vectors Envinronmental Services Fund (EVX)

The EVX is a unique fund that invests in firms that offer solutions to non-global warming environmental problems. Its largest holdings are in waste management, including leading consumer firms like Waste Management (WMI) and niche industrial players like Clean Harbors (CLH). It also invests in waste-to-energy, environmental consulting, and pollution control companies. It has 19 constiuents are carries an expense ratio of .55%.

Nuclear ETFs:

iShares Global Nuclear Energy Index Fund (NUCL)

Although some might object to the nuclear industry rebranding itself as “clean”, no one can deny that it will likely be a big winner from the shift away from carbon. The NUCL invests in 25 uranium miners, reactor constructors, and utilities heavy on nuclear generation. Its broad diversification across sectors and geographical regions, and low expense ratio (.48%) make it the winner in the category, although its tiny market cap (16 million) hurts liquidity and may endanger its future.

PowerShares Global Nuclear Energy Portfolio (PKN)

This fund is more diversified than its competitors, but perhaps too much so. Its sprawling list of 65 stocks includes a number of conglomerates which derive only a minority of their revenue from nuclear. General Electric (GE), for example, has traded recently as a financial stock, and certainly doesn’t belong in a pure nuclear ETF. PKN’s high expense ratio (.75%), thin liquidity and poor relative performance make this decision a no-brainer.

Market Vectors Nuclear Energy (NLR)

The NLR is little different than the PKN in that it seems to fill its index’s 25 stock quota with conglomerates that don’t trade with the industry. It shares the PKN’s poor relative performance and only marginally beats its expense ratio.

Solar ETFs:

Claymore/MAC Global Solar Energy Index (TAN)

The TAN invests in 25 solar photovoltaic and solar materials companies around the world. Its largest holdings are in Germany and China, and it is light on the silicon producers. It carries an idential expense ratio (.65%) and performance closely mirrors the KWT.

Market Vectors Solar Energy (KWT)

The KWT is hardly any different from the TAN. The TAN is slightly more internationally oriented, is more established and the much larger of the two. Considering thier nearly identical expense ratios and performance, TAN is clearly the way to go in solar.

Wind ETFs:

PowerShares Global Wind Energy Portfolio (PWND)

Powershares’ wind offering is the purer play of the two wind ETFs traded in the US. Its 30 holdings include the world’s major wind turbine players, and global utilites who sell lots of windpower.

First Trust Global Wind Energy (FAN)

FAN is a broader index of 45 stocks including several smaller players in the windpower market, and some surprising conglomerates. The FAN invests in both BP and Royal Dutch Shell Group, which hardly trade has cleantech companies and may be objectionable to some ethically minded investors. Although FAN is the larger and cheaper of the two, it has underperformed the PWND significantly.

ETF Grind CleanTech Picks:

Broad Cleantech: PZD or PBD.

Nuclear: NUCL

Solar: TAN

Wind: PWND

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