ETF Update: Waiting On China's Currency Release, Less Than Green ETFs, Getting ETFs Into 401(k)s

Currency ETF Awaits China Reserve Release

Investing in China's yuan doesn't have an easy or direct path, but an ETF from PowerShares does offer an indirect opportunity. The Stock Advisors says many investors are wondering what China will do with their $1.4 trillion worth of currency reserves, which is the single-largest pile in the history of the world. When it comes to influencing the worlds currencies, this gives China unbelievable power.

When China begins to release its reserves, the G-10 countries and their currencies will be affected. That's when PowerShares DB G-10 Currency Harvest Fund (DBV) can come into play. It tracks 10 currencies, going long on the top three currencies with the highest interest rates and going short on the top three currencies with the lowest interest rates. Countries include the U.S., Europe, Japan, Canada, Switzerland, Britain, Australia, New Zealand, Norway and Sweden.

DBV is up 8.4% year-to-date.

Less Than Green ETFs

Eco-conscious ETFs are at the forefront right now. Jim Lowell for Forbes remarks that as long as the global economy keeps crude prices high, alternative energy has staying power. But beware-not all green ETFs invest in green companies. For example, Claymore/LGA Green ETF (GRN) holds companies such as AT&T (T) and Bank of America (BAC).

Know what is under the hood, as different-sounding ETFs have the same holdings and overlapping occurs. For instance, PowerShares WilderHill Clean Energy (PBW) and PowerShares Cleantech (PZD) both give 15% allocations to Sunpower (SPWR) and take large positions in Cree (CREE).

While thinking about and supporting clean energy is good, abandoning traditional energy investment may not be so bad. Clean energy accounts for 6% of energy usage so consider that old fashioned energy stocks account for 10% of the S&P 500. Carbon-focused fuel is going to be a staple for some time longer.

Hope For Getting ETFs Into 401(Ks)

A fired-up congressman could be leading the charge to get ETFs and other index funds into all 401(k)s, reports Sara Hansard at InvestmentNews. House Education and Labor Committee Chairman George Miller, D-Calif., was sufficiently alarmed by the Government Accountability Office's [GAO] report on retirement that he sponsored a bill, which will also require better disclosure of 401(k) fees.

Highlights (or lowlights, as it were) of the GAO report were:

• Young workers entering the workforce today will only have enough money in their 401(k) plan to replace 22% of their pre-retirement income.
• Of those born in 1990, 37% will reach retirement age in the 2050s with no savings at all in a 401(k)-type account.
• The current median 401(k) balance is $22,800.

That's not good, especially with the troubles Social Security is having. The report suggests that workers should be able to participate in 401(k) or other retirement savings plans when they begin a new job, and when they leave, those savings should be rolled over into a new plan.

The GAO's full report can be found here.

Comments

[Reynold]

"Investing in China's yuan doesn't have an easy or direct path"? Oh yes it does! You can purchase a CD denominated in Chinese yuan (renminbi) from Everbank. It's listed under Products > Foreign Currencies > Worldcurrency Access Deposit Account > View Currency Rates. It does not pay interest.

[rafael]

As the Manager of Cleantech Index (on which the PowerShares Cleantech Portfolio ETF (ticker: PZD) is based, I must address some inaccuracies in Mr. Lydon's article.

1) PZD currently has a small weighting in CREE (under 2% as I write this). How this gets characterized as a ‘large weighting’ is beyond me.

2) PZD currently has about a 5.5% weighting in First Solar - NOT the 15% Mr. Lydon suggests.

3) Clean energy stocks currently account for about 28% of the Cleantech Index and hence, PZD. The Cleantech Index covers the broad spectrum of clean technology businesses from water, to new materials, sustainable agriculture, transportation, and of course, energy efficiency (including those that improve the efficiency of, and reduce the pollution from, carbon-based fuels which Mr. Lydon contends will remain critical for a long time to come.

4) The PowerShares ETFs Mr. Lydon mentions, PZD and PBW, have very different strategies in terms of composition, weighting & risk management, focus, screening criteria, etc. While there is some portfolio overlap, it tends to be exaggerated prior to quarterly rebalancing - especially when a particular sector common to both is hot (e.g., solar), but the weightings are far different.

In the case of solar, PBW currently has just over a 40% weighting in solar stocks, while PZD has 22.7% in solar. Just after the Q3 rebalancing, the Cleantech Index (and hence, PZD), had a solar weighting of about 16% - whereas Wilderhill’s Clean Energy Index was about 25-29%. Naturally, heavy sector weightings tend to be most pronounced just before rebalancing when winners are pruned back.

Finally, most solar stocks have tended to trade quite similarly. Over time, I would expect greater divergence in their fortunes and, I hope, a greater number of more discerning investors (how scarce they are). Since PZD and PBW only have about 50% overlap in their solar stocks and use different weighting schemes, I would expect the weighted overlap to decrease over time.