Investors: Don't Believe Everything You Read

Roger Nusbaum submits: At the end of this week's Up and Down Wall Street column there is a snippet from Alan Newman from CrossCurrents with a theory that the market has gotten a boost this year from the issuance of ETFs. According to the column "net issuance of ETF shares has totaled more than $34 billion thus far in 2006." Newman says that the new ETFs need to buy stock for the funds when they are issued which "is one of the things that has helped kite stock prices."

OK, $34 billion, that's the figure? It seems to me that the NYSE and the Nasdaq each average about 1.6 billion shares per day (anyone with the actual figures can leave a comment). Anyone know the typical share price of a stock on the NYSE or the Nasdaq? Me neither but it probably is more than $10. At $10 I think that puts the dollar value of shares traded on a typical day, between the two markets, at $32 billion or 94% of Mr. Newman's $34 billion in new ETF money. Even if my figuring is off by 100% working against my point we are talking about dollar volume averaging two and a half days of trading. I must be missing something.

Gene Epstein has an article in Barron's that opines the dollar will get stronger not weaker. He cites research about rising rates combined with the argument that too much global trade occurs in dollars which makes a decline work against the interest of too many parties.

The argument obviously has merit. I took the tone of the article to be longer than a year-end call. The thing to watch for in this case would be business now being conducted in dollars rotating to something else. The euro is an obvious candidate. Norway has made some overtures to having an oil bourse that trades oil in euros. We read about all sorts of smaller countries diversifying some portion of their dollar reserves. It seems like China is considering buying fewer dollars at some point in the future (note I am not talking about them selling what they own, I have never thought that). None of these by themselves would take the dollar down, but a trend to more and more of this type of action around the globe would become a problem.

I use ETFconnect.com almost every day; the information helps me with both my jobs. The site has one quirk I have never understood why the site blurs the distinction between closed end funds and exchange traded funds; Exchange-Traded Closed-End Funds.

Hey, its ETFconnect -- if they want to label them this way fine. People like me, though, need to know the difference.

Which brings me to this amusing nugget from The Motley Fool. They have written a bunch of articles that profile one ETF in an effort to pick the best one for 2007. One of the ETFs highlighted is the Hambrecht and Quist Life Sciences (HQL). Two of the merits cited are that the HQL ETF trades at a 7% discount and it pays an annual 8% dividend.

Oh, boy.

First, for what it's worth, the H&Q website makes no reference to ETFs; the fund is a closed-end fund per its news releases. It would appear that the author does not know the difference. The dividend is actually capital gains which he says once but uses the term dividend at least twice. ETFs don't trade at big discounts.

The fund has done well, paid out capital gains quite consistently, and for all I know might be a great way to invest in biotech, but I was amused by the writer's ignorance on the vehicles. I actually emailed the author who replied courteously with a definition and link from ETFconnect. After reading his email, I am convinced he does understand there is a difference.

As for the gains paid out, if I were interested in buying the fund I might want to find out if it paying out gains accrued before, or if it consistently can trade profitably to pay gains. If these are gains from years back do they run out soon? Would the fund then make no payouts or return capital to maintain the payout? The fund may have one more gain to pay or 100 more, but I would want to know. BTW, ETFconnect lists the distributions as dividends, but I looked at two news releases and the 2005 tax info which labeled the payouts as capital gains.

This article, which I am intentionally not linking to, belies the fact a lot of people writing about investment products don't really understand investment products. In addition to most of what I have read from Motley Fool, I would also lump in Morningstar. No doubt I am being overly critical, and I have made my share of goofs too, but I think you should be somewhat skeptical about what you read -- including my stuff. You can absolutely learn from these articles, but they are not anywhere close to the last thing you should read before buying something.

Comments

[Panskeptic]

Thank you. I may have come late to the party, but I have never read anything on the Motley Fool website that made a lick of sense. What on earth is going on over there?

[Thus spakeZarathustra]

Thanks also. However, I have found a fair amount of useful stuff at Morningstar. I don't think they deserve to be lumped in with the Motley Fool.