By Michael Johnston

Exchange-traded funds have burst on to the scene in the last few years, raking in hundreds of billions of dollars in assets and prompting a major shift towards indexing strategies in the process. ETFs have empowered financial advisors, registered investment advisors, chief financial officers, money managers, and retail investors to take greater control over their portfolios, pushing down fees and maxing out tax efficiency in the process. While ETFs appear quite simple on the surface, these securities can be quite complex. In order to get the most out of ETFs, there's a lot that investors need to know about the structure, opportunities, and limitations of these securities.

Below we outline just about everything you need to know about ETFs, from the basics to the more sophisticated aspects of these products.

1. ETFs Are Tax Efficient

One of the biggest advantages of ETFs is their tax-efficient structure; exchange-traded products generally maintain lower capital gains distributions than mutual funds thanks to the nuances of the underlying creation/redemption mechanism. Many mutual funds often trigger tax events when shares are redeemed-meaning that the remaining investors experience a tax event because someone else decided to sell their shares. When redemptions occur in ETFs they are done so "in-kind" and aren't considered sales. As such, these transactions don't trigger a taxable event.

It's important to note that the tax-efficient features of ETFs don't allow investors to skip out on their obligations; gains on positions in exchange-traded products will ultimately be taxed at the applicable rate. But the ETF wrapper gives investors more control over their tax situations, since most ETFs avoid incurring capital gains during the normal course of their operations.

Bottom Line: ETFs won't help you skip out on taxes, but they do give you more control over your obligations.

2. UITs vs. ETFs: Structure Matters

The exchange-traded product (ETP) umbrella includes a number of product structures, ranging from exchange-traded notes to true ETFs to grantor trusts and unit investment trusts (UITs). Many of the "first generation" ETPs are actually UITs-a structure that has a couple of peculiarities. First, UITs must fully replicate their underlying index, and they are prevented from lending out shares (which can be a source of additional income for ETFs). Second, UITs won't reinvest any dividends received by component companies-an activity that true ETFs can accomplish.
The S&P 500 SPDR(SPY) is a UIT, whereas the iShares S&P 500 Index Fund (IVV) and Vanguard S&P 500 ETF (VOO) are true ETFs. Because of the differences surrounding dividend reinvestment, SPY will generally lag slightly behind the true ETFs in bull markets and perform a bit better in bear markets. In other words, in some instances products such as IVV and VOO, which are true ETFs, might have some advantages over the ultra-popular SPY, which is actually a UIT.


Bottom Line: Pay attention to the boring details such as structure-they might have a big impact on returns.

3. Equal Weight ETFs Are Tilted Towards Small Cap

Linked to indexes that assign equivalent weightings to all component securities, equal weight ETFs have become increasingly popular in recent years as an alternative to market cap weighting. Proponents of equal weight strategies note that this methodology delivers better balance and can eliminate the tendency to overweight overvalued stocks that is built into cap-weighting. It is difficult to argue with the results of equal weighting; the S&P Equal Weight ETF(RSP) has consistently outperformed SPY over the last several years. But it is important acknowledge some of the biases in equal weight ETFs, and understand how those biases can impact performance in different environments.
Compared to a market cap weighting approach, equal weight translates into a tilt towards small cap and mid cap stocks. Doing so can increase overall volatility, which can be a positive in bull markets and a negative in bear markets. Equal weight can also have an "anti-momentum" bias resulting from the rebalancings, when the best performing components are sold off and the proceeds are used to purchase those stocks that have lagged behind recently. This delivers something of a contrarian strategy.


Bottom Line: Be sure to understand the biases introduced by alternative weighting strategies.

4. "Dividend ETFs" Don't Always Deliver Big Dividend Yields

Many investors have embraced ETFs as efficient tools for implementing a dividend-oriented investing strategy; the exchange-traded wrapper allows for cheap, low maintenance implementation of a rules-based dividend screen. With dozens of dividend-focused ETFs available to investors, there is no shortage of choices for buyers. It is important to note that not all "dividend ETFs" offer significant dividend yields, largely as a result of how these dividend ETFs are constructed and maintained.

Many dividend-focused ETFs prioritize consistency of payouts over magnitude of dividend yield. The Vanguard Dividend Appreciation ETF (VIG), for example, includes only companies that have increased their dividend for at least ten consecutive years. So component companies can have paltry dividend yields as long as the absolute dollar payout has been steadily increasing. There's nothing wrong with that approach, but it might not be appropriate for those looking to maximize current returns. It's important to look under the hood and fully understand the investment objective before piling in.

Bottom Line: There are many kinds of dividend ETFs out there; be sure to take a long, hard look at their criteria.

5. MLP ETFs Are A Bit Bizarre When It Comes To Taxes

Exchange-traded products (ETPs), a term that covers ETFs, ETNs, and other similar securities, have become tools for accessing a wide range of asset classes and investment strategies in the past few years. One growing corner of the market targets Master Limited Partnerships ("MLPs"), an interesting section of the domestic energy market that has the potential to offer both stability and significant current returns. There are now about a dozen MLP ETFs and ETNs with aggregate assets of $8 billion.

Investors considering any of these products as a way to tap into this market should do their homework, as there are some aspects to the combination of ETPs and MLPs that are somewhat confusing. Specifically, the structure used can end up having a big impact on the tax treatment of returns, meaning that the choice between ETF and ETN is in this instance a particularly important one. The details can be overwhelming, so here's a high level summary: Registered Investment Companies can have more than 25% of their portfolio in MLPs, so MLP ETFs are forced to make a C-corp election. The result is that products such as AMLP and MLPA accrue a deferred tax liability as the component securities appreciate, which can eat into returns over the long run. ETNs such as MLPI don't face that issue, though distributions made by MLP ETNs might be taxed at a higher rate than distributions from similar ETFs.


Bottom Line: When it comes to MLPs, ETFs may not give you the desired exposure.

6. Leveraged ETPs Come In Three Very Different Flavors

There has been a great deal of confusion in recent years over leveraged ETPs, with many investors failing to grasp the nuances of these products and the potential pitfalls associated with casual use. Another misconception about leveraged ETFs is that there is only one type. In reality there are three very different types of leveraged ETPs based on the frequency of reset, which has a huge impact on the risk/return profile:

Daily Reset Leveraged ETFs: These ETFs, which include the lineups from Direxion and ProShares, seek to deliver amplified results over the course of a single day only. At the end of each session, leverage resets and the fund sets out the next morning with another daily objective.

Monthly Reset ETPs: These ETPs seek to deliver leveraged results over the course of a month, meaning that the leverage resets only once every four weeks or so. Though the impact of compounding returns still exists in these products, it occurs much less frequently.

Lifetime Reset ETPs: There are now several ETNs that seek to deliver leveraged results over the term of the note-which can stretch for more than a decade. These ETPs are unique in that the effective leverage realized when establishing a position can be very different from the initial target-sometimes as much as 8x.

Bottom Line: The nuances of leveraged ETFs are extremely important in determining risk profiles.

7. Most Commodity ETFs Don't Offer Exposure To Spot Commodity Prices

ETFs have helped to democratize commodities by making this asset class more widely accessible to a wide range of investors. But some investors have failed to comprehend the opportunities and limitations of commodity ETPs-a misunderstanding that can lead to disappointment. It is absolutely critical for investors to understand that many commodity ETPs don't offer exposure to spot commodity prices. Commodity ETFs that utilize futures contracts generally won't move in perfect unison with spot prices for the underlying resources, and in many instances the differences can be significant.

Futures-based commodity ETPs are generally impacted by three factors:

1.Changes in spot price
2. Slope of the futures curve
3. Interest earned on uninvested cash

In many cases, point #2 above ends up being a major driver of performance, and can result in a major disconnect from a hypothetical return on spot over the long run. That doesn't mean that investors should stay away from commodity ETPs, but it does make it imperative that they understand the nuances of these products.


Bottom Line: It's important to understand the limitations of commodity ETPs; the vast majority don't track spot prices.

8. (Cap) Size Matters

Investors seeking international stock market exposure through ETFs often have an important decision to make: whether to use ETFs that are dominated by large cap stocks or those that focus specifically on small caps. The choice between these two can end up having a major impact on the risk/return profile realized. Generally, large cap stocks will be more stable whereas small caps can be more volatile but also exhibit greater long-term capital appreciation potential.

There are other factors to consider as well. For example, many investors view small caps as a way to establish better "pure play" exposure to the local economy. While large caps tend to be multi-national corporations that generate revenue around the globe, small caps depend more directly on local consumption.

Choosing between large caps and small caps can be tough as different types of stocks will perform better in different environments. Most major markets investors have the luxury of choice; be sure to take note of small cap products, and consider the potential benefits of using these funds as part of an international stock strategy.

Bottom Line: Not all international equity ETFs are created equal; there's a significant distinction between large and small caps.

9. Not All ETFs Are Cheap

One of the most widely cited benefits of ETFs is the cost efficiency relative to traditional actively-managed mutual funds. But ETFs are not homogeneous on the expense front; the range of the ETP universe spans nearly 200 basis points from products that cost as little as five basis points to those charging close to 2.0%.

Even for similar products, there can be significant differences in cost. For example, both EEM and VWO seek to replicate the MSCI Emerging Markets Index, but the former charges quite a bit more (0.67%) than the latter (0.20%). There are other examples as well; SCHZ has a significant expense edge on AGG (both are linked to a broad-based bond index) and IAU charges considerably less than GLD (though both hold physical gold).

This is a critical issue when deciding which particular ETF should be used to gain exposure to a desired market, and it illustrates the importance of doing the requisite diligence prior to investing in an specific ETF.

Bottom Line: To minimize expenses, it is important for investors to explore all their ETF options since there may be an alternative fund that is significantly cheaper.

10. Beware Of Commission Drag In IRA, 401(k)

While ETFs have a number of significant advantages over mutual funds - they generally offer lower fees as noted above, can deliver enhanced tax efficiency, and offer transparency that other vehicles simply do not - there are some disadvantages to the exchange-traded structure as well. One such disadvantage is the potential for "commission drag" when ETFs are used in certain retirement accounts. Most investors have to pay a fee or commission to purchase ETFs-just as they would when buying individual stocks. When making monthly or even bi-monthly contributions to an account such as an IRA or 401(k), forking over commissions to put that money to work can add up.

This concern isn't just related to IRAs and 401(k) plans; it can become an issue in an individual online brokerage account as well. Paying a $7 fee to establish a $100,000 position is a very small expense. But if you're paying that much on a $500 order, it can result in a significant increase in bottom line expenses and the effective expense ratio. This is particularly important when investors embrace a dollar cost averaging approach to investing where they buy a pre-specified amount of a security or basket of securities on a monthly, quarterly or annual basis  regardless of price. While this isn't an ETF-specific issue, investors must be cognizant of all of the costs associated with buying and maintaining any position in a security.

Bottom Line: Carefully monitor expenses when it comes to retirement; it can save you a lot in the long run.

11. You Don't Have To Pay Commission

If commissions to buy and sell ETFs sound like bad news to you, it might be exciting to know that hundreds of exchange-traded products are eligible for commission-free trading across a number of different platforms. Schwab and Vanguard both offer their lineups of ETFs free in brokerage accounts for their clients, which can help to lower the total expenses that come with maintaining an ETF portfolio.

Others have followed suit as well; iShares offers 30 of its ETFs commission-free through Fidelity, and all Global X and WisdomTree ETFs are commission free on E*Trade accounts. But perhaps the most comprehensive commission free ETF platform is maintained by TD Ameritrade; they offer more than 100 different ETPs without commission, covering a wide range of asset classes.

Below is a table showing where some popular ETFs can be traded commission-free:

Bottom Line: A number of funds are available to trade commission-free, which can help you effectively manage costs.

12. Market Orders Are A Bad Idea

It's been noted on countless occasions that ETFs trade just like stocks. That's generally a good thing; it means that investors can execute trades throughout the course of the day, as opposed to waiting until the closing bell to move into or out of a mutual fund position. But there can be drawbacks as well; ETFs change hands not at the NAV of the fund, but at whatever price clears the market and matches up a buyer with a seller. That introduces the potential to lose big on a trade; putting in big market orders to execute at whatever price is available can result in buying at a steep premium or selling at a discount.

Fortunately, the solution is both easy and free: limit orders. It's almost always a good idea to enter limit orders when executing an ETF trade in order to prevent you from executing at an unfavorable price and putting yourself in an early hole that can be tough to climb out of.

Bottom Line: Always use limit orders or you may end up with a sour trade.

13. ETNs Have Credit Risk

One increasingly common variation on the ETF is the exchange-traded note (ETN), a debt instrument whose returns are linked to the performance of a specified benchmark. There are some advantages to ETNs; they don't encounter tracking errors, and can represent an opportunity to enhance tax efficiency in certain asset classes. But there are some potential drawbacks as well. Specifically, ETNs are debt securities, and as such they expose investors to the credit risk of the issuing institution. That means that if the bank behind the note heads into bankruptcy, they may default on their obligations to investors. Admittedly, the likelihood of a bankruptcy filing from an ETN issuer is incredibly remote, but if the recent financial crisis taught us anything it's to never say never.

Unfortunately, these warnings are more than just hypothetical. Lehman Brothers, the now-defunct Wall Street giant that went belly up during the financial crisis, was once an issuer of exchange-traded notes.

Bottom Line: ETNs carry the potential to fold due to a problem with the underlying issuer.

14. Commodity ETNs Offer Tax Advantages

Though some investors are hesitant to use ETNs because of the aforementioned credit risk component, there are instances in which these products can deliver significant advantages over other structuresoften the case as ETNs can deliver cheaper, more efficient access to natural resources. The lack of tracking errors means that the slippage associated with rolling futures contracts is avoided, while the lack of a portfolio avoids brokerage commissions.

But the big opportunity lies in optimizing tax liabilities. Futures-based commodity ETFs such as DBC will be taxed at a blended rate of about 23%, and investors will have to pay taxes on gains annually regardless of whether the position was closed out. ETNs such as DJP will be taxed at the relevant capital gains rate, which can be 15% for holding periods over a year. Moreover, positions are only taxed when investors sell as opposed to on an annual basis.


12. Market Orders Are A Bad Idea

It's been noted on countless occasions that ETFs trade just like stocks. That's generally a good thing; it means that investors can execute trades throughout the course of the day, as opposed to waiting until the closing bell to move into or out of a mutual fund position. But there can be drawbacks as well; ETFs change hands not at the NAV of the fund, but at whatever price clears the market and matches up a buyer with a seller. That introduces the potential to lose big on a trade; putting in big market orders to execute at whatever price is available can result in buying at a steep premium or selling at a discount.

Fortunately, the solution is both easy and free: limit orders. It's almost always a good idea to enter limit orders when executing an ETF trade in order to prevent you from executing at an unfavorable price and putting yourself in an early hole that can be tough to climb out of.

Bottom Line: Always use limit orders or you may end up with a sour trade.

13. ETNs Have Credit Risk

One increasingly common variation on the ETF is the exchange-traded note (ETN), a debt instrument whose returns are linked to the performance of a specified benchmark. There are some advantages to ETNs; they don't encounter tracking errors, and can represent an opportunity to enhance tax efficiency in certain asset classes. But there are some potential drawbacks as well. Specifically, ETNs are debt securities, and as such they expose investors to the credit risk of the issuing institution. That means that if the bank behind the note heads into bankruptcy, they may default on their obligations to investors. Admittedly, the likelihood of a bankruptcy filing from an ETN issuer is incredibly remote, but if the recent financial crisis taught us anything it's to never say never.

Unfortunately, these warnings are more than just hypothetical. Lehman Brothers, the now-defunct Wall Street giant that went belly up during the financial crisis, was once an issuer of exchange-traded notes.

Bottom Line: ETNs carry the potential to fold due to a problem with the underlying issuer.

14. Commodity ETNs Offer Tax Advantages

Though some investors are hesitant to use ETNs because of the aforementioned credit risk component, there are instances in which these products can deliver significant advantages over other structuresoften the case as ETNs can deliver cheaper, more efficient access to natural resources. The lack of tracking errors means that the slippage associated with rolling futures contracts is avoided, while the lack of a portfolio avoids brokerage commissions.

But the big opportunity lies in optimizing tax liabilities. Futures-based commodity ETFs such as DBC will be taxed at a blended rate of about 23%, and investors will have to pay taxes on gains annually regardless of whether the position was closed out. ETNs such as DJP will be taxed at the relevant capital gains rate, which can be 15% for holding periods over a year. Moreover, positions are only taxed when investors sell as opposed to on an annual basis.

16. Currency Exposure Matters For Stock ETFs

Most investors looking to establish positions in international assets may not have a strong opinion on foreign currencies. But the reality is that exchange rate movements are one of the factors that impacts returns realized by international equities-and in some cases can be a significant driver of returns. For example, an appreciation of the euro relative to the dollar will boost the returns realized by U.S. investors with positions in euro-denominated securities; conversely, an appreciation of the greenback works against them.

For investors who want to avoid currency exposure in international stock positions, there are a number of products that use forward contracts to strip out any fluctuations associated with exchange rate movements: EAFE region (DBEF), emerging markets (DBEM), Japan (DBJP), and Brazil (DBBR).


Bottom Line: Take a close look at currency exposure in your equity ETF, as it can dramatically impact its performance.

17. Currency Exposure Matters For Bond ETFs Too

Just as currency exposure impacts investments in international stock markets, it can also have a potentially meaningful effect on fixed income securities. When evaluating potential positions in fixed income securities that are issued by companies outside of the United States, it is important to understand that the universe includes ETFs that target debt denominated in U.S. dollars and debt denominated in the local currency.

For example, EMB holds debt of emerging markets issuers that is denominated in U.S. dollars, and as such will not be impacted by exchange rate fluctuations. ELD and LEMB similarly hold debt from emerging markets issuers, but their holdings are denominated in the local currency. That means that appreciation of currencies such as the Indian rupee or South African rand will give an extra boost, while a depreciation relative to the dollar would hamper performance.


Bottom Line: The currency exposure in your fixed income ETF can dramatically impact its performance.

18. ETFs Can Close Down (But Don't Worry!)

The ETF lineup has grown at an impressive pace in recent years, with hundreds of new products beginning to trade every year. But closures of ETFs have been regular occurrences as well. Generally, ETFs shut down when they fail to generate significant interest from investors and drain cash from the company that offers them-think of it as a thinning of the herd.

It's important to note that an ETF closure doesn't mean your investment in the fund is disappearing; when ETFs close down they will gradually liquidate their portfolios and return the funds to investors. It may be a bit of an inconvenience from a tax planning and opportunity cost perspectives, but the announcement of a closure shouldn't be cause for panic.

Bottom Line: ETFs can shut down, but a cool and collected investor can easily maneuver this hassle.


19. Volume Does Not Equal Liquidity

When evaluating potential ETF investments, one of the first metrics that many advisors consider is the average daily volume of a fund. The reasoning relates to habits with trading stocks-and the concern that it may be difficult to establish or liquidate a position in thinly-traded ETFs.

When it comes to ETFs, historical interest is not always indicative of the liquidity of a fund. Because of the special creation/redemption mechanism that allows authorized participants to create new shares, ETFs are capable of what can best be described as "spontaneous liquidity" where new shares are created to help execute large demand. There are liquidity specialists such as StreetOne Financial or WallachBeth who can assist in executing tough trades; if you're concerned about poor execution, reach out to one of those companies.

Bottom Line: The process of creation makes all ETFs liquid, no matter what its volume may be.

20. Different Definitions Of Emerging Markets

Interest in emerging markets has climbed in recent years as investors have recognized India, China, and other developing economies as the primary drivers of GDP growth. If you're in the market for emerging markets exposure and are hoping to use ETFs to achieve it, it's important to recognize that not everyone agrees on the definition of "emerging." Index providers such as MSCI, which maintains the index behind the popular VWO and EEM, consider South Korea and Taiwan to be emerging and not developed. As such, these two economies account for about a quarter of VWO and EEM portfolios.

Dow Jones and organizations such as the IMF group consider South Korea and Taiwan to be developed, meaning that they aren't included in funds such as AGEM. You can judge where these two markets belong for yourself, and be on the lookout for a product that is consistent with your objectives.

Here's a quick way to decide for yourself; the following table shows four key metrics, per capita gross domestic product, literacy rate, life expectancy, and Human Development Index (HDI) scores:



Here's the same table with the country names filled in, revealing that South Korea and Taiwan are in many ways more advanced than one of the world's largest developed markets:


Bottom Line: Emerging markets have tangible requirements, observe and take note.

21. Cap Weighting Has Some (Potentially Serious) Drawbacks

The surge in use of indexing strategies and ETFs in recent years has increased scrutiny on the methodologies behind the construction and maintenance of such benchmarks. And some investors have expressed concern over inefficiencies baked into market capitalization weighting, the strategy that is behind many of the most popular equity ETFs on the market.

The biggest potential drawback with cap weighting relates to the link between the weight a stock is assigned in an index and its stock price; higher prices means a bigger allocation. That can translates into a tendency to overweight overvalued stocks and underweight undervalued ones-which can obviously create a drag on portfolio returns.

Bottom Line: Cap weighting is not always the best option; always consider alternatives.

22. (Most) Bond ETFs Don't Act Like Bonds

More and more investors have embraced ETFs in recent years as a tool for achieving fixed income exposure. But when using ETFs on the bond side of a portfolio, there are some important adjustments that must be made. For starters, most bond ETFs don't act much like bonds at all; they operate indefinitely and maintain a fairly stable duration. Individual bonds, on the other hand, see the interest rate risk decline over time and ultimately make a repayment of principal when the obligation matures.

There are, however, a number of "target date" bond ETFs that function more like individual bonds and feature an ultimate repayment of principal; products such as the BulletShares ETFs from Guggenheim and target maturity date muni bond ETFs from iShares can be useful tools for investors planning against future liabilities.

The following table shows several of the target maturity date bond ETFs:


Bottom Line: Fixed income ETFs do not always behave like bonds.

23. Not All ETFs Are Diverse

Part of the appeal of ETFs (and mutual funds) is the ability to immediately achieve diversified exposure to a basket of securities; it is far easier to purchase a single ETF than dozens or hundreds of stocks found within that fund. But when it comes to diversification, not all ETFs are created equal. Assuming that a potential ETF investment diversifies away any security-specific risk by holding a balanced portfolio could be a costly mistake.

One example is the Energy SPDR (XLE), which targets U.S. oil and gas firms. Exxon (XOM) and Chevron (CVX) combine to account for about a third of the total portfolio. In other words, the performance of those two stocks will go a long way towards determining XLE's returns. And XLE is hardly the only example of such a top-heavy portfolio; plenty of ETFs have big concentrations in a relatively small number of names.


Bottom Line: Always take a close look at the holdings of a fund; not all funds practice strong diversity.

24. Measuring Diversification: Depth, Balance

When attempting to determine just how diversified an ETF is, there are a number of metrics that can potentially be considered. Perhaps the two most useful and informative are depth and balance. Depth refers to the number of securities held by an ETF; the more individual holdings, the deeper the portfolio. Balance refers to how concentrated the portfolio is in the biggest positions-specifically in the top ten largest allocations. The smaller the weighting afforded to this group of securities, the more diversified the overall portfolio will be.

ETFdb.com compares the depth and balance of hundreds of ETFs with similar investment objectives; for example, a comparison of the various China ETF portfolios.

Bottom Line: There are several metrics to take into account when looking into diversification. Take note of them all.

25. TIPS ETFs Are Flawed

Investors seeking protection from a feared uptick in inflation tend to default to Treasury Inflation-Protected Securities, or TIPS, which are government-issued bonds whose principal adjusts with reported consumer price index (CPI). TIPS are extremely popular-as evidenced by the billions in ETFs such as TIP-but they might not be effective protections against actual inflation. The details of what can go wrong with TIPS are numerous and a bit complex, but it all basically boils down to the fact that these securities carry duration risk-which can be a recipe for disaster when interest rates start climbing.

The good news is that there are a number of other ETF options for protecting your portfolio against inflation, ranging from precious metals to short-term bonds to more sophisticated inflation-focused ETFs.

Bottom Line: TIPS ETFs are not necessarily the best funds for guarding against inflation.

26. Hedge Fund ETFs: Low Risk Investments?

One of the more impressive innovations in the ETF industry in recent years has been the development of index-based products that mimic strategies employed by hedge funds. From broad-based ETFs such as QAI to more targeted funds such as CSMA and MCRO, hedge fund ETFs have the potential to be extremely useful diversifying agents within traditional stock-and-bond portfolios.

There are, however, some misconceptions about exactly what hedge fund ETFs seek to accomplish. Many investors are under the impression that these securities take on a tremendous amount of risk with the goal of delivering huge returns. In reality, it's quite the opposite; hedge fund ETFs generally seek to deliver stable returns that exhibit low correlations with other asset classes.


Bottom Line: Hedge fund ETFs are not as risky as you think.

27. ETFs Can Offer Indirect Commodity Exposure

There are a number of exchange-traded products that offer cheap, efficient access to commodities, either by holding the physical resource (GLD) or a basket of futures (DBC). There are also ETFs that deliver "indirect" exposure to commodities through stocks of companies engaged in the extraction and sale of the resources, potentially delivering a more appealing way to access this asset class. Because the profitability of hard asset producers depends on the prices they are able to charge for their goods, there tends to be a high correlation between spot prices and stock prices.

There are dozens of ETFs in the Commodity Producers Equities ETFdb Category, including both broad-based funds such as HAP and more targeted securities focusing on everything from timber companies (CUT) to gold miners (GDX) to agribusiness stocks (MOO).


Bottom Line: Commodity exposure can be gained through equity tickers.

28. ETFs Can't Collapse

The last few years have seen a number of instances of ETF bashing-often by mutual fund companies who continue to see their market share being eaten away. One of the more ridiculous claims that for some reason gained credibility was the notion that exchange-traded products can suddenly collapse under a huge burden of short interest, leaving some investors with nothing to show for their positions.

The reality is that there are safeguards in place to prevent an ETF collapse; regulations on short interests ensure that nothing like that occurs. The intricacies of the explanation are pretty advanced, but the takeaway is very simple: ETFs can't collapse.

Bottom Line: No matter what you hear, an ETF will never collapse.

29. Low Volatility ETFs Are Powerful Tools In A Bear Market

In addition to offering access to a wide range of asset classes, ETFs have become increasingly effective tools for segmenting popular indexes. In particular, low volatility ETFs have seen a surge in popularity in recent years as tools for smoothing out the ups and downs of a portfolio by focusing on the individual stocks that tend to experience the smallest fluctuations in value.

Low volatility ETFs can be useful for scaling back risk exposure-perhaps in anticipation of a down period for stock markets-while still maintaining equity exposure. They might also be an appealing tool for structuring a long-term portfolio strategy; there is a case to be made that minimizing losses during bear markets is a key component of a winning long-term technique.



Bottom Line: Low volatility funds offer compelling results in bear markets.

30. Canada Isn't In EAFE ETFs

Canada is a dynamic economy home to a relatively strong, stable banking system, and has massive natural resource reserves that uniquely position it to thrive from the growing demand from emerging markets. But, believe it or not, many supposedly well-diversified portfolios overlook this economy entirely. That's because it isn't included in the EAFE region that is covered by funds such as EFA and VEA. Though investors generally think of the EAFE as broadly including developed markets outside the United States, it is actually gathering of developed economies that excludes North America.

For investors who want to include some exposure to our neighbors to the north in their portfolios, there are a handful of ETFs that specifically target Canadian stocks. EWC focuses on large Canadian stocks (with a tilt towards financials) while CNDA targets smaller companies.

Bottom Line: If you are looking for Canadian exposure, you won't find it in EAFE products.

31. Beware Target Retirement Date ETFs

Included in the ETF lineup are "one stop" products that offer an entire, diversified portfolio in a single ticker symbol. Some of these products even adjust asset allocations as investors age, reducing risk exposures as a desired retirement date approaches. While there are some potential uses for target retirement date ETFs, there are a number of pitfalls in these products as well.

For starters, the additional layer of fees can eat into returns over the long run. And, of course, making asset allocation decisions based solely on a desired retirement horizon is potentially irresponsible; factors such as income, spending habits, and risk tolerance should also be considered. Finally, many of these products appear to be dreadfully underweight in emerging markets, overlooking a potentially significant source of long-term capital appreciation.


Bottom Line: Target retirement date products come with their fair share of drawbacks.

32. Merger Arbitrage ETFs Let You Play Takeover Targets

ETFs have helped to democratize the business of investing, bringing previously hard-to-reach strategies to all types of investors and helping to level the playing field between individual portfolios and billion dollar institutions. One excellent example of that phenomenon is the introduction of merger arbitrage ETPs that seek to implement a strategy surrounding announced takeover targets. The idea is pretty simple: merger arbitrage involves buying up stocks of companies expected to be acquired in the relatively near future at a discount to what would be the ultimate deal price. If the deal goes through-which isn't always a certainty-investors capture the difference between their purchase price and the amount paid for the stock.

CSMA and MNA both offer access to this potentially intriguing strategy by providing immediate exposure to a basket of takeover stocks.

Bottom Line: Merger arbitrage funds employ a unique strategy to profit from takeover targets.

33. Long/Short ETFs Smooth Portfolio Volatility

Included in the lineup of ETFs is a growing number of long/short products that delivers market neutral exposure to investors. These ETPs essentially implement spread trading techniques, allowing investors to capture the difference in returns between two asset classes (which can be very similar or very different). There are a few potentially appealing attributes of long/short ETFs. First, these products are capable of delivering gains in any environment since they focus only on relative returns. Second, the market neutral portfolios maintained results in very low volatility, which can bring valuable diversification benefits to a long-term portfolio.

The current crop of long/short ETFs is extensive, including products that segment by size, beta, momentum, and various other factors.

Bottom Line: Long/short products can be used to dampen portfolio volatility.

34. RAFI Weighting Is Based On Four Factors

One of the more popular alternatives to market cap weighting that has popped up in recent years is a technique from Research Affiliates that involves determining what many see as a better indication of firm size. Rather than determining the allocation to a stock based on its price, RAFI weighting involves four "fundamental" factors: book value, revenue, cash flow, and dividends. There are a number of ETFs linked to RAFI indexes, including several from the PowerShares family. Some of these ETFs have delivered very impressive returns in recent years, thanks in large part to the unique weighting methodology.

Investors should note that there are some potential biases in RAFI weighting; the focus on dividends as one of the key metrics can result in a value tilt, while the focus on revenue can skew portfolios towards low margin or high debt companies.


Bottom Line: RAFI funds focus on book value, revenue, cash flow, and dividends when choosing their holdings.

35. Value/Growth ETFs Often Overlap In Holdings

There are dozens of ETFs that seek to break down the universe of stocks into two pools: value and growth. Investment strategies like these-that focus on a specific type of security-have been around for decades, and many investors have embraced ETFs as an efficient tool for bifurcating certain asset classes. But a look under the hood of some value and growth ETFs reveals that there can be considerable overlap between these products. Consider the iShares S&P 500 Growth Index Fund (IVW) and S&P 500 Value Index Fund (IVE); the former has about 280 holdings while the latter has about 370. Simple math tells us that many of the S&P 500 components are included in both ETFs-meaning they're classified as both value and growth stocks.

Rydex offers a suite of "pure style" ETFs that take the business of separating value and growth stocks a bit more seriously; RPV and RPG hold only the S&P 500 components that exhibit the strongest value and growth characteristics, respectively.

Bottom Line: There is a considerable overlap between what many indexes consider to be "value" and "growth" stocks.

36. Some ETFs Deliver K-1s

Certain exchange-traded products that use futures contracts are actually structured as partnerships, with investors as the partners in the entity. One ramification of that structure is the receipt of a Schedule K-1 that must be included in tax returns at the end of the year. While receipt of a K-1 is really not much of an inconvenience for individuals, some advisors handling dozens of clients may wish to steer clear of investments that will deliver these forms at the end of the year.

The ETFdb Screener includes a filed that allows investors to filter potential investments by tax form; those seeking to avoid a K-1 can easily identify any products that feature that complication.

Popular ETFs that deliver K-1s to investors include:

DB Commodity Index Tracking Fund (DBC)
DB Agriculture Fund (DBA)
United States Oil Fund (USO)
GSCI Commodity-Indexed Trust Fund (GSG)
United States Natural Gas Fund LP (UNG)

See the complete list using the "tax form" filter on the ETF screener.

Bottom Line:  A few ETFs distribute K-1s which can be a hassle come tax season.

37. Don't Always Rely On The 30-Day SEC Yield

When evaluating the current return potential of an ETF, investors are often confronted with a number of different metrics that quantify the distributions made historically. One of these is the 30-day SEC yield, which is useful because it is computed using a standard methodology across all providers. But there are a number of other metrics as well, some of which may offer better insights into the returns that can be expected:

Average Yield To Maturity: Discount rate that equates cash flows of holdings to market prices.
Distribution Yield: Annual yield that an investor would receive if the most recent distribution stayed constant moving forward.
12-Month Yield: Representative of the yield that an investor would have received had they held the ETF for the previous 12-month period.

Bottom Line: The 30-day SEC yield is not always the appropriate metric for determining income.

38. Dynamic ETFs Can Round Out Your Portfolio

Most ETFs offer what can be called "static" exposure, meaning that the asset class targeted remains constant over time (even if some of the components regularly change). There are also a handful of "dynamic" ETPs out there that alter their portfolio based on current market conditions. These products generally shift between high and low risk assets depending on metrics such as volatility, and as such they have the potential to deliver low cost, low maintenance access to compelling strategies.

Some of the dynamic ETFs and ETNs include:

Trendpilot ETNs (TRND, TRNM, TBAR, TWTI)
Barclays ETN+ S&P VEQTOR ETN (VQT)

Bottom Line: Dynamic ETFs can fill missing gaps in your portfolio.

39. Volatility Response ETFs Protect Against Sudden Highs and Lows

In a similar vein, Direxion now offers a suite of volatility response ETFs that adjust allocations to a target asset class (such as large cap U.S. stocks) depending on recently observed volatility in the underlying securities. When volatility is low these ETFs can go up to 150% long, effectively amplifying the exposure achieved. When volatility spikes, the allocation drops considerably to the risky asset (with proceeds put into cash). These ETFs can be intriguing alternatives to asset classes that are often core holdings in long-term portfolios, allowing for a cheap way to implement what could otherwise be a very time consuming and costly rebalancing. Here are a few examples of volatility response ETFs:

Direxion S&P 500 RC Volatility Response Shares (VSPY)
Direxion S&P 1500 RC Volatility Response Shares (VSPR)
Direxion S&P Latin America 40 RC Volatility Response Shares (VLAT)

Bottom Line: Volatility response funds can help protect you from sudden spikes and equity losses.
40. AGG And BND Are Not True Total Bond Market ETFs

AGG and BND are by far the two most popular ETFs in the Total Bond Market ETFdb Category. Their inclusion there, however, might be a bit misleading, since these funds really only offer exposure to a narrow segment of the global bond market. Many investors use AGG and BND (or similar products) as the bulk or entirety of their fixed income portfolios, which certainly keeps things simple. But that also delivers a very limited portfolio that overlooks other key segments of the global bond market entirely.

AGG and BND don't include any international debt or junk bonds, and also maintain a heavy tilt towards Treasuries. Investors looking for a truly global bond portfolio will have to put in a bit more effort ETFdb Pro Members Only; AGG and BND can be a great core holding, but they are certainly not a all-in-one solution for fixed income exposure.



Bottom Line: Contrary to popular belief, AGG and BND are not all-encompassing fixed income funds.

41. Beware Premiums When Creations Halt

ETFs generally trade at or very close to their net asset value (NAV) as a result of the arbitrage opportunities related to the underlying creation/redemption mechanism. If prices deviate too significantly from the value of the underlying securities, an Authorized Participant will step in and secure an arbitrage profit to send prices back in line. But in some cases, significant disconnects between an ETF's price and its NAV can develop-often when there is some disruption in the market for the underlying securities. Keep an eye out for big premiums or discounts in exchange-traded products; getting in on the wrong side can end up significantly hurting your results.

There are a number of real life examples of trading disruptions or regulatory concerns causing significant premiums in ETFs. The United States Natural Gas Fund (UNG) has traded at a premium of as much as 20% in the past when creations were halted due to crossing trading limits. In 2011 the Egypt ETF (EGPT) traded at a big premium after a revolution in the African country shut down the local stock market for weeks. And in 2012 a 2x Leveraged VIX ETN from VelocityShares (TVIX) was trading at a big premium after Credit Suisse halted creations.


Bottom Line: Beware of trading funds when creations halt; you could be setting up for disaster.

42. Ex-Sector ETFs Avoid Troubled Sectors

Most investors looking to generate alpha spend the bulk of their time seeking out asset classes that are positioned to outperform. But in many cases, alpha can just as easily be derived by what your portfolio excludes; steering clear of troubled asset classes can be an efficient way to beat the markets. This is especially true from a sector perspective, as there are often significant gaps between the various segments of the global economy.

For investors looking to avoid the financial sector, WisdomTree offers a couple of potentially interesting products. DTN and DOO offer broad exposure to U.S. and international markets, but avoid banks and other financial institutions. In 2011, these ETFs crushed comparable products that include financials, demonstrating the power of "ex-sector ETFs."


Bottom Line: Ex-sector funds can help you avoid sluggish segments of the economy.

43. Some Well Kept ETF Secrets

With more than 1,400 exchange-traded products now available to U.S. investors, it can be challenging to keep track of all the new additions and innovations hitting the market. Investors, as creatures of habit, tent to gravitate towards the funds that have been around for the longest period of time or those that have built the most substantial asset bases.

As a result of these biases, some of the most useful and cost efficient exchange-traded products can fly under the radar for long periods of time, largely ignored by investors in favor of better known ticker symbols. A few of what we consider to be the best kept secrets in the ETF universe include:

Focus Morningstar US Market Index ETF (FMU): This ETF should be very appealing as a core holding in long-term portfolios; FMU offers exposure to more than 1,000 U.S. stocks across all sizes and industries. And it does it at the lowest price point of any ETF; FMU charges just 0.05% annually, and can be traded commission-free on Scottrade. This ETF should have a lot more than $17 million in assets.

UBS Bloomberg CMCI Gold ETN (UBG): Though far less popular as a tool for accessing gold than IAU or GLD, this UBS ETN might be the most efficient tool for that job. That's because of the favorable tax treatment investors can get when using an ETN to invest in precious metals; whereas physically-backed funds such as IAU and GLD are taxed as collectibles-a 28% rate-long-term capital gains in UBG are taxed at just 15%. That's a huge difference that gives this note the edge in bottom line returns in many cases. Yet UBG represents only a small portion of total assets.

Madrona Forward Global Bond ETF (FWDB): This actively-managed ETF represents a way to gain truly global, broad-based bond exposure through a single ticker. Unlike many ETFs in the Total Bond Market ETFdb Category, FWDB includes junk bonds, international bonds, preferred stock, Build America Bonds, convertible bonds, and preferred bonds in its portfolio. In other words, this ETF casts a considerably wider net than products such as BOND, AGG, and BND, which focus primarily on high quality U.S. debt.

Bottom Line: There are a number of lesser-known products with compelling investment strategies.

44. An ETF's Name Doesn't Always Match Its Holdings

Quite simply, investors should never judge an ETF by its cover. For most funds, the name gives almost all of the relevant details. But in some cases, titles can be deceiving. There are countless examples in the ETF lineup. Many small cap ETFs have big allocations to mid caps. The SPDR S&P Middle East & Africa ETF (GAF) has about 90% of its portfolio in one country. The list could go on and on. Take advantage of the transparency of ETFs before investing, and make sure the portfolio is consistent with your objectives.

Bottom Line: A name does not make an ETF; always look closely prior to investing.

45. China Bond ETFs Offer Emerging Market Exposure

A relatively recent innovation in the fixed income space, there are now a number of ETFs available to U.S. investors that tap into the Chinese bond market. These products are potentially very useful tools, allowing access to a previously inaccessible market. There are a number of nuances surrounding these China bond ETFs that are worth considering before you invest. Specifically, these ETFs generally include significant allocations to Western companies that have elected to issue debt in the Chinese currency, and many don't offer the huge yield potential that some investors might expect. Dive in and take a closer look at these ETFs before investing.

Bottom Line: China bond ETFs can offer vital emerging market exposure.

46. Bond ETFs Have Allocation Concerns

Though bond ETFs have become increasingly popular in recent years, a decent number of investors are still hesitant about the idea of combining indexing strategies with fixed income. The biggest concerns about bond ETFs relate to the methodologies used in the underlying indexes and the potential inefficiencies in these techniques. Specifically, most bond indexes tend to give the largest allocations to the biggest debt issuers. The result: the companies behind the most substantial debt burdens will be effectively overweighted in any ETFs linked to those indexes.

There are other concerns about fixed income ETFs as well. It becomes relatively easy to front-run many bond indexes since it is possible to know in advance when ETFs must sell out of certain securities that will no longer fall into the "eligibility window." Moreover, there are additional concerns over the impact of transaction fees in high turnover fixed income ETFs.

Bottom Line: A number of investors carry valid worries concerning bond ETFs.

47. Fundamental Bond ETFs Address The Weighting Problem

While the vast majority of fixed income ETFs are similar in the manner in which weightings are determined, there are now some products on the market that take a completely different approach to the matter. Instead of determining weight based on outstanding debt burden, some newer ETFs determine allocations based on fundamental metrics such as cash flow, return on assets, interest coverage, and current ratio. The result is a shift towards higher quality securities, since issuers with the greatest likelihood of being able to cover their debt obligations tend to get a heavier weighting.

Fundamental bond ETFs include:

SPDR Barclays Capital Issuer Scored Corporate Bond ETF (CBND)
Fundamental High Yield Corporate Bond Portfolio (PHB)
Fundamental Investment Grade Corporate Bond (PFIG)

Bottom Line: Fundamental bond ETFs can solve the issues that many have with traditional fixed income funds.
48. Country-Specific ETFs Are Impacted Beyond Their Borders

In an increasingly interconnected global economy, isolating exposure to a desired region can be a tricky task. The Spain ETF (EWP) serves as an interesting example of some of the potential complications. The two largest holdings of that fund are telecom giant Telefonica and banking firm Banco Santander (the two stocks make up about 40% of the portfolio). While headquartered and listed primarily in Spain, both of those companies have significant operations in South America-specifically in Brazil. While Spain accounts for a big chunk of revenue as well, almost all of the growth comes from Brazil and neighboring economies. In other words, the Spain ETF can be impacted more significantly by development across the Atlantic than in changes in Spain's local economy.

There are a number of other examples of a similar phenomenon among international equity ETFs; in many cases, a substantial portion of holdings will derive revenues and growth from some place other than their home country.

Bottom Line: Not all country ETFs maintain a disciplined focus; proceed with caution.

49. Factor ETFs Target Specific Characteristics

Though the most popular equity ETFs out there are generally of the "plain vanilla" variety, interest in more targeted and precise products has been steadily increasing. One area of particular interest is "factor ETFs," products that offer targeted exposure to stocks exhibiting characteristics such ashigh volatility, low beta, or high momentum.

For the most part, the strategies underlying these factor ETFs are nothing new; investors have been implementing these techniques on their own for decades. But the combination with the ETF wrapper gives investors a way to achieve low cost, low maintenance access to a technique that could otherwise be time consuming and expensive. Think of factor ETFs as a fund manager in a box-except with a much, much lower price tag.


Bottom Line: Factor ETFs provide unique exposure at a low cost.

50. Expense Ratios Are Not The Only Expense

When comparing potential ETF investments, one of the easiest metrics to examine side-by-side is the expense ratio charged. While this value certainly provides some insights in the cost efficiency of a product, it isn't a bottom line measurement of the cost of investing in an ETF. The commissions charged can also be significant depending on individual circumstances; minimizing or avoiding those fees can be one easy way to keep costs in check. There are other fees that are difficult to quantify exactly, including the cost of bid-ask spreads when moving in and out of a position.

It should also be noted that some ETF expense ratios don't include the costs associated with rebalancing the portfolio. For some futures-based products those fees can add up and represent a meaningful expense that isn't included in the indicated expense ratio.

Bottom Line: Some ETFs carry fees beyond the face value of their expense ratios.

51. Invest In The U.S.A. With Build America Bond ETFs

Perhaps one of the longest lasting reminders of the American Recovery and Reinvestment Act of 2009 will be Build America Bonds, a type of fixed income investment that had a limited life span but became quite popular with investors. Though the Build America Bond program wasn't extended, these securities will be around for a couple more decades since many were issued with maturities in excess of 20 years.

Build America Bonds were conceived to help cash-strapped state and local governments access financing to complete important projects during the recent recession, and about $180 billion of these securities were issued in 2009 and 2010. Build America Bonds are slightly different from traditional muni bonds in a few ways-perhaps the most significant of which is that the interest payments are not tax deductible. Rather, the interest payments on the bonds are effectively subsidized by the U.S. Treasury, allowing this type of debt to be issued with an attractive interest rate that won't cripple the issuer. The result can be a fairly attractive yield for investors with limited risk.

There are currently three Build America Bond ETFs, each of which features a similar portfolio:

PowerShares Build America Bond Fund (BAB)
SPDR Nuveen Barclays Capital Build America Bond ETF (BABS)
PIMCO Build America Bond Strategy Fund (BABZ)

Bottom Line: Build America bonds can be a good way to invest in the strength of the United States.

52. ETNs Mature

As mentioned above, ETNs have several nuances that make them unique exchange-traded tools. As debt instruments, they exhibit credit risk from their underlying issuer, and like any debt, ETNs mature. Sometimes the maturity date is spelled out for you in the name of the actual ETN, but often investors are largely unaware that they are investing in a temporary instrument. Before buying into an ETN, you should always check the fact sheet as it will give the day and year on which the ETN matures.

The process of an ETN reaching its end is less scary than it sounds. It is similar to an ETF closing, but without all of the panic and desperation. Upon maturity, the ETN will simply return the cash back to investors, assuming that the issuer is still solvent enough to pay out. Note that traders and investors alike may still get spooked on or around the maturity date so it is always a good idea to closely monitor your holdings as their investment life comes to an end.

Bottom Line: ETNs will eventually mature so take that date into consideration prior to investing.

53. Commodity ETFs Have An Energy Bias

When it comes to commodity investing, many investors commit the sin of energy bias, whereby the majority of their commodity holdings fall under the umbrella of an asset like crude oil or natural gas. To be fair, energy products are among the most popular in the commodity world, but exhibiting a bias towards these investments can have some adverse effects on your portfolio. Energy products are quite often highly correlated to the movement of general markets, meaning that they will move closely in line with something like the S&P 500. One of the main reasons that commodity exposure is essential to a portfolio is the low correlation and diversification benefits that these investments offer. An energy-heavy portfolio will likely only steepen your losses on bad days which may not be enough to be erased by days in the black.

Energy investments are obviously very important; the majority of these commodities offer relatively inelastic demand because we cannot survive without them in our daily lives. But with these futures and products being particularly volatile, committing a bias may only hurt you in the long run. Instead, it is important to remember to keep vital energy holdings in check with other commodities like precious metals or softs. This way, a portfolio will still reap all of the benefits offered from energy, but will also gain the diversity of commodities tied to vastly different price drivers that offer sometimes zero correlation to major benchmarks.



Bottom Line: So-called broad commodity ETFs have a tendency to overweight exposure to the energy family.

54. Commodity ETFs: New Strategies Now Available

First generation commodity products generally consist of ETFs or ETNs that track front-month futures on their respective underlying commodity. While this was a nice start, the pitfalls of this strategy were quick to emerge, calling for a new kind of exchange-traded product to offer safer exposure to the commodity space. One of the biggest pitfalls of the front-month strategy comes from contango, which can erase a fair amount of value based on the fund's automated monthly roll process that would invariably sell low and buy high in a contangoed environment.

Now, there are a wealth of other options that aim to erase or avoid contango altogether; one of the most intriguing products is the United States Commodity Index Fund (USCI). This fund marks the third generation of commodity products, as it employs a unique strategy that was the first of its kind. Each month, the fund chooses 14 futures contracts from a basket of 27, creating a unique portfolio with automated commodity diversity. For those looking to play the commodity space through an exchange-traded structure, this may be one of the most compelling long-term strategies.

Bottom Line: Some of the newer commodity ETFs allow you to avoid contango, which can help improve your bottom line returns over the long-haul.

55. Bigger Is Not Always Better

One of the most common mistakes ETFdb Pro Members Only an investor makes when entering into an ETF trade is assuming that a fund with a large asset base is the best choice available. While a healthy AUM typically points to a solid investment thesis, it may also be due to a number of other factors like age. Some funds have simply been around longer than others, allowing them to attract more assets in the first place. When it comes time to look for a new ETF, if two products have similar strategies, chances are you are going to pick the fund with more assets as it seems like a logical indicator of the strength of a particular product.

One of the best examples of this pitfall comes from the FTSE China 25 Index Fund (FXI). The fund has just 27 holdings with the top ten receiving more than 60% of total assets. This makes for a generally non-diverse product, the exact opposite of what most ETF investors look for, but because FXI has been around since 2004, it was able to garner a fair amount of assets which had a snowball effect for the future. There are a number of better options for Chinese exposure, but you have to be willing to look for them. This example can be generalized to the industry as a whole, as this same mistake is made with countless other asset classes and investments. As a good rule of thumb, you should always explore similar funds, despite their size, prior to investing.

Bottom Line: Total assets under management should not be the only factor you consider when making an investment decision between products from the same category.

56. Infrastructure ETFs: Playing An Inevitable Trend

Emerging market investing has become a staple for any long-term portfolio, as the growth that these economies can potentially offer has been far too enticing for most investors to pass up. As these respective nations begin to develop and expand, there is one inevitable trend that will emerge: infrastructure. With soaring populations, increased urbanization, and rapidly developing economies, a solid infrastructure is a must.

There are now a number of ETFs to play the developing infrastructure of several emerging markets, and it seems likely that this number will only grow in coming years. For the time being, investors can make a play on this important sector for India with INXX, Brazil with BRXX, and China withCHXX, as well as a more general emerging market base with EMIF.

Bottom Line: Infrastructure ETFs can be a useful tool for tapping into the trend of increasing urbanization across the globe.

57. Ex-Japan ETFs: Powerful Tools

The Japanese economy was once a powerhouse of the world with seemingly limitless potential. But recent years have watched the economy fall into the doldrums as the Asian economy has struggled for the better part of three decades; the benchmark Nikkei index is about 75% below its all time high set in the early 1990s, as the country has failed to generate meaningful GDP growth and maintain a thriving export market. More recent issues like the Fukushima disaster and a struggling yen have maintained the heavy pressure on this economy.

There are a number of ETFs that offer exposure to Asia, but the vast majority of them grant a fair amount of exposure to Japan; something that many investors wish to avoid in the current environment. The need to avoid Japan has led to a number of powerful tools that eliminate Japanese exposure altogether. Investors looking to maintain Asian exposure without the stagnant Japanese economy will find ETFs like AAXJ, AXJS, PAF, and EPP helpful (note that there are more choices where those came from).

Bottom Line: Ex-Japan ETFs can help you avoid a sluggish corner of an otherwise booming Asian economic region.

58. ETFs For A Sideways Market

Markets trending downward can be a hassle, but markets that fail to establish any trend at all can be even more frustrating. Establishing an effective position in sideways markets can often be a tall order, as very few vehicles can actually post a profit while stocks remain in stasis. But while the options may be few and far between, there are a number of ETFs with investment methodologies that take advantage of horizontal trends.

XIV is an inverse VIX product that is able to prey on sideways markets, as volatility tends to stay flat during such environments and flat volatility will still allow XIV to profit due to the nuances of VIX contracts. Another option is PBP, a BuyWrite fund that preys on flat markets due to the nature of its investing strategy. Investors should also check out BDCL, as well as a number of spread ETFs like FSE and FSG.

Bottom Line:  There are a number of ETFs designed to generate positive returns even when markets are dragging sideways.

59. Commodity ETFs Can Be Front Month or 12 Month

As discussed above, contango can be a nasty issue for commodity ETFs, but it is unavoidable for some based on their strategies. First generation commodity products hold front-month futures contracts and execute an automated roll process which sells out of that contract and buys into the nearest maturity contract of the same commodity. This causes the fund to lose value in a contangoed environment as the fund is essentially selling low and buying high.

Some funds, on the other hand, use a 12-month futures methodology, which helps to alleviate some of these concerns. These ETFs hold contracts in the next 12 contracts available at once. Their automated roll process involves selling out of the front-month contract, but then buying into the 13th month, if you will. This helps to avoid contango as prices and patterns often look vastly different depending on how far out a contract matures. For those wondering how this strategy works out, look at a comparison of UNL (12-month natural gas) and UNG's (front-month natural gas) performances over recent history.

Bottom Line: Make sure to look for differences in the roll process when comparing seemingly similar futures-based products.

60. Targeted ETFs Aren't Always Pure Plays

Many of the most recent additions to the ETF lineup have been extremely targeted products that focus on very specific corners of the global stock market; examples include funds targeting smartphones, cloud computing stocks, and social networking companies. These ETFs can have the potential to be powerful tools for isolating a very specific type of exposure. But they can also be less effective at delivering the exposure desired than one might imagine.

In many cases, the universe of publicly-traded companies engaged in such a narrow range of operations is limited; for example, there are few stocks whose operations are focused exclusively on cloud computing. In these instances, creating an ETF involves expanding the definition quite a bit. That's why the Cloud Computing ETF (SKYY) holds stocks such as Netflix and the Social Media ETF (SOCL) has a position in Google. These features don't make such ETFs necessarily undesirable, but the correlation between the name of the fund and the nature of the holdings can sometimes be less than perfect.

Bottom Line: Targeted ETFs don't always offer a "pure play" on the given market segment they intend to track.

61. BDC ETPs: Access To The Next Facebook?

Most investors generally divide investments into three buckets: large, medium, and small. There are now exchange-traded products that allow exposure to companies that are generally too small to be publicly traded, opening up a new asset class that has potential to deliver impressive long-term returns.

There are a couple ETFs out there that invest in stocks of publicly-traded private equity firms and business development companies, which in turn generally hold portfolios full of privately held entities. These investments can take various forms, including traditional equity, preferred stock, or various types of debt. The PowerShares Private Equity Portfolio (PSP) and Business Development Company ETN (BDCS) are two such products that might be worth a closer look by many investors.

Bottom Line: There are a number of ETFs which offer exposure to private equity investments; an asset class that has been historically out of reach for mainstream investors.

62. Inverse ETPs Are Not The Same As A Short Position

There is a robust lineup of inverse ETFs available to investors, delivering a unique way to bet against a wide range of asset classes. While these can be very useful tools, it's important to understand exactly how they work; specifically, a position in an inverse ETF is not the same as a short position in the underlying asset. Most inverse ETFs seek to deliver daily results that correspond to daily movements in the specified index. As such, over multiple trading sessions the performance of an inverse ETF might not line up perfectly with the change in value of a short position.

It's also worth noting that the biggest loss possible with an inverse ETF is 100%. With a short position, losses are theoretically unlimited.

Bottom Line: Make sure to understand the complexities and how often a product resets exposure before buying into an inverse ETF.

63. Targeted Mining ETFs Aren't Always Pure Plays

There are a number of ETFs out there that offer exposure to mining stocks, which have become a popular way to establish a position in companies engaged in natural resource production. In addition to some broad-based funds, there are a number of mining ETFs that target specific types of raw materials, including gold, silver, and even platinum and copper.

When considering these products, be sure to review the underlying index methodology. A pair of copper ETFs highlights the issue that can potentially arise. COPX focuses on mining stocks that are engaged primarily in copper mining. CU, on the other hand, casts a much wider net that includes diversified mining companies (with an adjustment to weighting based on the percentage of operations focused on copper). The former therefore has a copper-focused portfolio, while the latter includes a number of stocks with operations focusing on other metals.

Bottom Line: Mining ETFs don't always offer a "pure play" on the given metal, so be sure to look at the holdings before buying into a position.

64. Money Market ETFs: Safe Havens In Rocky Storms

There are now ETFs for just about every objective-including products that can act as a substitute for a lock-box under your mattress. Not every ETF is designed to deliver impressive long-term returns; some focus exclusively on preservation of capital. For investors looking for a safe place to ride out a storm in equity markets, a handful of ETFs that effectively act as money market products might be worth a look.

The actively managed MINT is one interesting option; the ETF seeks results that exceed returns on money market funds. Other possibilities include Guggenheim's actively-managed GSY and State Street's BIL; both of those ETF maintain lower interest rate risk than MINT.

Bottom Line: Money market ETFs offer a way to safely put your cash to work during times of uncertainty on Wall Street.

65. Be Aware Of Revenue Weighting And Biases

One of the alternative weighting methodologies that has popped up in recent years involves allocating assets based not on market cap or bottom line earnings but on top line revenue. Revenue weighting might have appeal to investors looking to shift exposure to stocks with low price-to-sale multiples; it accomplishes that goal quite nicely. But there are some interesting side effects to consider as well.

Revenue weighting will shift holdings towards companies with lower profit margins, all else being equal. That occurs because low or negative earnings are not considered in the weight calculation-only top line revenue. It can also have a tendency to overweight high debt companies. In a cap weighting methodology, big debt burdens would reduce the value of equity, but there isn't a similar reduction for revenue weighting, since the fundamental measure used is the top line sales.

Bottom Line: Take note of the inherent biases when comparing similar products with different weighting methodologies.

66. Equal Sector Weighting ETFs Can Balance A Portfolio

The equal weight methodologies behind RSP and other similar ETFs focus primarily on the individual stock level, assigning an equivalent allocation to each component security. But equal weighting can also be implemented on a sector level, meaning that the breakdown between types of companies can be balanced across a portfolio. That's exactly what the ALPS Equal Sector ETF (EQL) accomplishes; it consists of equivalent positions in nine different sector SPDRs.

This approach could be appealing for several reasons; it allows investors to participate in rallies in any corner of the markets, and effectively builds in a mechanism to prevent overweighting sectors in which a bubble is forming.

Bottom Line: ETFs with equal-weighted sector exposure can offer an appealing risk/return profile for some investors.

67. Most ETFs Aren't For You

There are now more than 1,400 exchange-traded products available to U.S. investors. If you're looking to build a long-term, buy-and-hold portfolio, the vast majority of them are not appropriate for you. Even if you're a more active investor frequently making trades, many ETFs out there will be of little or no use. Included in the ETF lineup are a number of very sophisticated, very risky securities. If used correctly, they can be very powerful tools. But if used incorrectly-or by investors who don't fully understand their mechanics-the results can be disastrous.

Here's a simple rule: if you can't fully understand an ETF in five minutes-grasping the risk factors, drivers of return, underlying holdings, etc.-walk away. There's no shame in acknowledging that the goals of an ETF are over your head-but losing money because you made an inappropriately risky allocation is cause to hang your head.

Bottom Line: Make sure to fully understand the investment thesis behind an ETF because most of the products out there are simply not appropriate for many investors.

68. International ETFs Have Sector

ETFs are a handy tool for tapping into international equity markets; there are now "pure play" ETFs for just about every major global economy. When using these funds, it's helpful to understand the limitations and biases. One of the common tilts in international equity ETFs relates to the sector breakdown; it's fairly common for energy and financial companies to account for a big allocation of holdings, with sectors such as consumers, utilities and health care receiving very small weightings (in many cases, weights of 0%). This feature simply reflects the nature of the underlying economies, where banks and oil firms dominate and health care and utilities are quite small. But as these sectors grow, these biases could create a drag on returns.

For some larger international markets, sector-specific ETFs now exist for balancing out the sector breakdown. ECON (emerging markets) and CHIQ(China) are just two examples of consumer-centric ETFs that can be used to offset the tilt towards energy and banks in popular ETFs.

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