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)

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.

High Yield ETFs Take a Tumble

High-yield corporate bond ETFs tumbled today.

“This looks to be an exit trade from this asset class,” said Chris Hempstead, director of ETF execution services at WallachBeth Capital in a note, rather than a move to receive delivery of actual bonds.

Specifically, Hempstead’s desk has been very active in SPDR Barclays Capital High Yield Bond ETF (JNK), which dropped 1.3% to $38.19; iBoxx $ High Yield Corporate Bond Fund (HYG), which fell 1.4% to $87.59; PowerShares Fundamental High Yield Corporate Bond Portfolio (PHB), down 0.4% to $18.46, and SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK), down 0.6% to $29.70.

After a redemption of about $725 million in the SPDR Barclays Capital High Yield Bond ETF last week, allegedly for delivery of actual bonds, Hempstead says the pace of selling in high yield ETFs needs to be closely monitored.

So far this year, each of these funds has seen a significant increase in assets, for a total of more than $6 billion year-to-date. With the iBoxx fund holding $14.8 billion in assets under management, the SPDR high yield ETF holding $11.2 billion, the PowerShares ETF at $943 million and $119 million in the SPDR short-term high yield, all the funds have about doubled their assets since January 2011, says Hempstead.

“We are watching closely to see how well the Street can absorb a short-term exit strategy from these funds,” said Hempstead in a note. “How would the fixed income world respond to a heavy and swift sell-off in an ETF product space that has seen a steady inflow of assets for almost 18 months?”

He adds the products have started trading at a discount to their respective NAV, which is not uncommon, but they have a tendency to trade at a premium for longer periods than at a discount.

Down 50% in 2 Days, TVIX Could Fall More Monday

After the VelocityShares Daily 2x Long VIX Short-Term ETN (TVIX) plunged 30% in Thursday, Credit Suisse, the sponsor of the controversial fund, reopened share issuance on a “limited basis.” The ETF proceed to fall again Friday for a 50% drop over two days.

The Swiss banking giant was blamed for the two-day decline, by Benzinga, because it had temporarily halting new issuance of TVIX shares last month.

“Beginning March 23, 2012, Credit Suisse may from time to time issue the ETNs into inventory of its affiliates to make the ETNs available for lending at or about rates that prevailed prior to the temporary suspension of issuances of the ETNs. Also, beginning as soon as March 28, 2012, Credit Suisse may issue additional ETNs from time to time to be sold solely to authorized market makers,” according to a written statement issued by the bank after Thursday’s close.

Benzinga says “the halt in TVIX share creations may have caused a massive spike in the ETN’s net asset value. The elevated NAV and ensuing plunge in TVIX indicates that, simply put, traders discovered said premium and exploited it.”

TVIX’s slide continued in after-hours trading where the ETN lost almost another 12% and was found at $9 at 8:30PM Eastern Time. That’s by far the the lowest price TVIX has ever traded at.

On Friday, the shares fell 30% to $7.16 on volume of 29.3 million shares, more than twice its daily average volume. That’s 62% of the 46.7 million shares outstanding. And with the shares still 7% above their indicative value of $6.70, according to VelocityShares, the ETN could see another decline on Monday.

ETF Reading List:

China’s PMI Data Could Hinder, Help These ETFs (HAO, FXI, MCHI) (Benzinga)

Happy Water Day? Maybe For Water ETFs (PIO, PHO, CGW) (Benzinga)

Yorkville High Income MLP ETF’s Yield 8.5% On Average (Investors.com)

Seriously? Credit Suisse to Allow New TVIX Creations (TVIX, CS) (Benzinga)

Avoid These ETFs For Now (FXI, TVIX, GDXJ) (Benzinga)

Small ETFs Struggle as 18 Funds Hold Half of Industry’s Assets

If you’re looking for a reason why many of the ETFs launched last year failed to raise the $30 million in assets necessary to turn a profit and stay open take a look at the $10 Billion Club.

While there are more than $1 trillion in assets in the entire U.S. ETF industry, the majority are confined to about 100 funds, “leaving the other 1,300 ETFs in the dust,” says ETF Database.

Yesterday, I said many investors remain risk-adverse in today’s volatile market, leaving them squeamish about buying into hypertargeted ETPs. They prefer to stick with big, liquid funds tracking well-known indexes both because they understand what the index tracks and because they can get out quickly in an emergency. Other reasons why small, niche funds are having a hard time gathering assets is because institutional investors and investment advisors are restricted to buying products with minumum requirements for assets under management, average daily volume and age of the fund.

This leaves just 18 ETFs holding nearly half the assets of the entire ETF industry, according to ETF Database, which calls the group the $10 billion club because they all have more than that under management.

It’s no surprise who tops the list:

SPDR S&P 500 (SPY)
SPDR Gold Trust (GLD)
Vanguard MSCI Emerging Markets ETF (VWO)
iShares MSCI EAFE Index Fund (EFA)
iShares MSCI Emerging Markets Index Fund (EEM)
iShares S&P 500 Index Fund (IVV)
PowerShares QQQ (QQQ)

The big surprises to my eyese were the iShares iBoxx $ Investment Grade Corporate Bond Fund (LDQ) and the iShares iBoxx $ High Yield Corporate Bond Fund (HYG).

Dividend and Volatility Top ETF Trends in 2011

Morningstar’s Samuel Lee gives a nice review of the year in ETFs, saying it’s been a “banner year” with more than 300 new ETFs for a total of just under 1,400. Also, the $100 billion in assets flowing into ETFs over the 12 months far surpassed the mutual fund industry’s inflows, finally giving some credence to the claim by ETF providers that ETFs will soon begin to eat mutual funds’ lunch.

The big trends this year were ETFs focused on providing yield through dividends or good returns with minimal volatility. Lee’s top two ETFs for the year are the iShares High Dividend Equity Fund (HDV) and the PowerShares S&P 500 Low Volatility (SPLV), which each pulled in more than $800 million in assets under management. He also praised iShares for its suite of low-volatility ETFs, especially for their low fees.

iShares MSCI USA Minimum Volatility Index Fund (USMV), exp. ratio 0.15%
iShares MSCI EAFE Minimum Volatility Index Fund (EFAV), 0.20%.
iShares MSCI Emerging Markets Minimum Volatility Index Fund (EEMV), 0.25%.
iShares MSCI All Country World Minimum Volatility Index Fund (ACWV), 0.35%.

Lee calls the UBS E-TRACS 2x Wells Fargo Business Development Company ETN (BDCL) the worst new fund with an expense ratio of 0.85% and the possibility of 0.4% more in accrued financing charges. Yet, the big problem is that the note doesn’t take advantage of the ETN structure’s ability to avoid incurring taxes on the huge yield it offers.

Another big trend this year was ETFs that tracked factors such as momentum or volatility. New companies that produced these include Russell, QuantShares and FactorShares. I’ll look at these more closely later.

It’s Not the Heat; It’s the Liquidity

It’s not the heat, it’s the liquidity, says Nouriel Roubini on why Italy’s days in the eurozone are numbered.

Even as stocks and Italian bonds posted a recovery after Wednesday’s surge in Italian yields, Roubini, better known as Dr. Doom, said in the Financial Times, the only way to avert “the upcoming disaster is “if the ECB became an unlimited lender of last resort and cut policy rates to zero”, combined with the euro’s value falling to even with the dollar, “fiscal stimulus in Germany” and the deflation in the eurozone’s. Since the ECB can’t do that without rewriting the eurozone treaties, it doesn’t really matter that the other four are basically impossible as well. More to the point, even if Italy isn’t insolvent, the lack of liquidity in its system could be just as fatal.

Meanwhile, an extremely cute economist named Megan Greene agrees with Roubini. Greene has been waiting for the eurozone to go “into full meltdown mode” for months. She says “the only possible way Italy could regain market confidence at this point is if it swiftly implemented a package of austerity and structural reforms under a government with cross-party consensus and a strong, respectable leader, and this package immediately yielded results. This is nearly impossible.” Of course, being cute has nothing to do with it. She writes a blog called Euro area debt crisis. I’m going to assume that if your blog title is that specific, you’ve got a pretty good read on the situation. My favorite tab on the blog is “Beyond the Pigs.” It lends itself to so many interpretations.

Roubini says Italy, and the next bailout in line, Spain, are “too-big-to-fail but also too-big-to-save,” and will need a restructuring of 1.9 trillion euros of public debt. However, the European financial stability facility has already committed half of its resources to Greece, Ireland and Portugal, leaving just 200 billion euros for Italy and Spain. Efforts to leverage that 200 billion euros to 2 trillion, “is a turkey that will not fly, because the original EFSF was already a giant collateralized debt obligation, where a bunch of dodgy, sub-triple-A sovereigns try to achieve, by miracle, a triple-A rating via bilateral guarantees.” He calls it another “a giant sub-prime CDO scam.”

Still Wall Street isn’t going down easy. After Italy passed an austerity measure, the S&P 500 jumped 2% to 1264 and the Dow Jones Industrial Average climbed 2.2% to 12158. The yield on Italy’s benchmark bonds fell to 5.69%.

The rebound was so strong that some of the ETFs that tumbled on Wednesday are now trading above Tuesday’s close. These include the PowerShares DB Italian Treasury Bond Futures ETN (ITLY) up 3% to $18.25 and the PowerShares DB 3x Italian Treasury Bond Futures ETN (ITLT) up 10% to $14.29. These ETNs measure the performance of a long position in Euro-BTP futures, whose underlying assets are Italian government debt with an original term of no longer than 16 years. The ITLT ETN provides leveraged exposure three times greater than the unleveraged bonds.

Meanwhile, while not above the Nov. 8, close, these still made a nice recovery. The iShares MSCI Italy Index Fund (EWI), which tracks about 85% of the Italian equity market, gained 4% to $13.24 and the CurrencyShares Euro Trust (FXE), which offers U.S. investors a way to bet on the euro without trading on the foreign exchange markets, climbed back to $137.

Stocks, ETFs Plunge as Italian Bonds Top 7%

If you had any hopes that Europe would get its act together and come up with a reasonable plan to deal with its debt crisis, I think it’s time to give the points to the cynics.

Italian bond yields spiked to 7.25% today on fears that Italy has replaced Greece as the next flash point in the European debt crisis. People were hoping Italy would be able to institute some austerity measures if Italian Prime Minister Silvio Berlusconi stepped down. However, news that Berlusconi had pledged to resign, and his insistence on elections instead of an interim government, instead sent markets reeling.

With Italian bonds hitting an all-time high since the euro’s 1999 introduction, they reached the same level that forced Greece, Ireland and Portugal to seek bailouts. This sent U.S. stocks plunging. The S&P 500 Index tumbled 47 points, or 3.7% to 1229.

The evaporation of investor confidence was clear by the movement of ETFs that track the Italian bond and equity markets. The PowerShares DB Italian Treasury Bond Futures ETN (ITLY) fell 3% to a new low of $17.38 and the PowerShares DB 3x Italian Treasury Bond Futures ETN (ITLT) sank 10.3% to $12.37. These ETNs measure the performance of a long position in Euro-BTP futures, whose underlying assets are Italian government debt with an original term of no longer than 16 years. The ITLT ETN provides leveraged exposure three times greater than the unleveraged bonds. They have expense ratios of 0.5% and 0.95% respectively. If you’re looking for a good way to short the Italian bond market, these offer a good proxy. Just be aware, the ETNs are unsecured debt notes subjected to Deutsche Bank’s credit risk.

After months of failed plans, it’s become apparent that the European politicians are unable to make the hard choices to avert a disaster and that this has all been a huge shell game to push the problem forward without actually doing anything. I think it’s time for people to get out of U.S. stocks. We’re in for another hard landing.

Other ways to take advantage of the clustercuss that I fear will soon envelope Europe are the iShares MSCI Italy Index Fund (EWI), which tracks about 85% of the Italian equity market, and the CurrencyShares Euro Trust (FXE), which offers U.S. investors a way to bet on the euro without trading on the foreign exchange markets. The MSCI Italy fund, which charges 0.54%, plummeted 9.4% to $12.30, while the Euro Trust, which charges 0.4%, fell 2% to $135.03.

With Berlusconi demanding new elections, he effectively leaves Italy leaderless at the depths of the crisis, bringing the country close to a breaking point.

Meanwhile, late Wednesday, Greek Prime Minister George Papandreou did officially quit, without naming a successor.

It’s hard to see things getting better soon. The market’s recent bounce gave most people an opportunity to get out of the market with some profits. I think it’s a good time to go to cash.

KBW Jumps to PowerShares, New Funds Charge 0%

It appears the reason that State Street Global Advisors isn’t using financial indices from investment bank Keefe Brunette & Woods is because KBW jumped ship to Invesco PowerShares.

The same day State Street changed five of its financial ETFs from KBW indices to benchmarks from Standard & Poor’s, PowerShares began trading ETFs that tracked four of the same KBW Indices.

And in a stunning move to grab investors away from State Street, PowerShares said it would wave it’s unitary fee of 0.35% until February 1, 2012. The unitary fee is the management fee portion of the expense ratio. And since the entire expense ratio for these funds goes to the manager, the effective expense ratio for these funds is 0% until

Apparently, KBW’s license with State Street was expiring and coming up for renewal. Meanwhile, KBW had also licensed some indices to PowerShares for ETFs. KBW is also currently working with Invesco on some global initiatives and was happy with the service they had received from Powershares on the ETFs. So, KBW decided this was a good time to consolidate with one ETF provider and chose Powershares.

The new ETFS:
PowerShares KBW Bank Portfolio (KBWB)
PowerShares KBW Capital Markets Portfolio (KBWC)
PowerShares KBW Insurance Portfolio (KBWI)
PowerShares KBW Regional Banking Portfolio (KBWR)

Each ETF tracks the KBW index of the same name. The only KBW index that had been used for a SPDR ETF, but hadn’t moved to PowerShares was the KBW Mortgage Finance Index.

KBW is a well-known provider of research on the financial services sector and KBW indexes are widely used by industry professionals as performance benchmarks.

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.