The threat of increased regulation from the Commodities Futures Trading Commission continues to impact the ETF industry. Increased position limits are designed to reduce the impact that ETFs such as United States Natural Gas (UNG) have on the price of the commodities they are designed to track. The latest chapters in the futures regulation saga are the shuttering of PowerShares DB Crude Oil Double Long ETN (DXO) and the reconfiguration of the PowerShares DB Agriculture (DBA) and PowerShares DB Commodity (DBC) ETFs.

DXO was truly a victim of its own success. This leveraged exchange-traded note became so large that it was subject to limitations placed on its underlying components. Deutsche Bank considered the crackdown a “regulatory event” and redeemed the $407 million in outstanding notes on September 9. Its opposite, the PowerShares DB Crude Oil Double Short ETN (DTO), continues to trade.

Inflation is a topic on many investors’ minds as massive government spending plans go into action. While hard economic data has yet to cause investors much concern about the imminent threat of inflation, heightened awareness has triggered an influx in the demand for ETFs that track Treasury Inflation-Protected Securities (TIPS).

According to data from the National Stock Exchange, the two largest net asset ETF gainers during September were SPDR Gold (GLD) and iShares Barclays TIPS Bond Fund (TIP). While there is more than one reason why investors are adding the physically backed GLD to their portfolios (and the comparable iShares fund, IAU), both GLD and TIP can be inflation-fear fighters. The fact that investors poured $847 million into TIP seems to be a strong indication that inflation protection is being built into portfolios.

If entrepreneurs could time travel 10 years into the past, many would choose to create a business in China. A decade of rapid growth saw the country make huge strides toward becoming an economic powerhouse, with accompanying economic reforms that built upon the gains. China is planning for the full convertibility of its currency and wants to turn Shanghai into a global financial center to rival London, Tokyo and New York. While it is just a dream, according to some investment professionals, entrepreneurs and manufacturers, it is possible to go back in time by heading to Vietnam.

Vietnam did not embark on reforms as early as China, but the Communist Party in Vietnam is following the example set forth by the Communist Party in China. State-owned companies are being reformed, consolidated or privatized; financial reforms have led to the opening of a stock exchange and heavy inflows of foreign investment.

Austria’s economy has rallied in 2009, helping to boost returns of the iShares MSCI Austria Investable Market Index Fund (EWO) to more than 61% year to date. EWO is among the popular iShares MSCI funds. This indexing method allows iShares to take “slices” of the MSCI index to offer individual country funds. EWO tracks the MSCI Austria Investable Market Index, which contains publicly traded securities in the Austrian market. The fund uses a capitalization weighting strategy, so Austria’s largest companies are included in EWO’s basket.

The last three months have been particularly good ones for EWO, with the fund rising 32.51%. EWO’s performance has been reflected in our momentum rankings. EWO jumped from the No. 40 spot on our Sector Momentum Tracker ETF international rankings on June 16 to the No. 17 spot on August 25. We added EWO to our ETF International Portfolio on August 19, 2009. While this fund may be a good way to capitalize on the upswing and gain diversification, Austria’s road to recovery may continue to be bumpy.

The recent controversy surrounding futures-based commodity ETFs has left the PowerShares DB Oil ETF (DBO) noticeably unscathed. DBO, which tracks the futures contracts of Light Sweet Crude, has gained momentum in recent weeks, moving from the no. 90 spot in our ETF Sector Momentum rankings on May 19 to the no. 36 position on August 11. As the regulatory spotlight falls upon these futures-based funds, DBO may be in a better position to survive the scrutiny than peers like the United States Oil ETF (USO).

Both DBO and USO offer investors exposure to the performance of oil spot prices by tracking a basket of futures contracts. This strategy is particularly compatible with the ETF structure, and would be very difficult for an individual to achieve through a series of contract purchases. This accessibility has made funds like DBO, USO and United States Natural Gas (UNG) particularly appealing to investors.

On July 30, Fidelity Viewpoints presented the case for mid-cap stocks in “Don’t Overlook Mid-Caps.” They argue that mid-caps “historically performed well coming out of a recession,” trade at the lowest valuations since 1990-1991, and trade below historical valuations such as price to sales.

Long-term investors have moved away from asset allocation strategies in recent months, due to increased correlation between assets. During the bull market, analysts debated the merits of small caps versus large caps, growth versus value. Those discussions still take place, but they’ve been drowned by the collapse in equity, commodity and real estate prices. The difference between two market capitalization groups wasn’t as big a concern for investors when their decision was “to invest or not to invest.” Furthermore, industry- and country-specific news has dominated, with commodities, technology, emerging markets and financials grabbing headlines.

Over the last decade, investors have increasingly sought out ETFs as a low-cost, liquid and transparent alternative to mutual funds. The passive indexing strategies that have traditionally defined the industry have transformed in recent years, however, and a new generation of indexes are vying for inclusion with the bulk of capitalization- weighted funds.

The incredible expansion of the ETF universe has prompted two phenomena: undercutting of existing funds and development of unique indexing. In order to survive in an increasingly competitive environment, ETF issuers are finding that they can duplicate existing ETFs and charge less—a la Vanguard—or attempt to offer investors a strategy that seeks performance or enhancement.

The commodities and materials sectors were two of the hardest hit by the global economic downturn. With signs of market stabilization and the beginnings of a renewal in consumer confidence, commodities and materials may also have the most to gain on the upside. Growth, both at home and abroad, is dependent on the materials necessary to create infrastructure and the energy to fuel expansion.

One way to access this sector of the economy is through the iShares S&P Global Materials Index Fund (MXI). In recent months, MXI has steadily gained momentum on our charts, moving from the No. 36 position on May 5 to the No. 12 spot on July 28. This steady increase could continue as countries worldwide begin to exhaust and restock their raw materials.

In recent years, Thailand’s political and economic climates have been plagued by a series of paralyzing events. A military coup, a tsunami and public unrest have made many investors justifiably uneasy. Antigovernment protests in Bangkok in April further damaged a tourism industry made fragile by the devastating tsunami of 2004. Recent government programs and stimulus efforts, however, are helping the country to heal internally. Externally, investors are beginning to turn toward Thai investments like the MSCI Thailand Investable Market Index Fund (THD).

THD tracks the MSCI Thailand Investable Market Index, set to mimic the performance of the Thai equity market. The fund is up nearly 42% for the three-month period ending July 27, as international investors regain their appetite for risk. THD’s largest sector allocations are to energy and financials, which constitute 35.06% and 31.69% of the fund, respectively. When selecting stocks for the underlying portfolio, THD’s methodology takes into account limitations on foreign investment while creating a market-cap-weighted strategy.

Better-than-expected earnings from Goldman Sachs (GS) last week helped to bolster SPDR’s KBW Capital Markets ETF (KCE) by 4.13% for the week ending July 20 and encouraged investors to examine financial ETFs once more. KCE held the No. 6 position in our Sector Momentum Tracker ETF ranking on July 20, up from the No. 23 spot on May 19. Both KCE and rival iShares Dow Jones U.S. Broker-Dealers (IAI) have risen in recent weeks, as trading revenue helps to drive profits for broker-dealers.

KCE tracks the KBW Capital Markets Index, a float-adjusted, modified-market, capitalization-weighted index that measures the performance of publicly traded companies in the U.S. capital market industry. KCE’s index includes broker-dealers, asset managers, trust and custody banks, and a stock exchange. Morningstar classifies KCE’s portfolio as 9.46% giant cap, 49.58% large cap, 26.67% medium cap and 14.29% small cap.

An expansive stimulus package and an increase in lending have helped China’s economy, as well as the PowerShares Golden Dragon Halter USX China ETF Portfolio (PGJ), surge in recent months. PGJ has been solidly within the top 10 funds on the ETF International Momentum Table since mid-April, reflecting the rebound in China’s economy. Despite some long-term inflation fears, China’s economy could continue to grow quickly in the short term, and PGJ offers investors a balanced way to access this expanding market.

PGJ tracks the Halter USX China Index, which is composed of the U.S.-listed securities of companies that derive a majority of their revenue from the People’s Republic of China. Currently, 45.93% of the fund is giant cap, 32.65% is large cap, 4.19% is medium cap, 12.01% is small cap and 5.23% is micro cap. While PGJ’s assets are noticeably weighted toward the larger-cap stocks, access to the smaller-cap holdings helps investors keep a more balanced portfolio. The largest three economic sectors represented in the fund’s portfolio are information technology, energy and telecommunication services, with 22.28%, 18.88% and 13.86% allocations, respectively.

The second quarter was a good one for commodity and China ETFs. Almost everything risk related advanced in the past three months, with PowerShares Financial Preferred (PGF) sporting a 57 percent return, the fifth best among funds in our newsletter. Other strong performers include the India ETFs and ETNs, which popped more than 20 percent in one day following the country’s election results in May. Aside from the reduced risk aversion, these funds advanced on isolated factors. Commodity and China ETFs, however, were pushed by common threads, most important among them the growth in Chinese loans.

As early as February, Chinese economists were “ballparking” that as much as one-third of the country’s loans could be headed into stocks and real estate. The percentage may still be in that neighborhood, with roughly 20 percent heading into stocks, according to a Bloomberg story, which cites Wei Jianing, a deputy director at the macro-economics department of the Development and Research Center under China’s State Council.

When ETF issuer Direxion launched its Financial Bull 3X Shares (FAS) and Financial Bear 3X Shares (FAZ) in November of 2008, market volatility was skyrocketing, providing an attentive audience of nervous investors anxious to pick sides in an uncertain environment. Eight months later, bullish FAS has dropped more than 60% while bearish FAZ has plummeted 96% as the funds’ methodology has mercilessly taken its toll on both share prices. The Direxion pair has intensified an existing debate on the role of leveraged funds, which have experienced booming popularity as investors use ETFs to make previously inaccessible bets. The trend toward leverage has not gone unnoticed, however, and as leveraged funds are pushed into the spotlight, it is more important than ever for investors to understand what they’re getting.

Investors may be perplexed as to how both a bull strategy (FAS) and a bear strategy (FAZ) can be leveled simultaneously. The reason, while potentially controversial, is not a mystery to investors with the initiative to look: the disclaimer is front and center on Direxion’s home webpage. “Direxion Shares ETFs seek daily investment goals and should be used strictly as short term trading vehicles,” the website warns, highlighting the daily reset strategy of the fund. As the value of the fund vacillates, the daily impact is compounded, sinking both funds over time.

Hard economic data has yet to show signs of imminent inflation, but the buoyancy of gold prices demonstrates an ongoing fear for the future. Investors seeking a safe haven from possible inflation, while still desiring to participate in any upward movement of the stock market, should consider Market Vectors Gold Miners (GDX), which tracks the stocks of gold companies. GDX hovered in the top five of our Sector Momentum Tracker ETF rankings from May 19 to June 30, indicating the appeal that gold continues to hold for investors worldwide.

Rather than owning actual physical gold, like SPDR Gold Shares (GLD) or iShares Comex Trust (IAU) does, GDX invests in the stocks of gold miners. While this strategy may not be as “pure” a gold investment, GDX offers investors leverage when it comes to gold prices. Because there are two forces at work, the cost of bullion and the costs of the companies that are mining it, GDX often rallies harder as gold prices rally, but it can sink faster if the costs of the companies outpace the profits from bullion. In 2009, leverage offered by GDX has helped this fund beat IAU and GLD. Year to date, GDX has risen 13.08%, while GLD and IAU have jumped 5.47% and 5.48%, respectively.

Healthcare has dominated the headlines in recent weeks, as President Obama presents his new proposals and the industry recovers from a position where it was perhaps oversold. Where, in this mix, are ETFs the most helpful? iShares Nasdaq Biotech (IBB) helps investors navigate the popular, but hit-or-miss, biotech subsector. Healthcare has gained short-term momentum in recent weeks, and IBB is up 9.23% for the one-month period ending June 26. IBB offers investors exposure to a broad range of biotech funds with a concentration in large-cap names, a strategy that will save investors some of the pain that comes from failed start-ups. With the healthcare industry just regaining its footing, and government pressure being applied more acutely to other subsectors of healthcare, IBB offers solid long-term exposure to the biotech sector.

IBB tracks the NASDAQ Biotechnology Index, comprising companies with at least a $200 million market cap. IBB has 123 holdings and an attractive 0.48% expense ratio. The top industry allocation in the fund is Medical-Biomedical/Gene, with a 63.29% weighting, followed by Medical-Generic Drugs and Medical-Drugs, with 11.34% and 9.63% weightings, respectively. While the fund tends to be top heavy—its largest component, Amgen (AMGN), makes up 10.77% of the fund—IBB’s components are spread throughout the capitalization spectrum. More than 43% of IBB’s holdings can be classified as either giant or large cap, while 28.5% are medium and 27.75% are small or micro. Overall, the top 10 holdings in the fund are allocated nearly 52% of the fund’s assets.

Wind power companies have been on a roller-coaster ride for a year, but they are attracting attention once again as gas prices march upward and consumers look toward renewable alternatives for investment opportunities and jobs. First Trust Global Wind Energy (FAN) and PowerShares Global Wind Energy (PWND) have responded to the renewed interest, rising 39.73% and 41.92%, respectively, during the three-month period ended June 22. In a June 16 New York Times article, Katie Howell noted that scientists believe that wind power, strategically placed in jet streams, could power up the entire planet. While the push for alternative wind could make both FAN and PWND good holdings for long-haul investors, the funds are different in several key areas.

PWND tracks the NASDAQ OMX Clean Edge® Global Wind Energy Index, which is made up of companies that are primarily manufacturers, developers, distributors, installers and users of energy derived from wind sources. PWND’s index is made up of 31 companies, with 33.40% considered large-cap growth, 25% considered mid-cap growth and 30.67% considered small-cap growth. The top three countries represented in PWND are Spain, France and Denmark, with 23.07%, 14.50% and 11.78% allocations, respectively. When it comes to sector allocations, PWND is made up of 43.59% industrials and 42.77% materials. The expense ratio for PWND is 0.75%.

Technology ETFs have been rising to the top of our momentum charts in recent months, as tech-heavy indices like the PowerShares QQQQ outshine broader measures of market strength. Focused tech funds have performed even better, and iShares S&P North American Technology-Multimedia Networking Index Fund (IGN) and PowerShares Dynamic Networking Portfolio (PXQ) have hovered at the top of our Sector Momentum Tracker ETF rankings, as of June 12 holding the No. 10 and No. 20 spots, respectively. While IGN and PXQ share many top-10 components, their underlying methodologies and performance differentiate the funds and should be considered by prospective buyers. While PXQ has a slightly higher fee than IGN does, as well as significantly fewer shares trading hands in the course of an average trading day, this PowerShares offering represents a more appropriate investment for buyers looking to diversify a small amount of their portfolio with networking stocks over the long term.

click to enlarge

While the “R” in the acronym “BRIC” may stand for the least-talked-of emerging market in the group, Russia has seen an astonishing recovery in 2009. The Market Vectors Russia ETF (RSX) returned more than 103% for the three-month period ending June 5, a testament to the recovery of the Russian economy after last year’s drop. Russia’s current strength may be due to a “not-as-bad-as-we-thought” mentality, but the correction due from such sentiment could lead to further short-term growth. As oil prices recover and currency fears subside, RSX could continue to offer value in a well-diversified portfolio over the short term.

Russia’s substantial 2008 drop, a record 76% for the benchmark RTS Index, can be tied to the burst of the oil bubble late last year. With a large percentage of top holdings tied to the commodities sector, RSX tracks commodity prices closely. While RSX’s price dropped dramatically along with oil prices late last year, the reemerging demand from emerging markets has helped boost the price of scarce oil reserves in the short term.

Many investors look to emerging markets to find growth opportunities for their portfolios. China, Brazil and India are probably the largest and most popular, but smaller countries such as Malaysia, Chile and Thailand also attract investors’ attention. One country that has been underrepresented in the investing media, aside from a spate of recent coverage, is Indonesia. Market Vectors added the country (IDX) to its small but growing stable of eclectic funds in January, and the timing could not have been better.

First, some background on the country. The fourth-largest country by population has one of the 20 largest economies in the world. The nation is endowed with natural resources that had allowed it to remain a net exporter of oil until last year, when it quit OPEC, but it continues to be a net exporter of coal and agricultural produce. Close proximity to China has aided the country’s development, as has a commitment to economic reform in the wake of the devastating Asian Crisis. Finally, as the world’s most populous Muslim nation, Indonesia seeks to develop itself into an Islamic financial center.