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On Thursday (Dec. 17) at 2pm ET, Seeking Alpha hosted a live, interactive expert panel discussion on the topic of choosing the best sector ETF for one's portfolio (view the transcript below). The panelists are four ETF experts with deep experience in the matter. Here are the panelists, their credentials and an interview discussing their thoughts on choosing the right sector ETF, followed by a replay of the entire discussion.

Kim D. Arthur is a founding partner of Main Management, LLC. He currently serves as Main’s CEO and Portfolio Manager, where he actively manages a portfolio of passive ETFs. He began his career at Montgomery Securities in 1987 and remained through 2002 where he served on the Investment Policy Committee and Executive Management Committee of Banc of America Securities.

Matt Hougan is editor of IndexUniverse.com and the Exchange-Traded Funds Report, and senior editor of the Journal of Indexes. He was previously the lead biotech analyst for MetaMarkets.com, a pioneering financial services firm that managed the world's first fully transparent, actively managed mutual fund, Open Fund.

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Tom Lydon runs ETF Trends, a website with daily news and commentary about the fast-changing trends in the ETF industry. Tom is also president of Global Trends Investments, an investment advisory firm specializing in the creation of customized portfolios for high net worth individuals. He has been involved in money management for more than 25 years, beginning his career with Fidelity Investments. Tom was a founding member of Charles Schwab's Institutional Advisory Board. He serves on the Board of Directors for US Global Investors, Inc. and Rydex Investments, and is also on the Pacific Investment Management Co., LLC (PIMCO) Advisory Board for RIAs.

J.D. Steinhilber runs his own investment firm, Agile Investing, that manages client portfolios using a pure-ETF approach. He founded Agile in 2001 based on his conviction that indexed investment vehicles combined with a disciplined asset allocation methodology produces superior investment results. He has spent the last 16 years in the financial services industry.

This is the second in a series of Seeking Alpha live panel discussions on ETF investing. We plan to convene monthly to discuss opportunities and developments in this sector, while soliciting real-time comments and questions from our community.

[If you had any technical difficulties attending the discussion, please email jonathan@seekingalpha.com.]

~ Jonathan Liss, Seeking Alpha Senior Editor for ETF Content

Transcript of the live discussion:

Choosing the Right Sector ETF: A Seeking Alpha Expert Panel (12/17/2009)
2:01
Jonathan Liss, SA Editor:
Before we start, I want to thank all of our panelists for taking time out of their busy schedules to participate today.
Thursday December 17, 2009 2:01 Jonathan Liss, SA Editor
2:01
Jonathan Liss, SA Editor:
The topic of this session is choosing a sector ETF. Here's the format - we'll begin with a discussion among the panelists on a couple of issues that came out of their writing on this topic (links to those articles are above). Then in the second part, we'll field questions from our readers. You can leave a question at any time in the box below this field.
Thursday December 17, 2009 2:01 Jonathan Liss, SA Editor
2:02
Jonathan Liss, SA Editor:
I noticed that all of you mentioned liquidity as a serious concern for picking a sector ETF. At what point should an investor be concerned that an ETF is too small - in terms of assets held and daily turnover - to be seriously worth considering?
Thursday December 17, 2009 2:02 Jonathan Liss, SA Editor
2:03
Kim Arthur-Main Managemet:

We use a proprietary algorithm to trade the ETFs for matching NAV and market price.

Thursday December 17, 2009 2:03 Kim Arthur-Main Managemet
2:03
Kim Arthur-Main Managemet:
this gives a good feel of the availability of liquidity
Thursday December 17, 2009 2:03 Kim Arthur-Main Managemet
2:03
Matt Hougan:

To me, It varies with the fund, the investment objective and your time horizon. If you’re buying a fund for a short trade, say a week, you’re obviously very concerned with spreads and less concerned with things like tracking error.

Thursday December 17, 2009 2:03 Matt Hougan
2:04
Matt Hougan:
If you’re buying for the next two years, spreads become less of a concern and the functioning of the ETF itself becomes more important.
Thursday December 17, 2009 2:04 Matt Hougan
2:04
Tom Lydon:
Great point Matt
Thursday December 17, 2009 2:04 Tom Lydon
2:04
Kim Arthur-Main Managemet:

Agree 100% with Matt

Thursday December 17, 2009 2:04 Kim Arthur-Main Managemet
2:04
Tom Lydon:
As more advisors are trading ETFs, liquidity becomes more of an issue.
Thursday December 17, 2009 2:04 Tom Lydon
2:04
Kim Arthur-Main Managemet:
As Tom mentioned before $100m is a great starting point for AUM
Thursday December 17, 2009 2:04 Kim Arthur-Main Managemet
2:05
JD Steinhilber:

We generally look for a minimum of $50 million in ETF asset and trading spreads under 20 bp. We measure this by taking the size of the bid ask spread and dividing it into price of the fund

Thursday December 17, 2009 2:05 JD Steinhilber
2:05
Tom Lydon:
However, as assets have increased in ETFs, we've seen better liquidity and tighter spreads.
Thursday December 17, 2009 2:05 Tom Lydon
2:05
Kim Arthur-Main Managemet:

Expanded use of dark pools of liquidity are addressing this issue

Thursday December 17, 2009 2:05 Kim Arthur-Main Managemet
2:05
Matt Hougan:
I hear the $100 million number a lot too, guys. It is a good starting point. The way I think about it is like this: If you're above $100 million, you're definitely safe. But if you know how to trade ETFs, you can move significantly lower.
Thursday December 17, 2009 2:05 Matt Hougan
2:06
Tom Lydon:
True
Thursday December 17, 2009 2:06 Tom Lydon
2:06
Matt Hougan:
Use limit orders being rule #1
Thursday December 17, 2009 2:06 Matt Hougan
2:06
Tom Lydon:
it also depends on how many shares you're looking to purchase...
Thursday December 17, 2009 2:06 Tom Lydon
2:06
Tom Lydon:
Correct
Thursday December 17, 2009 2:06 Tom Lydon
2:07
JD Steinhilber:
I think you can feel comfortable under $100 mm in certain instances, such as PIMCO's recently launched money market alternative (symbol MINT). It is trading with good spreads and tracking, and there is little risk the fund would ever be closed
Thursday December 17, 2009 2:07 JD Steinhilber
2:07
Kim Arthur-Main Managemet:

Remember, these vehicles trade like stocks, not mutual funds, and if you are not carefull you will see why they call them trade executions,.

Thursday December 17, 2009 2:07 Kim Arthur-Main Managemet
2:07
Matt Hougan:

lol, exactly Kim.

Thursday December 17, 2009 2:07 Matt Hougan
2:07
Matt Hougan:
I agree with JD there. People don't know this, but the issuer can play a big role in keeping spreads tight on little ETFs.
Thursday December 17, 2009 2:07 Matt Hougan
2:08
Tom Lydon:
Would you guys agree that smaller trades aren't as big an issue these days?
Thursday December 17, 2009 2:08 Tom Lydon
2:08
Jonathan Liss, SA Editor:
Interesting fact on the $100 million number. Using ETFDB's screener, I found that of 917 listed ETFs, only 410 had upwards of $100 million in assets as of Wednesday.
Thursday December 17, 2009 2:08 Jonathan Liss, SA Editor
2:08
Matt Hougan:
It's definitely gotten better, Tom.
Thursday December 17, 2009 2:08 Matt Hougan
2:08
Matt Hougan:
A year ago there were spreads you could drive a truck through. Largely, they've tightened up.
Thursday December 17, 2009 2:08 Matt Hougan
2:09
Tom Lydon:
Advisors who are getting new clients in line with current allocations shouldn't be too concerned
Thursday December 17, 2009 2:09 Tom Lydon
2:09
Kim Arthur-Main Managemet:
Contenet providers like iShares, State Street are very much focused on addressing the liquidity issues we are talking about
Thursday December 17, 2009 2:09 Kim Arthur-Main Managemet
2:09
Jonathan Liss, SA Editor:
Matt, could you please clarify what you mean by this: "People don't know this, but the issuer can play a big role in keeping spreads tight on little ETFs"
Thursday December 17, 2009 2:09 Jonathan Liss, SA Editor
2:10
Matt Hougan:

Sure, Jonathan.

Thursday December 17, 2009 2:10 Matt Hougan
2:10
Matt Hougan:

Some ETF sponsors have dedicated market liason people who are on the phone with their specialists all day long, essentially hitting them over the head to keep spreads tight.

Thursday December 17, 2009 2:10 Matt Hougan
2:10
Matt Hougan:
There's no reason an ETF tracking a relatively liquid market should trade wider than 20bps.
Thursday December 17, 2009 2:10 Matt Hougan
2:11
Matt Hougan:
And if hte ETF issuer pays attention, they can work with the specialists and the APs to make sure that's true. Some do better than others.
Thursday December 17, 2009 2:11 Matt Hougan
2:11
Matt Hougan:
Also, investors who are buying in size can call the ETF issuer if a spread looks too wide. Oftentimes, you'll see it narrow in a matter of seconds.
Thursday December 17, 2009 2:11 Matt Hougan
2:12
Kim Arthur-Main Managemet:

Matt, there are also algorithms that will replicate the AP process

Thursday December 17, 2009 2:12 Kim Arthur-Main Managemet
2:12
Matt Hougan:
Right, exactly, Kim.
Thursday December 17, 2009 2:12 Matt Hougan
2:12
JD Steinhilber:

Spreads also vary according to the time of day. They tend to be widest right after the market opens

Thursday December 17, 2009 2:12 JD Steinhilber
2:13
Kim Arthur-Main Managemet:
People need to trade with a menu, versus market prices
Thursday December 17, 2009 2:13 Kim Arthur-Main Managemet
2:14
Kim Arthur-Main Managemet:
this requires more effort on the investor part, but the consequences are high for not doing it
Thursday December 17, 2009 2:14 Kim Arthur-Main Managemet
2:14
Tom Lydon:
Are you guys seeing alternative liquidity providers having a greater role in helping advisors buy and sell ETFs?
Thursday December 17, 2009 2:14 Tom Lydon
2:14
Kim Arthur-Main Managemet:
Definately, Fox Spotlight is one such
Thursday December 17, 2009 2:14 Kim Arthur-Main Managemet
2:15
Matt Hougan:
I think absolutely, Tom. If you're working orders more than 2% of ADV, going to an alternate liquidity provider is a good idea. Fox, as Kim says, is great. WallachBeth, Knight, NewEdge also all good.
Thursday December 17, 2009 2:15 Matt Hougan
2:16
Jonathan Liss, SA Editor:
Let's stear things towards ETF sector picking a bit. Can we you provide an example of where you wanted to gain exposure to a particular sector and how you whittled down several available options into a single ETF selection?
Thursday December 17, 2009 2:16 Jonathan Liss, SA Editor
2:16
Kim Arthur-Main Managemet:

First step in choosing the right sector ETF is to have a view of the capital markets that gets you into the right sector of the economy.

Thursday December 17, 2009 2:16 Kim Arthur-Main Managemet
2:17
Kim Arthur-Main Managemet:
Healthcare is a good example of a lot of sub-industry choices.
Thursday December 17, 2009 2:17 Kim Arthur-Main Managemet
2:18
Kim Arthur-Main Managemet:
Your choices run from biotech, medical devices, healthcare providers, to big pharma.
Thursday December 17, 2009 2:18 Kim Arthur-Main Managemet
2:19
Tom Lydon:
We use trends (200-day moving average). It helped us avoid the lion's share of the declines of the past few years. Those sectors that went above their trend lines in April and May tended to be the strongest sectors of the year.
Thursday December 17, 2009 2:19 Tom Lydon
2:19
Kim Arthur-Main Managemet:
If you are looking for stable cashflows, dividend payers, and a large style bet than large pharma is your choice
Thursday December 17, 2009 2:19 Kim Arthur-Main Managemet
2:20
Kim Arthur-Main Managemet:
Tom, do you compliment technicals with fundamental work?
Thursday December 17, 2009 2:20 Kim Arthur-Main Managemet
2:20
Tom Lydon:
It made the choices for us; we just had to pick the ETF to buy in the sector.
Thursday December 17, 2009 2:20 Tom Lydon
2:20
Matt Hougan:

Even within each sector, Kim, there are major differences. The spread of financial ETFs this year is about 80%, so where you allocated within that made a big difference.

Thursday December 17, 2009 2:20 Matt Hougan
2:20
Kim Arthur-Main Managemet:

You are right Matt

Thursday December 17, 2009 2:20 Kim Arthur-Main Managemet
2:20
Tom Lydon:
We're always aware of the fundamentals but invest primarily on the technicals
Thursday December 17, 2009 2:20 Tom Lydon
2:21
Jonathan Liss, SA Editor:
What's your general time frame Tom?
Thursday December 17, 2009 2:21 Jonathan Liss, SA Editor
2:21
JD Steinhilber:

We focus on broader asset classes, and not so much on particular sectors. There are certain exceptions to that however, such as commodity stocks. For that sector, as an example, we chose HAP, the hard assets producer fund run by Van Eck. It is a little pricy at 75 basis points, but we like the diversity of it. In addition to energy companies, it has agriculture, industrial metals, precious metals, and alt energy stocks. It is global in scope, with over half the holdings being foreign companies

Thursday December 17, 2009 2:21 JD Steinhilber
2:21
Kim Arthur-Main Managemet:

I see. We are very fundamental, and technical aware.

Thursday December 17, 2009 2:21 Kim Arthur-Main Managemet
2:21
Tom Lydon:
With most sectors having such great performance off the lows in March, having an exit strategy in the future will be important.
Thursday December 17, 2009 2:21 Tom Lydon
2:22
Tom Lydon:
Time frame tends to be 8-12 months for a hold
Thursday December 17, 2009 2:22 Tom Lydon
2:22
Matt Hougan:

Take biotech. The largest biotech ETF (IBB) is dominated by exposure to large-cap names, which are highly profitable companies like Amgen -- they're almost mini-pharma companies. If you wanted to take on more risk, you might move down the spectrum to XBI or FBT, and you get smaller, more experimental names---companies with less cash flow and more R&D potential.

Thursday December 17, 2009 2:22 Matt Hougan
2:22
JD Steinhilber:
When it comes time to reduce risk, do the other panelists simply cut back on longs or use inverse ETFs?
Thursday December 17, 2009 2:22 JD Steinhilber
2:23
Kim Arthur-Main Managemet:

Inside the sector ETF know the make-up of the individual companies; our single stock background enables us to do deeper plumbing analysis of the companies by talking to “C” level management about current and future trends.

Thursday December 17, 2009 2:23 Kim Arthur-Main Managemet
2:23
Tom Lydon:
Not tax efficient but protects from bear markets. Any sector can have its own trend.
Thursday December 17, 2009 2:23 Tom Lydon
2:23
Kim Arthur-Main Managemet:
We will sell covered calls to mange risk.
Thursday December 17, 2009 2:23 Kim Arthur-Main Managemet
2:23
Matt Hougan:
The spread on IBB vs. FBT since March is 30%, largely because investors are rewarding risk.
Thursday December 17, 2009 2:23 Matt Hougan
2:23
Tom Lydon:
We tend to sell the position and treat the cash as a "free agent"...available for use in another sector or asset class.
Thursday December 17, 2009 2:23 Tom Lydon
2:24
JD Steinhilber:
Kim, you use options strategies in all of your managed accounts?
Thursday December 17, 2009 2:24 JD Steinhilber
2:25
Kim Arthur-Main Managemet:
Matt, to your earlier financial question....capital markets up 40%, broad up 20%, and large banks are flat, and regionals are down 25%..........we use options in all of our strategies.
Thursday December 17, 2009 2:25 Kim Arthur-Main Managemet
2:25
Kim Arthur-Main Managemet:
We use the options to manage risk and dampen volatility...1 month duration
Thursday December 17, 2009 2:25 Kim Arthur-Main Managemet
2:26
Kim Arthur-Main Managemet:
keeping in mind that the premiums are not tax efficient since it is short term capital gains
Thursday December 17, 2009 2:26 Kim Arthur-Main Managemet
2:26
Tom Lydon:
Good for you Kim. Options are too sophisticated for me. I'm still learning what ETF stands for.Smile
Thursday December 17, 2009 2:26 Tom Lydon
2:26
Matt Hougan:

Right Kim. And I agree on the singlestock look. You at least have to look, because a broken index can make a big difference. In coal, you have two ETFs: KOL vs. PKOL. PKOL has 7% of its assets in Cameco, which isn't actually in the coal business. Maybe Cameco goes up, or down, but it's not going up or down because of it's coal business. It's a Uranium company!

Thursday December 17, 2009 2:26 Matt Hougan
2:27
Matt Hougan:
You mean EFT, Tom?
Thursday December 17, 2009 2:27 Matt Hougan
2:27
Tom Lydon:
Excellent point Matt.
Thursday December 17, 2009 2:27 Tom Lydon
2:27
Tom Lydon:
Many get too caught up in ETFs and don't take enough time to look under the hood.
Thursday December 17, 2009 2:27 Tom Lydon
2:28
Kim Arthur-Main Managemet:

That is sooooo true Tom

Thursday December 17, 2009 2:28 Kim Arthur-Main Managemet
2:28
Matt Hougan:
Absolutely, Tom. You can't always judge an ETF book by it's cover.
Thursday December 17, 2009 2:28 Matt Hougan
2:28
Jonathan Liss, SA Editor:
K, I'm gonna start splicing in some audience questions
Thursday December 17, 2009 2:28 Jonathan Liss, SA Editor
2:29
Kim Arthur-Main Managemet:
The 130/30's of last year were levered plays that got creamed in a expanding vol envirnment
Thursday December 17, 2009 2:29 Kim Arthur-Main Managemet
2:30
[Comment From gana gana : ]
What are your thoughts on going with a Sector Rotation ETF as opposed to choosing your own sector fund?
Thursday December 17, 2009 2:30 gana
2:30
Kim Arthur-Main Managemet:
Again, you need to know who is making the sector bets and what input they are using.
Thursday December 17, 2009 2:30 Kim Arthur-Main Managemet
2:30
Tom Lydon:
It comes down to how much work you want to put into it and finding a manager who can provide alpha
Thursday December 17, 2009 2:30 Tom Lydon
2:31
JD Steinhilber:

There also may be two layers of fees

Thursday December 17, 2009 2:31 JD Steinhilber
2:31
Kim Arthur-Main Managemet:

Ask the manager to show you how they make their sector rotation bets.

Thursday December 17, 2009 2:31 Kim Arthur-Main Managemet
2:32
Tom Lydon:
With ETFs you can do your own sector rotation using a simple moving average. But it does take work and discipline.
Thursday December 17, 2009 2:32 Tom Lydon
2:32
Matt Hougan:
To me, it's just active management. So you evaluate it like you would an active manager, looking at track record and risk-factors. I am from "IndexUniverse.com," so you can guess where I end up in that debate.
Thursday December 17, 2009 2:32 Matt Hougan
2:32
Matt Hougan:
Good point on the fees, JD
Thursday December 17, 2009 2:32 Matt Hougan
2:32
Kim Arthur-Main Managemet:
We straddle to passive/active
Thursday December 17, 2009 2:32 Kim Arthur-Main Managemet
2:32
Kim Arthur-Main Managemet:
we are active managers of passive indexes.
Thursday December 17, 2009 2:32 Kim Arthur-Main Managemet
2:33
Tom Lydon:
I guess that puts me on the other side of the tracks.
Thursday December 17, 2009 2:33 Tom Lydon
2:33
Kim Arthur-Main Managemet:
Zachs sector rotation strategy is up 20% on the year at 65bp
Thursday December 17, 2009 2:33 Kim Arthur-Main Managemet
2:33
Kim Arthur-Main Managemet:
with 268% turnover and the S&P500 is up 25%
Thursday December 17, 2009 2:33 Kim Arthur-Main Managemet
2:33
Tom Lydon:
Kim- how did it do last year?
Thursday December 17, 2009 2:33 Tom Lydon
2:34
Kim Arthur-Main Managemet:

In our sector rotation with an overlay we were down 16%

Thursday December 17, 2009 2:34 Kim Arthur-Main Managemet
2:34
Matt Hougan:
lol, don't misunderstand me Tom. I would trust the managers on this panel. I know how each of you work, I've seen you in action over the years, etc. I'm just not sure a fixed, quant strategy with little track record would convince me to part with my money.
Thursday December 17, 2009 2:34 Matt Hougan
2:34
Kim Arthur-Main Managemet:
This year we are up 30%
Thursday December 17, 2009 2:34 Kim Arthur-Main Managemet
2:35
Tom Lydon:
There you go. It's obviously worth it. More advisors are risk averse these days.
Thursday December 17, 2009 2:35 Tom Lydon
2:36
Kim Arthur-Main Managemet:
People want no risk, but return...hard combination.
Thursday December 17, 2009 2:36 Kim Arthur-Main Managemet
2:36
Tom Lydon:
Thanks Matt. Did you get my Christmas card?
Thursday December 17, 2009 2:36 Tom Lydon
2:37
Matt Hougan:
Grin.
Thursday December 17, 2009 2:37 Matt Hougan
2:38
Tom Lydon:
What sectors do you guys like for 2010?
Thursday December 17, 2009 2:38 Tom Lydon
2:39
Kim Arthur-Main Managemet:
We are going thru that drill right now....Late cyclicals should have room to run and the defensive sectors might be too early right now to rotate into
Thursday December 17, 2009 2:39 Kim Arthur-Main Managemet
2:39
Kim Arthur-Main Managemet:
even though the defensive groups like healthcare have moved up shrply the last month.
Thursday December 17, 2009 2:39 Kim Arthur-Main Managemet
2:40
Matt Hougan:

Kim - Hasn't the healthcare move been at least partially policy-specific?

Thursday December 17, 2009 2:40 Matt Hougan
2:40
Kim Arthur-Main Managemet:
We are staying away from financials.
Thursday December 17, 2009 2:40 Kim Arthur-Main Managemet
2:40
JD Steinhilber:

I like the "high quality" theme - represented by VIG, short-term high quality non-government bonds, as represented by a fund like CSJ, gold (GLD), and MINT (as a place for dry powder)

Thursday December 17, 2009 2:40 JD Steinhilber
2:40
Kim Arthur-Main Managemet:
Very much political, and cash flow dividends
Thursday December 17, 2009 2:40 Kim Arthur-Main Managemet
2:41
Kim Arthur-Main Managemet:
Healthcare bill looks less onerious for companies
Thursday December 17, 2009 2:41 Kim Arthur-Main Managemet
2:41
Kim Arthur-Main Managemet:

I like JD's VIG comments.

Thursday December 17, 2009 2:41 Kim Arthur-Main Managemet
2:41
Matt Hougan:

Interesting to see you in MINT, JD. That's one of the few places I'm convinced active management might well work. The other big one is commodities. I can't for the life of me understand why no one has launched an active commodity index. Classic commodity indexes during contango-ed markets are a bad idea (and I'm an indexer).

Thursday December 17, 2009 2:41 Matt Hougan
2:42
Kim Arthur-Main Managemet:

Spreads and defaults still look like they can play favorable for high yield

Thursday December 17, 2009 2:42 Kim Arthur-Main Managemet
2:42
Tom Lydon:
I agree Matt. Nat gas has been dragging these indexes down. What about UNG in 2010?
Thursday December 17, 2009 2:42 Tom Lydon
2:43
JD Steinhilber:

Commodities (outside of GLD) are a tough asset class for ETF investors because of the contango (roll yield) issue

Thursday December 17, 2009 2:43 JD Steinhilber
2:43
Matt Hougan:

On the broken clock theory, UNG must eventually be right. But it's been the great capital destroyer of the past 18 months.

Thursday December 17, 2009 2:43 Matt Hougan
2:43
Kim Arthur-Main Managemet:

For the next few months natural gas looks good...issue is finding an ETF that gives you the right exposure.

Thursday December 17, 2009 2:43 Kim Arthur-Main Managemet
2:44
Kim Arthur-Main Managemet:
The negative roll yield has killed you too
Thursday December 17, 2009 2:44 Kim Arthur-Main Managemet
2:44
Matt Hougan:
Right. Exactly, Kim.
Thursday December 17, 2009 2:44 Matt Hougan
2:44
Jonathan Liss, SA Editor:
How about the new 12-month Nat. Gas ETF?
Thursday December 17, 2009 2:44 Jonathan Liss, SA Editor
2:44
Kim Arthur-Main Managemet:
DBB is a place that could still have legs.
Thursday December 17, 2009 2:44 Kim Arthur-Main Managemet
2:44
JD Steinhilber:
Matt, are there any commodity ETFs/ETNs you like? I have gotten away from them in favor a GLD/HAP solution, which avoids the contango problem.
Thursday December 17, 2009 2:44 JD Steinhilber
2:45
Kim Arthur-Main Managemet:
DB does a very good job on managing the rolls
Thursday December 17, 2009 2:45 Kim Arthur-Main Managemet
2:45
JD Steinhilber:
Regarding MINT, the bar for outperformance is pretty low when money market fund yields are below 10 basis points!
Thursday December 17, 2009 2:45 JD Steinhilber
2:45
Tom Lydon:
(full disclosure) I bought a position UNG in the last 12 months in my IRA and am down 20%. The only time I broke my own rules. Just when you think you're smart...
Thursday December 17, 2009 2:45 Tom Lydon
2:46
Matt Hougan:

DB does do a good job. UBS CMCI do as well.

Thursday December 17, 2009 2:46 Matt Hougan
2:46
Matt Hougan:

I favor DJP in taxable accounts if you want commodities exposure, because of the tax advantage.

Thursday December 17, 2009 2:46 Matt Hougan
2:46
Kim Arthur-Main Managemet:
JD are you worried on GLD that they central banks have been buyers and usually that is a contrarian signal?
Thursday December 17, 2009 2:46 Kim Arthur-Main Managemet
2:47
Kim Arthur-Main Managemet:
Or are the developing central banks so under-invested that will out weigh it?
Thursday December 17, 2009 2:47 Kim Arthur-Main Managemet
2:47
JD Steinhilber:

It is the emerging markets central banks that will be the marginal buyers. they have very little gold relative to G7 banks and to their paper currency reserves

Thursday December 17, 2009 2:47 JD Steinhilber
2:47
Matt Hougan:

UNG may have a chance, now. Contango has come way in. It's "only" costing you about 7% a year now, instead of about 80% a few months ago. It's collapsed significantly today due to the new supply numbers.

Thursday December 17, 2009 2:47 Matt Hougan
2:47
[Comment From Steve Steve : ]
There are six Economic Cycle phases. Which one are we in now... Late Recession? If so, wouldn't XLF & XLU be the ETFs to be in?
Thursday December 17, 2009 2:47 Steve
2:48
Kim Arthur-Main Managemet:

6 months into the recovery is late cyclical sector time.

Thursday December 17, 2009 2:48 Kim Arthur-Main Managemet
2:49
JD Steinhilber:
I am in the new normal camp. I don't think you can use past economic cycles as your guide
Thursday December 17, 2009 2:49 JD Steinhilber
2:49
Tom Lydon:
XLU just crossed it 200-day ave. Great buy point with a tight stop-loss. Yield very attractive too.
Thursday December 17, 2009 2:49 Tom Lydon
2:49
Tom Lydon:
4.25%
Thursday December 17, 2009 2:49 Tom Lydon
2:50
JD Steinhilber:
Tom, is the yield that high? I thought it was lower - under 4%.
Thursday December 17, 2009 2:50 JD Steinhilber
2:50
Matt Hougan:
Jonathan - On principle I favor UNL as a long-term play. If you're buying nat gas for the next 3 years, UNL is the safe bet. But natural gas is actually a good place for active management, given the huge seasonality there. The literature on that is fairly robust. For non-commodity geeks, I'd say nat gas in general is too specific to buy either. And if you are a commodity geek, you can rotate from UNL to UNG as seasonality and contango levels change.
Thursday December 17, 2009 2:50 Matt Hougan
2:51
Kim Arthur-Main Managemet:

What if inflation comes to play in 2h2010, what happens to the XLU?

Thursday December 17, 2009 2:51 Kim Arthur-Main Managemet
2:51
Kim Arthur-Main Managemet:
JD, regarding gold, banks will buy 13.8 million ounces (429 metric tons) this year, worth $15.5 billion, for the first net expansion in reserves since 1988
Thursday December 17, 2009 2:51 Kim Arthur-Main Managemet
2:52
JD Steinhilber:

On the diversified commodity funds, why would DB raise their fees with new lower priced competition from UBS? Doesn't make any sense to me. I thought 75 basis points was already high!

Thursday December 17, 2009 2:52 JD Steinhilber
2:52
Tom Lydon:
Good point. And what about the billions that have flown into high yield corporate ETFs like LQD?
Thursday December 17, 2009 2:52 Tom Lydon
2:52
Matt Hougan:
JD - Great point. And I have a simple answer: Greed.
Thursday December 17, 2009 2:52 Matt Hougan
2:52
Kim Arthur-Main Managemet:
Or because they can.
Thursday December 17, 2009 2:52 Kim Arthur-Main Managemet
2:52
Matt Hougan:
Exactly
Thursday December 17, 2009 2:52 Matt Hougan
2:53
Kim Arthur-Main Managemet:
Why does iShares still charge 75bp on the EEM...because they can.
Thursday December 17, 2009 2:53 Kim Arthur-Main Managemet
2:53
Tom Lydon:
JD, you're correct. The XLU yield is 4% according to SPDR.
Thursday December 17, 2009 2:53 Tom Lydon
2:53
Matt Hougan:

Remember, assets there were WAY up already. DBC's assets were up from $1.1 billion in 2008 to $4.2 billion in 2009. So they were already making 4X as much money. There needs to be more of a focus on fees in the industry.

Thursday December 17, 2009 2:53 Matt Hougan
2:54
Matt Hougan:
True, Kim, but they are slowly losing out on assets to VWO. Slowly but surely.
Thursday December 17, 2009 2:54 Matt Hougan
2:54
Kim Arthur-Main Managemet:

I hear you, Matt. Do you think mother Blackrock will reprice the ETFs?

Thursday December 17, 2009 2:54 Kim Arthur-Main Managemet
2:55
JD Steinhilber:

I am shocked that iShares hasn't lowered that fee on EEM. It is such a glaring problem.

Thursday December 17, 2009 2:55 JD Steinhilber
2:55
Matt Hougan:
Good question, Kim. I hope so but have my doubts.
Thursday December 17, 2009 2:55 Matt Hougan
2:56
Tom Lydon:
Mother Blackrock probably has plans to launch actively managed ETFs now that they have distribution.
Thursday December 17, 2009 2:56 Tom Lydon
2:56
Kim Arthur-Main Managemet:
JD to your earlier comment on emerging countries purchase of gold reserves..India bought 200 tons from the IMF in October, the Washington-based lender said. It was the biggest single central- bank purchase in at least 30 years over such a short period, according to
Thursday December 17, 2009 2:56 Kim Arthur-Main Managemet
2:56
Jonathan Liss, SA Editor:
Here's a question from 'Johnni': Kim, You mention you use covered calls. How do you select the strike? Also do you consider using call options on other ETFs if the volatility skew is more attractive there? (of cause given correlation is high and significant)
Thursday December 17, 2009 2:56 Jonathan Liss, SA Editor
2:56
Matt Hougan:
I think they cede the buy-and-hold assets to Vanguard, because they can't compete. And they hope that EEM retains its liquidity edge, so that traders (who don't care about expense ratios) continue to use it.
Thursday December 17, 2009 2:56 Matt Hougan
2:57
Tom Lydon:
What do you guys think of EGShares - emerging markets sectors?
Thursday December 17, 2009 2:57 Tom Lydon
2:58
Kim Arthur-Main Managemet:

We are part art and part science on the calls. Always 1 month duration and than we use fundamentals and market movements to determine if at the $, out of the $, or in the $

Thursday December 17, 2009 2:58 Kim Arthur-Main Managemet
2:58
Kim Arthur-Main Managemet:
If vol skew is more attractive we definately will use others
Thursday December 17, 2009 2:58 Kim Arthur-Main Managemet
2:58
JD Steinhilber:

G7 cental banks have about a third of their reserves in gold. Emerging markets central banks have only about 4%.

Thursday December 17, 2009 2:58 JD Steinhilber
2:59
Kim Arthur-Main Managemet:
The EGS is conceptually a great idea, but no assets yet. Emerging markets still have country attribution as the most important factor, but sector is right there too.
Thursday December 17, 2009 2:59 Kim Arthur-Main Managemet
3:00
JD Steinhilber:
VWO's spreads are very good - usually a penny. Maybe it is harder to execute a very large order in VWO vs EEM, I don't know
Thursday December 17, 2009 3:00 JD Steinhilber
3:00
Matt Hougan:

I agree with Kim here. The EG Shares are a good idea, but have zero traction so far. I think they have a place.

Thursday December 17, 2009 3:00 Matt Hougan
3:01
Kim Arthur-Main Managemet:

JD, it is harder to execute a large order in VWO versus EEM

Thursday December 17, 2009 3:01 Kim Arthur-Main Managemet
3:01
Matt Hougan:
EEM also has a much more liquid options market.
Thursday December 17, 2009 3:01 Matt Hougan
3:01
Matt Hougan:
But for most smaller investors, VWO is sufficiently liquid.
Thursday December 17, 2009 3:01 Matt Hougan
3:02
Kim Arthur-Main Managemet:

Agreed, Matt.

Thursday December 17, 2009 3:02 Kim Arthur-Main Managemet
3:02
Tom Lydon:
I think they'll be a player to be reckoned with. It would be nice to see EEM and VWO have some competition.
Thursday December 17, 2009 3:02 Tom Lydon
3:02
JD Steinhilber:

Re: emerging markets, I have tended to keep things simple with VWO, and not use countries, sectors, small cap, regions, etc. I just vary my exposure to VWO. that way I don't need to decide which country has a more bullish outlook - china or brazil!

Thursday December 17, 2009 3:02 JD Steinhilber
3:03
Kim Arthur-Main Managemet:
We have a international country rotation strategy.
Thursday December 17, 2009 3:03 Kim Arthur-Main Managemet
3:03
Kim Arthur-Main Managemet:

Mostly fundamental on currency, inflation, current account, GDP

Thursday December 17, 2009 3:03 Kim Arthur-Main Managemet
3:03
Tom Lydon:
That sounds interesting Kim. What do you like now?
Thursday December 17, 2009 3:03 Tom Lydon
3:04
Kim Arthur-Main Managemet:
Israel, Chile, Indonesia,
Thursday December 17, 2009 3:04 Kim Arthur-Main Managemet
3:05
Tom Lydon:
Excellent.
Thursday December 17, 2009 3:05 Tom Lydon
3:05
JD Steinhilber:

Do any of the other panelists use emeging markets currency ETFs? CEW, CYB?

Thursday December 17, 2009 3:05 JD Steinhilber
3:05
Kim Arthur-Main Managemet:
singapore
Thursday December 17, 2009 3:05 Kim Arthur-Main Managemet
3:05
Kim Arthur-Main Managemet:
We use the CEW
Thursday December 17, 2009 3:05 Kim Arthur-Main Managemet
3:06
Kim Arthur-Main Managemet:
Yesterday someone bought 3.8 million shares of CEW
Thursday December 17, 2009 3:06 Kim Arthur-Main Managemet
3:06
Kim Arthur-Main Managemet:
Short term it is being painted with the debt fears of dubai, greece
Thursday December 17, 2009 3:06 Kim Arthur-Main Managemet
3:07
Kim Arthur-Main Managemet:
We also use the CYB.
Thursday December 17, 2009 3:07 Kim Arthur-Main Managemet
3:07
Tom Lydon:
Wow. The PowerShares Currency Harvest DBV seems to be attracting more attention.
Thursday December 17, 2009 3:07 Tom Lydon
3:07
Jonathan Liss, SA Editor:
k, well we're after 3 here so we should wrap things up. One last question: Where do you see the Sector ETF market going from here? More niche funds? Lower or higher expenses? New issuers essentially coppying already exisiting funds?
Thursday December 17, 2009 3:07 Jonathan Liss, SA Editor
3:07
Kim Arthur-Main Managemet:

The DBV is a commodity play in drag right now.

Thursday December 17, 2009 3:07 Kim Arthur-Main Managemet
3:07
Matt Hougan:
And on the flip side, UUP is gathering huge assts.
Thursday December 17, 2009 3:07 Matt Hougan
3:08
Matt Hougan:
CYB interesting since it's so tightly pegged right now. I'm not sure what to make of it.
Thursday December 17, 2009 3:08 Matt Hougan
3:08
Tom Lydon:
UUP is on a tear
Thursday December 17, 2009 3:08 Tom Lydon
3:08
Kim Arthur-Main Managemet:
More sub-industry sectors, but cap limits will cause tracking error...real growwth of sector will be in the emerging markets and later in the frontier markets
Thursday December 17, 2009 3:08 Kim Arthur-Main Managemet
3:09
Kim Arthur-Main Managemet:
CYB will stair step up as the politburo feels neccessary to revalue
Thursday December 17, 2009 3:09 Kim Arthur-Main Managemet
3:09
JD Steinhilber:

Is there a good diversified frontier markets ETF that is worth owning in conjuction with VWO? I have shied away bc of middle east concentration

Thursday December 17, 2009 3:09 JD Steinhilber
3:09
Tom Lydon:
Sector ETFs will continue to expand. The pie will be sliced in smaller pieces and we'll see more international and emerging market ETFs in the coming year. Advisors and investors love more choices and are getting more comfortable with ETFs.
Thursday December 17, 2009 3:09 Tom Lydon
3:10
Matt Hougan:
Jonathan - I think the big story in sector ETFs is just growth. More and more investors are realizing that sectors are a primary driver of returns, and much more interesting that growth/value and probably more interesting than size. It's really the primary driving force of most market.

Thursday December 17, 2009 3:10 Matt Hougan
3:10
Kim Arthur-Main Managemet:

Not yet, but iShares has an institutional flavor that they will ETF in 2010

Thursday December 17, 2009 3:10 Kim Arthur-Main Managemet
3:10
Matt Hougan:
I just hope that the analytical tools expand so that investors can understand what they're buying and make the appropriate choices, because there are huge differences between funds.
Thursday December 17, 2009 3:10 Matt Hougan
3:11
Kim Arthur-Main Managemet:
The iShares will cap Kuwait at 15% and eliminate Nigeria...today you have to marry GULF with frontier markets are 2/3 middle east
Thursday December 17, 2009 3:11 Kim Arthur-Main Managemet
3:11
JD Steinhilber:
I agree with Matt's comment, but sector picking is challenging. to me it may not be worth doing unless there are bubbles you want to avoid (like tech ten year ago or finance a couple of years ago)
Thursday December 17, 2009 3:11 JD Steinhilber
3:12
Kim Arthur-Main Managemet:

Today for frontier you can use AFK, MES, and GULF mix

Thursday December 17, 2009 3:12 Kim Arthur-Main Managemet
3:12
Tom Lydon:
Well...too bad we couldn't find anything interesting to chat about.
Thursday December 17, 2009 3:12 Tom Lydon
3:12
Jonathan Liss, SA Editor:
OK, well this has been very interesting, with some actionable takeaways for our readers. Thanks so much to our panelists for participating, and Happy Holidays to everyone from Sekking Alpha
Thursday December 17, 2009 3:12 Jonathan Liss, SA Editor
3:12
Kim Arthur-Main Managemet:
To the other panelists and audience ....thank you for your time
Thursday December 17, 2009 3:12 Kim Arthur-Main Managemet
3:13
Matt Hougan:

Thanks everyone!

Thursday December 17, 2009 3:13 Matt Hougan
3:13
Kim Arthur-Main Managemet:
and to Jonathan...Thanks
Thursday December 17, 2009 3:13 Kim Arthur-Main Managemet
3:13
Tom Lydon:
Happy Holidays!
Thursday December 17, 2009 3:13 Tom Lydon
3:13
JD Steinhilber:
thanks
Thursday December 17, 2009 3:13 JD Steinhilber
3:13

Source: Choosing the Right Sector ETF: A Seeking Alpha Expert Panel