A "First" Look at ETF Investor...

06/24/2005 12:00 am EST

Focus:

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

I’m always excited to share a new advisory service with our readers, particularly when it comes from a top expert in their field. In this case, income specialist Richard Lehmann has introduced The ETF Investor. Here's a first look at this timely new service.

"Exchange traded funds (ETFs) are the best idea to come along in the last generation. ETFs are designed to give you market average results for a particular market or sector nothing more and nothing less. They buy a basket of securities representing a cross-section of a particular market. ETFs have a number of factors working in their favor. There is minimal management fee since there is minimal intellectual input, trading, and less administrative requirements. There are no 12b-1 fees for distribution costs, advertising, and commissions to selling brokers. And the typical mutual fund holds up to 5% to 10% of its assets in cash to meet share redemptions, while ETFs hold virtually none, so all the money is working for you.

"Your cost basis is what you paid for your shares. You don’t inherit the unrealized gains and losses that are accumulated in mutual funds. And unlike mutual funds, shares can be bought and sold anytime of the day during trading hours. In addition, you are not exposed to the trading styles, personal agenda, and sheer luck of the fund manager. ETFs can be bought with limit, stop, and market orders; many have put and call options and can also be bought on margin as well as sold short. Finally, the investor knows what the fund holds. Conventional fund holdings are not transparent, being reported only quarterly, at most."

Here are additional excerpts from the inaugural issue of The ETF Investor, highlighting some of Lehmann's recommended ETF positions:

"We suggest sticking with what is working, so with the market favoring the large-cap, value components, we suggest the iShares Russell 1000 Value Index (IWD ASE). The fund includes some 717 issues, representing the stocks considered as ‘value’ investments. These are the largest, blue chips in America, providing more balance and stability than the Dow 30. The 12-month return is a respectable 9.2% and the yield is running at 3.2%. These kinds of numbers almost qualify it for fixed income investors. And, the dividends qualify for the 15% tax rate.

"Like the US stock market, the international sector has done little in the last 12 months. We do like one fund, however, because of the location and diversity of its holdings. BLDRS Emerging Markets 50 ADR Index Fund (ADRE NASDAQ) has its holdings dispersed over ten countries and 16 sectors, all in ADRs traded here in the US. The companies in the index have an aggregate market capitalization of $366 billion. The top ten holdings constitute 43% of the portfolio and include companies from Taiwan, Israel, India, Brazil, Mexico, and Korea. While there is the usual concentration in communications (24%) and computer-related (19%), there is also strong representation by oil & gas (15%) and banking (13%).

"Utility funds have shown significant upside for the latest month, quarter, and year. We feel, however, that there is significant upside left mainly because of the steep decline this industry suffered after the Enron energy trading debacle. Many of the companies in the sector are still in a recovery mode and are benefiting from improving capacity utilization. Our favorite utility fund pick is Utilities Select Sector SPDR (XLU ASE). The fund includes 39 companies, which are predominantly electric utilities, although some gas distribution and communication services are included. The fund is considered a value play, but given the recovery mode of the industry, its key attraction is the continuing growth potential. The main vulnerability here is fuel costs, much of which may be hedged. Meanwhile, you collect dividend income of 3%."

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