WisdomTree Cuts Some Branches

WisdomTree announced Friday that it plans to close 10 ETFs. Nine are stock funds and at least eight are international funds.

The New York firm creates funds and indexes based entirely of dividend-paying stocks. It said the designated funds represent about 3% of its more than $6 billion in assets under management.

CEO Jonathan Steinberg said in a written statement said that it’s better for the firm to focus on areas of greater client interest and that closing these 10 ETFs will ”create capacity for future growth initiatives.” He added he expects there will be no more fund closings and that WisdomTree will launch new funds this year.

The last day of trading for these funds will be Wednesday, March 24, 2010. Shareholders who do not sell their shares by this date will have them automatically redeemed on March 29, the funds’ last day of operations.

The 10 closing funds:

WisdomTree International Technology Sector Fund (DBT)
WisdomTree International Financial Sector Fund (DRF)
WisdomTree International Health Care Sector Fund (DBR)
WisdomTree International Consumer Staples Sector Fund (DPN)
WisdomTree International Consumer Discretionary Sector (DPC)
WisdomTree International Industrial Sector Fund (DDI)
WisdomTree International Communications Sector Fund (DGG)
WisdomTree Europe Total Dividend Fund (DEB)
WisdomTree Earnings Top 100 Fund (EEZ)
WisdomTree U.S. Short Term Government Income Fund (USY)

Second Book Put to Bed

Whew!! Okay, I’m back on the ETF beat.

I feel like I’ve just run two marathons with very little sleep in between. I just finished the final edits and put my second book to bed. Dividend Stocks for Dummies will hit the bookstores in April. I expect I will be taking a closer look at dividend focused ETFs now.

 But in the meantime, check out my first book and the inspiration for this blog, ETFs for the Long Run.

RAFI Wins Patent

Wow. So many great lead sentences that I don’t even know where to start.

Take that, market capitalization!

Take that, John Bogle!

Take that, Wisdomtree.

You get the point.

Research Affiliates, the asset management house that started the ETF Industry’s Index Wars, Wednesday received a U.S. patent on its Fundamental Index Investment Methodology. Vindication is sweet and I’m sure the folks at Research Affiliates poured champagne all over their heads as if they just won the World Series.

The Research Affiliates Fundamental Index, better known as the RAFI, selects and weights securities using four fundamental metrics of company size instead of market capitalization: total cash dividends, free cash flow, total sales and book equity value.

Whether or not this puts to rest who was the first to create an index or strategy based on fundamental metrics, it clearly says who has the rights to this methodology. The question now is does this extend to any index that follows a methodology based on fundamental metrics, or just ones using the same metrics as the RAFI? More important will there be a legal battle between Research Affiliates and its main competitor in the fundmal indexing space, the ETF firm WisdomTree.
Research Affiliates doesn’t manage any ETFs, but rather licenses indexes to ETF and mutual fund providers, its core business is developing and licensing new product ideas.

“So, unlike most asset managers, we have only our ideas to sell; we can protect these ideas as trade secrets or with patents,” said Robert Arnott, chairman and founder of Research Affiliates, in a written statement. “As we want to encourage wide use of these ideas, we favor the latter.”

Fundamental indexing has been a big deal to the ETF and indexing community ever since Arnott and his colleague Jason Hsu examined the concept in a 2005 issue of the Financial Analysts Journal. The basic premise is market-cap indexes overweight overpriced stocks and underweight under priced stocks which is exactly the opposite of what you the investor want to buy. It’s an interesting concept. I will publish I study I did on fundamental indexing later.

According to Research Affiliates’ original work, the historical return drag associated with this structural flaw is typically 2% to 4% per year, globally. Through October 31, Research Affiliates says the FTSI RAFI 1000 Index, which comprises large-cap U.S. equities, outperformed the S&P 500 by 14.39% in 2009, by 1.47% on an annualized basis for the last three years, and by 1.94% annualized since inception of the index. The FTSE RAFI Developed ex US 1000 Index, which comprises large-cap developed foreign market stocks, outperformed the MSCI EAFE Index by 12.71% for 2009, by 3.48% over three years annualized, and 3.18% since inception.

PowerShares is the only place to buy the RAFI in an ETF.

• PowerShares FTSE RAFI US 1000 Portfolio (PRF). This ETF tracks the FTSI RAFI 1000 Index.
• PowerShares FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ)
• PowerShares FTSE RAFI Asia Pacific ex-Japan Portfolio (PAF)
• PowerShares FTSE RAFI Developed Markets ex-U.S. Portfolio (PXF). This tracks the above mentioned FTSE RAFI Developed ex US 1000 Index.
• PowerShares FTSE RAFI Developed Markets ex-U.S. Small-MidPortfolio (PDN)
• PowerShares FTSE RAFI Emerging Markets Portfolio (PXH)
• PowerShares FTSE RAFI Europe Portfolio (PEF)
• PowerShares FTSE RAFI Japan Portfolio (PJO)

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