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.

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

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.

Hennessy: “I Hope We Go Over Fiscal Cliff”

Neil Hennessy doesn’t just think the U.S. will go over the fiscal cliff; he wants it to happen.

“I hope we go over,” said the Hennessy Funds’ all-around top dog about the fiscal cliff, the name given to the end-of-the year budget changes. On Jan. 1, spending reductions across the entire federal budget will kick in automatically the same day the Bush tax cuts expire. “I guarantee that within six months, Washington will get the tax situation right and the country should be on surer footing. But, within the next 30 days it’s unlikely they would get it right.”

Hennessy presented his 5th annual market outlook, as well as portfolio changes and the renaming of his flagship mutual fund at a New York press conference last Tuesday. Investors are incredibly nervous, said the chairman and chief investment officer of the Novato, Calif., fund house, because there is a crisis of clarity. He pointed to the August consumer confidence level, which hit its lowest point since March 2009, the month the market hit bottom during the fiscal crisis. While the presidential election cleared up the uncertainty over healthcare reform, the fiscal cliff will give us clarity on taxes and regulation, said Hennessy.

From 2008 through 2011, investors have pulled $404 billion out of U.S. equity mutual funds, while putting $775 billion into fixed-income funds. The trend continued into 2012 with equity funds seeing outflows of $116 billion vs. bond fund inflows of $278 billion.

However, Hennessy says equities are the only logical place to be in light of corporate profits near their all-time high. Investors have few other places to go, he said dismissing the real estate sector, the European Union and emerging markets. Meanwhile, bonds are not much of an option with the yield on the 10-year U.S. Treasury bond falling to 1.68% from 2.13% a year ago. Meanwhile, the yield on the “Dogs of the Dow,” the 10 highest yielding stocks in the Dow Jones Industrial Average is 4.13%, or 146% higher than the 10-year bond. The current yield on the full Dow Industrials is 2.67%.

In October, Hennessy Funds acquired all ten FBR Funds and merged them into existing funds. This brings the total assets under management at Hennessy Funds to $3.1 billion and total shareholders to about 180,000. The Hennessy Focus 30 Fund after merging with the FBR Mid Cap Fund was renamed the Hennessy Cornerstone Mid Cap 30.

Based on a rebound in the housing market and consumers spending more on their homes, the fund’s year-end portfolio rebalancing pushed consumer discretionary up to 40% of the assets from 30% a year ago. Industrials jumped from 13% to 30%, while Utilities fell from 30% of assets to 0%. The fund also had no assets in information technology or consumer staples. The fund’s top consumer picks are Pier 1 (PIR), Whirlpool (WHR) and Mohawk Industries (MHK). Industrials. In the housing sector he likes Standard Pacific (SPF), KB Homes (KBH), and Meritage Homes(MTH), as well as building products companies: USG (USG), Masco (MAS) and A.O. Smith (AOS).

ING Likes Value Stocks, Emerging Markets and Europe in 2013

Just like the Christmas season, forecast season rolls around this time of year with investment advisors predicting what the new year holds and where we should all be putting our investment dollars. Ahead of us looms the fiscal cliff, a combination of tax increases and large government spending cuts that could chop as much as 4% out of the gross domestic product. Should the fiscal cliff go into effect it could put the current tepid economic recovery into jeopardy.

In a press briefing at ING’s offices Tuesday, Paul Zemsky, ING Investment Management’s chief investment officer of multi-asset strategies, said he expects the fiscal cliff to be resolved by the end of this year, with a negative impact of just 1% to 1.5% to GDP. He expects to see an end to the payroll tax holiday and the Bush tax cuts for the highest-income brackets. He also expects capital gains taxes to rise to 20% and dividend taxes to revert back to taxpayers’ regular rate from 15% now. Should the Congress wait until after the new year, Zemsky expects to see a major sell off in the equity markets. “It could be as much as a 10% drop, but we would expect this to be a V-shape bounce because the government would have to fix the problem. We would consider this a buying opportunity should it happen.”

Stocks remain cheap relative to bonds, said Zemsky, and both U.S. and global equities are attractive investments right now with price-to-earnings ratios around 15. Zemsky said the housing market has bottomed and is poised to rise, however investors have not yet realized this. As housing prices bottom, this makes collateral stronger, said Zemsky, adding now is the time to increase investments in U.S. financial stocks.

Overall, ING expects 2013 will bring modest growth in the U.S., continued growth in emerging markets and the end of the European recession. Zemsky’s overall forecast predicts U.S. GDP to see 2% to 3% growth next year, which will lead to 5% to 7% earnings growth in the S&P 500. He expects the S&P 500 to grow 8% to 10% next year with a year-end target price between 1550 and 1600. U.S. value stocks and emerging market equities look especially attractive in 2013.

The most popular ETFs tracking these areas of the market are the SPDR S&P 500 (SPY), the Financial Select Sector SPDR (XLF) and the Vanguard MSCI Emerging Markets ETF (VWO). Click here for a list of ETFs that track U.S. value stocks.

Zemsky added that it might be time to begin overweighting European equities. He said people are too negative on Europe. While there is still risk in there, he said the Euro Zone is beginning to stabilize and this could lead to higher equity prices. Click here for a list of ETFs that track European stocks.

As for the bond market, Christine Hurtsellers, ING’s chief investment officer of fixed income and proprietary investments, said the U.S. market is not pricing in any changes in policy from the U.S. Federal Reserve Bank. She says it’s time to underweight U.S. Treasury bonds and high quality investment grade U.S. credit. She recommends moving into emerging market debt, especially high-grade sovereign debt. The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) covers this market.

U.S. Large-Caps’ Net Cash Inflows Top Bonds

Net cash inflows in U.S.-listed ETFs surged to $55.8 billion in the third quarter, far exceeding the average quarterly inflows of $33.8 billion seen over the last three years, according to the ETF research team at Morgan Stanley Smith Barney. With $133.4 billion for the first three quarters of the year, ETF net cash inflows are “on pace for the biggest year on record,” says Morgan Stanley. This would beat the $174.6 billion that poured into U.S.-listed ETFs in 2008.

Investors made a big switch to risk as ETFs following U.S. large-cap indices received $11.0 billion, the largest net cash inflows for the quarter, compared with $8.1 billion for fixed income ETFs. This was a big change from the previous quarter when fixed income ETFs received about $19 billion. ETFs tracking high-yield corporate bonds topped the fixed-income segment with inflows of $4.4 billion, according to Morgan Stanley.

With 20 new ETFs launched in the third quarter, and another 11 in October, the number of ETFs stands at the extremely cool total of 1,234. Total assets in the U.S. ETF market, as of Oct. 25, were $1.3 trillion, a 21% increase since the beginning of the year.

The top three funds in terms of net cash inflows were the SPDR S&P 500 ETF (SPY), with net inflows of $7.4 billion, the SPDR Gold Trust (GLD), with $4.1 billion, and the Vanguard MSCI Emerging Markets ETF (VWO), with $3.9 billion, according to Morgan Stanley. Currency ETFs experienced the largest net cash outflows for the quarter, at $71 million. For the first nine months of the year, currency ETFs have seen outflows of $2.0 million. Most of the outflows came from ETFs bullish on the U.S. dollar, while most of the inflows went into funds bullish on the euro vs. the dollar.

Blackrock continues to be the market leader with 280 U.S.-listed ETFs and $528.4 billion in assets. This accounts for a 41.7% share of the market, says Morgan Stanley, down from 48% at the end of 2008. State Street Global Advisors, with $235.8 billion in 116 ETFs holds 18.6% of the market, down from 27% at the end of 2008. Vanguard had $231.6 billion in 65 ETFs, giving it a market share of 18.3%, up from 8% at the end of 2008. Through the first three quarters of the year, Vanguard has had net cash inflows of $41.2 billion, the most of any provider, says Morgan.

ETFs to Buy on Outcome of Election

Election season always brings out investment professionals offering advice on how to best invest for both a Republican and Democratic outcome.

SPDR University, the ETF information arm of State Street Global Advisors, released a report yesterday, Election 2012: A Time of Polarizing Politics & Heightened Uncertainty, outlining the best ETFs to hold depending on who you think will win. Written by David Mazza, State Street’s head of ETF investment strategy, it’s no surprise that all the recommended funds comes from SPDR.

In this low interest rate environment, high yielding equities have been a favorite among investors. Under a Mitt Romney win, Mazza expects favorable tax treatment for dividends to continue, thus companies that pay dividends would be big beneficiaries. Certain sectors and industries would also benefit under a Romney administration. Increased domestic production would help the energy sector, while less regulation would boost the metals and mining sector. A less restrictive tax environment would help the transportation industry and an increase, or at least few cuts, in defense spending would help the aerospace and defense sector.

The ETFs SPDR suggests for a Romney win:

SPDR S&P® Dividend ETF (SDY)
Utilities Select Sector SPDR Fund (XLU)
SPDR S&P Telecom ETF (XTL)
Energy Select Sector SPDR Fund (XLE)
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
SPDR S&P Metals and Mining ETF (XME)
SPDR S&P Transportation ETF (XTN)
SPDR S&P Aerospace & Defense ETF (XAR)

Under another four years of President Obama taxes are likely to rise. Mazza suggests municipal bonds to investors in higher tax brackets. If taxes rise on dividends, REITs would offer a better choice for investors seeking income. However, increased government spending could spark a rally in the infrastructure sector. The healthcare industry should also “react favorably” to the president’s reelection.

The ETFs SPDR suggests for an Obama win:
SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (SHM)
SPDR Nuveen Barclays Capital Municipal Bond ETF (TFI)
SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB)
SPDR Dow Jones REIT ETF (RWR)
SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII)
Health Care Select Sector SPDR Fund (XLV)
SPDR S&P Health Care Services ETF (XHS)
SPDR S&P Biotech ETF (XBI)

Should the political paralysis that has gripped Washington over the past two years continue in the future, preventing major changes, Mazza suggests non-dollar denominated assets and those with low to no correlation to dollar-denominated assets. This could lead to a broad move away from U.S. assets to those in high growth emerging markets. For those looking to invest in local currencies, he suggests non-US fixed income. Gold would continue to rise if countries continue to devalue their currencies to boost exports or the U.S faces another debt crisis. And with increased government spending leading to a long-term inflationary environment, assets with a real return should rally.

The ETFs SPDR suggests for an political paralysis:

SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND)
SPDR Gold Trust (GLD)
SPDR SSgA Multi-Asset Real Return ETF (RLY)

BP’s Legal Drama Could Impact These EFTs

Reading List – a sample of what’s going on in ETF Land:

BP’s Legal Drama Could Impact These EFTs: Shares of oil company BP lost 4% after the U.S. Department of Justice said its 2010 oil spill was a case of gross negligence. With a settlement unlikely, here are the ETFs likely to fall if BP’s fortunes continue to sink.

4 International ETFs Yielding more than 5%: Many international dividend paying stocks pay out much higher yields than U.S. stocks. The combination of high yields and international exposure at the same time looks pretty enticing.

Exactly How Many ETFs Are Going to Close?: According to ETF Deathwatch, 25% of all U.S. ETFs face a risk of closing. Any ETF or ETN that is at least six months old and fails to generate at least $100,000 in average daily trading volume the preceding month joins the list. However, considering many of these ETFs come from sponsors that can afford to keep floundering funds open, the number is really closer to 18%.

3 Inverse ETFs For September: September is one of the worst months for stocks. Here are three inverse ETFs that capitalize on negative trends in the world.

New ‘Tail Hedge’ ETF Hunts Black Swans: The tail hedging strategy protects a portfolio from extreme market oscillations as a result of unpredictable, random and unexpected events, or so-called Black Swan events.