Fund Insider's Comments

Ten ETF Trends for the Next Ten Years

Fri, 18 Dec 2009 14:10:36 -0500

401k using ETF is a simple matter of having firms like etrade or schwab get into the 401k plan administration market. Mutual fund firms established infrastructure to meet govt and employer needs long ago, pre-ETF days, and that infrastructure doesn't include executing stock trades, just mutual funds. If brokers make the same investment, so you can trade in your 401k, then the question will be whether employers and the govt, want to allow trading any stocks or limit to just a list of ETFs. Of course we all want flexibility, but some think the 401k is sacred and we should be protected from our own stupidity with rules and restrictions.
Hard to predict how & when govt policy based issues will be decided, could be 10 years, could be never....

A Complete Guide to the Cheapest ETFs

Fri, 18 Dec 2009 13:59:40 -0500

Very useful summary of the ETF landscape from a cost and portfolio role perspective. Thanks.

Seeking High-Alpha, Low-Beta Countries (Part I)

Mon, 14 Dec 2009 15:44:33 -0500

Political environment and economic situation in a nation can no doubt have impact on all industries in that nation. It's not a case of looking at one or the other, but one must factor in both.

This type of analysis is very helpful to those who do macro level asset allocation investing, maybe in single country ETFs.
Others might prefer to buy industry ETFs and analyze the relative opportunities this way. If you are stock picking you should look at both the industry, the home country of the company and the specific finances of the company. As I see it, people who invest in countries, can invest for longer time horizons as politics and macro trends at the national level take time to play out. Industries as a whole, and certainly specific companies become over/undervalued much more quickly. So for the very active investor, I'd agree, industries and if you have the time/interest, specific company selection is the way to go, but for the long term asset allocator who wants to make bets with a bit more granularity than stocks vs bonds, this is a happy medium that makes sense.
Breaks down a bit when you consider large multinational companies and when you consider impact of the climate of the countries of the customers of your investments.

Also, if you are investing in an industry on a global basis,
such as managing a Global Healthcare fund,
seems useful to know if any particular countries
have a favorable environment for business, which might affect
your weights within the industry.

Again, it's not one or the other...

On Dec 14 10:10 AM TheTechFile wrote:

> This comment addresses both the article and several of the comments.
> I come at this from the perspective of a technology analyst who
> looks at industries rather than an investment analyst who focuses
> on specific companies. What my colleagues and I see is a broad decoupling
> of classic country and sector relationships. I won't get into the
> causes. The effect, however, is quite dramatic. Within any one country
> we will see very different recession recovery patterns occurring
> different industries. For those familiar with the history of science,
> the present period is not unlike the transition between the era of
> classical and modern physics at the beginning of the last century.

ETF Risk and Reward: Emerging Market vs. U.S. Small-Cap

Wed, 09 Dec 2009 17:05:48 -0500

Are these risk grades based on the holdings of the funds or the price movement of the ETF itself ? The ETFs themselves have little history, certainly not enough to judge volatility. Even if you look through to the holdings, small cap and emg will have lots of investments with less history by their nature. Finally, younger companies, and the massive change in international investing would tend to minimize the utility of longer term track records.

So in summary, volatility measure is only as good as your history and there is little useful, relevant history for these asset classes.

Besides, volatility is dampened (assuming that's your goal) by investing in uncorrelated asset classes. You are not going to put all your assets in a small cap fund nor an emg mkt fund anyway.

ETF Risk and Reward: Emerging Market vs. U.S. Small-Cap

Wed, 09 Dec 2009 17:05:32 -0500

Municipal Bonds: A Clear Case of Buyer Beware

Wed, 11 Nov 2009 12:31:39 -0500

This is an end of days scenario.
Yes there are financial problems for the states,
but if they do not pay interest on their obligations,
whom would ever lend them money again ?
The Feds will end up involved no matter what,
either bailing them out to pay off their bonds, or lending
them cash when they can no longer raise new issues.

Ambac: Now It Warns of Bankruptcy?

Wed, 11 Nov 2009 10:00:18 -0500

I am former Ambac employee.
They are not too big to fail,
and effectively they have already failed.
Went from $90+ to a penny stock,
and no prospects for selling any new product going forward.
All revenue is recognition of past sales that are realized over
the life of the insurance contract, no new sales, no prospects
for new sales. Their who business model hinged on having a AAA rating, which they lost.

I am not a disgruntled ex-employee, I actually loved working there,
but all is lost IMO. Best that can happen is if a financially sound firm had bought them, as Berkshire H had been rumored, but unless someone like that comes along, they are done IMO.

Very Long-Term Asset Allocation Results

Mon, 09 Nov 2009 09:16:13 -0500

If you have an account at Vanguard, they not only give you above numbers, but will tell you exactly how your portfolio would fall into the above chart. This includes non-vanguard funds too.

Former Citi CEO John S. Reed: Mea Culpa

Mon, 09 Nov 2009 09:09:49 -0500

As a former Citi employee, during the days of Mr. Reed,
I agree with Formyx and not with my former boss :-)

The vast majority of banks in this country are NOT investment banks, and never violated the old GS laws. Over 100 have already been taken over by the FDIC in 2009. These same "harmless" banks, were the very ones that issued mortgages to deadbeats, and sold those mortgages to the investment banks, FNMA, FHLMC etc. Whole idea of GS was to protect commercial banks, but now we need protect from the commercial banks ! There needs to be some way to make banks accountable for the loans they issue, which GS never addressed at all. Make them hold 50% of the loans they underwrite min, and they can only sell off 50% to the securitization market. Then maybe they'll think about who they loan cash. Problem before was huge leverage with no accountability for the banks. When you can loans trillions, sell the loans and lend again, that is leverage without accountability for your actions.

Not very comforting that the people who started the chain reaction still can not understand what they did wrong nor how to prevent a repeat of the crisis.

On Nov 09 08:27 AM Formyx wrote:

> Glass-Steagall would not have prevented the collapse. The collapse
> was due to dodgy mortgage lending, a commercial banking activity.
> Banks would have collapsed even if they did not provide any investment
> banking services.
>
> It seems that what we need is ONE super regulator with extensive
> powers, covering banks, insurance companies and anything financial,

Too Big to Fail - Even Greenspan Is Speaking Out

Mon, 19 Oct 2009 10:36:32 -0400

Jeez, leave Greenspan alone. No economist has all the answers.
We all enjoyed the huge market run up, in the values of our stocks and homes, which would not have happened without his low regulation, free market policies. Huge run ups have always been followed by huge declines. Reduced regulation is always followed by over-regulation. Human DNA requires that we ride a roller coaster, never happy unless we are on the way up, but coasters get all their energy from the free fall ! If you don't like the roller coaster ride, put your money under the mattress in your rented home.

PS I worked mostly for small financial services firms, but had a 2 year stint with Citibank before it became Citigroup. Citi had many resources that other smaller firms didn't have and was able to achieve many great things unthinkable by smaller firms. That said, small firms have an agility that can never be matched by large firms. The free market needs both companies that can move mountains and small firms that can quickly get around the mountains and move the economy forward. There is no inherent good or evil in bigness and size of businesses should NOT be regulated in any way. Many firms grow too big, and if the government doesn't step in the free market does so anyway. Most large firms buy and sell subsidiaries as they continually evaluate what fits in with their strategy. If they allow themselves to grow
fat and lazy, let them go bankrupt and the pieces will be sold off
as they should have been to start with.

Gov involvement in "too big" should only be limited to cases where a firm uses illegal monopolistic tactics so as to eliminate any fair competition from those smaller but valuable competitors that breed innovation and options for customers. Anti-trust should be the only reason govt breaks up a large firm, not some perception that we have too much risk, ridiculous. Had the US let evolution take it's course in the 1970s, Chrysler would be long gone and GM would probably be far healthier today due to lack of competition from it's own government, not elimination of competition. They still had to contend with Ford and many others, I just don't advocate unfair competition from the government for non-utility type services, any more than we should allow unfair competition from a monopoly.
After all, the US gov is the ultimate monopoly and should ban itself from bailing out/buying firms just on the basis of it's own anti-trust laws !

How Rebalancing Added Over 2% to the Returns of a Simple ETF Portfolio

Fri, 16 Oct 2009 12:53:03 -0400

I reduce taxes and transaction costs doing this by sweeping
all dividends to cash/mmkt and take that plus new deposits
to buy whatever is down below target allocation.

With this method, you can not only reduce cap gains after sales,
but also perform some strategic changes in asset allocation targets.
So if you are very bearish on stocks, your next purchases are based on a new target. If you must sell, I still avoid taxes by doing most of my selling inside 401k and IRA accounts (move them back and forth between bonds and stocks as needed, but mostly just buy new assets in taxable accounts).

The Dow: Ominous Parallels to the 1929-1930 Era

Mon, 12 Oct 2009 10:49:02 -0400

Thousands of PhD economists can't predict direction of markets despite their in-depth study of history and current data. What makes anyone posting here think any of us can get it right ?

Big Risks in Bonds and Bond Funds

Mon, 12 Oct 2009 09:50:21 -0400

Depends on your purpose for FI investments.
Older retirees in nearly 100% bonds should heed this warning.
If you are less than 60 years old, just using FI as part of overall
asset allocation, remember that the hedging effect of bonds is greater with longer term bonds than shorter. When equity markets decline, your short term bonds wont rally that much, maybe a bit.
Just as difficult to predict interest rates as the stock market, so
buy a mixture of long and short term bonds for diversification, and be prepared to have a bumpier ride on the longer term bonds.

Credit Card Defaults Set a New Record

Fri, 25 Sep 2009 09:23:46 -0400

Grow up you people. Maybe you should have avoided purchasing/leasing that new car every 3 years, the flat panel TV, the cruise tickets and saved for a rainy day. Get used to it, you live in America, and there is no safety net for the little guy. You need to create your own. That, or start a bank and then have the govt rescue you.

Don't Bet Against the Bond Market

Fri, 25 Sep 2009 09:19:56 -0400

Investing in the long or short end of the curve depends not just on economic forecasts (and who can ever predict that with certainty), but also on your purpose for being in Fixed Income. If you are managing a purely FI portfolio (maybe a retiree or institutional FI portfolio), then these bets are what you are paid to make. If you are an asset allocator (typical younger to middle age investor or balanced fund manager) then you need to consider other items, such as whether your bond portfolio truly offers diversification from your equity or other assets. Going with mmkt or short bonds there is no reverse (or any) correlation. I often consider this short/long conundrum discussed here, but in the end, I remind myself that the purpose of my FI portfolio is to offset the risk of my equity portfolio.
There are days I make money in stocks, lose in bonds, and vice versa. A portion of my FI portfolio is just for this purpose. Other portions I use to make specific bets, such as when I loaded up on corp bonds during the peak of the crisis (time to start thinking about getting out now ???). Point is, your strategy for FI investing should be based on your goal(s), not just on the markets and yield curves.

Why You Need TIPS in Your Retirement Account

Mon, 21 Sep 2009 16:28:07 -0400

There are very few bonds issued, so security selection isn't really much of an issue for fund managers. Performance is similar :

finance.yahoo.com/echa...;range=20040913,200909...

I'd pick based on whether you are using a brokerage acct where it's cheaper to trade TIP, or if you have an acct at Vanguard and can move in/out of VIPSX at no cost. Expense ratios are almost identical.

On Sep 21 09:30 AM mdpath wrote:

> What's your thoughts about the i shares Lehman (seekingalpha.com/symbo...)
> fund as compared to VIPSX.

ETFs at Center of Vanguard vs. Fidelity Dispute

Thu, 03 Sep 2009 15:19:47 -0400

"Although being the biggest and being the best are obviously not synonymous, there is a big advantage to being certified as the largest player in the space. This title can likely be used to recruit additional accounts, and perhaps charge higher fees, thereby increasing profits."

Additional accounts, maybe, higher fees, not in Vanguard's case.
Their key to success has been by keeping fees low. And in fact, I'd say even counting ETF's, Fidelity probably has more revenue than vanguard even with slightly lower assets, since they have so much more actively managed (read higher fee) funds.

Both good firms, all comes down to whether you want an index
manager or an active manager.

Some Graham and Dodd Type Thoughts on Stocks vs. Bonds

Thu, 13 Aug 2009 09:57:10 -0400

I don't know how any professional investor can talk about dividends as having anything to do with the merits of one stock over another. Companies are not obligated to pay dividends, and when they fall on hard times, they cut the dividend. Stocks are not bonds, bond issuers have to default, a very serious step, compared to cutting a dividend. Stocks are NOT tips. If true that the real return is same as TIPS, nobody should buy any stocks at all, as you have more risk with no commensurate reward. Your entire analysis is based on the false views of dividends being like bond coupons, and pure index buy and hold equity investing returns (not even asset allocation trades).

I really want to believe you, so I can move all my stocks to TIPS
and sleep better at night, knowing I'll get the same return with less risk, but I don't think this is even close to true.

Can We Insure Against Systemic Risk?

Wed, 15 Jul 2009 13:53:37 -0400

All insurance is designed to protect against what is called idiosyncratic risk but can also suffer from system risks.

Take for instance your home owners insurance. The property insurers can easily withstand a single claim on a single home, but a hurricane can potetnially wipe out an insurer if enough damage is done, that's systemic risk. They used to price a policy considering the potential that YOUR home will be damaged, but they got smarter and started charging higher premiums if your home was in an flood zone, coastal area etc. Problem is, in financial insurance the persons at AIG needed to be able to identify such hot spots and charge appropriately. They didn't know, nobody knew how easily then entire real estate market could collapse. The closest we have come to this in decades was the S&L collapses of the early 90s when mainly real estate in Texas was affected. Once could price a policy differently for mortages concentrated geographically than one distributed, based on that bit of history, but when the entire country goes down the tube, yes, systemic risk impacts us all.

Let's hope there is no plague. Whomever is left living will criticize life insurers for not forseeing the potential that a very large % of policy holders would die in a short span of time ! If they considered that potential, you couldn't affort life insurance. In the end, our society is always backed by the govt, or not and then you end up with the great depression under Hoover.

Can We Insure Against Systemic Risk?

Wed, 15 Jul 2009 13:43:25 -0400

Acccording to Michael Lews (a prolific writer on Wall Street greed)
AIG went against industry practice and refused to post collateral to dealers when they first started trading CDS (selling insurance).
It is this lack of collateral obligation that allowed them to run amok writing unlimited amounts of insurance, they didn't need any collateral at hand to fund them. At some point they had to do it, but could only do so with govt help to fund the collateral payments to Goldman, etc.

Interesting read
www.vanityfair.com/pol...

On Jul 15 01:26 PM Gtarras wrote:

> Here are two major points nobody mentions:
>
> 1. AIG was brought down not by the REAL losses on these tranches,
> but by mark-to-market SWINGS. It was offering to post collateral
> through a mechanism called CSA, if prices went too far against the
> protection buyer. Other players like AIG (monolines), did not offer
> these margin posting service.
>
> 2. It is still not clear whether the real losses that AIG will suffer
> will be enough to wipe out its capital. For example, MBIA seems to
> be ok in this regard.
>
> The CSA offer from AIG was a suicide. Their exposures were close
> to $1 billion in each deal, with VERY ILLIQUID deals 5-8 years in
> maturity. With this type of setting, if a price on your tranche jumps
> from 10 bps to 100 bps, you get slaughtered. (they clearly thought
> it would not happen.)
>
> For example, if you sell 5y protection, $10 mill exposure on a liquid
> name and things go against you, i doubt you'd suffer that much.

>
> Thats the reason its critical that this systemic risk issue is brought
> up. NOBODY is big enough to withstand this type of hit (except the
> govt). Of course, there was a reason the banks wanted to unload these
> tranches- to free up capital. Easy fix would be to make changes in
> Basel to view these types of exposures as "capital light".

Are TIPS Still a Good Investment?

Tue, 14 Jul 2009 19:00:49 -0400

For smaller investors, I-Bonds are another alternative.
They used to be available in larger face amounts,
but if you go to treasurydirect.gov as suggested above,
you will see this option and can decide if $5k/year investment
is too small to bother (used to be $30k/year). Advantage
is you get inflation protection without wild swings in price nor
phantom income, like TIPS. If you must go with TIPS, buy in tax advantaged account to deal with the phantom income.

Key Asset Categories vs. Cash

Tue, 14 Jul 2009 08:36:27 -0400

So what is the conclusion from this data ?

Also, Junk behind cash ? Where did you get this data ?
My junk fund is way up.

Thoughts on Portfolio Construction and Diversification (Part 2)

Fri, 26 Jun 2009 08:50:23 -0400

Refreshing to see people writing about CEFs still.
ETFs are getting so much attention, but CEFs give the asset manager so much more flexibility to make long term investments (no shareholder redemptions). They also reduce taxable gains being realized due to shareholder activity and the tendancy of open end fund investors to buy high and sell low.
Also the best FI managers in the world all have CEF's trading, so no compromise on the asset management skills. Main downside is that fees tend to be high, which is a major factor in FI investing.
I'd only use CEF for lower credit quality (high yield, or even investment grade corporates - and these days munis). A fund buying TSY and GNMA would be overpriced in the CEF vehicle.

Tax Dollars at Work: Goldman Sachs to Pay Record Bonuses

Mon, 22 Jun 2009 10:07:09 -0400

Enough bashing the banks. If they do poorly, people complain.
If they do well, people complain. What should they do, just close the doors ? They are no Angels at GS but they are doing what they are supposed to do, make a profilt. They avoided heavy investment in sub prime and that's why they are still here to take advantage of the current voids in the marketplace. They are smart, and others are jealous of them. Would you prefer if they go under and there are more mass layoffs and another 40% stockmarket slide ?

Goldman Sachs' AIG Collateral Demands Behind Company's Implosion

Mon, 22 Jun 2009 09:43:35 -0400

Heaven, Hel, you are 100% correct. Anyone who doesn't
collect collateral to which they are entitled under derivative trading is negligent in their duties.

Goldman Sachs didn't get to where they are by being "good guys"
but that doesn't mean they shouldn't enforce contracts they signed.
In this case, these are commonplace type of contracts, nothing invented by Goldman.

Why the Government Doesn't Belong in the Municipal Bond Business

Mon, 11 May 2009 10:15:01 -0400

Another important question, if the fed guarantee munis, are they still to be considered tax exempt from federal income tax ? If not, this could have an offsetting effect. Borrowing rates/yields for municipalities would decrease with the guarantee, but increase when investors lose the tax advantage. Not sure whether the net effect is an advantage or disadvantage for munis at this point. Munis do pay much more than the feds to overcome the current credit fears, and if rates go low enough (as low as US TSYs), who will care what % you keep ?

High Yield Bonds Were a Good Bet After All

Thu, 07 May 2009 16:18:20 -0400

Regarding your comment "It also needs to be recognized that with stocks and bonds moving higher in tandem, the progress the markets are making is balanced and that is never a bad thing." The idea that bonds and stock are inversely correlated is an over simplifcation of the bond market. It's usually US Treasuries that tend to move the opposite direction, in a flight to quality from stocks or vice versa.
Corp bonds, particularly high yield, more often move in the same direction with equities, especially during a recession when credit fears dictate corp bond price movement. It is only in good times that people are selling corp bonds to by stocks, thinking they are missing out on outsized equity returns by holding bonds of the same corporations.

Not sure what you meant by that comment, but my strategy is to hold stocks and bonds all the time, but my bond portfolio tends to vary between corporates in bad times (when spreads are wide) and gnma/UST/munis in good times (when corporates are overpriced). PS munis, with the new realization that there is credit risk, are in a gray area between corporates and gov, but doesn't matter. Let the market sentiment dictate your allocation amongst bond sectors, buy whatever is cheap. HYG was cheap recently, and may still be so by recent standards, but it's not surprising it's come back with equities. And as equities pull back so will HYG.

Whither the I-Bond?

Tue, 05 May 2009 09:09:30 -0400

I own both E and I bonds, and use them as an alternative to a money market fund for my emergency stash. Considering there was mmkt fund that "broke the buck" in last few months, and others are having to raise expense ratios (to fund gov bailout of the mmkt funds) while rates have dropped to near zero, my portfolio of E and I isn't so bad.
I earn much more than a mmkt fund on my Es and yes lately almost (soon) zero on my I bonds. Still a better overall yield in combination than almost any mmkt fund, with no state taxes (if you care) and deferred federal taxes. No I am not happy about zero interest, but that was a known possible outcome when I bought them, and in the mean time my stock are climbing, as is often the case when rates are very low. Would you rather be earning a positive return on your emergency cash as last year, while losing 40% in your stock portfolio ? You buy I / TIPS for a specific purpose, no different than you buy life insurance hoping NOT to die,
we hope NOT to have massive inflation, but I own them just in case.
Those who bought inflation bonds 3-4 months ago (TIPS) did very well. Those who owned I bonds last year, are very happy they earned 1-2% for the year !

Stock vs. Bond Performance

Tue, 05 May 2009 08:58:10 -0400

Long term historical data, while not something to be ignored, is not something that should be the major factor in your investment decision making.
1) Do you really care about 100 years stats ? Are you investing
for the likely outcome in 100 years ?
2) Technology has changed the world forever. The pace of information transmittal, and the pace of wealth creation/destruction is much faster than even 20 years ago, much less 100.
3) And yes, regulations are not perfect now, but they are DIFFERENT, no disputing that. Anyone ever read about Teddy Roosevelt and the trusting legislation ? There were a handful of huge companies controlling most industry 100 years ago, and otherwise small family businesses/farms for less mature industries.
Now there are many small/med/large/gigantic global companies competing in many more industries. Far more competition than ever before.
4) The bond market in particular, has a very fast pace of innovation.
30 years ago came the first mortgage backed securities. 20 years ago the first "junk" bonds. More recently CDO/CLO/CMO/ABS/CDS
and the list will continue to grow. I can't believe that the relatively simple bond market of 100 years ago has ANYTHING to do with the bond market today. People actually "clipped coupons" (paper) to get their interest payments 100 years ago (even 30 years ago).

I think you need to consider human nature and the fact that the world is a cyclical place. Whatever is doing well, is soon overdone, overbought, and don't be the last guy in. If you buy Treasury bonds now, you are the last man in. If you buy junk, you have to know when to get out. I happen to agree junk and corporates in general are a good place to be now, but I will reconsider that decision once others come to the same conclusion, and take the profits. Diversification with some recognition that you don't need to own everything to be diversified, diversify amongst the reasonably priced choices base on last 10 years, not 100 years !

High Yield and Corporate Credit Spreads

Thu, 23 Apr 2009 13:33:11 -0400

Munis a good bet too, for your taxable account.
Same or better yields than tsy, but tax exempt and less
risk than corporates (though I own corporates too, just about any debt is better than US Tsy right now).