Working on a New Book

Please forgive me if I don’t post everyday. I’m currently working on my second book. It’s called Dividend Stocks for Dummies and it will be one of those yellow books in the Dummies Series. I will try to post at least three times a week to the blog. And I will look closer at dividend ETFs. But, I have some tight deadlines on the book and I need to focus on that.

Thanks.

James Sees Market Testing March Lows

Short ETFs may see a resurgence if Barry James’ prediction comes true.

The Direxion Daily Financial Bear 3X Shares (FAZ), the ProShares UltraShort QQQ (QID) and the ProShares UltraShort Russell 2000 (TWM) were among the top 12 stocks to see the most net cash inflows today according

In a presentation yesterday by mutual funds recently named Lipper Leaders, Barry James, the portfolio manager of the James Balanced Golden Rainbow Fund, says we’re entering a depression.

Lipper, which competes with Morningstar as an evaluator of mutual funds and ETFs, rates funds according to five criteria: total return, consistent return, capital preservation, expenses and tax efficiency. The ratings go from 1 to 5, with 5 being the highest. I’ve attened quite a few of these Lipper Leader presentations over the years and Barry James keeps popping up. Compared to other mutual funds in the same category of balanced funds, those that hold stocks and bonds, the James Balanced Golden Rainbow Fund has scored a 5 in total return, consistent return and capital preservation for all the measured periods: the three-years ended March 31, the five-year period, the ten-year period and lifetime of the fund.

James makes the top of the class by properly evaluating the risk in the market. So, he’s worth listening to. He thinks the economy is heading into a depression. He comes to this conclusion because businesses have cut inventories, but he doesn’t see any increases in production. Restaurants at resorts are seeing declining business. He thinks the economy remains weak, which will lead to a weakened stock market. James expects the market to test the March low.

He said the recent rally has been a short covering rally. More than growth or value driving the market, he said the rally has been based on “silly cheap stocks. In terms of quality, poor, or low-quality stocks have been running rather than growth or value stocks.
to the Wall Street Journal.

Are ETFs Too Powerful?

Mark Haines of CNBC asks Tom Lydon of ETF Trends whether ETFs are too powerful.

Most of this asks will ETFs take over for mutual funds. But then says some ETFs don’t do what they say. Again, this is a case of investors not knowing what they are buying. So, who’s fault is that?

Six New Funds Track Emerging Markets

Updated 10 p.m.

In light of the huge inflows moving into emerging markets over the past two months, this past week saw the launch a total of six new ETFs to capture the trend. Typically, it takes three to six months for the Securities and Exchange Commission to approve a new ETF from a current ETF provider. So, these funds are a mixture of good foresight and the luck of good timing.

Two weeks ago, this blog reported that large-cap U.S. equity ETFs experienced heavy outflows last month, while emerging market ETF saw huge cash inflows.

Emerging markets go one step beyond with the first U.S. ETF to track the Peruvian markets. The iShares MSCI All Peru Capped Index Fund (EPU) began trading today on NYSE Arca. The fund tracks the index of the same name, which holds the top 25 Peruvian equity securities by free-float adjusted market cap. The index components are either in Peru, headquartered in Peru or have the majority of their operations based in Peru. Thirteen constituents are materials producers, providing significant exposure to commodities. Top three index constituent names as of March 31 are Buenaventura Minas, Southern Copper, and Credicorp. The expense ratio is 0.63%.

iShares quotes the IMF World Economic Outlook Database which this month said Peru has the fastest growing economy in Latin America and one of the lowest inflation rates in the region. The IMF also said Peru has the third lowest Emerging Market Bond Index spread in Latin America and an estimated economic growth rate of 3.5% in 2009. Peru’s Minister of Finance this month said Peruvian capital markets posted the best performance globally year to date in 2009. Can anyone verify this?

Friday saw the launch of the iShares S&P Emerging Markets Infrastructure Index Fund (EMIF) on the Nasdaq Stock Market. The eponymous index holds 30 of the largest publicly-listed companies in the infrastructure industries — energy, transportation and utilities — with the majority of their revenues derived from emerging market operations. Each constituents had a minimum market capitalization of $250 million. As of May 29, the index was comprised of companies from Argentina, Brazil, Chile, China, the Czech Republic, Egypt, Malaysia, Mexico, South Korea and the United Arab Emigrates. The annual expense ratio of 0.75%.

Meanwhile, if you think emerging market are due for a tumble, ProShares gave international investors a chance to short these markets with leveraged short ETFs that offer -200% returns. Thursday’s launches on the NYSE Arca doubled ProShares ultrashort international ETFs to eight:

• ProShares UltraShort MSCI Europe (EPV)
• ProShares UltraShort MSCI Pacific ex-Japan (JPX)
• ProShares UltraShort MSCI Brazil (BZQ)
• ProShares UltraShort MSCI Mexico Investable Market (SMK)

Earlier this month, ProShares launched the first of its 200% leveraged international ETF series with four similar funds. The new ETFs charge a managament fee of 0.95%.

For the four months ended April 30, iShares received 65% of all ETF and mutual fund emerging markets flows year-to-date, according to Strategic Insight. That shouldn’t have been difficult considering more than 70 of the more than 180 U.S. listed iShares ETFs have an international bent. This gives iShares the largest continent of international ETFs in the industry. Trading volumes in iShares emerging markets funds surged 119% for the five months ended May 30, compared with the same period last year to 16 billion shares.

According to iShares and Bloomberg, the ETFs with the hightest net inflows in May were

• iShares MSCI Brazil Index Fund (EWZ) with $1.5 billion in net new assets under management.
• iShares MSCI Emerging Markets Index Fund (EEM) with $1.08 billion new AUM.
• iShares FTSE/Xinhua China 25 Index Fund (FXI) with $1.02 billion new AUM.

Here’s an interesting tidbit about the lack of info coming from ProShares. IndexUniverse reportes that “ProShares’ Web site only provides data of the underlying indexes. Besides the prospectus for each, that’s the most recent detailed information available. And the benchmark data is only through March 31. Daily holdings are listed in totals of swaps held in the underlying index and cash.”

IndexUniverse does a nice break down of the ProShares international shorts.

When Is an Index Fund Not an Index Fund?

The coming transformation of ETFs into mutual funds.

At first glance, it seems like an unlikely marriage. Mutual fund leader BlackRock announced last week that it was purchasing Barclays Global Investors, which holds 49 percent of the exchange-traded fund market, for $13.5 billion. These have long been the opposite poles of investing: Most mutual funds try to make money by picking stocks, while ETFs try to make money by simply mimicking the market.

Perhaps the new megagroup will preserve both strategies. But it seems just as likely that BlackRock wants in on the business’s quiet but growing trend called the actively managed ETF. If that sounds like a contradiction in terms, well, it is.

In simplest terms, ETFs are index funds—passive, diversified portfolios that trade like a stock. For the past decade, ETF providers like BGI have touted their products as the antidote to the overpriced, underperforming actively managed mutual fund. Over the past six years, investors invested fewer assets in mutual funds and more into ETFs. The trend accelerated during the financial crisis, as investors grew disgusted at the inability of their active mutual funds to protect their assets. Last year, equity mutual funds saw net cash outflows of $245 billion, according to TrimTabs Investment Research, while equity ETFs posted net cash inflows of $140 billion, even as asset values tanked. With all the negative feeling around actively managed mutual funds, why would the ETF industry step backward to make a big push for the actively managed ETFs?

For the money.

Index funds charge lower fees compared with active funds, which means less money in the manager’s pocket. ETFs charge even less than comparable index mutual funds and offer the additional benefits of greater tax efficiency and transparency because they’re structured differently. In addition, ETFs offer the ability to buy or sell shares during market hours. These reasons led ETFs to capture more than $500 million in assets and grab a significant market share from the $9 trillion mutual fund industry.

The first active ETF appeared early last year in an inauspicious start. Bear Stearns launched the ETF just weeks before the bank went belly up. The fund closed soon afterward. A short time later, Invesco PowerShares launched a family of five active ETFs. But they have found it difficult to gain wide acceptance and attract assets. The financial crisis effectively took these funds off most investors’ radar.

However, a thaw in the financial blizzard shows that the industry had been waiting for the right moment to revive what many consider the industry’s Holy Grail. Coincidentally, a new entrant in the field named Grail Advisors launched the first post-financial-crisis active ETF last month.

“We are operating the ETF just like a fundamental mutual fund,” said Grail Chief Executive Officer Bill Thomas in an interview. This ETF, he added, is “similar to traditional actively managed mutual funds … because it allows portfolio managers unrestricted trading.”

And in a little-reported move that BlackRock didn’t miss, iShares, the brand name for BGI’s ETF family, last month began the registration process to launch two active ETFs.

Is this a good thing for the ETF industry? Possibly. Is it a good thing for investors? Definitely not.

For the full story see The Big Money.

TrimTabs Says Rally Is Over

Charles Biderman, the CEO of TrimTabs Investment Research, tells Yahoo’s Tech Ticker the stock market rally will soon end. He points to a massive amount of selling by company insiders and an expansion of the market’s float.

TrimTabs, which analyzes stock sales and cash flows into the market, says since May “there have been $98.5 billion of secondary stock offerings, mostly by banks, 4.6 times more than the level of new cash takeovers and buybacks. At the same time, there’s been ‘massive selling’ by insiders, to the tune of $3.9 billion vs. just $350 million of insider buying.”

Biderman said that every time since 1987 that the float of the stock market rose to these levels, the market fell sharply, with just one exception. He said most of the demand for the rally has come from under-invested hedge funds and pension funds, that he believes have completed their purchases. However, retail investors are much less enthusiastic about stocks than has been widely reported. Partly, that’s because few retail investors have the cash to put into the market.

Call It a Hunch, We’re In For a Tumble

I don’t have any complicated quantitative models at my disposal. I read, I think, and then I have a hunch. Then I have lunch.

I think the market rose too far, too fast and that we are going to test the March 9 low. The economy is not growing as fast as many had expected.

This morning the Federal Reserve Bank of New York released its’ Empire State Manufacturing Survey. This index of general business conditions fell to -9.41 in June, down from -4.55 in May. Economists expected a slight dip to -4.6 in this measure of regional manufacturing conditions.

It’s midday Monday. After a 40% rally since the March lows, the S&P 500 is down 2.5% today. The Dow, which was just 5 points from breaking even for the year, is down 200 points, or 2.3%. The Nasdaq is down 2.7%.

The Wall Street Journal asks is this a bull or bear market? Signs Suggest Stocks’ Surge Is Blip Within a Bear; Still, There’s Opportunity.

This would seem to prove my theory from last week, when I decided that all the outflows from the large-cap U.S. stocks was a sign that the market had topped. I think we’re going to go back to near 7,000 on the Dow. Good time to take profits and wait for the sale to begin again.

BGi’s Diamond Scores $36.5 Million; Vanguard Investors Pissed Off

Here’s a round-up of second day stories about the Blackrock purchase of BGI.

The Wall Street Journal says more than 400 top executives at Barclays will walk away from the deal pocketing a total of $630.3 million. It seems there was some sort of unusual management incentive plan in place at BGI that would have started to expire in 2010. They needed to do something quick to cash out. Barclays President Robert Diamond alone will walk away with $36.5 million.

WSJ’s Jason Zweig reports that Vanguard’s investors are furious with the mutual fund/ETF company for even making a bid on iShares. Zweig says this could have been a good move for Vanguard and I agree. Already the No. 3 ETF provider, Vanguard could have become the market leader. More important, Vanguard would have probably cut the expense ratios on the ETFs, which could have brought in even more investors. Few people realize that Vanguard doesn’t have an ETF to partner with its S&P 500 fund. Vanguard came to ETFs late in the game and wanted to make an ETF for its flagship index fund. However, S&P had already given an exclusive license to BGI for the iShares S&P 500 Index (IVV).This would have given Vanguard the S&P 500 ETF they’ve always wanted. Also, S&P sued Vanguard over basing the ETF on the index without giving S&P any additional licensing money That full story is in ETFs for the Long Run.

The Financial Times says Larry Fink, Blackrock’s CEO, has been trying to buy BGI for eight years, and capitalized on the financial crisis to make his dream come true.

Reuters’ Svea Herbst-Bayliss suggests the BGI deal will spark a buying spree as envious rivals figure out how to compete. Bank of New York Mellon (does that taste as good as a honeydew melon?) is expected to be the next buyer. BNY already plays a big part in the ETF industry as a trustee and custodian of many funds. BNY is the trustee and administrator of the second ETF, the MidCap SPDR (MDY).

DealJournal’s Michael Corkery says besides CVC, the big loser is Goldman Sachs, which advised CVC.

Jim Wiandt of IndexUniverse.com says by using an ETF company to create the largest asset manager in the world is a huge boost for the ETF industry and proves how big basis-point-linked passive assets have gotten. He asks a lot of questions, but doesn’t give any anawers. Questions like will Blackrock keep the ETF expense ratios low and what does this mean for the active ETFs?

What are your thoughts? I would love to hear them.

Blackrock Buys BGI for $13.5 Billion

In a deal sure to create major changes in the ETF industry, asset-management giant Blackrock agreed to buy Barclays Global Investors (BGI) from Barclays PLC for $13.5 billion late Thursday.

BGI, which coined the term exchange-traded fund, has been the industry’s market leader since the emergence of its iShares family of ETFs in 2000. It remains the industry leader with more funds than any other ETF sponsor and a little less than 50% market share.

With more than $2.7 trillion in assets under management, The Wall Street Journal says this creates a “money-management titan twice the size of its closest competitor,” such as State Street, another ETF provider, and mutual fund giant Fidelity Investments.

The most interesting tidbit comes out of The New York Times. The Times reports Barclays’ president Robert Diamond had first discussed a potential deal with BlackRock approximately seven years ago, but decided the timing was not right.

My favorite nugget, the boys at BGI won’t have to change the initials on their luggage. The firm will continue to be called BGI as the new company takes the name BlackRock Global Investors.

Typos, Screw-ups or Just Plain Wrong

If you’re a regular reader of this blog, or this is your first time here, welcome. Now that I’ve lulled you into a warm and fuzzy feeling, if you happen to see a stupid typo, a headline screw-up or me just plain being factually incorrect, please tell me.

I received a nice bump in traffic after the ETF Expert linked to yesterday’s story. (Your prize, my new friend, is an honored place on the blogroll and at least one new reader.)

Upon checking the Expert’s site I noticed that my headline had two extra words that shouldn’t have been there and totally confused its meaning. Nothing like writing something to attract attention and then welcoming them with a messed up headline. The fact is, it’s hard to copy edit yourself. I’m sure you know the feeling. You really don’t read the words on the page. You read what you mean to say.

I fixed it now. Here’s the goof if you want to see it. As they say on the subway, if you see something, say something. I will greatly appreciate it.