Fidelity Takes on State Street

Reading List for Monday, Jan. 7:

Fidelity’s new push into ETFs means it’s getting into the ring with cross-town rival State Street Global Advisors. The Boston Herald says Fidelity “is getting less and less business from investment advisers because it used to be that an investment adviser would pick a basket of mutual funds and Fidelity would be 30 percent or 40 percent of them.”

Wall Street Sector Selector does some technical analysis on the SPDR S&P 500 (SPY) and concludes “U.S. stocks and ETFs now face a moment of truth after the recent powerful rally.  Technical resistance and fundamental headwinds persist along with ongoing political uncertainty. “

Ari Weinberg explains in WSJ.com how ETFs lend out their securities for some extra cash. International securities regulators are in a tizzy over how this could cause potential disruptions in the market. But ETFs in the U.S. are much more stable than the derivative-based ETFs in Europe, so it’s not much of a concern on this side of the pond.

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Reuters: SEC Widens Investigation Into ETFs

The Securities Exchange Commission, which has been investigating the impact ETFs have had on volatility since the Flash Crash of 2010, has now widened the scope of its probe, reports Reuters.

While the initial probe had focused on complex ETFs, Reuters says the SEC is now focused on whether shorting ETFs is having an effect on the larger, more popular funds.

ETF Trading Volume Falls With Stocks

Despite the S&P 500 Index’s 4.4% rally in January, the second best month for stocks over the past year, the actual volume of shares traded fell sharply, reports Reuters. Daily volume dropped 15% year-over-year in January, and plunged 26% from a high in January 2009.

Stock market technicians consider volume an essential ingredient for long-term moves. The low volume typically means the recent gains are not sustainable.

Many attribute the low volume to the low volatility in the market, which led hedge funds and other high-frequency traders to sit on the sidelines. Reuters then says strategists think the low volatility will bring in large institutional investors and small retail investors, who will push the market higher as they put some of the cash they’ve been afraid to invest back to work.

No surprise then that the trading volumes in ETFs fell as well, according to J.P. Morgan. And not just ETFs holding stocks, but across all asset classes. ETFs that track stocks, bonds and commodities saw a 36% drop in trading volumes in January compared to the average daily volume in the second half of 2011.

This makes sense if you believe that hedge funds, frequent users of ETFs, have been sitting out the rally.

CNBC’s Bob Pisani then sets a up a straw man by asking if ETFs are responsible for the lower trading volume on the stock market? He knocks down the straw man, with a no that should be obvious to anyone who understands ETFs.

What’s really sad is that some of the traders Pisani talks to think this is the case. But then again, few traders are rocket scientists. A friend of mine, an Ivy-league educated trader, couldn’t even explain the basics of supply and demand even though that was the entire basis of his occupation. Of course, after the screw-up with the focal point on the lenses of the Hubble Telescope it appears even America’s rocket scientists aren’t rocket scientists.

Reuters: Germany, U.K. ETFs Best Way to Play Europe

With the recent agreement to save the Eurozone, European leaders seem to be ignoring one of the major problems, which is that Europe’s “economies are growing too slowly,” says Reuters.

The strict budget guidelines outlined in the agreement may actually exacerbate this problem Add cost-cutting austerity measures and huge debt burdens to slow growth and the recession that’s already engulfing Spain, Portugal and Greece will soon move into France and Germany over the next six months, according to Standard & Poor’s.

The United Kingdom also offers opportunities because it doesn’t use the euro, but rather the pound sterling. Because the UK has control over its currency, it can take measures to offset the slowing growth. The iShares MSCI United Kingdom Index Fund (EWU) holds 106 stocks, and provides a decent proxy for the British stock benchmark, the FTSE 100, which is currently not tracked by a U.S. ETF.

Because of recession fears and as a proxy for their European-wide market viewpoints, investors have been selling German stocks. The sell-off has left the German market trading at nine times forward earnings vs. the S&P 500’s forward multiple of about 12. Reuters says a good way to play the European crisis is to buy German stocks because of low valutions and because any drop-off in German exports to Europe may be picked up by the U.S. and China. I doubt the U.S. and China can make up for Europe’s weakness. But a good way to play it is to buy the iShares MSCI Germany Index Fund (EWG), which holds Germany’s 50 largest companies. It’s down 17% this year and yields 3.3%.

If you believe the euro will continue to fall as the debt crisis continues, Reuters says pick up the PowerShares DB US Dollar Index Bullish (UUP). By tracking the performance of the dollar against the euro and five other currencies it provides a hedge to U.S. investors holding European stocks.

Recent Sell-Off Sets Up Next Gold Rally

When the price of gold plunged 20% last month, many market watchers declared the gold boom over. Stalled, yes; ended, no, according to many gold analysts, who believe the precious metal may instead be near a new sustained rally.

“I can tell investors don’t sell off your gold,” says Martin Murenbeeld, the chief economist at DundeeWealth. “We’re at a crossroads here.”

During the summer, gold surged 29 percent to a record high of $1,920 a troy ounce. This jump caused the price to drastically detach from its 200-day moving average, an important trend line in technical analysis that the gold price had closely hugged for much of the last decade. Technical analysts considered this jump unsustainable and in September gold gave back most of these gains.

Gold fell to a low of $1,534.49, much to the technicians delight, and it bounced off the 200-day moving average’s support level of $1,527. While most gold watchers expect the metal to experience turbulence during the next few months, the world hasn’t changed much, and gold prices may climb higher because of its status as a safe-haven during turbulent times.

“Have the countries around the world solved the debt crisis?” asks Nick Barisheff, president of Bullion Management Group, a precious metals investment company based in Toronto. “Have the bailouts ended? Have their currencies stopped tanking?“ With the world already worried about Greece’s fiscal problems, gold summer’s rally was sparked by fears that the U.S. might default on its debt.

After Standard & Poor’s downgraded the U.S. debt, investors flocked to gold as one of the few safe havens left. This raised the specter of recession, which is never good for gold. The combination of increased collateral requirements for trading with falling commodity and stock markets, gold tumbled as investors sold it for liquidity amidst a flurry of margin calls.

Still many analysts think the gold market isn’t in a bubble and that the run-up is far from over. Analysts say a bubble is when an asset goes up exponentially 15 to 20 times.

Gold is up seven times during the last decade. Since its low on Sept.26, 2011, gold has jumped 9 percent. Most analysts expect the price to retest September’s low during the next few months. If it bounces again that would be the buy signal.

Ed Carlson, Chief Market Technician at Seattle Technical Advisors.com says gold could fall as far at $1,460. But even Carlson predicts a new sustained advance will begin after Thanksgiving.

The fundamental factors for being bullish are also compelling. Low interest rates are very good for gold. In August, the Federal Reserve promised to keep rates low for the next two years. Additionally, most analysts expect the European Central Bank (ECB) to stem the European debt crisis with a flood of new money.

For the full story go to Reuters Money.

Full disclosure, I own shares of the SPDR Gold Shares (GLD) in my IRA. You should too.

Indexes Beaten by Small-Cap & Large-Cap Value

The indexing and ETF communities received a significant blow when, in an extremely rare occurrence, slightly more than half the actively managed mutual funds holding stocks outperformed their benchmark indexes.

According to the Standard & Poor’s Indices Versus Active Funds Scorecard (SPIVA), for the year ended June 30, the S&P Composite 1500 Index, tracked by the iShares S&P 1500 Index Fund (ISI) outperformed only 48.99% of all the domestic equity funds. Small-capitalization stocks were responsible for pushing active managers over the 50% mark, with the S&P SmallCap 600 Index, tracked by the iShares S&P SmallCap 600 Index Fund (IJR), beating only 47.5% of all small-cap funds.

This plays into one of the main reasons for using active fund managers: they can spot inefficient pricings in markets ignored by Wall Street analysts and institutions. This strategy typically works well with small stocks and equities in emerging markets.

But fans of active management shouldn’t crow too loudly, in all the other categories, the indexes won. The S&P 500 Index, tracked by the SPDR (SPY), beat 60.5% of the active managers, the S&P MidCap 400 – SPDR S&P MidCap 400 ETF (MDY) – beat 66.7% of the active managers.

Breaking it down further, between growth, core and value, small-cap value was the true hero, with 60.4% of the funds beating the S&P SmallCap 600 Value Index and the iShares S&P SmallCap 600 Value Index Fund (IJS). However, over three years, the index beat 52.3% of the funds.

Most shocking was large-cap value funds. Over the past year, 54.6% of the large-cap value funds posted better returns that the S&P 500 Value Index — iShares S&P 500 Value Index Fund (IVE). For the 3-year and 5-year periods, the percentage of large-cap value funds that topped the index were 55.9 and 64.7, respectively.

But investors in ETFs and an indexing strategy shouldn’t worry, the results don’t include the recent stock swoon. And in the 2008 crash, the average equity fund plunged 39.5%, according to Lipper, compared with the 37% drop in the S&P 500.

However, one of the big reasons for not buying actively managed funds is that few can consistently beat the indexes. So, a one-year record might just be a bit of luck. And the long-term results bear it out. Over three-years, small-cap funds still had the best record, but the indexes beat 63.1% of the funds. That only increased for the other categories, with 75% of all midcap funds beaten by its benchmark.

Meanwhile, growth funds took a kick to the teeth. Over the three-year period, the indexes beat 75% of the large-cap growth funds, 84.1% of the mid-cap growth funds and 69.6% of the small-cap growth funds. And for the five-year periods, all the growth sectors fared worse. These funds track the winning indexes: S&P 500 Growth Index Fund (IVW), S&P MidCap 400 Growth Index Fund (IJK) and S&P SmallCap 600 Growth Index Fund (IJT)

“Sleep Well” funds: Where to invest for a good night’s rest

Actively-managed mutual funds took a big hit in the stock market’s 2008 crash. The average equity fund plunged 39.5 percent compared with the 37 percent drop in the S&P 500 Index.

Many investors concluded, “if my active fund is going to fall more than a cheaper index fund, what am I actually paying for?”

Not much, it appears. But what if you could find a mutual fund that managed risk by significantly reducing losses in a down market, that could also capture profits when the market rallied? Now, that would be an expense worth paying.

After last week’s wild market roller coaster, a familiar refrain heard among investors was “where do I put my money now?” Wherever it goes, you can’t afford to stay awake all night worrying about your portfolio. That’s why we went searching for what we like to call “Sleep Well” funds. These are funds that can weather market volatility, give you peace of mind and let you get a good night’s rest.

The three funds mentioned are the Sierra Core Retirement Fund, Permanent Portfolio, and the Berwyn Income Fund.

For the full story go to Reuters Money.