Is it time to re-enter the stock market?

[citizen k]

What etfs were you thinking of?

I am not sure... Havent looked into it in detail yet. I am very much leaning toward waiting until January.

I am tempted of emerging markets, my ETF of that kind was growing nice (like up 20-25% after 6 months) until I had to sell it to cover my forex losses 

That sucks. Were you buying on margin or something?

[Tamas]

What etfs were you thinking of?

I am not sure... Havent looked into it in detail yet. I am very much leaning toward waiting until January.

I am tempted of emerging markets, my ETF of that kind was growing nice (like up 20-25% after 6 months) until I had to sell it to cover my forex losses 

That sucks. Were you buying on margin or something?

Yes. Most embarassing is that it happened in a course of a couple of days and I flipped emotionally. GBP/JPY started to move much more radically than it usually does (yeah) and one time I  missed an insanely huge move I was waiting for a long time, because it happened during my 10 minutes drive home and because I thought I had no need to set a conditional buy order. And as a degenerate gambler I considered the missed opportunity for a HUGE profit as lost money and tried to nail a similarly lucrative trade and well I could not make it. But I think this experience burned out all the emotional attachments I have had for trading so it had its uses.

[Martinus]

Well, according to The Economist, various prominent bear experts are predicting another crash early next year, so from that perspective this is the worst moment to enter the markets.

[citizen k]

What etfs were you thinking of?

I am not sure... Havent looked into it in detail yet. I am very much leaning toward waiting until January.

I am tempted of emerging markets, my ETF of that kind was growing nice (like up 20-25% after 6 months) until I had to sell it to cover my forex losses 

That sucks. Were you buying on margin or something?

Yes. Most embarassing is that it happened in a course of a couple of days and I flipped emotionally. GBP/JPY started to move much more radically than it usually does (yeah) and one time I  missed an insanely huge move I was waiting for a long time, because it happened during my 10 minutes drive home and because I thought I had no need to set a conditional buy order. And as a degenerate gambler I considered the missed opportunity for a HUGE profit as lost money and tried to nail a similarly lucrative trade and well I could not make it. But I think this experience burned out all the emotional attachments I have had for trading so it had its uses.

Well, at least you learned from it. Another lesson might be to stay away from investments that are so volatile. I stick to plain vanilla equities, plan to hold for usually at least a few months unless something drastic occurs and use limit orders.

[alfred russel]

Well, according to The Economist, various prominent bear experts are predicting another crash early next year, so from that perspective this is the worst moment to enter the markets.

Various bear experts are always predicting a crash. Hence the adjective "bear."

[Richard Hakluyt]

Marti thought they meant something else by the term "bear" 

[citizen k]

What etfs were you thinking of?

I am not sure... Havent looked into it in detail yet. I am very much leaning toward waiting until January.

I am tempted of emerging markets, my ETF of that kind was growing nice (like up 20-25% after 6 months) until I had to sell it to cover my forex losses 

The Beauty of Currency ETFs
Don Dion
10/13/09 - 06:02 AM EDT

NEW YORK (TheStreet) -- WisdomTree Dreyfus Chinese Yuan Fund(CYB Quote) uses forward contracts to replicate holding foreign currency in many of their foreign currency ETFs.

Although forward contracts can be confusing at first, these funds are straighter forward than they appear and come much closer to matching their target than commodity ETFs. The Japanese yen and euro ETFs are the exceptions in that they hold short-term yen- and euro-debt.

I recently discussed the difference between commodity and currency ETFs after the Wall Street Journal published a confusing article on CYB.

Due to government restrictions and capital controls, and in some cases liquidity, WisdomTree uses currency contracts known as non-deliverable forwards, along with U.S. dollar denominated short-term government and commercial paper.

Besides CYB, there are several others, including the Brazilian Real ETF(BZF Quote) and Indian Rupee ETF(ICN Quote).

A forward contract is an agreement to exchange currencies for a given rate at a specific future date. It states at what price currency X will be exchanged for currency Y.

Interest rates are a major factor in determining this price and the best way to show this is with an example. Say the interest rate in Brazil is 10% and the interest rate in the U.S. is 1%. Also, two reals can be exchanged for $1 today, and the exchange rate in a one-year forward contract is the same. You have 1000 dollars.

If this were the scenario, you could exchange $1,000 dollars for 2000 reals today, and buy a forward contract to exchange reals back to dollars at 2-to-1 in one year's time.

You could then put your 2000 reals in a Brazilian bank, earn 200 reals interest, and one-year later, exchange them back for $1,100.

Since you locked in the exchange rate in the future, you were able to make a risk-free trade. Essentially, you put American dollars into a Brazilian bank for one year by completely eliminating currency risk. This is a textbook example of arbitrage.

Traders (now high speed computers) will execute these trades over and over until the risk-free profit disappears. The purchase of reals today will push up the spot price, such that $1 buys less than 2 real. The buying of dollars in the future will raise the future price of dollars. Investors will have to pay more for real today and get less in return when they switch back one year from now. In this way, the profit opportunity is closed.

Furthermore, interest rates could change to make the profit disappear. If everyone is switching from dollars to reals today, the U.S. interest rate may increase and the interest rate in Brazil may fall.

The benefit of these contracts is that they allow a foreign investor to approximate the return of a money market fund in a foreign currency, thanks to the implied yield that is calculated into the contract. In some cases, where arbitrage is easier to conduct, this gets very close to the actual rate of interest in a country.

Through August, almost every currency ETF in WisdomTree's lineup that was in existence before 2009 has outperformed the currency itself, thanks to the implied yields in the forward contracts.

Of course, that's not always the case. The Emerging Currency(CEW Quote), a basket of several emerging market currencies, hasn't had as much gain over the spot price due to negative implied yields on the Israeli shekel, Chilean peso, and Taiwan dollar. Traders expect those currencies to appreciate and have bid up the forward price. Currently, the CYB also has a slightly negative implied yield of 0.4%.

Finally, the forward contracts settle by an exchange of the difference in the value of these contracts. WisdomTree rolls these contracts monthly and uses five or six counterparties to minimize counterparty risk. WisdomTree charges 0.45% annually for the single emerging market currency ETFs and 0.55% for CEW.

The other major currency ETF issuer is Rydex CurrencyShares, which deposits the underlying currency with J.P. Morgan. Rydex's offerings are limited to the major currencies available to foreigners, so the only comparable funds are the WisdomTree Dreyfus Japanese Yen(JYF Quote) and CurrencyShares Japanese Yen(FXY Quote); WisdomTree Dreyfus Euro(EU Quote); and CurrencyShares Euro(FXE Quote). The returns for these ETFs have been similar; WisdomTree charges 0.35% versus 0.40% for CurrencyShares; CurrencyShares has hundreds of millions in assets in FXE and FXY versus about $10 million in EU and JYF.

Investing in currencies carries risk, and emerging market currencies carry more risk than average. Central banks are flooding the globe with currency to fight the financial crisis, and the chances of a major accident are not small. However, for investors who want to invest in emerging market currencies, the WisdomTree products work as advertised. You can check their holdings on the WisdomTree Website.

-- Written by Don Dion in Williamstown, Mass.

[Tamas]

Interesting, thanks!

[citizen k]

Are There Too Many ETFs?
Don Dion
11/10/09 - 01:34 PM EST

NEW YORK (TheStreet) -- The ETF industry continues to expand rapidly, as new products hit the market and issuers file for additional funds.

According to recent data from the National Stock Exchange, the number of listed ETFs has jumped 11 percent from 716 in October of 2008 to 796 in October of 2009.

Issuers have begun to target increasingly narrow regions of the market, looking to claim first-mover status. Investors can now buy the Oklahoma ETF(OOK Quote) or the Market Vectors Brazil Small-Cap ETF(BRF Quote), both launched in 2009, and access these specific locales.

Investor interest in ETFs seems only outmatched by the eagerness of issuers to launch new funds, and it is important to ask if we have come too far too fast.

Assets are flowing into many different regions of the ETF marketplace, but much of the money is concentrated in top funds. October NSX data states that more than $707 billion is invested in ETF funds.

Of that amount, more than $268 billion is invested in the top 10 largest ETFs. This group includes broad index funds like the SPDR S&P 500(SPY Quote) and iShares S&P 500(IVV Quote), commodity funds like SPDR Gold(GLD Quote), and emerging market funds like the iShares MSCI-Emerging Markets (EEM Quote) and Vanguard MSCI Emerging Markets(VWO Quote).

While the list of top funds confirms the dominance of issuers like State Street and iShares, it also underscores the importance of competition in the industry. EEM, which was launched in April of 2003, was considered the dominant emerging markets ETF in the wake of its release.

VWO, however, launched by Vanguard in March of 2005, is now a serious competitor in the emerging markets space. The ascendance of VWO's assets is a testament to the willingness of ETF investors to look for a bargain. While EEM has a 0.72% expense ratio, VWO charges just 0.27%.

This phenomenon is important to remember as new issuers like Schwab(SCHW Quote) enter the market with funds that sound familiar. Even though new funds may seem redundant, the competition has helped to push down costs for individual investors.

ETFs also thin their ranks through a powerful self-selection process. Funds that are not able to garner sustainable investor interest fold over time.

This process has been especially evident in the universe of exchange-traded notes. These products, which track debt instead of equity, were once heralded as the new ETFs. From October 2008 to October 2009, however, the total number of listed ETNs has dropped from 90 to 84.

Rather than focusing on the number of ETFs, investors should take care in choosing quality products for their objectives. Keep an eye out for portfolio balance and volume. The new influx of ETF products will be tempered by popularity, while helping to bring new ideas and lower prices to the market.

-- Written by Don Dion in Willliamstown, Mass.