As shown below, the S&P Midcap 400 has outperformed its large and smallcap brethren so far in 2009. The Smallcap 600 has been the worst performer with a gain of 15.4%, but it was down the most during the declines in the first quarter, so it has had to make up the most ground. The S&P 500 is up 20.77% year to date, while the Midcap 400 is up 29.17%.

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Advisors and individuals who favor a tactical asset allocation to investing have historically analyzed broad macroeconomic trends and statistics to identify asset classes and sectors poised deliver strong returns. In the early days of the ETF industry, this meant homing in on a certain sector or style and picking the fund that tracked that segment.

But as the landscape has continued to evolve, asset class and investment style aren’t the only decisions investors face. Market capitalization weightings were once the only game in town, but in recent years alternative weighting methodologies have become more popular among investors who find flaws in a strategy that gives the most weight to the biggest companies.

Rebalancing is a key to lower risk and higher returns because it forces the discipline and takes the emotionalism out of “buy low and sell high.” The illustration below shows how a simple portfolio that has a target allocation of 50% bonds and 50% stocks gets rebalanced as the allocations move away from their targets.

Over the last year, leveraged ETFs have been the subject of intense scrutiny from a number of parties, including regulatory agencies, state governments, broker-dealers, individual investors, and even class action lawyers. While several aspects of leveraged ETFs have been thoroughly analyzed and debated, perhaps no issue has drawn more attention than the effects of compounding returns when held for multiple trading sessions.

Because most leveraged ETFs seek to provide amplified returns on a daily basis, they reset their exposure to the underlying benchmark on a daily basis.

A weak market may not seem like an ideal investment environment, but small-cap stocks and ETFs may thrive in these conditions.

During the last bear market, small-cap stocks skyrocketed and investors took in 22% a year over the next three years, remarks Ryan McLimans for MSNBC. Small-caps have a long history of leading the way out of recessions, actually starting their uptrends in the middle of a bear market, rather than after a turnaround. Their small size owes a lot to this, because it makes them more nimble and better able to react to changing market conditions.

To help visualize key aspects of the commentaries posted on this blog recently, the accompanying 2 charts illustrate important patterns that investors should keep a close watch on.

On Thursday, State Street launched the SPDR Wells Fargo Preferred Stock ETF (PSK), an ETF that invests in non-convertible preferred stocks. The new SPDR will compete with two existing products from iShares and PowerShares, both of which have been incredibly popular among investors through the first three quarters of 2009.

Preferred stocks are an attractive investment option for several reasons. They feature the regular distributions of fixed income investments, but allow investors to participate in upward price movements in a company’s share price, making them a hybrid of stocks and bonds. Preferred stockholders generally have priority over common shareholders in bankruptcy proceedings, although they must line up behind a company’s debtholders.

Sean O’Hara is the President of RevenueShares Investor Services. He recently took time out of his busy schedule to talk about weighting methodologies, alpha, and more with ETF Database.

ETF Database: Market capitalization-weighted indexes are widely accepted and used among investors, but they aren’t without their flaws. Why might these cap-weighted indexes be less than ideal for benchmarking purposes?

As we head into the Labor Day weekend, we thought investors might like to take a look at how various asset classes have performed over the last month, 3 months, and year. Below we have broken up a number of key ETFs into asset classes to easily highlight asset-class performance.

As shown, ETFs are mostly up over the last month and three months, but they're still down over the last year (with the exception of gold and fixed income ETFs). The S&P 500 tracking SPY ETF is down 17.85% versus a year ago, while the Nasdaq 100 tracking QQQQ is only down 7.8%. Smallcap ETFs are down more than midcaps, and Financials, Energy, and Industrials are down the most out of the ten US sectors.

A common approach to retirement planning is to determine an amount that can be initially withdrawn from a retirement portfolio, and increased each year by the rate of inflation. For example, Monte Carlo simulation might show that someone withdrawing $35,000 a year (in today’s dollars) from a $1,000,000 portfolio with some given asset class allocation would result in a terminal portfolio value after forty years of at least $250,000 in 85% of the simulations.

The problem with modeling a retirement plan based off of a fixed initial withdrawal rate that adjusts for inflation each year is that it does not account for the wide range of potential outcomes. Some of these will be negative outcomes – such as the 15% of outcomes where the afore mentioned portfolio dropped below $250,000 – but others will be positive, in that the portfolio will grow at a higher rate, making the initial 3.5% withdrawal rate effectively fall over time.

Charles Schwab, one of the world’s best known and largest asset management firms, recently took another step towards finally breaking into the rapidly-expanding ETF industry.

Earlier this month, Schwab filed paperwork with the SEC to launch nine ETFs. The proposed funds will have the benefit of the Schwab name (and the tremendous resources that come along with it), but will still face an uphill battle, given the firm’s late arrival to a now very crowded market.

If the consensus earnings estimates coming out of Standard & Poor’s and “the Street” (via Thompson Reuters) are realistic, then it looks pretty good for a stable to rising market value. We say value instead of prices, because price and value don’t always coincide.

At 923 the S&P 500 is about 12 times the 2010 $74.10 forecast for the S&P 500 operating earnings by Standard and Poor’s, or the $74.48 forecast by “the Street” according to Thompson Reuters. Barron’s reports a Capital IQ survey of six strategists’ forecast of $68.45 for 2010, making today’s 923 index price about 13.5 times 2010 operating earnings.

As ETFs have become the investment vehicle of choice for an increasing number of asset managers and individual investors, the landscape continues to evolve, sometimes seemingly on a daily basis.

The first ETFs to burst onto the scene generally tracked traditional asset classes and indexes. And while these “plain vanilla” funds remain among the most popular investor choices today (State Street’s SPY, which tracks the S&P 500, is acknowledged as the first U.S. ETF, and today remains the largest and most actively-traded ETF), numerous funds tracking non-traditional assets and indexes have sprung up in recent years, expanding the reach of ETFs to nearly every corner of the investment sphere.

It has become trendy to declare that "buy-and-hold is dead". Some critics regard dollar-cost averaging, or automatically investing a fixed amount every month/quarter/year, as foolish as well.

Many buy-and-hold investors have essentially lost a decade of accumulated wealth, and there is no guarantee that these losses will be reclaimed, according to a recent article in the May/June 2009 issue of CFA Institute Magazine. The US market historically has been an anomaly in regaining lost ground. If you look at other countries of the world, three quarters of them have shown that you could spend a quarter of a century without achieving a zero real return on equity. The most recent example is Japan.

In the week during which the Obama administration will unveil details surrounding its plan to revamp the regulation of the U.S. financial sector, calls for increased oversight of the ETF industry are picking up steam as well. Scott Burns, director of ETF Analysis at Morningstar, recently laid out a case for increased regulatory requirements for ETFs that use derivatives to achieve their objectives.

But I'm not quite convinced that more regulation is the answer.

Investors are wondering if we are coming out of a recession, with the latest evidence suggesting that we are in a valuable period for small cap growth. This could give small cap ETFs the chance for a rally if a turnaround occurs.

Russell Investments research indicates that small-cap stocks tend to do well after a recession, indicating their possible outperformance once the market has hit its bottom. This theory has been reinforced since the market lows reached on March 9. Since then, Ian Wyatt for SmallCapInvestor says, the majority of stocks gaining on any particular day have been of the small-cap variety.

Why? Chalk it up to nimbleness. Small-caps can shift and change strategies as market conditions change much more easily than larger companies can.

It's been almost 17 years since two economists at the University of Chicago, Eugene Fama and Kenneth French, published an attack on the stock price measure of risk known as "beta," prompting "Beta is Dead" headlines from numerous financial publications.

While these obituaries may have been a bit premature (beta is still widely taught in university finance courses and widely accepted in the business valuation field), the groundbreaking article caused some irreparable damage to beta's reputation.

Hedge fund Replication

Below we highlight the one-day, five-day, and one-month performance of key ETFs across all asset classes. Tuesday was a strong day across the board, with small caps and mid caps doing slightly better than large caps. Value stock ETFs actually outperformed growth stock ETFs as well. On a sector basis, the financial ETF (XLF) was up the most with a gain of 14.86%, and outperforming the second best sector (Industrials) by a wide margin.

Globally, the Russian market ETF (RSX) was up 12.93%, followed by Italy (EWI), and China (FXI). Commodity and US Treasury ETFs were the only areas of the financial world that were down today. Looking at the one-month performance of all of these ETFs, however, snaps investors back to the reality that things are still pretty bad out there.