Exchange-Traded Fabian Funds
06/09/2006 12:00 am EST
Doug Fabian,long a noted expert in mutual funds, has become one of the pioneers in covering the rapidly developing market for exchange traded funds. Here, in his ETF Trader, he looks at two new developments in the sector that have caught his attention.
"There are two new developments in the ETF
world that we'll be keeping a very close eye on. The first ETF to invest in
shares of public gold-mining companies has just begun trading. The Market
Vectors-Gold Miners ETF (GDX ASE) is brought to us by Van Eck Global, a firm
specializing in hard-asset funds. GDX is designed to track the performance of
the Amex Gold Miners Index. This benchmark gold mining index holds 44 mining
stocks, with top gold mining companies such as Newmont Mining Corp., Barrick
Gold, and Goldcorp atop the list.
"What's different about this gold ETF is that it tracks an index of mining companies as opposed to the current precious metals ETFs, which are based on the value of the actual metals (gold, silver). One caveat here to using gold mining stocks is that these stocks tend to be more volatile than the actual underlying value of the precious metals. So, if you are going to use GDX, just be aware that it is more susceptible to big market swings than previous precious metal ETF offerings.
"We also recently learned that ProFunds Advisors— a company whose funds we often recommend in the Fabian services—is proposing the launch of the first leveraged ETFs that, if approved, would allow bullish investors to double the gains of the US stock market, while giving those in the bear camp a way to profit from market declines. ProFunds recently filed an updated prospectus for these new funds that seek to provide daily returns twice that of bellwether stock indexes including the S&P 500. The new offerings will come in three basic varieties. The first is a bullish ETF that uses leverage to double the market's normal return. For example, if the S&P 500 index rose 1.5% in a day, the corresponding ProFunds ETF is designed to give investors a 3% return.
"The second is a bearish strategy that aims to deliver the exact opposite, or inverse, of the market's return. If the index declines 1.5%, then the inverse ETF aims for a positive 1.5% return. Finally, a leveraged ultra-short bearish fund seeks to provide twice the opposite of the market's return. So in the case of a 1.5% market decline, this portfolio would gain 3%. We've been employing the principles of both leverage and inverse correlation to our ETF Trader and Successful Investing services for quite some time, but we've always had to do it via mutual funds. When the ProFunds ETFs come to market, it will be easier than ever to take advantage of both leverage and inverse correlation."