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What the experts say

A warning on exotic ETFs; How to play the dollar; Tax-credit headaches

A warning on exotic ETFsDon’t be too proud of yourself if you’ve recently begun venturing beyond investing in “plain-vanilla” ETFs, said Christopher Emsden in The Wall Street Journal. A new report from the international Financial Stability Board describes the growth in specialized exchange-traded funds as a “disquieting” echo of the craze for exotic investments that helped fuel 2008’s meltdown. Already, almost half the ETFs issued in Europe are backed not by actual securities but by derivatives such as interest-rate swaps. Such “synthetic” securities expose ETF owners to the risk of default on the derivatives, just as buyers of AIG’s credit-default swaps stood to lose billions when AIG ran out of cash. Before investing in exotica such as “leveraged,” “inverse,” or “leveraged-inverse” ETFs, make sure you know what they’re made of and what protection ETF investors have against default.

How to play the dollarThe dollar’s weakness against the euro explains “why U.S. tourists are bringing their own food when they go to Paris,” but it’s also “a wonderful thing” for many U.S. investors, said John Waggoner in USA Today. A 100-euro dividend was worth $137 when converted into U.S. currency last year; this year, that same dividend check would translate into $149. The dollar will inevitably rise again, probably when the Federal Reserve decides to raise short-term interest rates. But placing bets on currencies is a dangerous game and individuals should do it for one reason only—to protect against stock-market losses. Because the dollar’s value tends to rise when stocks fall, you can hedge against stock losses by investing in a broad-based currency fund such as PowerShares DB G10 Currency Harvest.

Tax-credit headachesThe first-time-homebuyer tax credit that helped stimulate the housing market from 2008 to 2010 is now mostly stimulating aspirin sales, said Michelle Singletary in The Washington Post. Its name is somewhat deceiving: The “credit” is actually an interest-free government loan of up to $7,500 that buyers are required to repay in 15 annual installments—beginning this month with their tax filings. But the entire loan becomes due if a buyer sells the home. Such requirements are sowing confusion even inside the Internal Revenue Service, which admits now that it should have done a better job of sharing information about the loans.

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