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Money Report


Upgrading Your Munis

Allstate is weeding out some of its municipal bonds. On Nov. 5 the insurance giant announced in a conference call that its muni position had dropped 4% in the third quarter, to $22.2 billion on Sept. 30. It's not planning to eliminate munis altogether—state and local government bonds still account for more than 20% of Allstate's investments. But it's selling bonds from some riskier parts of the market. On the way out are health-care-related munis and certificates of participation, a type of security backed by a municipality's budget appropriations rather than its taxing power. With Allstate's zero-coupon bonds, which repay face value at maturity but pay no coupons along the way, rising interest rates are the worry.

Neil Klein, a senior portfolio manager at Carret Asset Management in New York, says investors should follow a similar strategy and invest in high-quality bonds backed by either taxes or revenue from essential services, such as utilities and water treatment. He also recommends short and intermediate-term maturities to reduce exposure if interest rates rise.

An ETF for Lone Star Fans

On Nov. 4, Texas became the second U.S. state to get an exchange-traded fund of its own. Keith Geary of Geary Advisors says his company launched the Texas Large Companies ETF (TXF) in part because of performance. A computer program showed that if the portfolio had existed five years ago it would have outperformed the S&P 500-stock index by 32 percentage points, he says.

But the fund is not a bet on the Texas economy, says Scott Burns, director of ETF analysis at Morningstar (MORN). Top holdings include ConocoPhillips (COP), ExxonMobil (XOM), and Schlumberger (SLB)—global companies that just happen to have headquarters in Texas. Energy dominates the ETF, at 63%. Burns says investors can achieve similar exposure by purchasing the Energy Select Sector SPDR (XLE) and the SPDR S&P 500 (SPY) fund and save on management fees. The Texas fund's expense ratio is 0.85%, compared with less than 0.22% for the SPDRs. (Geary says this is a result of the fund's small size.) Ultimately, says Burns, the fund is for investors with a soft spot for the Lone Star State. "It doesn't have a fit in portfolio allocation," he says. "You're paying up to invest your pride in your state."

A Refuge in Gold

Gold closed above $1,100 an ounce for the first time on Nov. 9 and is up 25% so far this year. It's not rising just because the U.S. dollar is falling, although the greenback gets a lot of attention. Investors are equally worried about the pound, the euro, and the yen. With governments around the world printing money, global inflation is the real fear—and investors are buying gold as an insurance policy against their currency holdings. "Gold's a replacement because those currencies aren't a safe place to be," says Richard Kang, chief investment officer at Emerging Global Advisors, which sets up exchange-traded funds. Still, fear hasn't turned to greed yet, says Kang. If gold trades above $1,250, watch for Wall Street's herd mentality to take over. That's when momentum traders could jump in. "That would be the trigger," he says. "We could easily see $2,000."


Cash Is for Losers
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