A recent article from the NY Times Business section titled, “When the performance looks a little too good“, got our ETF engines thinking. We put together a screen of high and low Beta ETFs which reflects a key point in the article that, “The extreme outperformance of speculative stocks could make them vulnerable to another market shock.” Seems pretty simple, which we like.

The utilities sector has been much talked about since Warren Buffet and Bill Gross threw their support behind it. We thought it would be interesting to take a look at the historical yields of utilities vs. the 10-year Treasury yield. The current spread provides an opportunity to short the 10-year Treasury yield and go long utilities. Should the yield spread contract to historical levels, this strategy would have the potential for significant appreciation.

With information streaming over newswires 24/7, it is easy to get bogged down with noise. We’d thought we cut through the chatter and find the most relevant, big picture articles of the week. Enjoy.

The Good:

• “Goldman Gains on Rivals’ Pain” – Goldman (GS) crushes earning expectations. “Net income in the second quarter was $3.44 billion, or $4.93 a share -- more than Goldman earned in all of 2008, when it was hammered by the financial crisis. Analysts had been expecting strong earnings, but they were surprised by how much the firm exceeded expectations.” (WSJ)

Good to see some positive earnings news for once, but let's not get too ahead of ourselves here. You better make a profit if you borrow for virtually nothing and loan it out of 300/400 basis point margin.

Head to Head: High Yield ETFs

Lehman High Yield Bond ETF (JNK) vs. iShares iBoxx High Yield Corporate Fund (HYG)

With the rapidly growing ETF product list, we thought it appropriate to differentiate like-products. Our attempt is to analyze funds among popular categories and compare their strengths and weaknesses against each other.

Today's study: SPDR S&P BRIC 40 ETF (BIK) vs. iShares MSCI BRIC Index Fund (BKF).

A recent article in the WSJ titled “Buy-Write: Safe Harbor in Troubled Times?” by Brett Arends discussed the benefits of covered-call strategies. We believe there are many attractive characteristics to the strategy, and owning it in a closed-end format seems to make even more sense than other structures. Additionally, covered-call closed end funds are currently trading at deeply discounted levels. Below are some reasons we like the strategy pulled from the article. Also, we included a spreadsheet which describes the differences of the between the numerous covered-call closed-end funds (Covered Call Closed-End Cheatsheet).

1. Call options are usually overpriced. Those who sell them tend to make more money than those who buy.
2. The strategy "has generated superior risk-adjusted returns over the last 18 years… generating a return comparable to that of the S&P 500 at approximately two-thirds of the risk."
3. From 1988 through 2006, Callan said the buy-write strategy had made compound returns of 11.77% a year compared to 11.67% for the S&P, with much less volatility.
4. Over the past two years, someone who invested in a regular S&P 500 index fund would be down 43%. At the lows, early last month, they were down 54%.Over the same period, someone following the BXM would have lost a much more modest 25%. At the worst point they were down 37%.
5. Over a ten year period, buy-and-hold investors in the total US stock market have lost about 2% of their money. Investors pursuing a BXM strategy would be up about 13%.
6. From April 1989 to the present, the BXM has made total returns of about 400% -- slightly ahead of the broad US equity market. In other words, the buy-write index beat the stock market, with a lot less volatility.

While there is common mention of covered-call funds in this article and many others, authors fail to mention the differences between the funds, and how their strategies differ.We thought this would help.

Naturally, when stories such as the current swine flu hit the newswires, a lot of misinformation is disseminated. Unfortunately, the 24/7 news establishment doesn’t help the situation. For some, it creates a sense of panic and for others, who tend to shrug off cable and network news’ sensationalism, a sense of apathy. Both, of course, are dangerous. I thought I would take this time to “clear the air” and ask an epidemiologist contact from the Imperial College in London to explain to me her general thoughts and concerns on the outbreak and why we should not immediately write this off as another sensationalist story.

The Unknown

iShares has come a long way since introducing WEBS in 1996. Since then, it has done an incredible job growing assets, establishing a dynamic product base and assembling a very talented global team. Most of which was in the last five years. Much Respect.

That being said, we were surprised to see Barclays (BCS) sell such a prized asset. (The details of the deal can be found here.) In contrast to asset management firm valuations that remain depressed, iShares continues to gain assets at a rapid pace. Given that ETFs are competing successfully with mutual funds for investor assets, and iShares’ ability to target nearly every market segment that mutual funds have to offer, we believe there was little doubt of their ability to maintain a brisk growth in assets under management. There is no shortage of growth potential in the industry, they could easily replicate or buy a niche ETF business such as Direxion. What’s more, improving market conditions would further encourage institutional and retail investors risk appetite, increasing assets.

Oil, Still Oversold

Today we face many economic obstacles; the obvious ones are quite evident. From frozen credit markets and unemployment to the auto industry and housing, there is no shortage of problems. While the world grapples with these issues, we believe the market is underweighting a potential oil supply-crunch that could reignite higher prices. On the supply side, the current economic slowdown has eased significant exploration ventures.

The market has staged an impressive rally since breaking through its 12 year low on March 6th. The S&P 500 index (SPY) is up nearly 24% as of Friday’s close, while the Nasdaq (QQQQ) and Dow Jones Industrial Average (DIA) up 28% and 24%, respectively. With a sense of optimism coming out of the G-20 Summit in London, relief that jobless numbers were not as bad as they could be, recent talk of the appearance of “green shoots” and predictions of economic recovery towards the end of 2009 (one bank economist is even predicting positive second quarter growth!), we’re not buying it. We still see the economy in a very tenuous and weak state and expect another fall from these levels.

It Begins and Ends With Financials

While China and India get the bulk of attention as B.R.I.C. nations (NYSEArca: BIK), it's Brazil that has shown the most promise. Through the March 24th market close, the iShares MSCI Brazil fund (NYSEArca: EWZ) has climbed roughly 15%. We are enthusiastic with Brazil's multi-faceted potential.

While chasing returns is not a promising strategy, examining Brazil’s larger macro picture is encouraging.