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from Reuters Money:

Actively managed ETFs and other wrinkles

The following is an edited excerpt from Never Buy Another Stock Again: The Investing Portfolio that Will Preserve Your Wealth and Your Sanity, written by David Gaffen, who is the Reuters markets editor. It was printed with permission of FT Press, an imprint of Pearson.

One of the biggest growth industries in finance right now is in exchange-traded funds, and further growth in ETFs appears likely to come from several places.

Sector or country-specific ETFs and actively managed ETFs are likely to continue to be a growth area, along with perhaps a combination of the two (an actively managed ETF focusing on small-cap stocks, for instance).

The most popular sector ETFs are in natural resources and technology, although State Street, which sponsors the SPDRs ETF, has S&P sector ETFs for nine of the ten S&P sectors (telecommunications is the lone exception—it’s folded into another area); new ones continue to crop up.

For professional investors attempting to beat the market, they’re an ideal vehicle because they carry a relatively low cost and have tax efficiency, as David Kotok of Cumberland Advisors has pointed out. But John Bogle, in his book “The Little Book of Common-Sense Investing,” quoted (anonymously) a chief investment officer at an ETF company cautioning against “pin-pointed” bets on sectors, because they “still involve nearly as much risk as concentrated stock picks.” But that doesn’t mean they’re going to stop growing.

Like mutual funds, tech stocks, tech funds, and other hot investments that dominated the landscape for a time, the ETF world is turning into its own “app economy,” as Nicholas Colas, chief market strategist at BNY ConvergEx Group, puts it. This, by itself, is not necessarily a bad thing, but with more choices comes more confusion.

Another area where one can expect a growth spurt is in actively managed ETFs, first introduced by investor Harry Dent with his Dent Fund through AdvisorShares, which is now marketing other new actively managed exchange-traded funds. And so ETFs are starting to come full circle: While this is still designed for the same kind of tax efficiency and liquidity offered as most ETFs, now investors have the (supposed) benefit of active management—but the higher expenses to boot.

from Reuters Money:

Lazy portfolios win again in 2010

Those of you who diligently invest from reclining chairs with passive portfolios, rejoice! You had another good year without doing much of anything.

Not only did you get more out of life by not watching business TV channels, stock prices on your smartphone or fretting over the latest blip on Wall Street, you built up your retirement portfolio without much effort.

Those of you who thought you were smart and safe by piling all of your money into bond funds, turn off your TV. There's a better way.

One of the best approaches last year -- as in most years -- was to cover the major asset classes in one portfolio. This doesn't involve guessing whether stocks, bonds or real estate will be hot. You place almost equal amounts of money in every major category.

Craig Israelsen, who teaches finance at Brigham Young University, has a real lazy portfolio he calls "7-12." The concept is elegant: seven asset classes covered by 12 funds. He blankets nearly all of the U.S. and overseas stock and bond markets, real estate, commodities and a little bit of cash.

Over the past five years, the 7-12 has been among the best performing passive portfolios tracked by the online service MyPlanIQ.com, sporting a 13 percent return.

The 7-12 makes it simple by equal weighting most U.S. stocks and bonds (16.7 percent each) with smaller allocations to real estate, non-U.S. bonds and cash (about 8 percent each).

from Reuters Money:

The year’s best and worst ETFs

The best investments often don't have the highest returns. I know this is heresy to most, yet mass behavior can be a siren song.

About this time every year, we gaze intently at our portfolios, hoping against hope that we did something right. Sometimes we get lucky.

Two years ago, we didn't even want to open the envelope containing the bad tidings of the market meltdown. I kept my mutual fund statements sealed that year.

This year, there's some palpably good news to spread around, although it doesn't necessarily involve the best-performing investments.

Unfortunately, those who noted and invested in the best performers in ETFs recently are doing exactly the wrong thing. They are loading up in overheated funds when the general consensus is that this is the right thing to do. As previous market manias have proven, "the lemming effect" is something that millions of investors routinely forget or ignore.

Case in point are the sizzling returns of the most-popular ETFs this year. The iShares Gold Trust (IAU), with a three-year return of almost 20 percent (year-to-date as of Dec. 13), was one of the darlings of the precious metals crowd. The SPDR Gold Shares (GLD), iShares Silver Trust (SLV) and Powershares DB Precious Metals ETF (DBP) were not far behind.

As economic klaxons sound alerts about the troubled Euro and Dollar, investors have herded into precious metals with abandon. The SPDR Gold Shares fund alone has grown to more than $54 billion in assets.

from Reuters Money:

Coming soon: the loud thud of a gold bust

Some time in the future the price of gold will crash and it won't have a fairy-tale ending for the millions of investors who piled on in recent months.

If I could tell you when gold was going to bust, I'd likely be wrong or bigger than Warren Buffett, so I won't even try. Just be incredibly cautious now. There are too many signs that gold is frothier than a Starbucks cappuccino.

It's not that I don't nod in agreement when gold bugs rant about why their metal holds a special value now. The dollar is in deep trouble as the U.S. sinks deeper into debt. Will Portugal and Spain be the next Ireland on the bailout boulevard? Ben Bernanke may not be able to put a dent in U.S. unemployment or the intractable housing crisis.

And yes, I also know the argument on how gold is nowhere near its inflation-adjusted equivalent of its high in January, 1980. According to the Leuthold Group, gold will have to hit $2,400 an ounce to match the $850 high mark it hit in 1980 in real terms. That doesn't mean it will, of course.

Yet the back story of the world's financial insecurity isn't necessarily about gold being the last or only store of value. It just may be the most popular red herring at the moment.

One flaw in the "gold can still climb to $2,000" argument is that the last boom was due to the hyperinflation of the 1970s and early '80s. Everyone who is leery of the U.S. debt flooding the bond market is right to suspect that a new version of stagflation (no growth, higher prices) may be upon us.

Right now, though, we're in a deflationary mode. This "deleveraging" could go on for some time as demand for credit stays low and foreclosures continue to ravage the housing market. Home prices are still falling in some places and hot money has shifted to stocks and commodities because of record-low yields in Treasury securities and savings vehicles.

Vanguard plans UK target retirement date funds

US passive giant Vanguard is planning to bring its target retirement date products to the UK market to target the growing defined contribution (DC) pensions business.

Taking to Reuters at the Fund Forum, Tom Rampulla, managing director of Vanguard UK, said that the firm was currently trying to structure these long term savings products for the UK market, and looking to add key funds to support the offerings.

“We’re trying to construct a glide path and looking to add an inflation-hedge bond fund and a long-dated bond fund,” he said. A glide path describes the way an investor’s asset allocation changes over time as they near their target retirement date. For example, a younger investor might have more equity exposure than bonds, but move more of their savings into bonds as their retirement date nears.

Rampulla said that the DC market wasn’t huge yet in the UK but 80 percent of these DC assets are in the “default” option – generally a balanced fund which is concentrated in equities.

Although Vanguard didn’t initially set out to target the instistutional market in the UK, some 50 percent of its £800 million under management is in this segment, and Vanguard recently appointed David Plumstead to lead the institutional sales business.

It has already received commitments from pension funds, insurers and a Belgian multi-national with a UK retirement plan, with flows mostly into the equity index products.

Beyond the bond fund launches and the roll out of the target retirement date products, Rampulla said he was also looking to add Exchange Traded Funds (ETFs) to the UK range to help support its targeting of the fee-based adviser market.

Pensioners totter to the rescue

It may look like an unlikely scenario on paper, but Europe’s elderly masses could be about to provide the killer blow to draft EU rules to regulate the alternative investment industry.

Hedge fund associations, private equity lobbyists, the British government and even the United States Treasury have waded into the debate over the proposed legislation, seeking to soften an approach which has been labelled an exercise in post-financial crisis political grandstanding, rather than a measured look at how to better regulate the sector.

Now though, the pension funds have entered the stage, and their concerns will be far more likely to win over MEPs across the politcal spectrum.

The giant schemes have pushed more and more retirement money into alternatives as they seek to diversify their portfolios and find the kind of returns that can cushion the effects of pensioners — eventually you and I — living long enough to drain the coffers dry.

They have been stung into action by the possibility that their pursuit of profit to pay future liabilities could be derailed by measures likely to remove non-EU competition from the funds marketplace, while loading punitive additional expenses on the funds that remain. 

Hedge fund body Aima has clearly spotted the opportunity to ride on the coat-tails of a powerful ally and has rushed out estimates that Europe’s pension funds face a 25 billion euro hit. But they might want to cool their enthusiasm:

Pension funds have been constantly pushing for increased transparency from the hedge fund industry as their allocations increased, and are only protesting what they see as misguided regulation, not the concept of regulation itself. Should the retirement schemes succeed in forcing the tipping point which leads to changes to the draft, they will gain a powerful new bargaining tool and could even end up dictating the terms of a new era for a once secretive industry.