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There's a lot going on in the mutual fund world, and if you miss something, it could end up costing you money. To keep you up-to-date and on top of things, we'll scope out some of the recent happenings in the mutual fund industry during the past week and see how they may affect your portfolio.
A new game for insider trading
The new investing trend around town is "ETF stripping," and the SEC isn't happy about it. The regulatory body suspects that some traders are using this technique to cover up insider trading activity. In ETF stripping, a trader uncovers some insider information about a company, but instead of buying that company, he or she buys an exchange-traded fund that tracks the stock and then shorts the rest of the stocks in the index. Such an approach would allow someone to benefit from any appreciation in the stock's price without buying it directly. Word has it that the SEC is looking into various suspected cases of ETF stripping, so there may be more information coming to light soon.
I have to give folks credit for being inventive. If there's a way to get around existing rules to make a profit, it seems someone will find it. However, ETF investors shouldn't be too worried about how this practice might affect them. There will always be unscrupulous types who seek to profit at the expense of others who follow the rules, but ETFs are still an excellent vehicle for any investor to gain broad, cheap exposure to the market. Don't let these suspected practices deter you from buying ETFs. As long as you're buying and holding for the long run, you'll still reap the benefits of long-term capital appreciation from all the components in the index. However, I'd recommend keeping an eye on this topic, as future events or regulation could have an impact on ETF investors.
Passive management on the move
Passively managed index funds and ETFs have been gaining in the investor popularity polls in recent years, and now a new move by Charles Schwab (NYSE: SCHW ) aims to bring the benefits of tracking the market to 401(k) investors. Schwab recently announced that it's working on an all-index fund 401(k) platform to launch later this year, as well as an all-index ETF platform for mid-2012. These new instruments would offer proprietary Schwab funds as well as products from other fund shops.
Considering that actively managed funds have had a pretty good monopoly in most 401(k) plans in the past, it's not surprising that companies such as Schwab would make a push for an all-index platform. Right now, passive investments are in style. And though some 401(k) plan participants may not like the idea of being limited to market-tracking investments in their retirement plans, going with all index funds isn't the worst thing in the world, given their lower costs and most active funds' track record of lagging the market.
In addition, Schwab offers several very solid ETFs and index funds that come with some of the lowest price tags in the business. Some of the shop's better index funds include Schwab Total Stock Market Index (SWTSX) and Schwab S&P 500 Index (SWPPX), both of which charge a mere 0.09%. On the ETF side, investors might want to consider the Schwab U.S. Broad Market ETF (NYSE: SCHB ) for domestic coverage, Schwab International Equity ETF (NYSE: SCHF ) for foreign developed exposure, and Schwab Emerging Markets Equity ETF (NYSE: SCHE ) for an allocation to developing economies. Keep an eye out for more index- and ETF-based retirement platforms to hit the market in the coming months.
TIPping the scales
Of course, not all ETFs are appropriate for a wide range of investors, and one of the biggest gray areas is in leveraged and inverse leveraged ETFs. As the ETF market has matured, these types of offerings have exploded. You can now buy funds that offer you three times the inverse of the daily return of many different broad or narrowly focused market indices. ProShares, one of the industry's leading providers of alternative ETFs, recently announced it that it's launching the ProShares UltraShort TIPS ETF, which seeks to provide two times the inverse return of the Barclays Capital U.S. TIPS Index.
I can understand the reasoning behind introducing such a fund now. Given that interest rates are on tap to rise, not to mention the billions of dollars that have flooded into inflation-protected bonds, this sector does have more inherent risk than it did a few years ago. Investors have already built meaningful inflation expectations into the price of TIPS, so if that doesn't materialize, these instruments could take a hit.
But regardless of where inflation-protected bonds are headed in the next few years, they still make a lot of sense for investors who need to preserve their purchasing power in retirement. So if you're closing in on your retirement date, make sure your bond exposure includes a decent allocation to TIPS, either through a mutual fund such as Vanguard Inflation-Protected Securities (VIPSX) or an ETF such as iShares Barclays TIPS Bond ETF (NYSE: TIP ) or SPDR Barclays Capital TIPS (NYSE: IPE ) . You should really only buy inverse leveraged funds such as the ProShares fund if you're more of a speculator or you want to bet on the near-term direction of the market. The majority of investors should stick with the investments dictated by their long-term investing plan.