The Float

Fun with Exchange-Traded Funds

Last Thursday, Ian Salisbury's "Fund Track" item in the Journal included the following nugget:

There are 721 ETFs with about $478 billion in assets, according to the Investment Company Institute, a trade group.

That's a lot of ETFs.

So as we flipped through (i.e., recycled) some recently-arrived industry mags, we ran across the quarterly "ETF Reference Guide" put together by Research. That rapidly-expanding insert always seems to provide a few laughs. Here are our nominations for the funniest* ETFs in the marketplace, with award categories in bold and ticker symbols, expense ratios, and average daily trading volumes in parentheses. Data are through November 25, 2008. 

Shameless Name-Dropping
ELEMENTS Benjamin Graham Total Market Value (BVT; 0.75%; 164)

Cynical Exploitation of Something Genuinely Important (Unnecessarily Long Name Subcategory)
ELEMENTS Credit Suisse Global Warming Index ETN (GWO; 0.75%; 1,673)

Provocatively Indeterminate Fund Name
First Trust Nasdaq Clean Edge U.S. Liquid (QCLN; 0.60%; 26,452)

Obligatory HealthShares Nominee
HealthShares Diagnostics (HHD; 0.60%; 6,562)

Better Than Regressive Transportation
PowerShares Global Progressive Transportation Portfolio (PTRP; 0.75%; 445)

Not Necessarily Clinging to the Efficient Frontier
Claymore/AlphaShares China Small Cap Index (HAO; 0.70%; 54,856)

Taking a Bad Idea and Making It Worse
Claymore/Zacks Country Rotation (CRO; 0.65% 4,644)

Country-Specific Chocolate Yes, Country-Specific ETF No
iShares MSCI Belgium (EWK; 0.51%; 88,770)

Ticker Symbol Onomatopoeia (multiple winners)
First Trust Multi Cap AlphaDEX Fund (FAD; 0.70%; 4,818)
WisdomTree International Dividend Top 100 Fund (DOO; 0.58%; 41,933)
PowerShares DWA Developed Market Technical Leaders (PIZ; 0.80%; 27,030)

Dubious Ticker Symbol Expropriation of Ancient Cultural Concepts
Claymore/AlphaShares China Real Estate (TAO; 0.65%; 13,874)

Name That Will Not End
E-TRACS UBS Bloomberg CMCI Short Platinum ETN (PTD; 0.65%; 2,161)

Seemed Like a Good Idea at the Time
PowerShares Listed Private Equity (PSP; 0.60%; 99,265)

Pure Esoteric Delightfulness
Barclays Asian and Gulf Currency Revaluation ETN (PGD; 0.89%; 13,855)

We're written before on the silliness manifested in certain corners of the ETF universe (here, here, here, and here for example). That absurdity will continue, no doubt, but you might want to get your giggles in now. Given their trading volume, some of the winners listed above might not be around much longer.

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* On their investment merits, some of these are not irredeemably ridiculous. Some are. But for one reason or another, all of these struck us as funny. And in the midst of financial markets like these, we'll take funny where we can find it.

Source

Ian Salisbury, "New ETFs Bank On Social Themes," Wall Street Journal, January 8, 2009

Some Parades Need Rain

Back in those sweet, sweet college days, a small group of friends came up with a category of people we weren't terribly fond of.* We called 'em "parade rainers," and their crimes against our sensibilities typically took the form of finding something negative to say about, some set of caveats to offer concerning, some form of doubt or discounting to apply to somebody else's success. It was conduct unbecoming, we thought, and, preferring sun to clouds (in particular given our pacific northwest whereabouts), we didn't like to see negative energy crowding out the positive.

Those basic preferences still apply, but the fact is that not all parades are created equal. Many are richly deserved, serving to encourage and reinforce whatever good behavior combines with good luck to produce good outcomes. But some reflect more good luck than good behavior, and can actually reinforce bad behavior that appears (to almost everyone!) to correlate with good outcomes.

With that as a semi-philosophical backdrop, please read this, Justin Lahart's description of one observer who rained--not obnoxiously, but wisely--on a very big parade thrown for Alan Greenspan in 2005. (A free summary version of Lahart's account is available here.)

The key substantive point in Lahart's piece is that free market absolutism makes no more sense than other forms of dogmatic ideology. That's not to say that markets don't make more sense than other forms of economic organization. We certainly think they do, and we think whatever finishes second in that race finishes a very distant second indeed. But the totalizing ideology of markets, which tends to rise up just as market mechanisms are about to break down, tends to leave some serious--and, what's worse, unnecessary--destruction in its wake.

The ultimate irony here is that those best suited to defend markets are those most attuned to their limits and periodic failures.

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* Yep. That sentence ends in a preposition. We're over it. Many grammatical rules exist for good reason, and we'll defend those that do until last we type. But the no-preposition-at-the-end-of-a-sentence rule serves no identifiable purpose, does nothing to favor clear communication over muddled, and deserves polite but firm relegation to the dustbin of linguistic history.

Source

Justin Lahart, "Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party," Wall Street Journal, January 2, 2009

Diversification and Varieties of Risk Management

Kathleen Pender published an interesting piece in the New Year's Day edition of the San Francisco Chronicle. Pender's basic question is this: What good is diversification when pretty much everything lost value (and with relatively high correlations) in 2008?

Asking that question suggests a subtle-but-important misunderstanding of portfolio design and expectations thereof. Throwing volatile asset classes together (say, U.S. stocks, EAFE stocks, and BRIC stocks) can help smooth a portfolio's trajectory (as it did in the first years of this decade, when non-U.S. equities outperformed), but that smoothing is hardly a sure thing.

The fact is, sensibly risk-averse investors (as opposed to those who have become risk-averse* only in the aftermath of the last 18 months) can/should/must reduce expected short-term risk by adding high-quality fixed-income (i.e., treasuries notes and bonds) and cash-equivalents (i.e., treasury bills) to their portfolios. As it happens, those asset classes did hold up last year, which makes this passage from Pender's piece a little mystifying:

"Diversification is supposed to work, so that not everything goes down by the same amount. It didn't work (in 2008). If you were diversified or not, it didn't matter," says Jennifer Ellison, a principal with San Francisco money management firm Bingham, Osborn & Scarborough.

If asset managers and investors allowed themselves to believe that small-cap and non-U.S. equities provided some sort of safe haven...well, let's just say they earned last year's nasty bear market.

Some say diversification is the only free lunch in investing.** There's some truth to that. But when it comes to diversifying across asset classes with an eye to reducing volatility, the only way to make a meaningful dent in expected short-term risk is to reduce one's exposure to equities and equity-like assets. And the time to do that, for the vast majority of investors, passed by several months ago.

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* In a perfect world, we'd never see "adverse" used where averse belongs. Alas, that's a world we're unlikely to experience.

** In a former life, we copped a few actual free lunches courtesy of the Wall Street selling machine, but that's another matter entirely.

Source

Kathleen Pender, "Investors ask: Where did all that money go?" San Francisco Chronicle, January 1, 2009

SOAFOUG

Today's posts are like golf's silly season: At this late date, at the end of such a long year, we can only process trivia.

In our daily update from Investment News, we saw this headline:

Ex-Fidelity traders fined $1M for taking swag

That's a pretty hefty fine for accepting "stuff we all get." Wouldn't a better headline be "Ex-Fidelity traders fined $1M for taking soafoug"? Doesn't roll off the tongue quite the same, but that would be "stuff only a few of us get." Those few had it pretty darn good for a while. And now...the reckoning.

Markets and Ad Campaigns

It can't be easy making high-end corporate advertisements that relate to commodity prices in an era of wild price swings. An example: Exxon's ad where a soothing-sounding geoscientist voices the following:

One of the factors impacting* energy prices is growing global demand. And one way to put downward pressure on prices is to make more supply available.

He then goes on to tease us about the home-heating potential of his outfit's new method of unlocking natural gas from subterranean rocks.

All of which is fine and dandy. But let's not forget: Another way to put downward pressure on prices is to burst a speculative bubble with a massive, deflationary recession.

That doesn't make Exxon's method of natural gas extraction any less impressive (or so we assume, anyway). But with crude oil now trading in the low $40s, it does make this slick ad feel a little...last Summer.

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* Pedantic language thought of the day: "Impact" never has been and never should be a transitive verb.

Not Less...Fewer

Just because it's good. From The New Yorker...

Pedantic Language Post #2

A moment ago, we were subjected to an all-too-familiar error in usage, courtesy of CNBC's perfectly pleasant Sue Herrera (emphasis added in bold):

You know if you've been in gold lately, you know that that metal has literally been on fire.

We assume the problem with that formulation is self-evident. But just for kicks: Unless Herrera and her trader friends have roasted their gold something fierce, the yellow metal has decidedly not "literally been on fire."

Figuratively? Yes. Metaphorically? We'll give her that too. But literally? No.

Pedantic Language Post #1

This is the first in a new series of wildly off-topic and self-consciously pedantic items concerning grammar, usage, diction, punctuation, &c. We'll post on this topic when we feel like it, which is to say when we see something on television, in print, or online that strikes us as both (1) erroneous and (2) representative of some broader pattern of misuse.

Today's motivating item is the following CNBC chyron (emphasis on the error):

"E*Trade takes out ad in WSJ to ensure investors their money is safe."

The beauty of the English language is that we have different words for different concepts. For example, ensure means to make something (more or less) certain, assure means to make someone (more or less) certain, and insure means to provide some sort of guarantee against a potential loss, as in the business of insurance.

Example: "E*Trade moved to assure investors that their assets are safe by ensuring that the firm had set aside adequate loan-loss reserves. Fortunately, most individual investors' assets would be insured by the Securities Investor Protection Corporation."

Sadly, these words get mixed up all the time. To her credit, however, it sounded like Maria Bartiromo used "assure" instead of "ensure" in her voiceover.

Now back to your regularly scheduled finance material...

(And for old times' sake...Download Writing Tips--Spring 2003)