ETF Update: Buy Opportunities, Bond Fund Yields, SEC Backs Off ETFs

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Includes: BEO, DTD, IEF, LQD
by: Tom Lydon

ETF Buy Opportunities

Research firm MarketGrader compiles the indexes that underly the Spa ETFs.

MarketGrader's latest fundamental research indicates that the U.S. market is largely oversold in the wake of volatility, reports ETF Express.

Buy opportunities exist in particular in the information technology and industrials sectors. MarketGrader 100, and equal-weighted fundamental index, offers investors to a basket of 100 top-rated U.S. equities according to the analysis of attractiveness of the 5,700 U.S. equities using 24 fundamental factors.

High growth characteristics at low price-to-earnings ratios are part of the grading process.

Relative to the S&P 500, the index is overweight in cyclical sectors and underweight in defensive ones, according to Neil Michael, head of quantitative strategies at Spa ETF. He says that the index is well-positioned to take advantage of any economic stimulus package and further interest rate cuts from the Federal Reserve.

Scouting For ETF Yield

ETFs have different ways of generating returns for investors, and one way is through bond funds. They buy a relatively static pool of securities based on an index, and they're attractive for the same reason other ETFs are: lower cost, because they lack an active manager.

Jack Colombo for Forbes shares his preferences in the world of ETF bond funds. Check out these bond ETFs:

  • iShares iBoxx Investment Grade Corporate Bond Fund (NYSEARCA:LQD): Yields 5.64% with an expense ratio of 0.15%.
  • iShares Lehman 7-10Yr Treasury Bond Fund (NYSEARCA:IEF): Yields 3.80% with an expense ratio of 0.15%; focuses on government bonds.
  • Enhanced S&P 500 Covered Call Fund (BEO): This new idea for a bond fund generates income by buying an index of stocks and then writing call options on them.
  • WisdomTree Total Dividend Fund (NYSEARCA:DTD): Pays 3.37% with an expense ratio of 0.28%; buys a portfolio of dividends paying common stocks and pay out the proceeds to shareholders.

In addition to Colombo's picks, a few other bond funds we track are currently residing above their trend lines (200-day moving average):

  • Vanguard Total Bond Market (NASDAQ:BND)
  • iShares Lehman 20+ Year Treasury Bond (NYSEARCA:TLT)
  • iShares Lehman 3-7 Year Treasury Bond (NYSEARCA:IEI)
  • iShares Lehman TIPS Bond (NYSEARCA:TIP)
  • iShares Lehman 1-3 Year Treasury Bond (NYSEARCA:SHY)
  • Vanguard Short-Term Bond (NYSEARCA:BSV)
  • iShares Lehman Aggregate Bond (NYSEARCA:AGG)
  • SPDR Lehman International Treasury Bond (NYSEARCA:BWX)

Less SEC Scrutiny Isn't So Bad

It seems like ETFs are having their chops busted a little these days.

Charles Jaffe for MarketWatch says the recent SEC ruling on the ETF approval process is bound to bring more funds to the market if it goes through.

The problem, Jaffe feels, is that most of those funds won't be worthy of investors' attention. The rules changes will lead to fund providers essentially throwing ETFs up and seeing what sticks in an already-crowded field of more than 600 ETFs. Many observers think that the number of ETFs could be doubled within a year.

It's a legitimate concern, sure, but we think it's an ultimately unfounded one. First, while the new rules would ease the exemptive relief requirements, new funds will still undergo scrutiny as they move through the process of registration, according to John McGuire, partner at Morgan, Lewis & Bockius LLP.

Yes, while the SEC may in some ways step aside, leaving investors to do their research - what else is new? It's what investors should be doing anyway, regardless of how much or little the SEC is involved.

Doing otherwise is a little like assuming that just because the FDA approved a drug, it's all right to go to town without considering how that drug fits into your life. What other drugs are you taking? What are the side effects of the drug you're considering?

Second, since when is choice ever a bad thing? Providers can launch all they like but ultimately, investors will decide what works and what doesn't. Funds that fail to pull in assets will be closed by responsible providers, while the successful ones will continue to grow. More choice keeps the spirit of competition alive and well in the market, while keeping costs in check.

Not every fund launched is going to be a success, but it's up to the investors to do some research and make sure the ETF they're eyeing has a place in their portfolio.