ETF Update: Tax Swaps, Leverage Caution, October Performance Report, Retail Doldrums

Tax Swaps

The market meltdown has created an opportunity at tax time for ETF users.

John Spence for MarketWatch explains that when investors sell an ETF or mutual fund, any losses in excess of capital gains can be deducted from regular income up to $3,000 annually, with unused losses carried forward.

This tax management strategy can be valuable to investors. A tax swap involving the sale of one fund and the simultaneous purchase of another with similar objectives may create losses while maintaining market exposure and may not be subject to wash sale rules, says one analyst. These losses can actually be used to offset gains from other holdings.

The wash sale rule prevents investors from claiming a loss on a stock sale if a purchase of equal value is bought within 30 days of the previous sale.

We need to note that we are not accountants. Always contact your tax advisor first and have your tax situation evaluated.

One example of a tax swap with ETFs: selling SPDR S&P 500 (SPY) and purchasing any similar large-cap U.S. portfolio such as iShares Russell 1000 Index Fund (IWB).

Use Caution with Leveraged ETFs, But Don't Discard

Many new ETFs come in the short and leveraged variety, designed to help out educated investors. But the latest results have found that individual investors have had more trouble with leverage than anticipated, and many are saying that this type of strategy is best left to the experts.

MarketWatch reports that Morningstar Analyst John Gabriel said that key market events, such as limits on short-selling, have impacted a few funds, but have not changed the overall picture for ETFs. Risks of certain funds, such as the ProShares Ultra Short Financials (SKF) makes them issues that investors should avoid right now.

Gabriel also says that the market for exchange traded notes (ETNs) is scary right now, and that investors can get the same kind of exposure to some areas ETNs cover via an ETF instead, minus the credit risk.

We respectfully disagree on both counts. One of the great things about the ETF and ETN market is the wide range of choices and options offered to investors.

No ETF is one-size-fits-all. Investors need to decide for themselves what works with their portfolios and what doesn’t, and this is no less true with leveraged ETFs.  Any kind of fund deserves careful consideration and use of caution. Leveraged funds and ETNs are merely another tool in the shed for investors.

As far as ETNs, while there is credit risk, this does seem to be under control right now.

No matter what you invest in or what your risk level happens to be, having a stop-loss point will protect you on the downside.

October ETF Performance Report:

October was a spooky month for the markets and ETFs, and we saw things that haven’t been seen in decades.

The two strongest areas, and one of the few to end the month in positive territory are the Japanese yen and the U.S. dollar. CurrencyShares Japanese Yen (FXY) rose 7.3% this month, while PowerShares DB U.S. Dollar Index Bullish (UUP) finished up 7.8%.

Global regions were especially battered in October. Europe lost about 22%, Asia fell about 21% and Latin America tumbled about 30%.

Click here to read our full October performance report.

Read the disclosure, as Tom Lydon is a board member of Rydex Funds.

Retail ETFs Suffer from Spender's Remorse

Spender’s remorse has set in and retail-related ETFs are showing the aftermath of a less enthusiastic buyer.

The most recent figures show that the American economy has shrunk by an annualized rate 0.3% in the 3rd quarter. Consumer spending, the largest factor in the GDP, fell at an annualized rate of 3.1%, according to a report by the Economist.

On top of consumer confidence bottoming out, the unemployment rate has risen to 6.1% and there is no bright side to that percentage. It is projected that unemployment may even be pushed to 6.3% in the weeks ahead.

Banks are loath to lend to anyone, furthering the mindset of a credit crunch. Lost wealth is seen as a chance for consumers to curb spending habits and to start putting their money in their piggy banks.

A few retail-associated ETFs hit by a lack of consumers consuming include:

• SPDR S&P Retail (XRT): down 29.6% year-to-date

• Retal HOLDRs (RTH): down 16.3% year-to-date

Comments

[sbenard:]

Does someone know of an ETF to SHORT retail?

2008 Nov 12 05:24 PM