ETF Update: Check Out Chile, Short ETFs, Next Gen ETFs, 401(k) News, Which ETFs Will RIP?, New Vanguard, PowerShares Offerings

Includes: DBB, ECH, MGC, MGK, MGV
by: Tom Lydon

Check Out Chile

Chile is a quiet and lesser-known emerging market, but its ETF is providing some valuable opportunities.

The iShares MSCI Chile Index Fund (NYSEARCA:ECH) in particular exposes investors to copper, a commodity that has been essential in growing economies. As we noted last year, copper is used in every major industry, and China is the biggest consumer of the metal. Chile is primed to get a boost as other emerging markets continue to thrive, since the country accounts for one-third of the world's metal production.

Zoe Van Schyndel of the Motley Fool breaks down the fund, which tracks an index of 30 stocks and was launched last November. Half of the assets are in utilities and industrial stocks, 17% are in materials and 13% are in consumer-related stocks.

Not only does Chile have a valuable commodity in copper, the country has several other factors working in its favor: it has a population of 16 million people and a literacy rate near 100%. There is a high level of domestic investment and savings rates, and nearly 45% of the country's GDP is tied to foreign trade.

If you're still waiting for a pure copper ETF, there isn't one yet, but you can also take a look at the PowerShares DB Base Metals (NYSEARCA:DBB), which holds one-third each of copper, aluminum and zinc.

Short ETFs, Big Returns

It's been a rough new year, but not for short ETFs.

Short ETFs are the contrarians of the markets, designed to do the opposite of whatever the market is doing, which means when things are heading south, short ETFs are exactly where you might want to be. Trang Ho of Investor's Business Daily reports that those funds cleaned up last week.

While shorts simply do the opposite, ultra-shorts are designed to do twice the opposite. The ProShares UltraShort Semiconductor (NYSEARCA:SSG) was up 24% for the week after its index, the Dow Jones U.S. Semiconductors, dropped 15%. The technology sector took a hit last week, too, because the ProShares UltraShort Technology (NYSEARCA:REW) was up 13.7%.

Other sectors that saw their double-short ETFs moving upward were consumer services, real estate, financials and emerging markets.

See how it works? In volatile times like these, short ETFs may be something to consider to keep the markets from dragging your portfolio down with them. Handle them with care, though: if those sectors begin to perform well, you could take a nasty hit.

Next Gen ETFs

The ETF industry is buzzing with talk about "second-generation ETFs." These are funds that are actively managed by a money manager instead of the original passive ETFs.

Diya Gullapalli for The Wall Street Journal explains that 2007 had plenty of bumps in the road for the young industry, making it tough for smaller companies to start up and take off with their ETF families. Factor in the oil craziness, the zig-zagging market and talk of a recession and it's not difficult to see why.

The first actively managed ETFs could launch as early as the first quarter this year, and providers are awaiting approval from the SEC. Although the environment is touch and go for some of the smaller fund providers, of the ETFs available at the moment, 40% were last year alone. The added competition could also be making the environment tougher to survive, which is great for investors. It ups the ante for providers to supply a good product with lower fees.

ETFs Edge Closer To 401(k)s

Investors have been pleading for ETFs to be available in 401(k) retirement plans for quite some time now. Some feel like they are getting burned with hidden fees found in many traditional mutual fund-based plans.

Laura Rowley for Yahoo Finance adds fuel to the fire by reporting that members of Congress, the Department of Labor and financial experts have officially found that some companies managing 401(k) plans are siphoning off billions in excessive fees. These fees are "bundled services" that are taken before returns are reported, and are either overlooked or not disclosed at all.

The average fee charged to a plan is 1% of assets managed, and they can range as high as 2.25%. Those fees can really put a dent in a retiree's budget and hurt a population of people who need food and medicine.

The Fortune 500 companies are under scrutiny right now, but the smaller businesses with fewer than 100 employees are actually hit the hardest. They lack economies of scale and are paying higher fees because the plan is smaller. By incorporating ETFs into these 401(k) plans, many of these fees wouldn't be an issue.

Which ETFs Will RIP?

Predictions are just that -- predictions -- and by no means fact, and while some of the ones out there regarding ETFs for the coming year are right on, others we feel are a bit of a miss.

The always-entertaining Chuck Jaffe of MarketWatch foresees that dozens, if not hundreds, of relatively new ETFs closing up shop this year. Sure, we posted about a report earlier this week saying the newbie ETFs are experiencing a bit of struggle as they try to get assets, but we don't think things are that dire.

Certainly some ETFs won't be successful as others and they may disappear. But hundreds? That's a huge dent in the roughly 600 ETFs available and something that we feel is highly unlikely to happen.

The industry has learned its lesson from the glut of mutual funds it offered at the market top. Many of them were of a "throw it up and see what sticks" variety, and it's no surprise that a great number of them failed to attract assets and suffered from sub-market performacne. These days, many ETFs are launched only after much research, exploration and consideration of what the market wants and/or needs. The flow in assets to ETFs speak for themselves.

One thing we're certain of this year is that hundreds of conventional mutual funds will likely be heading off to that big mutual fund junk yard in the sky.

New Vanguard, PowerShares Offerings

You've heard that timing is everything, and if mega-cap stocks continue to perform, Vanguard's three new mega-cap ETFs could be a case of the right ETF at the right time.

The three new ETFs are:

  • Vanguard Mega Cap 300 Index Fund (MGC)
  • Vanguard Mega Cap 300 Growth Index Fund (MGK)
  • Vanguard Mega Cap 300 Value Index Fund (MGV)

The December-born ETFs track 300 of the largest stocks within their MSCI indexes, reports Jesse Emspak of Investor's Business Daily. Expense ratios are at 0.13%. Pay attention, as some mid-cap stocks overlap with large-caps at the top of their market caps. For this reason, the firm launched these ETFs to offer a more purely large-cap play.

PowerShares Capital Management has added another fundamentals-based ETF to its expanding family.

The fund tracks the FTSE RAFI global index, and will cover international real estate outside the US. PowerShares FTSE RAFI International Real Estate ex-US Portfolio (PRY) has been listed on the NYSE Arca trading platform.

The expansion of global markets is accelerating, and these ETFs will provide exposure to real estate companies outside our own borders and in developed markets, according to a Hedgeweek press release.