Shilling Sees Paradigm Shift From Spending

If you’re anything like me, you’re thinking this market has gone too high too fast to last. It has to fall. But what if I’m wrong? Will I totally miss out on the biggest recovery since WWII?

The Tech Ticker at Yahoo! Finance has had a very bearish bent for at least two months, maybe more. Almost all the experts they have on say we in for a serious correction. Well, all the experts I listen to. But I think the boys at Tech Ticker feel they don’t want to be cheerleaders in this rally and are trying to do their best as journalists to warn people about the dangers ahead.

Today they interview a guy named Gary Shilling who appears to own his own firm. They don’t say who he is or what he does and Aaron Task should be punished for not properly identifying this guy or why he’s a credible analyst. That said, he sounds smart.

And he is smart. He’s an economics consultant with a doctorate from Stanford University. According to his Web site he “set up” the economics department at Merrill Lynch at age 29 and served as the firm’s first economist. He’s also worked at the Federal Reserve Bank in San Francisco. And Schilling has a pretty impressive resume of making correct forecasts before major market turns.

Shilling says after “a 25-year borrowing and spending binge the ability of the U.S. consumer to borrow, especially against their house, is severely constrained.”

He adds with baby boomers needing to feather their nest eggs, savings not spending will be the order of the day for the next few years. On top of that, when people are unemployed they don’t spend a lot of money.

Check out the clip.

How does this tie into ETFs? I think for anyone worried about the state of the market but wants to be invested the smart thing to do is do what professionals do when they don’t know what to do. Buy the SPDR (SPY)

Schwab Puts Nail into Mutual Funds’ Coffin

Charles Schwab knocked down one of the last barriers mutual funds held over ETFs, commission free trading, with the launch of its new family of ETFs on Monday.

That’s right. Free!

Previously free was the sole province of the no-load fund, mutual funds that refuse to charge investors a commission to buy or sell their shares. ETFs, because they trade on the stock exchange, require investors to buy and sell shares through a registered stockbroker. And if there’s one thing you can say about stockbrokers, they don’t trade for free. That means every time an investor wants to buy and sell ETF shares, she needs to pay a commission. While discount brokers have reduced the commission to below $20 a trade, this remains a significant fee for small investors following a dollar-cost averaging schedule.

Until now that is.

Open up an account with Schwab and you can trade any of the new Schwab ETFs for free. The catch? Only the new Schwab ETFs trade for free and only when you buy online. Want to buy online an ETF from another company in your Schwab account? That commission starts at at 12.95. Still, it’s a big deal and it will make a big difference for small investors who either day trade or use a dollar-cost averaging strategy.

Dollar-cost averaging is the strategy of investing a steady amount of money into the stock market on a regular basis, such as weekly, monthly or quarterly. The strategy holds two purposes. One, it forces you to save money and invest it on a regular basis. Second, it’s a form or risk management that averages your cost basis. If you had $50,000, and you wanted to put it into the stock market, you could put it all in a variety of investment vehicles in one day. The big risk is that the market falls soon afterward, providing you with an opportunity to have bought even more at a cheaper price. By investing say $1,000 a week, you can average out the year’s volatility and make it work for you.

If the share price falls, because you didn’t put it all in at once, you get an opportunity to buy at a lower price, and get more shares. If the share price rises, you do get less than you would have earlier, but you’re making a profit, your shares are rising.

Realizing investors want to put their feet back into the market, but have lost a taste for niche portfolios; Schwab has created eight conservative, broad-based ETFs to grab the widest audience.

· Schwab U.S. Broad Market ETF (SCHB) – this tracks the Dow Jones U.S. Broad Stock Market Index, a market-cap weighted benchmark that contains the 2,500 largest stocks in the U.S. market. This provides a comparable index for people who want to track the Russell 3000. The expense ratio is 0.08%, which comes in one basis point lower than the Vanguard’s Total Stock Market ETF (VTI) and less than half the 0.21% charged by the iShares Russell 3000 Index (IWV).

· Schwab U.S. Large-Cap ETF (SCHX), which follows the DJ U.S. Large-Cap Total Market Index, a cap-weighted index of the 750 largest U.S. companies. This is Schwab’s alternative to the S&P 500 Index. It also charges 0.08%, compared with 0.09% on the SPDR.

· Schwab U.S. Small-Cap ETF (SCHA). This follows the DJ U.S. SmallCap Total Stock Market Index, the 1750 members of the DJ U.S. Broad Market Index not included in the large-cap index above. This would be analogous to the Russell 2000 small-cap index.

· Schwab International Equity ETF (SCHF). The tracks an index by FTSE, the people who made the benchmark for the British stock market. The FTSE Developed ex-US Index holds about 85% large-cap stocks and 15% small-cap from more than 20 developed markets outside the U.S. It charges an expense ratio of 0.15%.

By the end of the year, Schwab expects to launch four more ETFs to track large-cap growth, large-cap value, international small-cap and emerging markets.

The no-load ETF appears to be part of Schwab’s broader strategy to become the lowest-cost provider in the ETF space. In addition to no commissions, the Schwab ETFs either beat or match the expense ratios of its nearest competitors, making them the lowest priced ETFs on the market.

This follows Schwab’s move in May to lower the expense ratios on all its no-load equity index funds with a minimum investment of $100. At the time Schwab lowered the expense ratio on its Schwab S&P 500 Index Fund to nine basis points, the same charge as the SPDR and half the cost of the Vanguard 500 Index fund, the benchmark for low cost index funds.

Schwab Ready to Enter ETF Market

Mutual fund giant Charles Schwab Investment Management expects to launch its first ETFs during the first week of Novemeber.

A subsidiary of The Charles Schwab Corp., the investment management unit is one of the nation’s largest asset management companies. It held more than $210 billion in assets under management as of September 30. The firm, which says it’s the third-largest provider of retail index funds, manages a total of 82 mutual funds, with 36 actively-managed.

ETF Assets Surpass $700 Billion

Total assets under management at U.S. listed exchange-traded funds (ETF) and exchange-traded notes (ETN) at the end of September surpassed $700 billion for the first time , according to the National Stock Exchange (NSX). The record close of $704.9 billion was a 5% increase over August’s $672.3 billion.

The September ETFs/ETNs net cash inflows came in at $9.2 billion, bringing the year-to-date total to more than $63 billion. The number of listed products at the end of September totaled 868, vs. 813 a year ago.

The top ten ETFs in terms of total assets.

1)SPDR S&P 500 (SPY) saw monthly net cash outflows of $1.795 billion and $29.725 billion year-to-date to post $70.364 billion in assets at the end of September, down from $90.131 billion a year ago.

2) SPDR Gold (GLD) reversed the Spyder’s outflows with montly net cash inflows of $2.005 billion, bringing its year-to-date total to $12.255 billion. The Gold Shares grew 64% year-over-year to become the second largest exchange-traded product at $35.054 billion, half the size of the Spyder.

Assets in Millions/Net Cash Flow YTD ’08/NCF YTD ’09/NCF Sept. 09
3) iShares MSCI-EAFE (EFA) $34,369 ($4,108) ($4,382) ($161)
4) iShares MSCI-Emerging Mkts (EEM)
$33,739 ($129) $1,881 $651
5) iShares S&P 500 (IVV) $20,494 $2,485 $1,733 $42
6) PowerShares QQQ (QQQQ) $17,058 $1,886 ($440) ($239)
7) iShares Barclays TIPS (TIP) $16,444 $3,147 $7,032 $847
8 ) iShares iBoxx Inv Grade Corp Bond (LQD)
$13,711 $1,002 $5,595 $534
9) Vanguard MSCI Emerging Markets (VWO)
$13,380 $2,789 $4,174 $770
10) iShares Russell 2000 (IWM) $12,884 $7,536 ($34) $300

Efficient Market Theory Gets Smacked Down

Paul Krugman in the Sunday New York Times offers an insightful smack down of the Chicago School of macroeconomics and the efficient market theory that forms a foundation of index investing. The basic question in How Did Economists Get is So Wrong? is how did the economists completely fail to predict the financial crisis?

Krugman says the Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten and quotes Brad DeLong of the University of California, Berkeley, about the “intellectual collapse” of the Chicago School. Krugman points to Robert Shiller, an economics professor at Yale, the author of Irrational Exhuberance and a partner at the ETF firm MacroMarkets, as one of the few economists to get it right.

Krugman says economics needs to go back to the great economist of the Great Depression: John Maynard Keynes for an explanation of what had happened and a solution to future depressions.

Keynes, who called the financial markets a casino, “did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” Krugaman says, “he wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.”

Bell Ringing At the Nasdaq Stock Market

ETFs for the Long Run gets the royal treatment on the Nasdaq Stock Market's 7-story high tower screen in Times Square. New York City.

To honor the one-year anniversary of the publication of ETFs for the Long Run, I”m a publishing the photos from my biggest media event.

My friends in and out of the ETF industry join me as I ring the Closing Bell at the Nasdaq Stock Market Aug. 19, 2008

Last summer, to help promote the publication of the book and in appreciation for telling the Nasdaq’s influencial part of the history of the ETF, I was invited to ring the closing bell on Aug. 19, 2008.

I've just received the Nasdaq's highly coveted blue glass award for effectively closing the market that day from Richard Keary, former managing director of Nasdaq's exchange-traded products business. Without me, people might have traded until midnight.

Why publish these now? Well, at the time this occurred I  just started the blog and didn’t have the hang of it yet. Then the financial world blew up.

My friends and I in the middle of Times Square. When the Nasdaq's behind you like this, you know this is an important book. What are you waiting for? Order a copy now.

A few weeks later, I had the “good fortune” to have my book hit the bookstores the week Lehman Brothers went bankrupt. At the time, people were worried about the financial collapse of the entire Western World and the coming of the second Great Depression. So, no one really wanted to celebrate a book talking up Wall Street products. But things are better now. I want a redo.  So, I’m ramping up publicity and this is the beginning.

So long, folks.

Protection Against Identity Theft

This isn’t ETF news, but it is related to personal finance and another one of my areas of extreme interest: identity theft and privacy of personal information. Just got an email from my lawyer recommending people follow these ideas.

We’ve all heard horror stories about fraud committed after the theft of a name, address, credit cards or social security number. Once a thief has these numbers it’s easy for him to apply for new credit cards, get a cell phone service contract and cause other trouble that will cost your many hours and dollars to fix. I’ve been following most for a while, but it’s nice to have them written down all in one place.

1. Do not sign the back of your credit cards. Instead, put “PHOTO ID REQUIRED.”

2. When writing checks to pay on credit card accounts, DO NOT put the complete account number on the ‘For’ line. Instead, just put the last four numbers. The credit card company knows the rest of the number. Anyone else handling your check as it passes through the processing channels won’t have access to it.

3. NEVER, EVER, have your social security number printed on your personal checks.

4. If you have a post office box, use that as the address on the check. Some people say put your work address and phone number on the check. I say don’t put any phone number on the check. You can always add information with a pen if you have to, and most times you are not required to give it. But if you have information printed, anyone can get it.

5. We’ve been told we should cancel stolen credit cards immediately. But the key is having the card numbers handy and the companies’ toll free numbers so you know whom to call. Keep those where you can find them. Copy the contents of your wallet on a photocopy machine. Do both sides of each license, credit card, etc. If you lose the wallet, you will know what you had in it, all of the account numbers and the phone numbers to call and cancel. Keep the photocopy in a safe place.

6. Carry a photocopy of your passport when you travel.

7. If your wallet or credit cards are stolen, file a police report immediately in the jurisdiction where it occured. This proves to credit providers you were diligent and is the first step toward an investigation.

8. The most important thing to do immediately after the theft of a credit card or Social Security number is to call the three national credit reporting organizations to place a fraud alert on your name. Also call the Social Security fraud line number. The alert means any company that checks your credit knows your information was stolen and they have to contact you by phone to authorize new credit.

Here are the numbers of the three credit agencies. Contact them immediately if you have been the victim of a theft. Also, you are entitled to one free credit report a year from each of them so that you can make sure nothing funny has occurred in your files and to correct any incorrect information. You don’t need to use FreeCreditReport.com. That actually will cost you money.

1.) Equifax: 1-800-525-6285
2.) Experian (formerly TRW): 1-888-397-3742
3.) Trans Union: 1-800-680 7289
4.) Social Security Administration (fraud line): 1-800-269-0271

Getting Some TIPS from PIMCO

Pimco, the world’s largest bond fund manager by assets, launched its second ETF, the PIMCO 1-5 Year U.S. TIPS Index Fund (STPZ). The ETF began trading Monday on the NYSE Arca. It tracks the Merrill Lynch 1-5 Year U.S. Inflation-Linked Treasury Index. This unmanaged index holds TIPS (Treasury Inflation Protected Securities) with a maturity between one and five years, and averaging about three years. The fund charges in expense ratio of 0.20%.

STPZ is the first of three ETFs on TIPS, U.S. Government-issued fixed-income securities that give investors explicit inflation protection and the potential for additional yield. The principal value of TIPS is adjusted monthly according to the rate of inflation measured by the U.S. consumer price index.

Pimco said in a written statement that the new fund is the “first ETF to focus specifically on the short maturity segment of the TIPS market and aims to offer investors a high degree of protection against the immediate effects of inflation on their portfolio. Shorter-dated TIPS have historically shown a significantly higher correlation with current inflation and lower volatility relative to an index that covers the entire TIPS maturity spectrum.”

Currently, inflation remains close to non-existent, with deflation a bigger threat to the economy. But, that situation just can’t last. The government’s spending surge from the unprecedented fiscal stimulus bill passed earlier this year has the potential to significantly boost prices across the economy.

Pimco has been one of the most active participants in the TIPS market since the product’s inception in 1997. Next month, the bond fund firm expects to launch two more TIPS ETFs. The PIMCO 15+ Year U.S. TIPS Index Fund (LTPZ) will address the long end of the market while the PIMCO Broad U.S. TIPS Index Fund (TIPZ) will give TIPS exposure across the maturity spectrum. These two will take on the two TIPS ETFs already on the market, the iShares Barclays TIPS Bond Fund (TIP) and the SPDR Barclays Capital TIPS ETF (IPE).

“By focusing on the short end of the maturity curve, we’re addressing the two main concerns we’ve heard from investors (inflation protection and protection against the risk of rising interest rates),” John Cavalieri, a Pimco senior vice president and real return product manager, told IndexUniverse. He said while the ETFs on the market provide inflation protection, STPZ is uniquely positioned to protect against the risk of rising interest rates. “It boils down to this ETF providing exposure to the short end of the maturity curve, which limits interest rate sensitivity.”

Pimco launched its first ETF in June.

ProShares Launches Mild Short Bond Fund

With interest rates near 0%, the only direction they can go is up. And as anyone who has ever read a story about bonds knows, when interest rates go up, bond prices fall. When that will happen is anyone’s guess. But ProShares is getting ready for that day. ProShares timed the market perfectly last time by launching a series of ETFs to short the equities markets just in time to capitalize on the crash that started in October 2007. Now, they are priming the market for the popping of the bond bubble.

The ProShares Short 20+ Year Treasury ETF (TBF), a fund designed to provide short exposure to long-term U.S. Treasury bonds, launched Thursday on the NYSE Arca. This ETF will try to match the inverse performance of the Barclays Capital 20+ Year U.S. Treasury Index each day. The Barclays Capital 20+ Year U.S. Treasury Index trackes the performance of U.S. Treasury bonds with maturities of 20 years or greater.

ProShares says it’s launching this in “direct response to strong investor demand for a single beta2 short treasury fund.” I believe them. The inverse bond ETFs will soon become very hot.

Currently, ProShares offers two bond funds that offer a 200% inverse move of two other indexes. The ProShares UltraShort 7-10 Year Treasury ETF (PST) gives double the inverse return of the Barclays Capital 7-10 Year U.S. Treasury Index, while the ProShares UltraShort 20+ Year Treasury ETF (TBT) does the same for the Barclays Capital 20+ Year U.S. Treasury Index. All three charge an expense ratio of 0.95%

Of course, if negative 200% is a little too tame for you, Direxion offers short Treasury funds that seek an inverse 300% return to their tracking indexes. The Daily 10-Year Treasury Bear 3x Shares (TYO) and the Daily 30-Year Treasury Bear 3x Shares (TMV) also charge a fee of 0.95%.

The new ProShares bond ETF stands out from this crowd in that it’s the only one to offer a 1-to-1 inverse ratio, just a mild negative 100% of its tracking index.

TheStreet.com says the recent uproar over leveraged ETFs has led UBS and Ameriprise to stop selling the funds.

ETF to Track Herring Index

A Nordic Fund? Really? I didn’t think there was anything up there except Aquavit, herring and a lot of depressed Swedes. Yes, Nokia is from Finland, but is that enough to build an ETF around?

Well Global X Management thinks so. The New York-based asset manager today launched the Global X FTSE Nordic 30 ETF (GXF) on the NYSE Arca. It’s the first ETF in the U.S. to offer diversified access to the largest companies in Sweden, Denmark, Finland, and Norway. The ETF tracks the FTSE Nordic 30 index, which holds the 30 largest and most liquid companies in the Nordic region.

As of July 31, the FTSE Nordic 30 index had a 46% weighting in Sweden, 20% in Denmark, 17% in Norway, and 17% in Finland. The top sectors in the index are financials (28%), industrials (16%), technology (15%), health care (8%), and oil and gas (8%). Nordea Bank of Sweden, Novo-Nordisk of Denmark, and Nokia make up the largest companies in the index. I have officially nicknamed this the Herring Index.

I’m sure many people share my view and aren’t shocked it took this long to make a Nordic ETF. And probably many think this smacks of the resurgance of the niche ETFs. Yet, while the U.S. stock market is pretty much in that exact same place it was about 10 years ago, Globax X says the Nordic region has stood out in the developed Europe region. As of July 31, over the last five years the FTSE Nordic 30 Index’s return of 56.5% outperformed the FTSE Developed Europe Index’s return of 33.0% Year to date, the Nordic 30 has posted a 34.9% return vs. Developed Europe’s 19.3%. Not quite sure what all those Swedes are depressed about. Maybe they should lay off the Aquavit. And how did the land of opportunity, corporate theft, corruption and massive bailouts do over the last five years? As of July 31, the S&P 500 index posted a -0.7% return. Year-to-date, the S&P is up 11.0%. Maybe we should all be eating some herring here.

According to Global X, Sweden, Denmark, Finland, and Norway are members of a select group of 15 countries that receive top AAA ratings with stable outlooks from Standard & Poor’s. The firm reports that World Economic Forum’s most recent Global Competitive Report ranks Denmark, Sweden and Finland as third, fourth, and sixth, respectively, for global competitiveness. They also hold the top three positions in higher education and training.

“In our view, the Scandinavian region offers a stable macroeconomic environment and a unique economic model that has historically produced higher returns than its European neighbors,” said Bruno del Ama, Global X chief executive in a written statement.

This is the second ETF from Global X. On Feb. 5, 2009, it launched the Global X/Interbolsa FTSE Colombia 20 ETF (GXG). Through July 31, it has returned 64.7%.