There is no denying that the ETF boom is in full swing, as billions of dollars continue to flow into the industry every month despite a difficult economic environment. As individual investors and advisors alike become more informed on the nuances and potential benefits of ETFs, usage has surged. Part of the impressive surge in assets is no doubt attributable to the flexibility of the exchange-traded structure; these securities have found homes in the portfolios of investors across the risk tolerance spectrum. ETFs have been embraced by long-term buy-and-holders because of the extremely competitive expense ratios relative to traditional actively managed mutual funds. They’ve also become quite popular as “replacements” to equities; more active investors who measure holding periods in hours have gravitated towards the exchange-traded structure because it provides exposure to a basket of securities that can be traded throughout the day.

There are other, more creative uses for ETFs as well. These securities can extremely useful for investors looking to implement market neutral pairs trading strategies that generally involve equivalent long and short positions in related (but unique) asset classes. By identifying two securities that are seemingly mispriced relative to one another, investors can capitalize by purchasing the undervalued asset and shorting the overvalued asset. Because the net exposure is zero, these investors don’t really care if broader markets boom or bust; so-called “market neutral” positions can thrive in any environment.

There were no changes to Northlake's Market and Style models for August. The market Cap model continues to recommend Mid Caps and the Style models still favors Value. As a result, Northlake client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) will be maintained for another month.

The Market Cap model saw a few shifts in its underlying indicators with one moving from large cap to small cap and another shifting the opposite way. The overall model thus held quite steady. Moving to small cap was the market breadth indicator which reflects the broad rally in July that lifted all the major indices, sectors, and themes up in unison. Shifting to large cap was the coincident indicators factor. This factor reflects the ongoing economic recovery. Small caps make sense when the economy is doing quite poorly because cyclical influences mean the next move is likely up. Therefore, when things look bleak the riskiest trade makes sense. Now that a recovery is underway, even if it is stalling, it no longer makes sense to play the higher risk small caps. Overall, the Market Cap model continues to reflect a moderate economic recovery that is supportive of the stock market.

The list of Russell Reconstitution Preliminary candidates came out on Friday June 11,2010 with 262 additions and 205 deletions. This list will be filtered in the next two weeks and on June 25, 2010 the final list will be announced. A quick overview on the process below from the Russell website: