CTMPR

I felt totally comfortable with my position in the Uranium ETF – URA until I heard about the Earthquake and Tsunami in Japan. It was obvious from the start that one of the major issues was going to be cooling down their nuclear reactors without the benefit of electricity. Since I was out of town and didn’t have access to my trading account I wasn’t able to get out on that Friday. Monday and Tuesday were brutal as the reactor problems became magnified in the media as Japanese stocks plunged so did everyone involved in the uranium / nuclear industry. There is nothing like the sight of people in nuclear suits testing babies and children for radiation poisoning to get investors to exit their positions.

Since I was in during the plunge I decided to wait and accumulate a few additional shares instead of trying to cut my losses. After all, I’m viewing this as a buying opportunity similar to the oil spill sell off last year after the BP Oil Spill. After all, there is little doubt that despite the tension in Japan right now regarding their nuclear reactors this world needs nuclear power.

I noticed the largest company in the sector Cameco came under severe pressure and the smaller companies fell even harder. In the past I would’ve just bought Cameco in this situation but with the new Uranium ETF (URA) I’m able to purchase a basket of 23 industry leaders. Since I already owned some I simply increased my position once it had dropped nearly 1/3 in just a couple days. It’s possible that there will be more turbulence before this is over but overall I think it will end up being a great buy opportunity just like oil stocks in the summer of 2010.

As you can tell by my writing, I’m a big proponent of all types of ETF investing, but there are definitely good and bad ETFs. I was recently reading a comparison of a few of the volatility ETF offerings and was quite shocked by their performance. It’s not too surprising that a derivative of a derivative (an ETF based on the Futures Contract of an Underlying Index) would have some tracking error but wow, these are worse than crude oil. In the short run (10 days) the only one that matched the explosion in the VIX was the leveraged TVIX, the VXX which is so popular didn’t even come close.

If that wasn’t bad enough, just take a look at the longer term chart of the past few months. You would’ve had to have impeccable timing in order to make money in one of these without being shredded. I knew from experience that volatility is tough to play on the long side and these ETFs are not going to make it any easier. For the average investor I would suggest not even considering these instruments, they are strictly for experienced short term traders!

With Japanese stock markets hitting levels not seen since early 2009 it may be a good time to take a look at Japan ETFs to see if there are any bargains. Being the 3rd largest economic power in the world, Japan is a large force in the world economy. Since peaking in 1989 the large cap Nikkei along with the Japanese economy has struggled in a prolonged bear market.

This has lead to relatively inexpensive stocks especially if one looks at the Topix which is mostly small cap stocks.

According to Dr Steve Sjuggerud:

“Small-cap Japanese stocks are trading at just 0.7 times book value – or a 30% discount to book value – and 0.34 times sales. This is off-the-charts cheap. Those are the statistics of the WisdomTree Japan Small Cap Dividend Fund (DFJ).”

Here is an accompanying chart that shows how price to book value has contracted over the past 20+ years.

When you look at that chart and consider that things have gotten dramatically cheaper in the past few days it should seem obvious that there is some long term potential here.

The Japan ETF that was mentioned by Steve was the WisdomTree Japan SmallCap Dividend (DFJ) but there are several to choose from.

DXJ – WisdomTree Japan Total Dividend Fund (Large Cap Value)

EWJ – iShares MSCI Japan Index Fund (Large Cap Blend)
ITF – iShares S&P/TOPIX 150 Index Fund (Large Cap Blend)
SCJ – iShares MSCI Japan Small Cap Index (Small Cap Blend)

JSC – SPDR Russell/Nomura Small Cap Japan Fund (Small Cap Blend)

Leveraged Japan ETFs:

EZJ – ProShares Ultra MSCI Japan ETF (2X Long)
EWV – ProShares UltraShort MSCI Japan ETF (2X Short)

Use caution and make sure you understand the risks before investing in any ETF. This is especially true if you decide to try a leveraged ETF.