On our most recent radio show, we discussed the latest actions taken by the Federal Reserve and more importantly, how those actions can impact your investment portfolio.  In many ways, the Fed is making it harder than ever on investors by creating two real problems that can be difficult to combat.  The first problem is that the Fed’s low interest rate policy penalizes savers and people who depend upon income from their portfolios to live.  The second issue is that the types of actions the Fed is currently undertaking have historically led to inflation.  So, the real question is how do you position your portfolio in this type of environment?

The good news is that ETFs can help you solve these issues.  There are a number of excellent ETF options that can help you generate income in your portfolio, protect against the devastating impact of inflation, or in some cases – do both.

Listen to the full show here to learn about some of the ETF options that can help you protect your portfolio from the Fed’s policies.

On our most recent radio show, we spent some time discussing some of the more popular emerging markets ETFs including VWO, EEM, and SCHE.  While emerging markets were down nearly 20% in 2011, they’re off to a strong start in 2012 and we explained why having a material allocation to emerging markets in your portfolio is still important over the next decade.

Listen to the full show here.

On our most recent radio show, we explained the common mistakes or shortcomings that we tend to see in people’s investment portfolios including:

• Overpaying for investments
• Using a cookie-cutter allocation with no disciplined investment strategy
• Failing to use alternative asset classes
• Overlapping mutual funds
• Investing in individual stocks and/or bonds
• Underperformance

We discussed each of these issues in detail and more importantly, explained how you can fix each of these issues by using ETFs.

Listen to the full show here.

Commodity investing seems to be all the rage these days. Before adding commodities to your investment portfolio, you should answer two questions.  First, why invest in commodities?  Second, what is the best way to invest in them?

What is a commodity? A commodity is simply a good or service that is not readily distinguishable from another of its type. For example, gold is a commodity. One ounce of gold is pretty much like every other ounce of gold; the same with a gallon of gasoline, a barrel of oil, a pound of copper or a pound of steak. Many of the things we buy, use, consume and wear in our daily lives are commodities or are derived from them. Cotton is used to make the clothes we wear. Gasoline fuels our cars. Coal and natural gas heat and cool our homes.

Just as you can buy and own a share of stock or a bond, you can also buy a commodity. Commodities do not pay a dividend or pay interest, so the return on your investment is solely dependent on the change in the price of that commodity. Since they are commodities, their price is determined by the balance of supply and demand. If more people demand a commodity at a price than can, or will, supply it at that price, then the price of that commodity will rise, and vice versa.

Why invest in commodities at all?

There are three broad reasons:

1)     Diversification – Commodities are a separate asset class. An asset class is simply an asset that moves in price differently than another asset.  Though the price of commodities can be volatile and risky, they often perform differently from stocks and bonds.   Because they perform differently, combining commodities into a portfolio of stocks and bonds will likely lower the volatility and risk of your overall portfolio and deliver better risk-adjusted returns over time. Someone called diversification the only free lunch in investing. Adding commodities to your portfolio will typically increase its diversification.

2)     Hedging – Since your returns from owning commodities depend on the change in the price of that commodity, commodities make good inflation hedges. As inflation drives up prices, the prices of commodities also increase, which increases the value of your investment. It is important to note that not all commodities respond the same way to inflation, so this hedge is best done with a basket of various commodities.

While commodities are good inflation hedges, they are also hedges against currency devaluation. If the US dollar weakens against other currencies, commodities from other countries will increase in price in terms of US dollars. For example, if the US dollar weakens against the Mexican peso by 10%, then Mexicans will demand roughly 10% more US dollars for a barrel of oil. In this way, owning commodities is a form of insurance for if the US dollar weakens against other currencies.

3)     Speculation – There has been much press about the rapid growth of many developing nations, chief among them are China, India, Brazil and Russia. As those countries develop, they are building infrastructure which uses industrial metals like copper, iron and steel. As the middle class in those countries grows, the demand for a better diet increases, which in turn increases demand for agriculture commodities. The middle class also buys more cars, which increases demand for the metals needed to build the cars and for gasoline to fuel the cars. They are also able to spend more to heat and cool their homes, which increases the demand for coal. That growing middle class also wants to dress nicer, which means more clothes and jewelry.

You get the picture. The growth of the middle class in many developing countries has dramatically increased the demand for many commodities. Supply has increased for some commodities, but not at the same pace as the increase in demand. Accordingly, the price of these commodities has increased for much of the last decade. You might speculate in commodities if you think that these developing countries will continue to grow and increase their demand for commodities at a faster pace than the supply of those commodities can be increased.

If you decide that commodities are, in fact, an investment you want to include in your portfolio, you need to determine the best way to invest in them.

So how do you invest in commodities?

There are several ways:

1)   Futures – A futures contract is simply the right to receive a physical commodity at some point in the future. You pay the futures price now for delivery in the future. Farmers sell futures contracts to lock in the price of their crops. Food companies like Kellogg buy futures to lock in the price they will pay for their raw materials. Speculators buy or sell futures in expectation that prices will go up or down in the future. For most investors, however, futures are not the best way to invest in commodities. First, futures use leverage which means you can lose more than your initial investment. Second, you would have to buy many different futures contracts to buy a basket of commodities, which means you need a large investment account. Third, futures contracts expire, so you would have to regularly buy and sell contracts to hold your investment.

2)   Stocks – you can buy shares of companies that are involved in the commodity, usually producers of that commodity. For example, you could buy stocks of gold miners to get exposure to gold. A gold miner’s earnings will increase as the price of gold increases. However, owning stock in companies exposed to a commodity is an imperfect way to invest in the commodity because the price of those stocks will also fluctuate as a result of many factors unrelated to the price of the commodity itself, such as general stock market conditions, management’s ability to effectively manage the company, and the competitive environment impacting the industry in which the company competes. These factors can cause the value of your investment to go down even when the price of the actual commodity goes up.

3)   Mutual funds – most mutual funds dedicated to a commodity simply own the stocks of the companies involved in that commodity as we discussed above. A few, but not many, mutual funds invest more directly through futures contracts. In addition, because of the way mutual funds work, you will usually receive capital gain distributions each year from your mutual fund investment.  As a result, you may pay taxes each year on the investment even when the value of your mutual fund doesn’t go up.

4)   Exchange Traded Funds (ETFs) – The potential advantages of ETFs over mutual funds has been well documented. ETF’s trade throughout the day like stocks and represent an investment in an underlying portfolio like a mutual fund. They combine the advantages of mutual funds with the freedom to buy and sell when you want to without the tax disadvantages of mutual funds (e.g., capital gains distributions). There are well over 100 different ETFs that provide investment exposure to commodities which increases the likelihood of finding one that suits your investment needs.

Why might ETFs be the best way for many investors to invest in commodities? First, with the variety of ETFs that invest in commodities, it is easier to find one or several that best suit your individual investment needs. Second, one ETF can give you broad based exposure to commodities. If you chose futures or stocks to invest in commodities, you would need to purchase and manage a significant number of securities, which increases your costs and the amount of time spent managing your investments. Third, compared to mutual funds, ETFs are generally more flexible, liquid and cost effective.

While we think that ETFs are the best way to invest in commodities, there a few issues to consider. With over 100 ETFs devoted to commodities, there are likely to be some that are better for your individual situation than others.

There are four broad types of commodity ETFs:

1)   ETFs that attempt to track the price of a commodity or a basket of commodities through futures contracts. The advantages of these ETFs are that professionals manage the futures contracts and you cannot lose more than your initial investment. The disadvantages are tracking error (due to the way futures contracts work, the price of the ETF can sometimes not track precisely the cost of the underlying commodity), costs to manage the futures contracts and tax structure. Many of these are structured as limited partnerships, so investors are responsible for paying tax on their portion of the capital gains regardless of whether the investor sold shares in the ETF. These capital gains and interest income are reported on form K-1, which could have tax implications for some investors.

2)   ETFs that own the underlying commodity.  For these ETFs, ownership of the ETF actually represents an ownership interest in a fractional amount of that physical asset. For example, when an investor owns the SPDR Gold Trust ETF (ticker symbol: GLD) the investor directly owns physical gold stored in a vault in London.

3)   ETFs that own the stocks of companies involved in the commodity. An example is the Market Vectors Gold Miners ETF (ticker symbol:  GDX), which owns shares of various companies that mine and sell gold.  As discussed above, owning commodity related stocks are an imperfect way to invest in a commodity, but a stock-based ETF is a low cost, tax efficient, professionally managed vehicle for the investment.  This saves the investor from the investment and resources needed to analyze stocks, and eliminates or reduces the costs and taxes related to a mutual fund. For some commodities, a stock-based ETF is the most efficient way to get exposure to that commodity.

4)   Finally, there are ETNs or exchange traded notes. ETNs are non-interest paying debt instruments that track a specific price index. The advantage of ETNs is that your investment return matches that of a price index of that commodity or basket of commodities minus the management fee. Taxes are based on when you sell the ETN. The disadvantage of an ETN is that there is a risk, usually very small, that the issuer could default on the debt.

On our most recent radio broadcast, we took a look back at the financial markets in 2011 and also previewed what to look for in 2012.  As with 2011, the European debt crisis and the slow U.S. economic recovery remain front and center in 2012.

In addition, to begin the New Year, we offered several investing-related New Year’s resolutions that you may want to consider adopting as your own.  Every year, there are a lot of New Year’s resolutions that get bandied about – exercise more, eat better, quit smoking.  However, we have some New Year’s resolutions that just might be easier to implement, easier to stick to, and best of all, they very well may put your portfolio in a much better position for many years to come.

Listen to the full show here.

On our most recent radio broadcast, to close out 2011, we discussed a recent article from etfdb.com titled “Ten Reasons ETFs Are Better than Mutual Funds”.  We covered quite a bit of ground on our radio show in the second half of 2011 and we thought this article did an excellent job of summarizing many of the key points we’ve continued to emphasize.

As we head into 2012, we would encourage all investors to think about these benefits in terms of their own portfolios and ask themselves if they’re taking advantage of these benefits.  If not, why?  If your advisor still has you invested in actively managed mutual funds, present them with this list and ask them to explain the reasoning.  Ask them if they get a kickback to put you in actively managed mutual funds.  You may not like what you hear.

Listen to the full show here.

As we explained way back in May of 2009, ETFs were “Eating Fidelity’s Lunch”.  Back then, it had already become clear that a primary reason for Fidelity’s deteriorating asset levels was the rapid growth of ETFs.  Fidelity was clearly concerned with entering a market that was an obvious competitor to their lucrative actively managed mutual fund business.  Remember, actively managed mutual funds charge significantly higher fees than ETFs (and more often than not, underperform the same benchmarks those ETFs are tracking).  Unfortunately for Fidelity, investors have continued to vote with their money and it looks as if Fidelity is finally realizing where the future of investing is heading.

As they say, better late than never…

On our most recent radio broadcast, we explained another timely, year-end topic – tax loss harvesting.  ETFs are an excellent investment tool to implement various strategies to take advantage of an area of the federal tax code that allows investors to use losses on investments to reduce their income and therefore, lower the amount they pay in taxes.  We explained several ways that investors can take advantage of ETFs to swap out of underperforming mutual funds or stocks and lower their tax bills at the same time.

Speaking of underperforming mutual funds, we also spent some time discussing a recent article on thestreet.com titled “13 Fund Managers Who Lost Among the Most Money”, which drove home the point on just how badly mutual funds are underperforming this year.  The article was full of statistics that should alarm even the most ardent mutual fund supporters including that 72% of the 261 large cap core mutual funds were underperforming their indices and a staggering 84% of large-cap growth mutual funds were underperforming.  And what’s worse for mutual fund investors is that they’re paying exorbitant fees for this underperformance.  It makes sense then, as the article pointed out, that Goldman Sachs predicts there will be $125 billion dollars in equity mutual fund redemptions, while ETFs will see $100 billion dollars in new purchases in 2012.  Why invest in expensive mutual funds that can’t deliver benchmark returns when you have low cost ETFs available that can?

Listen to the full show here.

The arguments over which is the better vehicle, ETFs or mutual funds, usually get bogged down in quarrels about active versus passive (which is a different debate), investor behavior, and product proliferation.  All of these diversions miss the point.  What we are really debating is technology.  Both vehicles are technologies for gathering a broad group of investors together to combine assets under a single manager.  One is Depression-era technology, however, and the other is digital-age technology.

Mutual funds are often referred to as 1940 Act funds, referring to not only the securities act that created them, but also the time period in which they were created.  In 1940, the mutual fund was cutting-edge technology.  Can you imagine being an asset manager in 1940 and being told that you had to price your fund and clear all trades at the end of the day, each and every day?  Remember, this was a paper-trading world where trades were done on the floor of the stock exchange by people flashing funny hand signals at each other.  On top of that, you had to communicate your portfolio holdings to all of your investors quarterly in public filings and mail annual reports!

In 1940, these changes were massive and onerous to fund companies, but they allowed for the creation of the $9 trillion mutual fund industry that we see today.  But it isn’t 1940 anymore; it is 2011, and the technology has made what was probably considered impossible in 1940 laughable today in terms of its capabilities.

Enter the digital age’s answer to gather assets communally:  ETFs.  Why, in today’s computerized environment, do investors need to wait until the end of the day to know what price they purchased their fund at?  Would you buy a car that way?  Would you go to the dealer at 10 a.m. and say, “I want to buy that station wagon,” only to have the salesman tell you that you should give him $16,000 now, come back at 3 p.m., and then after everyone else has bought their car, he’ll tell you how much car you bought?  Of course not, but that is how mutual fund technology works.

ETFs are investment vehicles for the digital era.  Daily liquidity is possible because the trading technology has made it possible.  Tax efficiency is improved with the injection of a secondary market in addition to a primary one.  Daily disclosure is not only required but also feasible with low-cost distribution on the Internet.  In 1940, you couldn’t have disseminated daily holdings if you wanted to.  But most important, the digital technology is cheaper.

On our most recent radio show, we discussed the latest on the debt crisis in Europe and some ETFs with European exposure that may be impacted including VGK (Vanguard MSCI Europe ETF), EWG (iShares MSCI Germany Index ETF), EWQ (ishares MSCI France Index ETF), and EWI (ishares MSCI Italy Index ETF).

We also spent some time focusing on a timely, year-end topic – capital gain distributions.  This is the time of the year where if you own mutual funds, you may be getting some bad news in the mail in the form of taxable capital gain distributions.  With ETFs, in addition to typically being much cheaper and offering more investment options than actively managed mutual funds, they can also be much more tax efficient due to their minimal capital gain distributions.

Finally, we delved into some of your questions, including emerging market ETFs to consider and how easy it is to work with The ETF Store.

Listen to the full show here.