Reuters: SEC Widens Investigation Into ETFs

The Securities Exchange Commission, which has been investigating the impact ETFs have had on volatility since the Flash Crash of 2010, has now widened the scope of its probe, reports Reuters.

While the initial probe had focused on complex ETFs, Reuters says the SEC is now focused on whether shorting ETFs is having an effect on the larger, more popular funds.

List of ETFs That Issue K-1s Skips MLPs

I’m sure you’ve all heard the mantra for why ETFs are better than mutual funds: They’re cheaper, have greater transparency and flexibility and are much more tax efficient. That’s definitely true for ETFs that are structured at investment companies under the 1940 Act. These ETFs, which typically hold stocks or bonds, report their taxable gains and losses on IRS Form 1099.

However, some exchange-traded products are structured as partnerships, such as the ones that hold shares of master limited partnerships or futures contracts for commodities, currencies or volatility. Because of the creation/redemption system of acquiring securities, most ETFs don’t post capital gains. That means an investor only pays capital gains when he or she sells the shares in the fund.

However, limited partnerships pass through their taxes to the investor/partners every year. So investors need to pay taxes on any profits earned during the year. These investors receive a K-1 tax form, which outlines their profits or losses in the partnership over the past year. It’s a complicated form that can make figuring out and reporting taxes a big headache.

ETF Database has created what it calls the Complete List of ETFs that Issue K-1s. It’s a good list, but I don’t think it’s complete. It doesn’t list any of the ETFs that track master limited partnerships, which are usually companies that deal with natural resources.

Nonetheless, this is a good starting point on whether you should expect to receive a K-1 form from your ETP this year.

Webinar to Teach How to Evaluate Corporate Bond ETFs

Matt Hougan, IndexUniverse’s President of ETF Analytics, and Jason Bloom of Guggenheim Partners will lead a webinar on how to evaluate corporate bond ETFs and what special risks and opportunities should you be aware of? It will teach tactical approaches to corporate bonds such as managing the yield curve to enhance yield and evaluating credit spreads, duration and other key fixed-income metrics.

It will be held at 2 pm EST on Thursday, February 23.

ETF Companies Seek Vanity Plates for Tickers

Rachel Louise Ensign wrote a funny story in the Wall Street Journal on ETF sponsors searching for memorable ticker symbols to help market their funds. Laura Morrison of the New York Stock Exchange says they’re like vanity plates on cars. But with 1,350 symbols already in use on the NYSE Arca, the biggest exchange for ETFs, and another 2,446 reserved for future products, it’s getting hard to find something catchy.

Ensign likes the literal, such as SOIL, the ticker for the Global X Fertilizers/Potash ETF, the figurative, such as DUST for the Direxion Daily Gold Miners Bear 3X Shares and the alluring, such as GGGG for the Global X Pure Gold Miners ETF.

My all-time favorite is humor, with MOO, the symbol for Market Vectors Agribusiness ETF. For literal, it’s hard to beat EGPT for Market Vectors Egypt Index ETF or CORN for the Teucrium Corn Fund. For figurative I like GULF for WisdomTree’s Middle East Dividend Fund
.

The question on whether these vanity plates help a fund’s marketing efforts ends up with a big possibly considering the Global X Farming ETF, with the ticker BARN, gets ready to shut down this month.

ETFs End Rough 2011 Stronger

The Financial Times came out with a special report on ETFS today. It said the industry’s breakneck growth rate slowed as it faced adversity last year in the form of weak stock markets, and media hostile for the first time and “unprecedented criticisms from regulators.” And while net inflows of cash fell year-over-year, it still market a striking contrast to the “substantial net outflows” mutual funds saw on both sides of the Atlantic.

Even as investors sold moved out of stocks, especially in Europe, exchange traded products (ETPs) moved into the role of a risk reducer as they were used as a way to buy gold. Gold ETFs in Europe saw inflows of 730 million euros. So are this year, the SPDR Gold Shares (GLD) in the U.S. has seen inflows of $1.32 billion, compared with net outflows of $518 billion for all of last year.

ETF Trading Volume Falls With Stocks

Despite the S&P 500 Index’s 4.4% rally in January, the second best month for stocks over the past year, the actual volume of shares traded fell sharply, reports Reuters. Daily volume dropped 15% year-over-year in January, and plunged 26% from a high in January 2009.

Stock market technicians consider volume an essential ingredient for long-term moves. The low volume typically means the recent gains are not sustainable.

Many attribute the low volume to the low volatility in the market, which led hedge funds and other high-frequency traders to sit on the sidelines. Reuters then says strategists think the low volatility will bring in large institutional investors and small retail investors, who will push the market higher as they put some of the cash they’ve been afraid to invest back to work.

No surprise then that the trading volumes in ETFs fell as well, according to J.P. Morgan. And not just ETFs holding stocks, but across all asset classes. ETFs that track stocks, bonds and commodities saw a 36% drop in trading volumes in January compared to the average daily volume in the second half of 2011.

This makes sense if you believe that hedge funds, frequent users of ETFs, have been sitting out the rally.

CNBC’s Bob Pisani then sets a up a straw man by asking if ETFs are responsible for the lower trading volume on the stock market? He knocks down the straw man, with a no that should be obvious to anyone who understands ETFs.

What’s really sad is that some of the traders Pisani talks to think this is the case. But then again, few traders are rocket scientists. A friend of mine, an Ivy-league educated trader, couldn’t even explain the basics of supply and demand even though that was the entire basis of his occupation. Of course, after the screw-up with the focal point on the lenses of the Hubble Telescope it appears even America’s rocket scientists aren’t rocket scientists.

Fund Manager Sees Little to Fear from Greece and China

I spoke with Christopher Baggini , the senior portfolio manager for the long/short Turner Titan Fund yesterday. He sees the U.S. market moving higher and likes the technology, industrial and health care sectors. However, he’s down on utilities, telecom and basic materials.

As for his view on the macro environment, he says last year’s fears that China will soon be experiencing a hard landing have diminished. He says the sales comparisons for Chinese New Year are up 15% year over year.

While the problems in Europe are already dragging down the U.S. economy, he thinks there is a low probability that a full-fledged Greek default will affect the market. Most of that is already priced into the market and he says that “Greece’s impact is minor to the overall scheme.”

Italy is a bigger problem, says Baggini, but so far it’s not an issue and neither are France or Germany. While Spain has been an issue for a long time, with little money and a high cost of labor, he doesn’t expect it to have an impact in the near term.

State Street Undercuts Vanguard Expense Ratios

ETF reading list for today:

SSgA Undercuts Vanguard On Sector ETFs – State Street Global Advisors goes after Vanguard’s status as the low-cost provider by slicing the expense ratios on its nine “select sector” funds.
Each State Street fund is now 0.01% cheaper than the Vanguard fund tracking the same sector.

U.S. News and World Report finally discovers ETFs.

Stock, Treasury ETFs Send Mixed Messages on Economy. Even as the stock market rallies, the iShares Barclays 20+ Year Treasury (TLT) has gained about 3% over the past week.