Barclays takes “dynamic indexing” to a new level with VQT.  The underlying index can be dramatically reconfigured on a daily basis and employs a stop-loss mechanism.  The underlying index seeks to provide broad U.S. equity market exposure with an implied volatility hedge.  It will dynamically allocate investments among three components: equity (S&P 500 Total Return Index), volatility (S&P 500 VIX Short-Term Futures Index), and cash.

The VQT overview page and VQT fact sheet (pdf) provide the investment philosophy behind this product:

“the volatility component of the Index is premised on the observation that, historically, volatility in the equity markets tends to correlate negatively to the performance of US equity markets. In addition, rapid declines in the performance of the US equity markets generally tend to be associated with particularly high volatility in such markets. The Index, therefore, seeks to reflect such historically observed trends by allocating a greater proportion of its notional value to investments in the US equity markets during periods of low market volatility with the ability to allocate a greater proportion of its notional value to investments in a reference asset that tracks implied volatility during periods of high market volatility.  The Index also incorporates a “stop loss” mechanic that shifts the entire value of the Index to an interest-bearing cash investment under certain circumstances.”

The S&P 500 Dynamic VEQTOR Total Return Index

Barclays has demonstrated its ability to design and deliver products that can accurately track an index after fees (a 0.95% investor fee in this case), so the key to understanding VQT is to understand the index.

On any index business day, the index allocates weightings to the equity and volatility components based on a combination of realized and implied volatility.  The maximum weighting of the volatility component is 40%, and the combination of the equity and volatility components are typically 100% of the notional value of the index (no leverage) and 0% if a stop-loss event has occurred.

The stop-loss feature will allocate into a 100% cash position if the value of the Index has fallen greater than or equal to 2% over the preceding five days.  Since the stop-loss criteria is determined from the index itself, the move to cash can be as short as one day and a maximum of five days since being in cash for five days guarantees that the five-day return is greater than a 2% loss.

Index calculation is a 4-step process:

1. Determine the Realized Volatility
2. Determine the Implied Volatility Trend
3. Determine the Target Weightings of the Equity Component and Volatility Component
4. Evaluate Whether a Stop Loss Event Has Occurred

The following table is part of the prospectus and shows the 15 combinations of realized and implied volatility and the resulting allocation between the equity and volatility components.

When not in a cash override stop-loss condition, the volatility component can range from a low of 2.5% to a maximum of 40%.  Additional details on the index calculation methodology are in the VQT prospectus and pricing supplement (pdf).

Investors could potentially implement this strategy on their own using the SPDR S&P 500 (SPY) and iPath S&P 500 VIX Short-Term Futures ETN (VXX), but I wouldn’t recommend it.  The daily slippage, commissions, and overnight gaps are likely to induce extreme tracking error into any do-it-yourself implementation, not to mention the time and effort involved.

VQT has the potential to be a great product.  Investor education is likely to be the largest hurdle at this time, and I would advise anyone to understand this product before buying it.  It also has the negative characteristic of credit risk that comes with all ETNs.  Barclays also needs to work on a consistent marketing message because once again they avoided the iPath brand for VQT.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Companies like Apollo Group (APOL), Corinthian Colleges (COCO) and Strayer Education (STRA) were first hammered on news that their graduates are significantly more likely to default on federal student loans than alumni of traditional four-year colleges.  Then Barron’s quoted an analyst saying the Department of Education’s estimates are probably accurate, bringing more pain for these stocks.

Worse yet, for-profit education stocks are a subsector of the consumer discretionary space.  In this market environment, consumer discretionary names are tough bets from the long side.  Even so, there is opportunity among for-profit education names.  You just need to look outside the U.S. to China.

Consider New Oriental Education (EDU).  EDU is a Chinese provider of foreign language training, test preparation services and software products.  Shares of New Oriental were up slightly last month while the U.S.-based education stocks were deep in the red.

On a fundamental basis, there is a lot to like with New Oriental.  China takes education seriously.  As the country continues to boost its presence on the global economic stage, more Chinese citizens will need to learn foreign languages.  This will boost demand for New Oriental’s services.

The smart money crowd apparently likes New Oriental as well.  Second-quarter 13F filings show that the stock is among the favorite Chinese American depositary receipts owned by professional money managers.

To be sure, New Oriental is no stodgy blue chip.  This is a growth stock with growth stock traits.  The market cap is just $3.73 billion, putting New Oriental barely into the realm of the mid-cap universe.  Its trailing P/E is over 49, the forward P/E is over 28 and shares trade at almost 9x book value.  Year-to-date, the shares are up more than 30%.  That compares with a loss of 5% for the iShares/FTSE Xinhua China 25 Index Fund (FXI).

Recent performance underscores how New Oriental is a preferred option in the for-profit education space.  It’s also one of the better bets among all U.S.-listed Chinese stocks.  New Oriental may face some near-term headwinds simply because of negative market sentiment, but support for the stock seems firm at the 50-day moving average.  If EDU can hold the $97-$100 range heading into the fourth quarter, it could find its way above $110 by the end of this year.

To play the always-optimistic Chinese education market in a difficult year, go with EDU. All the best.

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

We discussed the exploding number of new ETFs and ETNs coming to market and how I identify the potentially troublesome products included in ETF Deathwatch.  We also covered the reasons investors should be cautious of low-liquidity funds with some specific examples.

Here’s a link to the video: http://link.reuters.com/cet27n

If the size of your nest egg is a concern for you retiring comfortably in the United States, you might consider a place where your savings can go much further.  You know how much things cost in the US – but did you realize there are places where your dollar can go up to 4 times further?

You don’t have to go to the “Third World “ or give up all the comforts of America.  Many foreign retirement destinations have Internet connectivity, satellite TV, golf, beachfront property, and other amenities you are accustomed to – at a deep discount.  Granted, you may be a couple of plane trips away from the U.S., but the cost savings and new adventures may be enough to overcome any inconvenience.

For example, US News recently highlighted a couple, Jason and Elizabeth Pearce, who retired to Belize.  The Pearce’s live on Jason’s Social Security alone, allowing Elizabeth’s to go into savings.  They have a house on the ocean, a maid, a gardener, the Internet, and have made new friends.  They are enjoying a far more comfortable retirement than they could have afforded in the U.S. or Canada.

Here’s the sample budget for the Pearce’s in Brazil:

• Rent: $300
• Utilities, telephone, and Internet: $500
• Groceries: $150
• Health insurance: $50
• Entertainment: $100
• Car expenses: $300

However, Belize is not the only country that offers cheap living with home style amenities.  Other popular expatriate destinations abound in Latin America: Chile, Costa Rica, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama, and Uruguay.  Granted, you may need a few Spanish classes before you go, but it’s a small price to pay.

If you’re feeling more adventurous, look to a different hemisphere. Cambodia, Laos, Malaysia, Philippines, Thailand, or Vietnam all offer a similar experience to retirees, but in a less-familiar environment.  English will be spoken less in these areas, but that’s a challenge met by most retirees going abroad.

Before you buy plane tickets, do some planning.  Consider healthcare coverage, cultural differences, and the differences in legal systems.  Check out Retired Expat for more information on foreign living.  They cover a variety of overseas retirement issues if you’re considering that route.  For a more luxurious experience, you can always subscribe to one of the pioneers in the overseas living arena: International Living.

Living abroad is certainly not for the majority of folks looking to retire, but for a select few, it could be a great way to reduce your cost of living while providing a brand new adventure in retirement.  Just be sure to pack the sunscreen.

Earlier this week (on 8/25/10), the Alerian MLP ETF (AMLP) was launched.  It is the first MLP ETF product joining a lineup of five existing MLP ETNs.  I also believe it is the first ETF of any kind that is virtually guaranteed to underperform its chief competitor.

Corporate Taxes

Before buying AMLP you need to ask yourself why all the other sponsors chose an ETN package over an ETF wrapper.  The answer is taxation.  As noted in the prospectus:

AMLP is taxed as a regular corporation for federal income tax purposes and as such is obligated to pay federal and applicable state and foreign corporate taxes on its taxable income. This differs from most investment companies, which elect to be treated as “regulated investment companies” under the tax code in order to avoid paying entity level income taxes. Under current law, AMLP is not eligible to elect treatment as a regulated investment company due to its investments primarily in MLPs invested in energy assets. As a result, AMLP will be obligated to pay federal and state taxes on its taxable income as opposed to most other investment companies which are not so obligated.

In order to achieve “ETF status” AMLP had to give up its “pass through status” and be taxed as a corporation. AMLP will generally compute deferred income taxes based on the federal income tax rate applicable to corporations, currently 35%, and an assumed rate attributable to state taxes. Therefore, AMLP is required to make the following disclosure in its prospectus:

Potential Substantial After-Tax Tracking Error From Index Performance. As discussed above, AMLP will be subject to taxation on its taxable income. The NAV will also be reduced by the accrual of any deferred tax liabilities. The underlying index however is calculated without any deductions for taxes. As a result, AMLP’s after tax performance could differ significantly from the Alerian MLP Infrastructure Index even if the pretax performance is closely correlated.

Neither the AMLP prospectus(pdf) nor the Statement of Additional Information(pdf) provide estimates or examples of how significant an impact the corporate taxation will have on performance.  It is also not clear to me which state taxes will apply: the MLP’s state or the corporation’s (AMLP) state.  Don’t forget, this is taxation that occurs at the ETF level before an individual shareholder’s federal and state taxes are taken into account.

About the Fund

The Alerian MLP ETF (AMLP) from ALPS seeks investment results (before fees, expenses, and taxes) that generally correspond to the price and yield performance of the Alerian MLP Infrastructure Index.  The underlying index is comprised of 25 midstream energy Master Limited Partnerships and provides investors with an unbiased benchmark for the infrastructure component of this emerging asset class. The index is calculated using a capped, float-adjusted, capitalization-weighted methodology that results in greater diversification.

Additional information can be found on the AMLP home page, the fact sheet(pdf), and the complete list of holdings.  The claimed “Total Expense Ratio” of 0.85% appears to be misleading as it does not account for any of AMLP’s corporate taxes.

It would appear that AMLP is a roaring success, averaging more than one million shares a day for its first two days on the market.  I haven’t seen an AUM (assets under management) report, but I wouldn’t be surprised to see assets north of $20 million already.  My guess is that all the trading and assets are from shareholders that did not read the prospectus and are in for a big surprise.

AMLP vs. MLPI

UBS E-TRACS Alerian MLP Infrastructure Index ETN (MLPI) tracks the same index as AMLP with the same identical 0.85% expense ratio.  However, there will be one huge difference in their performance:  AMLP will be taxed as a corporation and the NAV will reflect a 35% withholding for taxes while MLPI will not.

For my money, MLPI is the clear choice over AMLP.  Taxation of MLPs is a difficult subject, and I do not claim to know all the ins and outs.  I am not a tax advisor, but I cannot envision a profitable situation where AMLP’s corporate taxes will be negative.  Therefore, a potentially “risk-free” arbitrage trade could be to go long MLPI while shorting AMLP – it’s just like being the tax man.

Disclosure covering writer, editor, and publisher: I am not a tax advisor.  I am not a lawyer.  All comments regarding taxes and legal issues are merely my opinions as an interested observer.  No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

The Van Eck press release says Indian small-cap stocks are supported by one of the world’s largest and fastest-growing domestic consumer markets, with a demographic profile skewed toward the young.  India’s rapidly growing middle class is projected to triple in size over the next 15 years, making it twice the size of the entire U.S. population.  “It continues to be our strong belief that small-cap stocks are an excellent way to gain direct exposure to a country’s domestic economy,” said Jan van Eck, Principal at Van Eck Global.  “India, in particular, has exhibited demographic and economic factors that support strong continued domestic growth for years to come.”

SCIF will attempt to capture the performance of the smallest 10% of India’s total market capitalization.  Van Eck points out in the Investment Case for India Small-Caps (pdf) that this smallest 10% represents 91.2% of the total number of listed equities in the country.  The fund’s expense ratio is capped at 0.85% and the top sectors are Industrials 26.8%, Financials 20.4%, Materials 13.7%, Technology 12.2%, and Consumer Discretionary 11.8%.

There are a total of 122 holdings, with the largest being IFCI 4.7%, Sintex Industries 4.0%, IVRCL Infrastructures & Projects 3.3%, GTL 3.2%, and Nagarjuna Construction 2.8%.  The SCIF fact sheet (pdf) lists the top 25 holdings and provides a link to the complete holdings.

SCIF (summary page) will compete head-on with EGS INDXX India Small Cap ETF (SCIN).  There are more than 9,000 listed small cap stocks in India, and with SCIF holding 122 stocks and SCIN holding just 75, it is not surprising that there is zero overlap in their top-10 holdings.  The EGS fund has done a good job of attracting assets and trading volume even though the brand is unfamiliar to most investors.  This is likely to be an area where the Market Vectors fund can gain an advantage.

Both SCIF and SCIN have expense ratios of 0.85%, so the performance winner will be decided by the indexing and sampling methodology employed by each fund.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

This confluence of factors makes emerging markets even more appealing for investors who want capital appreciation and growth.  That said, not all emerging markets are created equal.  Not surprisingly, Asia is frequently a favored destination for investors who want to take advantage of emerging markets growth.  Two of the favorites are Thailand and Indonesia.

To say that Indonesia is one of the most compelling emerging markets opportunities is an understatement.  We’ve discussed how investors can get exposure to the Indonesian market before.  It’s worth noting that even on down days for U.S. stocks, the two Indonesia-specific ETFs traded here in the U.S. often find a way to trade higher.

Outside of ETFs, few Indonesian stocks are listed on U.S. exchanges.  We’ve found one that looks like an ideal trade for this market environment: Perusahaan Perseroan PT Telekomunikasi Indonesia (TLK).  OK, that’s a confusing name, but TLK is pretty straightforward.  This is a telecom stock, usually referred to simply as PT TELKOM.

The telecom sector is a favorite hideout in turbulent markets because telecom stocks are often less volatile due to their robust dividend yields.  TLK certainly swings around more than stocks like AT&T (T) or Verizon (VZ), but that is to be expected.  After all, TLK is an emerging market stock and the others are two of the stodgiest U.S. blue chips.  TLK’s current yield of 5.9% also trails the average yield of 6.45% of AT&T and Verizon.

TLK’s last dividend was a very nice $2.32 a share.  In the past six months, TLK shares are up 10% compared to a 7% gain for AT&T and a 2% run for Verizon.  Sometimes it’s worth sacrificing some yield for better capital appreciation.  You’re also tapping into one of the world’s top emerging markets.  To go with an Indonesian telecom while the U.S. market struggles, go with TLK.  All the best.

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

When I first read the book, the world was still in the midst of the 2008-2009 financial crisis.  I thought it offered solid advice, but I was second-guessing myself, thinking perhaps I was just caught up in the panic that was gripping the nation and the world.  So I recently pulled it down from the shelf and read it again, this time without needing to offset the strong emotions so prominent during the crisis.  And you know what, it makes even more sense now!

The first page of the first chapter gives away Martin’s economic forecast.  In his view, a second Great Depression is inevitable.  The culprit: staggering amounts of debt, both public and private.  The unsustainable housing bubble could not last, and the resulting implosion will give us years of economic stagnation.  Martin’s question is not whether we will have a depression, but how bad it will be.  The parallels he draws to the 1929 crash and the Great Depression are chilling.

Unlike many other analysts, Martin is less concerned about inflation than deflation.  If you are heavily in debt – which our society most definitely is – inflation is actually helpful.  You get to pay off your debt with depreciated dollars.  Deflation means the opposite, and the combination of heavy debt and price deflation is deadly.

Martin advises,

 ”Debt alone is usually tolerable.  People can pile up debts year after year, and as long as borrowers have the income – or as long as they can borrow from Peter to pay Paul – they continue making their payments.  Life goes on.

“Deflation – falling prices and income – is also not all bad.  It makes homes more affordable, college education more achievable, a tank of gas easier to fill.

“It’s when the debts and deflation come together that the wheels are set in motion down the path to depression.  That’s what happened in the 1930s, and that’s what’s beginning to happen this time as well.”

Martin goes on to explain in clear, concise language the implications for real estate, stocks, bonds, banks, currencies and more.  Every chapter includes practical tips on how to protect yourself and even thrive in any depression.  The book ends on a hopeful note; he explains how the difficult times will force all of us to adapt new and better habits.

The Ultimate Depression Survival Guide is a quick read, at just over 200 pages, and is available through many sources.  Additionally, Martin has generously agreed to donate all his royalties to charity.  I highly recommend it, especially for beginning investors and others who feel overwhelmed by the financial news.  If Martin is right, the time to protect yourself from depression is now.  This book tells you exactly what to do and how to do it.

Disclosure:  My company has a consulting agreement with Weiss Research and I am the editor of one of their publications, International ETF Trader.  I am also a regular contributor to their Money & Markets newsletter and web site.

Shareholders of Grail RP Technology ETF (RPQ) or Grail RP Financials ETF (RFF) don’t have much time if they want to avoid being involuntarily liquidated.  The last day of trading will be Friday, August 27, 2010.  As always, I recommend investors sell their shares in the open market prior to the delisting to avoid the liquidation process.  Both are being quoted today with bid/ask spreads near 2% so be sure to use a limit order.

Grail decided to pull the plug on these two ETFs rather quickly.  They were part of a four ETF introduction last October from Grail and RiverPark.  Despite all the fanfare surrounding Grail’s “actively-managed” ETFs, all seven of their funds are part of the current ETF Deathwatch.

Actively-managed ETFs face five obstacles, and this batch is not the first to shut their doors.  That dubious honor belongs to Bear Stearns Current Yield (former ticker YYY) back in 2008.  The WisdomTree U.S. Short Term Government Income Fund (former ticker USY) is another actively-managed ETF that did not survive.

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

Last Friday (8/20), a Claymore press release trumpeted the “launch” of a new ETF – the Claymore Wilshire Micro-Cap ETF (WMCR).  However, when I checked with the NYSE and Nasdaq, they informed me there were no new listings from Claymore on Friday.  A quick check of my quote screen did show a security trading with that ticker symbol, but its name was identified as the Claymore/Sabrient Stealth ETF.

Upon further investigation it was revealed that Claymore is staging another Extreme Makeover: ETF Edition.  You may recall that in late July 2009 Claymore/Great Companies Large-Cap Growth Index ETF (XGC) became Claymore/BNY Mellon International Small Cap LDRs ETF (XGC).  The result was a completely different fund with zero overlap of holdings, but with the same ticker symbol and a historical track record better than its new peers.

The current makeover is stranger in many respects.  First, Claymore changed the ticker symbol as well as the name this time around.  What was known as Claymore/Sabrient Stealth ETF (STH) on Thursday became Claymore Wilshire Micro-Cap ETF (WMCR) on Friday.  Only the CUSIP identifier code remained the same.

By changing both the name and the ticker, Claymore avoided having to close and liquidate one fund and open another.  Just a week prior, on August 13, Claymore announced it was closing four of its funds and could have just as easily made it five by including STH.  STH has been on ETF Deathwatch more than a dozen times, so no one would have been surprised to see it closed.

The second strange aspect of this makeover is that the new ETF is now saddled with a long-term below-average track record.  From its inception on September 21, 2006 the ETF has a cumulative loss of -35.9%.  Meanwhile, the primary competitor in its new micro-cap category, iShares Russell Microcap (IWC), held its loss to -25.7% over the same period.

Claymore has an “exclusive partnership with Wilshire” and is the only ETF provider using Wilshire indexes.  I don’t understand why Wilshire would allow their name to be used on a product with such a substandard track record when they could have just as easily started fresh.

I contacted Claymore for an explanation as was informed that the “critical mass” behind STH and the “cost benefits” of not having to close one fund and open another were primary reasons behind this approach.  The fund was very small before and remains small now, so the amount of money at stake is relatively insignificant and stretches the definition of critical mass.  Seeing as how the bulk of these assets are probably the sponsor’s seed money, getting shareholder approval was likely not an obstacle.

The new incarnation of this ETF will carry an expense ratio of 0.50%.  Additional information can be found on the WMCR summary page and in the WMCR fact card (pdf).

WMCR will not be counted as a new ETF and STH will not be counted as a closure in the ETF Statistics.  There was not a new listing, and there was no closure.  We will record it as a name and ticker symbol change.

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.