Guggenheim to Close FAA and 8 Other ETFs

And the death knell continues.

Guggenheim Investments announced Friday it will liquidate in March nine exchange traded funds that have under performed in terms of gathering assets. The New York firm said it will focus resources on products that have demonstrated the most demand. The nine ETFs together hold a total of $144 million, roughly 1% of Guggenheim’s $13.7 billion in ETF assets. That’s an average of $16 million in assets per fund.

“Guggenheim remains committed to the ETF business,” said William Belden, head of product development. Guggenheim Investments, the investment management division of Guggenheim Partners, has become the eighth-largest ETF provider since purchasing the Claymore and Rydex ETF families.

The nine funds to close:

Guggenheim ABC High Dividend ETF (ABCS)
Guggenheim MSCI EAFE Equal Weight (EWEF)
Guggenheim S&P MidCap 400 Equal Weight ETF (EWMD)
Guggenheim S&P SmallCap 600 Equal Weight ETF (EWSM)
Guggenheim Airline ETF (FAA)
Guggenheim 2x S&P 500 ETF (RSU)
Guggenheim Inverse 2x S&P 500 ETF (RSW)
Wilshire 5000 Total Market ETF (WFVK)
Wilshire 4500 Completion ETF (WXSP)

The most shocking of the bunch is the Guggenheim Airline ETF, the only ETF to track the airline industry. And of course, the disappearance of that great ticker, FAA. Granted the airline industry is a notoriously risky investment. Still, it’s pretty shocking that this fund has only $20.7 million in assets under management and an average daily volume of just 9,000 shares considering it surged 33% in 2012, twice the gain of the S&P 500. And year to date, FAA is up 13.6% vs. the 7.6% rise in the S&P, according to Morningstar.

Most ETF liquidations occur in funds that have a small-niche appeal. So, it’s disheartening that an ETF following the index that tracks the entire stock market, the Wilshire 5000 Total Market ETF (WFVK), couldn’t garner more than $9 million in assets.

The liquidating funds’ last day of trading on the NYSE Arca and the final date for creation and redemption activity is expected to be Friday, March 15, 2013. The ETFs will be delisted, Monday, March 18. Shareholders remaining in the affected ETFs as of close of business March 21, will have their shares liquidated as of that date’s closing net asset value. The liquidation proceeds will be distributed on or about March 22. The net asset value of each affected ETF on March 21 will reflect expenses encountered in closing the ETF.

SPDR Turns 20 Years Old

It was 20 years ago today, State Street Global launched the ETF. (Sung to the tune of
Sgt. Pepper’s Lonely Hearts Club Band.)

On January 29, 1993, the first exchange traded fund, called the Standard & Poor’s Depositary Receipt, began trading on the American Stock Exchange. With the abbreviation SPDR, the product was immediately nicknamed “the spider.” The Amex created the product, then called an “index tracking stock,” with State Street’s logistical help, as a way to increase trading volumes on the dying exchange. The first day the SPDR traded one million shares. Not a bad total for that time period. However, a month later trading volumes had shrunk to 19,500 a day and within three months volumes had fallen so low the Amex considered delisting it.

The Amex is now dead and gone, but its legacy lives on as a huge success and flagship of a revolution in investing. Renamed the SPDR S&P 500 (SPY), the Spider is now the largest fund of any kind in the world, with net assets of $123 billion and average daily volume of 144 million shares.

State Street Global Advisors celebrated the 20th anniversary of its product Tuesday with a panel discussion about the present state and future of the industry it helped start.

I Will Give a Guide to ETF Investing on Monday

I will be giving a lecture called “Guide to ETF Investing” this Monday, January 28, 2013, to the New York Investing Meetup group.

This is a prepaid event and the in-person class costs $20. You must register and pay through PayPal (you can use a credit card) at: https://www.paypal.com/cgi-bi/webscr?cmd=_s-xclick&hosted_button_id=ZHARD4QPF4P94 (this URL is good for in-person attendance and not the webinar).

Space is limited and all of this group’s previous classes have sold out. Please register early.

There is a webinar available for the class (you hear the presentation and see the slides, there is no video) and the cost is only $15. You can register for the webinar at: https://www.paypal.com/cgi-bin/webscr?cmd=_s-xclick&hosted_button_id=55SXFKTV644C6.

The class will be held at the group’s meeting hall at 5th Avenue and 21st Street in Manhattan. You will receive directions and at least one reminder after you have paid and registered.

The New York Investing Meetup group offers a profitable alternative to Wall Street hype. It provides unbiased, practical stock market education and economic analysis from independent traders and successful investors. You can view their videos on You Tube at:http://www.youtube.com/watch?v=BnSltpGcKNM.

CLASS LEVEL: Beginner/Intermediate Investor

Fidelity Takes on State Street

Reading List for Monday, Jan. 7:

Fidelity’s new push into ETFs means it’s getting into the ring with cross-town rival State Street Global Advisors. The Boston Herald says Fidelity “is getting less and less business from investment advisers because it used to be that an investment adviser would pick a basket of mutual funds and Fidelity would be 30 percent or 40 percent of them.”

Wall Street Sector Selector does some technical analysis on the SPDR S&P 500 (SPY) and concludes “U.S. stocks and ETFs now face a moment of truth after the recent powerful rally.  Technical resistance and fundamental headwinds persist along with ongoing political uncertainty. “

Ari Weinberg explains in WSJ.com how ETFs lend out their securities for some extra cash. International securities regulators are in a tizzy over how this could cause potential disruptions in the market. But ETFs in the U.S. are much more stable than the derivative-based ETFs in Europe, so it’s not much of a concern on this side of the pond.

PowerShares Plans to Close 13 ETFs

Invesco PowerShares Capital Management plans to close 13 of its more than 140 ETFs in the new year. The Chicago fund firm said the funds due to close represent less than 1% of its more than $74 billion in assets under management.

At a Dec. 18, meeting, the PowerShares Board of Trustees voted to make the ETFs’ final day of trading on Feb. 26, 2013. Shareholders who do not sell their holdings on or before Feb. 26, 2013, will receive cash equal to the amount of the net asset value of their shares, which will include any capital gains and dividends, in the cash portion of their brokerage accounts on the liquidation date, which is currently scheduled for March 7. Shareholders will generally recognize a capital gain or loss equal to the amount received for their shares over their adjusted basis in such shares.

The affected ETFs are listed below:

• PowerShares Dynamic Insurance Portfolio 
(PIC)
• PS. Morningstar StockInvestor Core Portfolio (PYH)
• PowerShares Dynamic Banking Portfolio (PJB)
• PowerShares Global Steel Portfolio
 (PSTL)
• PowerShares Active Low Duration Portfolio 
(PLK)
• PowerShares Global Wind Energy Portfolio 
(PWND)
• PowerShares Active Mega-Cap Portfolio 
(PMA)
• PowerShares Global Coal Portfolio 
(PKOL)
• PowerShares Global Nuclear Energy Portfolio 
(PKN)
• PowerSh. Ibbotson Alternative Completion Portfolio (PTO)
• PS. RiverFront Tactical Balanced Growth Portfolio (PAO)
• PS. RiverFront Tactical Growth & Income Portfolio (PCA)
• PowerShares Convertible Securities Portfolio (CVRT)

Capital Gains Need to be Focus Before Year End

With the Bush tax cuts on capital gains and dividends due to expire December 31, ETF investors need to evaluate what tax moves to make before the year ends, says the ETF Team at Charles Schwab.

“ETF investors need to focus on capital gains,” Michael Iachini, the managing director of ETF Research at Charles Schwab Investment Advisory during a conference call. Because that tax rate on capital gains may rise next year, “If you have ETFs that you’ve owned for many years, especially since the bottom of market from 2009, you may have big gains. If you have large unrealized capital gains you may want to take them in 2012.”

While ETFs have a reputation for being tax efficient, that efficiency relates to the securities within the fund. Mutual funds incur capital gains every time the fund sells securities for a profit inside the fund. While ETFs can realize capital gains, they rarely do, especially in equity ETFs, because of how the ETF is structured. However, individual investors still incur capital gains in their personal portfolio accounts anytime they sell a mutual fund or ETF for a profit.

Another strategy investors use to lower their capital gains taxes is to sell other investments at a loss. This is called tax-loss harvesting because investors can offset capital gains with a similar loss of capital.  However, a big concern with tax-loss harvesting is investors need to avoid the wash sales rule. If you sell a security for a taxable loss and you buy a substantially identical security to the one you sold within 30 days it’s called a wash sale and you don’t get to count the loss.

“The most important thing clients need to be aware of is that not all ETFs are tax efficient,” said Eric Pollackov, Schwab’s managing director of ETFs.  “There are many ETFs that don’t allow the in-kind redemption process [where shares are traded for other shares] and they have to use cash.” These exchange-traded products track commodities and currencies and often hold futures contracts or physical commodities.”

Pollackov said Schwab has yet to pay capital gains in any of our ETFs since their inception. “This shows the skill of our team,” he said. “We try our best to have each ETF track its underlying index, but also make sure that it isn’t paying capital gains at the end of the year.” Schwab ETFs hold only equities and bonds. None hold commodities, futures or currencies.

Pollackov also noted that Schwab’s original eight ETFs hit a milestone recently by passing their third birthday. This is significant because most investors and advisors refuse to look at a fund before it has a three-year track record. This period of time give investors a good idea how a fund and its manager perform in a variety of markets circumstances. Not only does the third birthday show the products are well established and are probably here to stay, but many rating agencies, such as Morningstar, won’t rate a fund until it’s three years old.

He also suggested investors check out Schwab’s new educational research website at www.schwabetfeducationexchange.com/charlesschwab/

Gold Could Rally If We Go Over Fiscal Cliff

Gold is definitely not in a bubble, said Nicholas Brooks, ETF Securities’ head of research and investment strategy, recently. The yellow metal hasn’t experienced the typical exponential rise seen in the run up to the collapse of previous asset price bubbles. As long as countries have to tackle economic problems over the next year, Brooks predicts the price of gold will do well.

“Gold could rally if we go over the fiscal cliff,” said Brooks at the ETF Securities Annual Precious Metals Conference in New York. “There seems to be a growing view that gold may be one of the better hedges against the risk that a policy mistake is made and we go off the fiscal cliff.”

The fiscal cliff is the name given to the dramatic spending cuts across the federal budget that will go into effect January 1, 2013. This is the same day Bush era tax cuts expire, causing tax across the board to increase to the rates seen during the Clinton Administration. The big fear is that spending cuts and higher taxes will hurt the economy so much the U.S. will fall back into a recession. This could also spark another downgrade of U.S. debt by the debt rating agencies. While not good for the economy, such a situation would be good for the price of gold, he said.

Brooks said structural factors continue to support the gold price, especially behavioral changes among the world’s central banks. Prior to the second quarter of 2009, central banks were large net sellers of gold, selling between 10% and 15% of their supply. But in 2009 they became net buyers. Now between 10% and 15% of the annual supply of gold is being bought by central banks, a switch of 30 percentage points which is a net positive for the precious metal, he said.

He also pointed to central banks around the world, including the U.S. Federal Reserve, saying they will continue to increase liquidity until their economies recover.

“Low real interest rates and a decline in the real return on cash are enormously good for gold,” said Brooks. And if later in the year, “European sovereign risk concerns rise again, a relatively high probability scenario, the gold price has the potential to rally strongly, as it did last summer when Spain saw its bond yields rise sharply on growing fears it would not be able to finance its debt payments.”

The British-based ETF Securities says it launched the first exchange-traded commodity (ETC) in the world when it listed the Gold Bullion Securities in Australia and London in 2003. When the SPDR Gold Shares (GLD) launched in 2004, it was the first U.S.-listed ETC. Today, GLD, with $73.5 billion in assets, is one of the largest ETP’s in the world.

ETF Securities manages seven precious metal exchange-traded products in the U.S. The ETFS Physical Swiss Gold Shares (SGOL) and the ETFS Physical Asian Gold Shares (AGOL) each charge an expense ratio of 0.39%, one basis point less than the SPDR Gold Shares. ETF Securities’ other products track silver, platinum and palladium.