ETF Update: Credit Default ETFs, High Put/Call Options Ratios, Backtesting, Short Gold ETN

by: Tom Lydon

Credit Default ETFs

Four ETFs are in the making that will track credit default swap contracts, according to CCM Partners of San Francisco, who does business with California Investment Trust Fund Group. The funds are currently in registration with the SEC.

David Hoffman for Investment News explains that a credit default swap, or CDS, is a type of derivative that is basically a form of insurance against a company's defaulting on debt. The swap buyer pays a quarterly fee to the seller, and in exchange, the seller agrees to make a payment to the buyer in the event of a default. It is a pure method of investing in credit risk.

This is the first investment tool of this type, an easy access to these contracts. Skeptics think the proposed products are overly complicated. The ETFs will not appeal to everyday investors, while many advisors say they would not use them.

High Put/Call Options Ratios

Put/call options ratios are high for certain ETFs and stocks right now.

Mark Fightmaster for Schaeffer's Research reports that the Select Sector SPDR Health Care Fund (NYSEARCA:XLV) has a put/call volume ratio of 320.66 or 320.6 puts for every call while the Select Sector SPDR Metals and Mining (NYSEARCA:XME) has experienced 155.7 puts traded for every call. While the numbers are extreme, the actual underlying stocks see a light trading volume on a day-to-day basis.

Options can be used as a means of predicting the market's direction, says John Summa for Investopedia. By tracking the ratio of puts to calls, you can get a sense of how traders are feeling. If the volume of puts is high, a market bottom could be looming. Too many calls, and the top could be near.

However, do with this what you will: options traders are wrong 90% of the time. Be sure that if you're going along with them, you're not just getting swept up in a frenzy. As with any kind of investing, keeping your emotions out of it will serve you well.

Backtesting ETFs

One thing many ETF providers do is "backtest" their investment strategy. They'll use historical data, apply their strategy and measure the returns against a comparable benchmark.

Thaddeus Malley for ETF Guide wonders if the average investor knows how to consider the data and what it all means.

A number of ETFs are so new and innovative, they don't have an index that's been around for any kind of meaningful time frame. If that's the case, the backtest comes in. Had this index been around for a given period of time, how would it have performed?

Malley has also noticed "historical returns" on ETF fact sheets, and he cautions that many of these returns are for the index and not the actual returns of the fund.

All in all, investors should take these numbers for what they are: hypotheticals. They're important to illustrate trading metrics, but they shouldn't be the sole reason you choose a fund.

Short Gold ETN For Skeptics

Commodity prices corrected after a lengthy rally driven by the Federal Reserve interest rate cuts, sending ETNs that short gold up 7% in two days. DB Gold Double Short ETN (NYSEARCA:DZZ) gained 7% last week, as the shift in precious metals, oil and wheat occurred.

John Spence for MarketWatch reports that gold prices fell after the Federal Reserve cut interest rates again on Tuesday, by three-quarters of a percent to their lowest level since 2004.

We're in volatile times, and anything goes. The following gold ETFs are affected: streetTRACKS Gold Shares (NYSEARCA:GLD) and iShares COMEX Gold Trust (NYSEARCA:IAU).

New Bond ETFs

State Street Global Advisors unveiled their first International Inflation-Protected Bond ETF. The SPDR DB International Government Inflation-Protected Bond (NYSEARCA:WIP) began trading on the American stock exchange March 19. The index, DB Global Government ex-US inflation-Link Bond Capped Index, uses 120 inflation-indexed bonds from 18 developed and emerging counties outside the U.S.

BusinessWire reports the expense ratio at 0.50%. The ETF joins the iShares Lehman TIPs ETF (NYSEARCA:TIP) in this area of the market.

Bonds, in general, can be a safer place for investors to stash their money when the markets are haywire.