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ETFs: The Road To China

Now that Burton Malkiel has conquered Wall Street, he has set his sights on the Great Wall. Malkiel, author of A Random Walk Down Wall Street and a Princeton University economist, sees China as a great investment opportunity. He says investors are getting a bargain for "the most undervalued currency in the world."

Malkiel suggests exchange-traded funds that focus on Chinese companies trading in Hong Kong and New York. He also recommends ETFs holding shares of companies in countries that are China's major trading partners. Malkiel's strategy is to combine the SPDR S&P China ETF with the Vanguard Pacific ETF.

Malkiel's From Wall Street to the Great Wall: How Investors Can Profit from China's Booming Economy (W.W. Norton) comes out in December.

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You may own a vacation house, farm, ranch, or an interest in a privately held company or a family limited partnership you'd like to put into a trust for your heirs. But if you have a special attachment to these investments, you may also be worried the trustee would sell your stake to diversify the trust's portfolio.

That's one reason why a growing number of donors are flocking to Delaware to set up trusts. The state's "trust adviser" statute allows a donor to decide when the assets in a trust can be sold, says David Diamond, trust officer at JPMorgan Private Bank.

The law isn't new, but with the rise of alternative assets in investors' hands, "we're getting a good deal of business this way," Diamond adds. Other states have similar statutes, but only Delaware's has withstood a court challenge, says Diamond.

In pursuit of ever higher yields, managers of closed-end funds are getting downright creative. They've launched 17 new funds so far this year, some of which are built around exotic investments commonly used by hedge funds and institutional investors. One such investment is a total return swap, in which the fund cashes in if the underlying stock goes up, and owes money to an investment bank if it doesn't. Another is catastrophe bonds. Issued by insurance companies, they pay a plump interest rate unless, say, a catastrophic hurricane hits, and then they may not pay anything at all.

The new funds sport initial yields of 9% or 10%, which has made them big sellers. The average fund IPO this year is $820 million, up 62% from last year (through June 15). Mariana Bush, a closed-end fund analyst at Wachovia Securities (WB), warns that "risks are greater than they appear." Exotic assets can always blow up, but the more common risk is capital erosion. That's what happens when a fund maintains a high payout even as its investments fail to produce enough income to support it. Some of the fat yield coming back to you is your own money.

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