A number of recent headlines have indicated that there might be hidden risks for investors in Exchange Traded Funds [ETFs]. Indeed, one headline characterized ETFs as ‘Emerging Threat Funds.’

What’s going on? Are these warnings credible, or is this yet another example of sensational headlines designed to lure readers into buying a publication or subscribing to an on-line investment advice service, that upon examination turns out to be unfounded?

We explore this topic in the article below.

Trustees and legal counsel are sometimes confused regarding the extent to which an investment advisory firm will act in a fiduciary capacity when accepting delegation of investment matters. Although the Investment Advisors Act of 1940 provides that the advisor must act as a fiduciary, it is an unwarranted leap of logic to assume that all advisory firms provide conflict-free services at a level of care skill and caution demanded from a fiduciary. Investment Advisory Services Agreements often contain contractual provisions which opt the parties out of the default prudence standards embodied in state Prudent Investor statutes. This places trustees in a true caveat emptor situation.

Kathleen Pender quoted SCLC Principal Jon Chambers, head of the firm’s retirement plans consulting practice, in a column published on Thursday January 12, 2012, discussing a new 401(k) product that features index funds and default enrollment into a managed account product.

Foreign bonds have been in the news a lot recently. Lots of European countries borrowed too much money, and now they are trying to find a way to get out from under that debt without defaulting on it.

The only question at this point is what sort of haircut the owners of European sovereign debt are going to enjoy. One way or another, they are going to take a haircut. And that threatens the solvency of big European [and American] money-center banks, who own a lot of that sort of debt. This in turn threatens the liquidity of the overall financial system. And we know from 2008 how nasty that sort of thing can be.

Investors currently in or approaching retirement are, of course, correct to be concerned whenever their investment wealth decreases. Less money is not a good thing—especially if there are binding constraints on labor income. Without the financial flexibility of a paycheck, the consequences of assuming investment risk are necessarily magnified.

Given the decline in stock values over the previous quarter, I’d like to inform you of a portfolio-survival-blueprint you may wish to consider. The nature and scope of this blueprint form the main topic of my article published in the Wealth Strategies Journal in 2008. The article “Managing Retirement Portfolio Withdrawals in Turbulent Times: Precautionary Savings, Investment Reserves and Mid-Term Adjustments” can be found in the PDF file below.

Investment Quarterly for the 3rd Quarter of 2011 looks back at the behavior of U.S. Treasury Inflation Protected Securities over a period of extraordinarily low inflation. How did TIPS perform over that period, which exhibited none of the problems they were designed to ameliorate?

We also briefly examine the question of whether TIPS are a good barometer of future inflation. Finally, we discuss in greater detail the differences between three different ways to gain exposure to the risk/return characteristics of TIPS: a passive exchange-traded fund, a somewhat active open-end mutual fund, and a very active open-end mutual fund.

Should skilled investors use stop-loss trading strategies or derivative instruments to protect a portfolio during periods of market turbulence? Do such protective strategies work? Are they costless?

During a period of downside turbulence capital markets are likely to become tightly coupled. Investment portfolios become more fragile because negative shocks to world markets propagate through capital markets more quickly and pervasively than during bull market periods. Tight coupling often means that assets with low or negative correlation during normal market conditions suddenly exhibit similar downside return patterns. This, of course, may reduce the effectiveness of portfolio diversification as a risk control strategy during severe market declines.

Although diversification — the inclusion of assets with return patterns that tend not to mimic each other — is the classic method of portfolio risk control, a variety of other risk mitigation techniques are available. Given the sequence of volatile equity market returns from the plunge in the technology-heavy NASDAQ stock exchange in 2000 through the global recession and the recent U.S. & European sovereign debt credit rating downgrades, investors wonder if trading or financial engineering techniques can mitigate declines in portfolio values.

Is it prudent to set a withdrawal rate of 4% from a portfolio that is intended to support retirement income? For many years, 4% has been the “rule of thumb” in the financial planning community. But the 4% rule is controversial, and there are strong opinions on both sides. After all, there is always a risk that any schedule of regular portfolio withdrawals might interact viciously with adverse markets, causing the portfolio to crash and burn before the retirement is successfully completed.

Our latest Investment Quarterly reviews the discourse on the subject among academic economists and financial planning practitioners. We examine two sets of studies of the question, with two different ways of approaching it: empirical analysis, or modeling. Each has its strengths and weaknesses; their findings disagree.

The main article of the first Investment Quarterly of 2011 compares the 2000 and 2010 editions of an SCLC diagnostic instrument, the Risk/Return Continuum. Since our firm’s founding in 1995, we have been using the Continuum to help clients understand investment risk, so that they can decide how much of it they want to tolerate. Updated annually, the Continuum looks back at investment history over the last 50+ years, and shows how it would have treated six different portfolios of differing degrees of risk.

In this issue of IQ, we compare the Continuum of 2000 to its counterpart of 2010, to see how a decade of turmoil, war, political controversy, and market crashes might have affected risks and returns of different portfolios and their elements.

In its February and March issues, the Banking Law Journal, one of the pre-eminent trade journals for lawyers and bankers, has published a two-part article written by Patrick Collins. The title: Trustee Asset Management Elections: Portfolio Performance Evaluation and Preferencing Criteria. It is available here