Fed Cuts Rates by Quarter Point, Some ETFs up 12%, 70% on Year. Is it all in the Software?

On the heels of a quarter point cut in the federal funds discount rate, stocks closed lower today. Leading the declines were financial stocks, which had been rising on hopes of strong Fed action to resolve the credit-market crisis, and stocks of companies whose profits are most closely tied to economic growth, such as transportation firms, retailers and industrial companies.

Smaller stocks suffered more than big ones, on the theory that they are less stable in times of economic trouble. Technology stocks closed lower also. The Nasdaq Composite Index dropped 2.5% Tuesday.

However, an Exchange Traded Fund (ETF) that shorts real-estate values was up nearly 12% on the day, and an ETF based on the Brazilian economy is up 70% for the year. International markets and selective investment instruments that are betting on the devaluation of real estate have performed well this year. This compared to an ETF that is tied to an index in selected tech stocks, which is only up approximately 12% for the year.

ETFs, which trade on exchanges like a stock and generally track various stock and bond indexes, already had lower expenses on average than traditional mutual funds. So now investors can find razor-thin expense ratios for some ETFs that track broad-based indexes of market sectors like international stocks, U.S. growth stocks or municipal bonds. But investors' infatuation with ETFs also has prompted several firms to introduce much pricier versions that seek higher returns by following offbeat and narrow indexes, such as ones tracking European drug companies or using computer-based algorithms to pick stocks. Such algorithms might be described visually, in their simple form as a flow chart using a lamp scenario to illustrate (see below):













Essentially, investors are paying for the quality of software, programmed with scenarios (or, as above, algorithms) and the added value of the managers who review the investments indicated by the algorithm that simulate market conditions.

No World Borders can help you assess the value of intellectual property (IP) that is in the form of software.

Here is a video from the WSJ with Chief Investment Officer Bob Doll of BlackRock with his reaction to the rate cut by the Fed today: