This Week In ETFs: February 26th Edition

by on February 26, 2010 | ETFs Mentioned:

ETFs finished February range-bound, as most equity markets remained choppy to finish the week. This came after continued weakness in the euro zone and some disappointing news on the jobs front, with 20,000 additions to the list of people seeking unemployment benefits. In other news, AIG reported a $8.87 billion quarterly loss, raising concerns that it may need further federal assistance to stay afloat.  Below, we offer our picks for the week’s most important and interesting ETF stories from around the Web:

Are Low Interest Rates Here To Stay? at ETF Guide:

Bond holders have been tortured by pathetic yields for the vast majority of government bonds, especially short-term funds such as Barclays 1-3 Year Treasury Bond Fund (SHY) which tracks bonds maturing in one to three years and only pays a yield of 0.87%. With rates near record lows, investors have been chasing yields in more high risk bonds, such as SPDR Barclays Capital High Yield Bond ETF (JNK), offers much high payouts.  However, with the Fed recently raising the discount rate to 0.75%, these days of extremely low yields may not last for long, since the stage seems to be set for the Fed to raise the Fed Funds rate up from its historic low. While the economy remains weak, some believe that this will be the next step and that investors should watch Bernanke’s actions and not listen to his words in order to understand where the market is heading next.

Five ETFs To Own During The “Great Deflation” at ETF Database:

With core-CPI falling for the first time since 1982, some investors are wondering if we will see a Japan-like economy with flat or declining prices for a long period of time. For these investors, we have highlighted five funds that will help to protect portfolios from deflation. In addition to long-term bond funds, both in the form of iShares Barclays 20 Year Treasury Bond Fund (TLT) and Vanguard Long-Term Corporate Bond Index Fund (VCLT), we highlight one option that you probably have not considered as a protector against deflation: iShares Barclays TIPS Bond Fund (TIP). While the fund is designed to protect against inflation, it is more like an option on inflation prices which allows investors to maintain their principal if inflation does not materialize and prices fall instead.

Risks Present in Futures-Based ETFs at ETF Zone:

This article highlights several issues that futures-based ETFs face and some warning signs that investors should look for before investing in these funds. Investors should be wary of investing in futures-based funds that make up an excessively large part of the market or have predictable trading dates which can make rollovers more difficult. A good way to avoid these issues is to focus on semi-active funds that do not box themselves in to the same trading times every month and those that make an attempt to spread out their allocations over a several month period. In addition to reducing rollover costs, this can help investors to better track the price of a commodity, which is obviously the ultimate goal of these futures-based ETFs.

Energy ETFs: The Tracking Problem at Hard Assets Investor:

Many commodity based ETFs are perceived to have a difficult time tracking their underlying commodities, yet this is not always the case. In this article, United States Oil Fund (USO), United States Natural Gas Fund (UNG), and United States Gasoline Fund (UGA) are compared in order to see which does the best job of matching the price movements of its underlying energy product. USO and UNG both track their commodities about 80% of the time but pale in comparison to UGA, which matches the price movements of unleaded gasoline 98% of the time, by far one of the best in the industry.

Disclosure: No positions at time of writing.