This Week In ETFs: November 27th Edition

by on November 27, 2011

The last week may have been a brief one for U.S. equity markets, but the Thanksgiving-shortened stretch saw the continuation of disappointing losses that raise the likelihood of a year in the red for 2011 and potentially accelerating declines heading in to the final month of the year. While investors attention stateside focused on retail outlooks and the beginning of the holiday shopping season, drama continued to unfold in the euro zone as the currency took another hit, more countries saw ratings slashed, and the likelihood of additional defaults climbed.

Last week was a slow stretch for the ETF industry; there were no additional launches in anticipation of thin trading ahead of the Thanksgiving holiday. There was, however, still plenty of interesting news from around the Web; below, we highlight some interesting ETF-related reads from the last week [for regular ETF insights, sign up for our free ETFdb newsletter]:

Common Myths, Best Practices And Better Trading Execution For ETFs

This article by Julie Abbett, a portfolio manager at IndexIQ, highlights some of the misconceptions about the liquidity of ETFs–specifically that historical volume is indicative of how easy it will be to establish or liquidate a position at or near NAV. “Best execution can be determined by a number of factors – the fair value of the underlying basket, getting competitive bid/ask information and finally communicating your objective through your trade instructions,” writes Abbett, who also discusses myths related to the price at which a trade can be expected to be executed. This article, complete with illustrations that shed some light on how the ETF mechanism works, is a must read for anyone who does not yet fully understand the nuances of ETF liquidity. 

Big Year for Bond ETFs Could End With a Visit from the Tax Man

This article highlights some aspects of bond ETFs that may catch some investors by surprise; specifically that bond ETFs, many of which have performed quite well in 2011 amidst continued market turmoil, will be serving up some meaningful tax liabilities at the end of the year. With some bond ETFs expected to make capital gains distributions of more than $2.50, this article highlights elements of fixed income investing that should be considered now rather than catching advisors off guard later.

This article, however, does gloss over some of the basics of bond ETF investing–including the fact that capital gains distributions are common within these products in certain environments (specifically, when there is significant upside volatility). It should be noted that bond ETFs can still be very tax efficient; a comparison of any of the funds mentioned in this article to mutual funds would paint a rather rosy picture.

Overcoming The Local Currency Conundrum

This article, posted on the iShares blog, deals with an issue with which advisors seeking international bond exposure have been wrestling. Those seeking exposure to this potentially exciting asset class have a decision to make; do they also take on exposure to the local currencies, or simply invest in dollar-denominated securities that won’t be impacted by exchange rate fluctuations. In this post Matt Tucker examines the hurdles that can be expected when seeking local currency exposure–essentially an explanation of why the ETF wrapper makes so much sense in this instance.  

Disclosure: No positions at time of writing.