ETF Update: International REIT ETF, Mega-Caps, ETFs vs. Mutual Funds, All-ETF Portfolios, DIA's Ride

Includes: DGT, DIA, OEF, RWX, WPS, XLG
by: Tom Lydon

Here's a quick update on: International REIT ETFs, Mega-Cap ETF Strategy, ETF vs. Mutual Funds and All ETF Portfolios.

New Int'l REIT Index Could Save Sector

As domestic real estate investment trust [REIT] indexes decline steadily, the new international real estate-based exchange traded fund might be the sector's savior.

Barclays Global Investors launched the iShares S&P World ex-U.S. Property Index Fund (NYSEARCA:WPS) last week on the NYSE. WPS has an expense ratio of 0.48% that will put it in direct competition with the SPDR Dow Jones Wilshire International Real Estate ETF (NYSEARCA:RWX), which has an expense ratio of 0.59%.

ETF Guide reports that the underlying index is composed of companies involved in international property development, rental, management and investment.

The world mix includes Australia, Canada, Denmark, Germany, France, Japan, Hong Kong, Singapore, and the U.K. among others. This is the first international REIT ETF to complement the seven U.S. real estate iShares ETFs.

Mega-Cap ETF Strategy

Considering large caps have outperformed small and mid-cap stocks recently, investors might want to look at "mega-cap" stocks for their ETF portfolio. Megacaps generally have a stock-market value of at least $50 billion.

Although their gains are generally smaller than large-cap stocks, mega-cap stocks tend to remain steady through rough market times, according to Eleanor Laise for The Wall Street Journal Another benefit of mega-cap ETFs is that they tend to charge lower fees than typical ETFs. Some easy ways to access mega-cap stocks include:

  • DIAMONDS Trust, Series 1 (NYSEARCA:DIA)
  • SPDR DJ Global Titans (NYSEARCA:DGT)
  • iShares S&P Global 100 Index (NYSEARCA:OEF)
  • Rydex Russell Top 50 (NYSEARCA:XLG)
  • However, be careful to ensure you don't have overlapping megacaps in your portfolio. This can easily happen because the same huge companies within mega-caps are already within many ETFs. To avoid double exposure, investors might want to trade their traditional ETF that tracks the S&P 500 for one that tracks the S&P 100.

    In addition, mega-cap ETFs pose the risk that when one stock suffers within the ETF, it can greatly affect the ETF's overall performance. This is because mega-cap ETFs tend to be more concentrated in top holdings than their broader large-cap competitors.

    Consumer Reports on ETFs vs. Mutual Funds

    Consumer Reports has an excellent article comparing ETFs and mutual funds in its September 2007 issue. The following is a quick synopsis:

    ETF Pros

  • ETFs are typically cheaper than mutual funds because they cost less to operate. Mutual funds have a fund manager involved that must be paid; most ETFs passively track indexes.
  • ETFs tend to be more tax-efficient than mutual funds. Mutual funds make capital gain distributions at the end of the year that can give investors unpleasant, unexpected tax obligations.
  • ETF Cons

  • ETFs must be bought through a broker, and broker fees must be paid.
  • If investors invest or withdraw small amounts of money regularly, it can detract from their returns.
  • Some mutual funds are cheaper than ETFs. For example, the Fidelity Spartan International Index [FSIIX] has an expense ration of 0.1%. The iShares EAFE Index (NYSEARCA:EFA) has an expense ration of .35%.
  • All ETF Portfolios

    The allure of an all-exchange traded fund portfolio is appealing to many investors. With more than 500 different products available on the market, a well-diversified approach using only ETFs is possible.

    ETFs are popular with do-it-yourself investors and professional money managers alike. They like that the products can cut down "bleeding" during down times and amp up returns during market rebounds, reports Rob Wherry for The Wall Street Journal. Along with tax advantages and low costs, ETFs are based upon published indexes available in real time so investors know exactly what they're getting.

    An adviser can fill out a client's asset allocation plan where it's needed or plug small cracks in a portfolio with the narrowly-focused ETFs. ETFs hold multiple stocks, so it helps reduce the risk and volatility of a single stock pick. ETFs also can help investors get in and out of aggressive positions; they have no investment minimums or penalties for brief holding periods except brokers' fees. With flexibility like that, an all-ETF portfolio can bend to meet almost every investor's needs.

    DJIA ETF Roller Coaster

    Yesterday was a "V" kind of day for Wall Street and ETFs. The eagerly anticipated Federal Reserve report came yesterday saying the government will leave interest rates at 5.25%, despite market turbulence and credit and housing worries, reports Joe Bel Bruno for the Associated Press.

    The Fed indicated its continued concern about inflation, didn't express any greater anxiety despite recent credit problems.

    Markets were shaky yesterday, in anticipation of what the Fed might say. When the report was released, markets took a dive. However, once investors digested and accepted the Fed's statements it rallied in response. As the market made up the initial losses, it created a V-shape for the Dow Jones and its ETF counterpart DIAMONDS Trust, Series 1 (DIA).

    With all the problems in the housing market, iShares Dow Jones U.S. Home Construction (NYSEARCA:ITB) has been giving a notoriously negative performance, yet it turned up sharply yesterday-- up about 5.4%. Could the Fed's report be partly responsible for this? It will be interesting to see if ITB holds the recent surge.

    DIA vs. ITB 1 day chart:

    For full disclosure, some of Tom Lydon's clients own DIA and Tom Lydon is a board member of Rydex Investments.

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