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 Cash Inflows Fall 85% in August

Net cash inflows for ETFs and ETNs fell to $2.0 billion in August, an 85% drop from the $13.2 billion seen in July, according to the National Stock Exchange (NSX). However, over the same period, notional trading volume for ETFs and ETNs doubled to $2.99 trillion, representing 37% of all U.S. equity trading volume.

Blackrock posted the biggest outflows of the month at $4.95 billion.

Still, 2011 has seen total net inflows of $73.2 billion for the year-to-date ending Aug. 31, 54% greater than the $47.6 billion for the same time last year. Net cash inflows for the first eight months of 2010 were also 12% below the same time period in 2009.

Long fixed income funds saw the most August inflows with $4.73 billion, up from $2.6 billion in July. Long-leveraged U.S. equity came in second with $3.10 billion. Long U.S. equity funds came in third with $1.11 billion, however, year-to-date, this category leads with $25.9 billion. The largest outflows were seen in long global equity funds. Commodity funds saw the second largest outflows in August with $1.45 billion.

NSX says at the end of August there were 1301 listed ETF/ETN products with $1.06 trillion in assets, a 31% increase over the same period last year, but down 4% from July’s total of $1.11 trillion.

Bounce of a Dead Cat

Both the Dow Jones Industrial Average and the S&P 500 have given back more than two-thirds of their opening rally by 11:30 a.m.

David James of James Investment Research says the fear gripping the U.S. stock market make conditions good for a rally, but he adds, “Unfortunately, the expected rally is unlikely to be the start of a new bull market.” In addition to concerns about the sustainability of economic growth, valuations are still to high. “Looking at the CAPE (Cyclically Adjusted Price to Earnings) ratio, we find most bull markets begin when one has to pay $10 or less in stock price to get $1 of corporate earnings. Today? One must pay over $20; too expensive.”

Graham Summers of Phoenix Capital Research says,”In plain terms, the market’s are in full-scale Crisis mode. While stocks have bounce hard temporarily the rest of the financial system is in a complete and utter panic.”

Even as the markets rise, so does gold. The SPDR Gold Trust (GLD) was up 2% to $184.

It’s a dead cat bounce, kids. And a good time to put in some shorts if you couldn’t last week.

Russell Rebalance Sees 751 Million Shares Reconfigured

For the eighth consecutive year, the Nasdaq Closing Cross reconfigured the entire family of U.S. Russell indexes during their annual reconstitution on Friday. In 1.1 seconds the Nasdaq Closing Cross executed approximately 750.8 million shares representing $10.6 billion across 2,298 Nasdaq-listed stocks.

“The Nasdaq Closing Cross is a price discovery facility which has become an industry standard for index providers, mutual fund managers and the investing public who seek accurate closing prices in microseconds,” said Eric Noll, executive vice president of Transaction Services, Nasdaq OMX, in a written statement. This year the Closing Cross experienced fewer shares in the rebalance than previous years.

The Closing Cross brings together the buy and sell interest in specific Nasdaq, NYSE and NYSE Amex stocks and executes all shares for each stock at a single price, one that reflects the true supply and demand for these securities. All nationally-listed securities are eligible for the Nasdaq Closing Cross. Official closing prices determined by the Nasdaq Closing Cross are widely used throughout the industry, including by Russell Investments, Standard & Poor’s, Dow Jones, and mutual funds across the country.

The Russell U.S. Indexes include only common stocks incorporated in the U.S., its territories, and certain countries or regions offering U.S. companies operational, tax, political or other financial benefits. All Russell U.S. indexes are subsets of the Russell 3000 Index, which represents approximately 98% of the U.S. equity market. Today, more than $3.9 trillion in assets are benchmarked to the Russell Indexes.

The newly reconstituted index membership took effect before markets opened on Monday, June 27.

The Russell Reconstitution And Your ETFs

The biggest event on the indexing calendar is the annual reconstitution of Russell Investments’ flagship Russell 3000E Index, of which the Russell 3000, Russell 2000, Russell 1000 and Russell MicroCap Index are subsets.

While changes to the Dow Jones Industrial Average and S&P 500 make big news, they’re few and far between, largely at the subjective discretion of the indexes’ custodians. You can’t plan for or truly predict the changes. Russell’s change can be seen from a mile away.

And it’s a big deal. With $3.9 trillion in managed assets benchmarked to its U.S. indexes, according to Russell (around $542 billion of that in indexed assets), the activity surrounding the annual reconstitution makes June 30—switchover day—one of the U.S. equity market’s largest trading days of the year. The rebalancing forces the movements of many stocks in and out of indexed portfolios as managers try to get the best price for their shareholders amid a huge amount of trading volume.

Negotiating The Transition

“We do a lot of work, months ahead of time, to anticipate the movement from the small-cap index to the large-cap index and vice versa,” said Greg Savage, managing director of iShares’ portfolio management.

According to BlackRock, iShares’ parent, at the end of March there was $83.9 billion in ETF assets following Russell indexes. And while iShares only sponsors 16 of the 70 ETFs tracking Russell’s U.S. indexes, it holds the lion’s shares of the money, with $74.4 billion in assets under management.

The biggest issue affecting passive funds replicating these indexes is the idea of a “free lunch” for traders and active funds that front-run the reconstitution.

You might assume that graduating from the small-cap Russell 2000 to the large-cap Russell 1000 is a good thing for a company. But from a flows perspective, it’s quite the opposite.

When a stock falls from the large-cap Russell 1000 Index to the small-cap Russell 2000, there can be buying pressure. As the smallest stocks in the large-cap index, they may be excluded from both optimized index and actively managed funds. However, when they move to the small-cap index, they tend to be the largest stocks in the new pool, granting them some of the largest weights in that index. Managers of the small-cap fund could potentially buy a lot more shares than the large-cap fund managers will sell.

Meanwhile, opposing high selling pressure occurs when a stock graduates from the Russell 2000 to the Russell 1000.

Consider Capitol Federal Financial (CFFN), a company with a market cap of $1.9 billion. It currently has a weight of 0.000036 percent in the Russell 1000, after falling more than 35 percent over the past 12 months. Given its low ranking, it will likely drop into the Russell 2000 during the rebalance. But what will be the impact?

Estimates say that $135 billion is benchmarked to Russell 1000-linked index trackers. Given CFFN’s weight, that means these funds own about $4.9 million of the stock. If and when it moves to the Russell 2000, it will become a bigger fish.

Based on current levels, it would represent about 0.15% of the index. With $44.2 billion tied to Russell 2000 trackers, those funds would have to buy $6.6 million of the stock. Much of that can slide over from Russell 1000 funds exiting the position, but given the current numbers, there would be a net $1.7 million purchase taking place at the close on the day of the rebalance. That’s the equivalent to 11% of the stock’s average daily volume—a significant, but not overwhelming buy order. However, mutliply that out over hundreds of stocks, and you get some major market-moving activity.

“Some fund managers want to offset the price movements that they think are part of the front- running,” said Joel Dickson, senior ETF strategist at Vanguard. The Valley Forge, Pa., fund company runs seven ETFs tracking Russell indexes. “However, passive managers don’t want to beat the index. They want to minimize the tracking error with respect to the underlying stocks. So, if the goal of the ETF is to provide exposure to the Russell index with low tracking error, then that is attained by doing all your trades on the day of the reconstitution. That way, the front-running doesn’t matter.”

For the full story to go IndexUniverse.com.

ETF Assets Surge 31% in March

Assets in U.S. listed ETFs and exchange-traded notes (ETNs) continue to hit record levels in March, surging 31% year-over-year to $1.08 trillion, according to the National Stock Market.

ETF/ETN net cash inflows for March totaled $11.2 billion. For the first quarter, cash inflows soared 240% to more than $28.9 billion, compared with $8.5 billion for the same period in 2010. March notional trading volume for ETFs and ETNs totaled approximately $1.8 trillion, representing nearly 31% of all U.S. equity trading volume. At the end of the month, there were 1,173 listed products compared with 971 at the same time last year

To view the full report go to: National Stock Exchange Market Data. NSX also publishes a product-by-product breakdown of the 1,173 products on which the data is based.

A Roaring Trade

The global exchange traded products (ETP) industry is booming. Worldwide demand for exchange traded funds (ETFs) soared in 2010 as more investors, both retail and institutional, learned about the benefits of these versatile financial instruments. Products and assets under management (AUM) grew by 26.6% in 2010, according to BlackRock’s year-end ETF Landscape. The asset manager reports that growth has continued thus far in 2011, with worldwide AUM as of the end of January rising to more than $1.33 trillion with the number of products surpassing 2,500 in January 2011.

With the global ETF industry expected to grow more than 20% annually for the next three years, and AUM for all ETPs expected to surpass $2 trillion by early 2012, Markit sat down with ETF industry leaders at roundtables in Paris in December 2010 and New York in January 2011.

Armins Rusis, Markit’s executive vice president, led the discussion in New York, while Bernie Thurston, managing director of Markit, hosted the Paris roundtable. Both meetings sought to assess the major issues confronting the industry, what was being done to solve the problems and the overall outlook for ETFs globally. The roundtables were notable for bringing together ETF sponsors on the sell-side, their buy-side customers, the investment advisers, as well as the authorized participants (APs), or traders, involved in the creation and redemption process that makes ETFs such a transparent, flexible and cost-effective investment tool.

What’s inside the fund?

One of the major benefits of US ETFs over other portfolio products, such as mutual funds and hedge funds, is
the transparency of the portfolio. This transparency results from the process undergone to create shares of the ETF. Brokers who bring shares to the secondary market, known as APs, need to trade a basket of shares of all the stocks in the portfolio in order to receive shares in the ETF. To facilitate this, the fund must post a full account of its holdings every day after the market closes.

This transparency can be difficult to achieve, particularly in Europe. Fabien Dornier, a partner at Ossiam in Paris, said that because many European ETFs are synthetically replicated, it can be difficult to see what is actually inside these funds. Additionally, in Europe, due to the region’s market structure many securities are traded in the over-the counter
market. Whereas in the US, exchange traded products are typically created from securities openly traded in the secondary markets. This difference in execution could also impact actual fund expenses. However, participants at the European roundtable noted that a fund’s performance would expose suboptimal transaction costs.

The transparency dichotomy is due primarily to a fundamental difference in the European ETF industry’s structure. While most ETF issuers in the U.S. are asset managers, most European issuers are banks. The market is quite different in Europe because the banks and brokers are the fund managers, and the ETFs reflect this. ETFs are products that use many parts of the bank including legal, trading, borrowing, lending and execution.

“The [European banks] have a swap desk that sells a swap to the fund,” said Deborah Fuhr, BlackRock’s global head of ETF research and implementation strategy, at the New York roundtable. “The swap desk can do securities lending, yield enhancement and synthetic shorts based on this inventory backing the swaps for the ETFs. So there’s a large potential revenue stream from this. And for many of them, this income stream was one of the real reasons to get into the ETF industry.”

For the rest of this story go to Markit Magazine.

Qubes Ticker Changed Back to QQQ

Invesco PowerShares Capital Management changed the ticker symbol for its PowerShares QQQ ETF from “QQQQ” to “QQQ,” as of Wednesday.

Originally called the NASDAQ-100 Index Tracking Stock when it launched in 1999, it traded on the American Stock Exchange under the QQQ symbol. Traders called it “The Triple Q” or “Qubes” for short. In 2004, it moved to the Nasdaq Stock Exchange, where stocks are required to have four-letter tickers. PowerShares bought the fund in 2006, and to keep continuity with the old nickname rechristened it PowerShares QQQ. It will continue to trade on the Nasdaq, so the ticker change seems odd.

It’s possible that nothing symbolizes the euphoria of the stock market’s technology bubble better than this ETF.         The day it began trading — exactly one year to the day before the Nasdaq Stock Market hit its all-time high — it was the largest ETF launch in story. Within six months, it was the largest ETF in the world. It tracks the Nasdaq 100 index, which holds the 100 largest non-financial stocks on the Nasdaq, mostly technology, biotech and retail stocks. The expense ratio is 0.2%.

Not only does it have no financials, but also no energy stocks. Energy makes up more than 7% of other large-cap growth ETFs. Meanwhile, hardware, at 32% of the portfolio, and software, at 16%, are each more than twice the size of other growth funds, according to Morningstar.

On particular oddity about the fund is that Apple’s (AAPL) has an index weighting of 21%, while Microsoft (MSFT) is only 4%, despite the software giant  being 70% the size of the its rival. This bizarre weighting comes about because of a problem that needed to be solved before it launched in 1999. At that time, the top five companies represented two-thirds the weight of the index, and Microsoft more than 25%. This prevented the EFT from avoiding taxes like a mutual fund. So, the creators modified the index formula, lowering the weightings of the largest stocks to below 40%, then lifting the small stock weightings to make up the difference and regain preferable tax status. Ironically, at the time, Apple was one of the smaller stocks. Now that the computer maker is the second largest stock in the U.S. market, the boosted weighting it received when the fund began trading, has caused it to dominate the ETF.

If Korea Becomes a Developed Nation

Index providers put a lot of time and effort into deciding whether countries are classified as developed or emerging nations.

The choice, to an outsider, seems simple. The U.S. is a developed country, and China is emerging. But breaking that down into a rule-set is more of a challenge. Each of the major index providers looks at a different set of criteria to make its determination.

With billions of dollars tied to each market, these classification systems matter, and countries lobby index providers hard to convince them that they meet this or that criteria.

For ETF investors, the index provider that matters most in this regard is MSCI, which dominates the market for both developed and emerging market international ETFs. MSCI has an annual review process for evaluating economic development status based on economic development, size and liquidity requirements, and market accessibility criteria. It maintains watch lists of countries that are under consideration for status changes.

In the middle of 2010, Israel jumped from emerging to developed status in the MSCI system, as it finally was judged to fully meet MSCI’s criteria for developed markets. Based on a 2008 consultation report from MSCI, the country’s graduation was primarily held up by concerns about market accessibility, but currently, the only remaining issue of concern, MSCI says, is the Tel Aviv Stock Exchange’s settlement cycle, which is shorter than is normal for a developed market. The issue is considered a minor one and did not prevent the country’s promotion to developed status.

Among other things, the promotion pushed Israel out of the broadly followed MSCI Emerging Markets Index and into the pre-eminent benchmark for measuring developed international equity performance, the MSCI EAFE (Europe, Australasia and the Far East).

Investors always want to know what will happen to a country’s market when a graduation event takes place. Viewed from a static ETF-only lens, the answer is simple. On April 30, 2010, there was roughly $60 billion in ETF money invested in the MSCI Emerging Markets Index via the Vanguard Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM). Israel had a 4 percent weight in the index, meaning the funds likely had in the area of $2.4 billion invested in Israeli equities at the time. When MSCI promoted Israel, those funds had to sell.

The next countries likely to graduate in the MSCI system may be bigger deals. In both 2009 and 2010, MSCI decided after careful review to leave both South Korea and Taiwan in the emerging markets index. They won’t be up for review again until June 2011. If chosen, they would make the switch in the middle of 2012. If that happens, MSCI would have to decide whether to make the transition over a period of time in a step process, or all at once.

Both countries meet many of the requirements MSCI has of developed nations. Korea satisfies the criteria in economic development, size and liquidity, but it fails on three levels: the lack of an offshore currency market for the Korean won; investor accessibility; and continued anti-competitive practices. With no active offshore currency market, investors need to exchange their money into won during Korean trading hours in order to trade. However, the limited trading hours means Korea’s market is mostly closed when Western markets are open. Meanwhile, a rigid identification system limits investor accessibility in the use of omnibus accounts. For instance, instead of Fidelity Investments having one account, it needs to set up separate accounts for each mutual fund that wants to trade in Korea, creating a very inefficient system. Finally, stock market data continues to be subject to contractual anti-competitive practices as a way to keep trades on the Korean market.

Taiwan also meets the economic development criteria, along with the size and liquidity requirements. However, market participants have said Taiwan’s overall market accessibility is comparable with that of Korea’s. MSCI said the “lack of full convertibility of the new Taiwan Dollar and restrictions associated with the Foreign Institutional Investors identification system were raised as areas where significant progress is still required.”

But if South Korea and Taiwan resolve these issues, the impact will be large.

For the full story go to IndexUniverse.com.

ETFs Cross $1 Trillion Milestone

Just another $10 trillion more to go.

The ETF industry crossed the $1 trillion in assets milestone for the first time yesterday. Actually, $1.027 trillion to be exact, according to BlackRock’s Global ETF Research and Implementation Strategy Team. It took 17 years for the industry, which includes all exchange-traded products classified as ETFs or ETPs, to achieve what took the mutual fund industry 40 years. The first ETF, the SPDR, launched Jan. 29, 1993, so just edged in under 18 years.

The modern mutual fund industry, which began with the Investment Company Act of 1940, crossed the $1 trillion mark in 1980. There are currently $11.51 trillion in assets under management in the U.S. mutual funds, according to the Investment Company Institute.

According to Blackrock, in the U.S., as of December 16, there were 894 ETFs with $887.2 billion in assets under management from 28 providers on two exchanges. Year to date, 171 new ETFs have been launched in the U.S., while 49 were delisted. Another 828 ETFs are in the regulatory pipeline. The $1 trillion comes when you add in the $115.5 billion from the 185 ETPs listed in the U.S. There are currently 20 providers and they all trade on one exchange. That’s ups from 142 ETPs with assets of $88.1 billion from 17 providers a year ago.

“Cost features make ETFs and ETPs among the most ‘democratic’ of investments, as a product’s pricing is consistent regardless of the type of investor or level of assets invested,” said Deborah Fuhr, the head of Blackrock’s ETF research team. She said the growth reflected the products expansion to retail investors. Providers are expanding into more specialized areas to cater to the growing number of professional and retail investors using ETFs as advanced portfolio construction tools. “The increasing availability of these highly-specialized ETFs and ETPs across the full spectrum of equities, fixed-income and alternative investments means that investors can use these vehicles to instantly deploy capital to take advantage of new investment opportunities – with complete transparency into the underlying investments as well as low cost.

Net new asset flows this year show increased interest in equities in both developed and emerging markets, compared to a drop off in net new asset flows among fixed income and commodities. Most striking was through November, net new flows into North American equity ETFs/ETPs jumped 950% to $21 billion, compared with just $2 billion in 2009. Over the same time period, flows into emerging markets equity ETFs/ETPs totaled $29 billion, up from $27 billion last year. Flows into fixed income products fell 30% to $31.2 billion, compared with $44.8 billion last year, while flows into commodity products plunged 65% to $11.4 billion from $32.6 billion a year ago. In November, ETF trading volume accounted for 24.1% of all United States equity turnover.

For more info check out Daisy Maxey’s piece in the Wall Street Journal and IndexUniverse.com.