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.

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.

Jacques Cousteau’s Grandson Creates ETF With AdvisorShares

The marquee name may be Cousteau, but no one wants this new ETF to go underwater.

Philippe Cousteau, the grandson of famed marine conservationist Jacques Cousteau, joined forces with AdvisorShares, the sponsor of the most actively managed ETFs, to create a new socially responsible ETF that hopes to do well by doing good.

The AdvisorShares Global Echo ETF (GIVE) is “the first ETF to be launched with a sustainability mandate,” says Cousteau, the co-founder and president of Earth Echo International, a non-profit that creates programs to educate people on protecting and restoring the oceans. This focus on sustainable investments means the fund’s four subadvisors must look for investments through a screen of sustainability in one of three categories, environmental, social or governance. Sustainable governance means forging strong relations with its community and having strong corporate governance of the company’s funds.

“There can be no environmental sustainability without social sustainability, says Cousteau.

Because of the difficulty in raising money for charitable organizations in the current economy, Cousteau joined with AdvisorShares as a way to fund causes he believes in on a steady basis.

Thus one objective of the ETF is to donate about a quarter of its very high 1.7% expense ratio to the Global Echo Foundation, Cousteau’s new 501 (c)(3) charitable organization. The Global Echo Foundation, which launched with the ETF, hopes to provide resources to solve social issues affecting women and children, environmental conservation and support entrepreneurship through micro-enterprise. It aims to provide investors the best of two worlds: making investments in companies providing a sustainable impact, while also helping Global Echo, and hopefully, realizing a return on their capital.

At the time of the launch, the foundation didn’t know exactly where it would place its donations. Cousteau suggested groups like Girl Effect, which seeks to alleviate poverty by investing in girls, and Grameen Bank, a microfinance organization in Bangladesh.

Four asset managers will each run a quarter of the ETF’s portfolio. Community Capital Management manages sustainable fixed income strategies that invest in bonds that support and finance affordable housing. Baldwin Brothers invests in global equites that follow sustainable investment themes. Reynders, McVeigh Capital Management invests in global equities focuses on sustainability and concentrated growth. First Affirmative Financial Network manages long/short strategies with alternative investments, such as commodities.

Currency Hedge ETFs Win Big at Global ETF Awards

Deutsche Bank’s family of Currency Hedge ETFs won the award for the Most Innovative ETF in the Americas for 2011 at the 8th Annual Global ETF Awards. The awards are given to industry participants for outstanding achievements in the marketplace. In Europe Deutsche Bank tied with the Nomura Voltage Mid-Term Source ETF for the top prize, while the Motilal Oswal Most Shares NASDAQ-100 ETF was named most innovative in the Asia-Pacific region.

The five ETFs under the Currency Hedge banner:
db-X MSCI Brazil Currency-Hedged Equity Fund (DBBR)
db-X MSCI Canada Currency-Hedged Equity Fund (DBCN)
db-X MSCI EAFE Currency-Hedged Equity Fund (DBEF)
db-X MSCI Emerging Markets Currency-Hedged Equity Fund (DBEM)
db-X MSCI Japan Currency-Hedged Equity Fund (DBJP)

The Most Innovative Exchange Traded Product (ETP) in the Americas went to the iPath S&P 500 Dynamic VIX ETN (XVZ), while the db Physical Gold SGD Hedged ETC won in Europe.

Held at the Grand Hyatt Hotel in New York last Thursday, the Global ETF Awards provide a window on how the global ETF industry views itself. Unlike the Capital Link awards, where a small committee of analysts and industry insiders choose the winners, the Global Awards is voted on by the entire ETF industry. Here 520 organizations from around the world voted on who they think are the industry’s leaders and innovators. The awards and ceremony were created and run by the operators of exchangetradedfunds.com.

The evening began with a new prize, the Nate Most Award. Named after the man who invented the SPDR, the first ETF, it’s awarded to the individual who has made the greatest contribution to the ETF Market.

“We honored to be able to celebrate Nate’s place as the father of the ETF and to honor achievements in the ETF industry,” said Arlene C. Reyes, chief operating officer of exchangetradedfunds.com.

The first winner of this new prize was James Rose, senior managing director of State Street Global Advisors, for his commitment to the industry and for setting a standard of excellence. In addition to running State Street’s ETF business he serves as the first chairman of the Investment Company Institute’s Exchange-Traded Funds Committee.

“Nate Most created a product that created an industry and a great product for investors,” said Ross upon receiving the award.

Here is the list of other winners:

Most Innovative ETF Index Provider
The Americas – Dow Jones Indexes
Europe – STOXX
Asia-Pacific – MSCI

Most Widely Utilized ETF Research (Statistical)
Deutsche Bank won in all three regions.

Most Widely Utilized ETF Research (Analytical)
The Americas – Bloomberg
Europe – Deutsche Bank
Asia-Pacific – Deutsche Bank

Best ETF Market Maker
The Americas – Knight
Europe – Flow Traders
Asia-Pacific – Flow Traders

Most Recognized ETF Brand
The Americas – SPDRs
Europe – (Tie) db x-trackers and iShares
Asia-Pacific – China 50 ETF

Best Service Provider
The Americas – BNY Mellon
Europe – (Tie) Northern Trust and State Street Fund Services (Ireland)
Asia-Pacific – SSgA

Most Informative Website
The Americas – SPDRS.com
Europe – etf.db.com
Asia-Pacific – hkex.com.hk

Most Informative Website – Media
The Americas – IndexUniverse.com

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.

Currency and Emerging Market ETFs Look Good for 2012

Since ETFs merely track asset classes or stock sectors, what works in ETFland is what worked in the markets in general. ETFs that tracked income producing dividend stocks, such as utilities and consumer staples, did very well, as did funds tracking U.S. Treasurys, oil and gold. Meanwhile, emerging markets took a big hit this year, as did alternative energy and natural gas.

In deciding whom to read on what will be the trends next year, I looked to the place with the most appropriate name, ETF Trends. Here are ETF Trends’ top five predictions and the ETFs to track these trends.

Currency ETFs: With more investors seeking to hedge currency risk, as well as use currency to make a bet on the Eurozone debt crisis, currency ETFs should see a lot of action next year.

Emerging Markets took a bath this year, mostly from surging inflation. But the truth remains that the biggest growth will be found in emerging markets. Of course, a lot of that growth comes from selling to Europe and the U.S. and if those two areas fall into recession, we could see emerging markets fall furthers. Still, the valuations have come a lot from their lofty prices at the start of 2011. With clean balance sheets and a rising middle class, emerging markets look attractive and even if they fall some, this is where the action will be in the coming years.

Bonds are still going to be winners. With the Federal Reserve promising not to raise interest rates for another year, we won’t see a huge sell off in U.S. Treasurys. And with more potential problems in Europe, Treasurys will continue to profit from investors looking for safety. But with yields so low, it may be time to put more money into corporate debt, or even emerging market bonds.

Commodities and the falling dollar: While the dollar has risen lately, the broader trend remains down. Meanwhile, as people worry about massive money printing in Europe and the U.S., gold will come back, especially the SPDR Gold Shares (GLD).

While gold and gold ETFs rallied in 2011, surprisingly gold miner stocks tumbled. Typically, you see leverage in gold mining stocks, with moves three to four times the same direction as gold bullion. With David Einhorn thinking “that there is a major disconnect between miners and gold prices”, ETF Trends says Market Vectors Gold Miners (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ) will move sharply higher in 2012.

ETFs Post Largest Weekly Net Inflow Last Week.

ETFs received $17.4 billion of net inflows last week, the largest weekly net inflow of the year, Morgan Stanley said in a report. U.S. equity ETFs received the most of any asset group, at $13.7 billion.

The top two asset classes over the past week were U.S. large-cap stocks, with net inflows of $5.3 billion and U.S. small and micro-cap stocks with $3.9 billion. Commodities saw inflows of $623 million. The SPDR S&P 500 (SPY), with $3.478 bilion and the iShares Russell 2000 Index Fund (IWM), with $3.471 billion, were the top two funds. The SPDR Gold Trust (GLD) saw net inflows of $852 million.

The short interest betting the SPDR will fall grew the most of all ETFs, $4.4 billion. Meanwhile iShares Russell 2000 Index Fund saw its short interest post the largest decline, $1.1 billion.

In a sign that investors were moving away from safe-haven assets, Morgan Stanley says the two funds with the largest net outflows were iShares Barclays Short Treasury Bond Fund (SHV), losing $683 million, and SPDR Barclays Capital 1-3 Month T-Bill ETF down $674 million.

Over the past 13 weeks, ETFs in all asset classes received a combined $29.4 billion in net inflows. Fixed income saw inflows of $13.8 billion over the past 11 weeks.
For the year to date, $98.3 billion have flowed into ETFs, or 9%, for a total ETF assets of $1.1 trillion.

Among ETFs under a year old the largest net inflows were seen by the PowerShare S&P 500 Low Volatility Portfolio, with $38 million last week, and the iShares High Dividend Equity Fund (HDV), with $19 million.

When Exchange-Traded Notes Trump ETFs

On the surface, exchange-traded notes appear similar to their more popular cousins, exchange-traded funds. Both seek to match some sort of market barometer, and both offer similar advantages over actively managed mutual funds: lower fees, lower investment minimums and greater tax efficiency. And, like stocks, you can trade them throughout the day.

But don’t be misled. ETFs and ETNs are very different animals. ETFs mimic the indexes they track by holding a diversified collection of securities, such as stocks or bonds. ETNs, however, don’t own anything. An ETN is an unsecured debt that is typically issued by an investment bank. Like an ETF, an ETN tracks an index. But when you invest in a note, you’re merely buying a promise from the issuer to pay you the index’s return, minus fees.

So when you buy an ETN, you not only take a chance on whatever index the note seeks to copy, you also assume the risk that the issuer could fail to make good on its promise. Investors in three ETNs sponsored by Lehman Brothers got a taste of that sort of risk after Leh­man went belly up in 2008. So far, none of its creditors, including its ETN investors, has received a penny.

So Why Buy ETNs?

Even with all that extra risk, notes do have some advantages. For starters, ETNs offer access to hard-to-reach asset classes and investment strategies (we’ll discuss some of them later). Moreover, although ETFs are subject to tracking error — that is, the chance that the fund will not move precisely in sync with the index it’s designed to match — ETNs are not.

ETNs are also more tax-friendly than ETFs. ETFs, like mutual funds, must distribute annually to shareholders all the interest and dividends they collect from the securities they hold. Investors who receive these distributions in taxable accounts must share their earnings with the IRS at rates as high as 35%. An ETN, by contrast, reflects the collection of dividends and interest by adjusting its net asset value, so you don’t pay taxes until you sell the ETN. And if you hold an ETN for more than a year, you pay the long-term capital-gains tax rate of 15%.

Commodity-oriented ETNs also have a tax edge over similar exchange-traded products. With a commodity ETN, you pay taxes when you sell, allowing you to pay the favorable capital-gains tax rate if you hold the ETN for more than a year. Most exchange-traded commodity funds invest in futures contracts and are set up as limited partnerships. That means investors have to tackle potentially complex Schedule K1 forms. Moreover, you must pay taxes on any capital gains the ETF realized during the year, even if you didn’t sell any shares. In addition, ETFs that hold precious metals, such as gold, are taxed as collectibles, at a maximum rate of 28%, not 15%. (Currency ETNs don’t have the same advantage as other ETNs; interest from these ETNs is taxed as ordinary income on an annual basis.)

4 ETNs Worth a Look

In each case we list below, the ETN either offers advantages over comparable ETFs or provides a strategy that is unavailable with an ETF.

Commodities. Because of the tax pluses, investors may find Elements Linked to the Rogers International Com­modity Index — Total Return (RJI) the best way to invest in stuff. Issued by the Swedish Export Credit Corp., RJI is the fourth-largest ETN in the U.S., with $919 million in assets. It follows a benchmark of 38 commodities created by Jim Rogers, a commodity expert and author. The index has a 44% weighting in energy, 35% in agricultural products and 21% in precious and base metals. Over the past year, the ETN returned 40.4%, compared with 37.9% for PowerShares DB Commodity Index Tracking Fund (DBC), the largest commodity-oriented ETF (all returns are through June 3). The ETN’s annual expense ratio is 0.75%.

For the full story and other three ETNs, go to Kiplinger.com.

Corn ETFs Get Creamed

ETFs that track corn got creamed today after the U.S. Department of Agriculture shocked the market with reports of larger-than-expected supplies and an increased forecast for the fall harvest.

The Teucrium Corn Fund (CORN) tumbled 8.7% to $40.50 and the iPath DJ-UBS Grains SubIndex Total Return ETN (JJG) sank 7.4% to $46.23 after federal regulators reported the number of acres planted this spring rose 5% to 92.3 million acres, the second highest planting since 1944.

This far exceeded analyst expectations of 90.7 million bushels as did the report that U.S. corn inventories as of June 1 fell 15% to 3.67 billion bushels instead of declining 23%. In early June corn prices rallied on expectations that the market would see shortages by the end of the summer.

The Teucrium Corn Fund is a commodity pool that holds three futures contracts, the second-to-expire CBOT Corn Futures Contract, weighted 35%; the third-to-expire CBOT Corn Futures Contract, weighted 30%; and the CBOT Corn Futures Contract that expires in the December following the expiration month of the third-to-expire contract, weighted 35%. The fund charges the exceptionally high expense ratio of 1.49%.

The iPath is an exchange-traded note, a debt instrument that doesn’t hold any assets. The Dow Jones-UBS Grains Subindex Total Return reflects the returns of three grains futures contracts.

Where to Invest in 2011

Kiplinger.com posted a special report called Investing Outlook 2011 for the best places to invest in the coming year. It’s mostly a compilation of the outlook content from the January issue with added Web-only content.

ETF ideas can be found in these articles:

• The Best Ways to Profit from Emerging Markets
• James Glassman’s 10 Stock Picks for 2011
• 5 Strategies to Lower Risk

For my story in the package see the posting below.