Buying The Risk Rally? ETF Transparency Has Never Been More Important

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September 22, stock tips .- Mom-n-pop investors may not be taking on more risk, but institutional investors are. Perhaps the best example came in a Wall Street Journal article today by Kirsten Grind. Specifically, fund managers are investing in riskier high yield bonds, yet those funds still compare their “benchmark-beating” returns against benchmarks with safer assets (e.g., investment grade bonds).

The good news? Those who own one or more of the nearly 200 “benchmark beaters” are seeing super-sized returns. The bad news? Those mutual fund owners are unlikely to understand the risks that their funds are taking.

Indeed, greater transparency in ETFs is one of the huge reasons for selecting them over traditional mutual funds. If you want intermediate investment grade corporate bonds, you can confidently purchase iShares Barclays Intermediate Credit Bond (CIU); the exchange-traded vehicle passively tracks an established index in the Barclays U.S. Intermediate Credit Bond Index. Similarly, if one chooses to take on more risk with higher yielding, non-investment-grade bonds, he/she might pursue SPDR Barclays Capital High Yield Bond (JNK). Simply stated, there’s far less ambiguity about exchange-traded index fund assets as compared with actively managed mutual funds.

With so many actively managed mutual fund managers trying to keep pace with indexes that have been hitting multi-year highs, understanding the ongoing rally becomes easier. Add open-ended quantitative easing in Europe as well as the U.S., and even hedge funds have had to give up their short positions.

Moreover, the breadth of the rally is wide. A quick check of new 52-week highs is showing strength in small caps, large caps, foreign, domestic, economically sensitive and economically agnostic. If you want dividend-payers, iShares Telecom (IYZ) and Morgan Stanley Cushing MLP (MLPY) keep hitting new peaks. If you want a housing recovery angle, iShares DJ Home Construction (ITB) as well as iShares FTSE NAREIT Mortgage REITS (REM) regularly reach new pinnacles. Low volatility or high volatility, being “long” the market has been profitable.

That said, one has to wonder how long the bears will stay silent. For instance, on this very Friday (9/21/12), Yahoo Finance ran with a headline, Near Perfect Conditions Suggest 30% Rally for Stocks in Next 12 Months. Anyone who has checked in on Yahoo Finance features over the last 3 months has seen feature after feature of interviews with those who believed a 20% decline or 30% bear or even 50% collapse were coming very shortly. Now they are interviewing and/or quoting the most bullish analysts and money managers? ... Continue to read.

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• Buying The Risk Rally? ETF Transparency Has Never Been More Important (seekingalpha.com)
• ETF Insights: Q&A With Nathan Geraci (businessinsider.com)
• WisdomTree Debuts First China Dividend ex-Financials ETF (FXI, CHXF, CHL, CEO, PTR) (etfdailynews.com)