ETF Update: Struggling Emerging Markets, Rethinking 'Buy-and-Hold', Questioning Yen's Ascent, BuyWrite's Popularity, Defiant Gold

Emerging Markets Reeling From Crisis

Some of the world’s fastest-growing and smallest economies, as well as their ETFs, have been left reeling in the wake of the global financial crisis.

One such country is Poland, which is struggling with a weakened currency and a falling stock market after previously enjoying a go-go atmosphere.

In response to the newfound changes, developers have halted building, banks are hardly lending, and the zloty has lost value against the euro and the U.S. dollar. Nicholas Kulish for The New York Times reports that in a country that seemed to be on the fast track to full membership in the Western club, the question on everyone’s lips is, “Why us?”

The latest turns that the economy has taken has caught many financial experts by surprise; they thought the indicators pointed to a fundamental economic soundness. Adding to the pain, the zloty has fallen around 17% against the dollar over the past week, and more than 10% against the euro. Economic experts have also cut growth forecasts.

Poland is still healthier than her neighbors, Ukraine and Hungary. It appears that the lack of confidence in Central Europe has overflowed out of Hungary and Ukraine, and into other countries nearby.

Claymore BNY/Mellon Frontier Markets (FRN) is down 55.1% since its June 13 inception; Poland is the top holding at 25.1%

SPDR S&P Emerging Europe (GUR) is down 74.1% year-to-date; Poland is 13.3%

Rethinking 'Buy-and-Hold'

The recent market and ETF turmoil has investors and advisors alike rethinking the “buy-and-hold” strategy.

One firm in Pennsylvania has moved 65% of its assets into cash positions, making it the largest cash weighting for the firm in its history, reports Jeff Benjamin for Investment News. The firm isn’t alone. While some advisors say they would prefer to buy-and-hold forever, they realize it would be tougher to explain to clients why they haven’t made money for 10 or 20 years.

The fact is, too, that many advisors have never experienced this kind of market volatility.

Mutual fund investors are pulling out of U.S. and international stock funds, albeit at a slower rate than in previous weeks. The week ending Oct. 15, $13.9 billion was pulled out. The previous week, $43.3 billion was pulled out, reports Jonathan Burton for MarketWatch.

Bond funds came under the greatest pressure as investors withdrew $15.1 billion, or almost twice the $8.8 billion that flowed out the week before.

Although redemption is letting up, the intensity is still apparent and sales problems for the future may be at stake. TrimTabs suggests that funds have experienced redemptions at $5 billion per day in October, sign of nervous investors, reports Joe Morris of  Ignites.

The sales that are at stake are focused on the buy-and-hold investors, which have been burned badly this month. Also, the retirement customer is at risk, as they may not invest as generously in the future, due to the disappearing nest eggs.

If you’re a buy and hold type and are stressed out, consider selling one-third of your portfolio as you wait out the market storm.

Questioning Yen's Rapid Ascent

The Japanese yen and its ETF (FXY) have been on a tear lately, but not everyone is excited about the currency’s rapid ascent.

The Group of Seven countries issued a statement saying they’re concerned about the yen’s volatility, reports Martin Crutsinger for the Associated Press. The yen is at a 13-year high against the dollar, which has heightened concerns in Japan that its exports will be harmed.

The G-7 reaffirmed its shared interest in a strong financial system, and is vowing to continue to watch the markets. The group’s pledge could signal a possibility of a joint intervention in currency markets, in which governments would buy and sell currencies in order to influence their values.

History suggests the United States would sit this one out, as the Bush administration has never participated in such an intervention.

Why is a strong yen such a big deal? Paul R. LaMonica for CNN Money reports that since Japan is such a big exporter of goods, a robust yen hurts profits, which will then hurt the country’s stock market. That, in turn, could have a ripple effect on exchanges in the United States and Europe.

One economist says that the Nikkei is heavily influenced by manufacturers and exporters. Already, Toyota is feeling the pinch from a weakened global economy and stronger yen. Financial firms are straining, too.

The CurrencyShares Japanese Yen (FXY) is up 17.3% year-to-date, and up 11.7% in the last month.

BuyWrite ETFs Gain Popularity

As the markets have turned, many investors are looking at possible opportunities and different strategies to approach the market with ETFs.

A BuyWrite fund is a strategy that has been most commonly utilized by institutional investors. The method allows investors to buy a basket of stocks and then write covered call options on the holdings, explains Eric Rosenbaum for Index Universe.

During periods of flat or negative returns, BuyWrite funds tend to smooth volatility, while allowing investors to pick up some income from options premiums. The reason the funds weren’t as popular in recent markets is that during a bull run, the strategy can limit upside potential.

In essence, as BuyWrite strategy is considered conservative, as a writing options contract is involved and therefore, do not appeal to the masses. Investors that use this strategy say that the actual “smoothing” effect will be seen over a long period of time, to actually see the benefits. The major benefit comes from the premium generated from options writing.

PowerShares S&P 500 BuyWrite (PBP) is down 29.6% year-to-date.

Gold Defies Conventional Wisdom

Typical wisdom when it comes to gold and ETFs for the metal is that when the markets go down, gold goes up. That’s why for ages, it’s been seen as a safe-haven investment; a place for worried investors to go to safely put their money.

But recent activity has been confounding investors: why is the price of gold declining along with the broader market? While gold managed to gain 2.2% on Friday, it still ended the week down 7.1% and 16.6% this month.

There are several explanations for gold’s defiance of the usual fundamentals, reports Carolyn Cui for the Wall Street Journal. One big one is the firmer dollar, since gold is priced in dollar terms. Also, financial institutions are unwinding their bets on commodities as they lower their leverage and raise capital. India has even shown signs of slow buying as the rupee has depreciated, making gold pricey for jewelry makers.

Down the road, the market is split on gold’s direction. One expert says that gold’s value will be revealed when the dollar stabilizes. A strategist says that market sentiment is tilting down for most other commodities, even if it’s divided over gold.

The World Gold Council says higher volatility should be “put in perspective” and gold remains less volatile.

SPDR Gold Shares (GLD) is down 12.4% year-to-date, and down 20.9% in the last three months.