What the US can learn from Sweden about how to launch a bitcoin fund

Many Americans are tired of hearing about how Scandinavian societies have figured out how to do everything better than us, but here’s one more: how to launch a bitcoin fund.

The Securities and Exchange Commission and ETF companies can’t agree on how to bring a bitcoin exchange-traded fund to market. Just last week four prospective bitcoin ETF issuers withdrew their filings for new funds tracking the digital currency after the SEC shot them down, citing concerns about trading liquidity and valuation of underlying bitcoin futures.

But a Swedish company has proved how it can be done. It has successfully run a bitcoin exchange-traded product for the last two years that can be accessed by European investors in multiple countries, and the products have attracted more than $1 billion.

Stockholm-based XBT Providers launched its CoinShares series in 2015. The XBT Bitcoin Tracker One (COINXBT) trades in Swedish krona, while the XBT Bitcoin Tracker Euro (COINXBE) — they launched on the Nasdaq Stockholm in 2015. XBT also issued versions in Denmark, Finland, Estonia and Latvia. In the Swedish krona version, 200 shares equal the price of one bitcoin, and in the euro version 20 shares equal the price of one bitcoin.

The big difference between the successful Swedish launch and the impasse in the United States is the type of exchange-traded product: the XBT portfolios are exchange-traded notes (ETN), not exchange-traded funds.

An ETN is an unsecured debt instrument that promises to pay the pattern of returns of the bitcoin price. Ironically, despite being an unsecure instrument, the XBT product tracks the spot price of bitcoin by holding the actual currency and forward contracts in case of a liquidity shortfall.

“At that point in time, the ETN structure was the best route to bring the products to market,” said Laurent Kssis, chief executive officer of XBT Provider. “As a result of using this structure to bring the product to market, investors have been able to gain exposure to the price movement of bitcoin since 2015. This stands opposed to the U.S., where most investors are still waiting for access to bitcoin exposure via their normal brokerage account.”

There are three ways to construct a bitcoin portfolio

There are three different ways in which a firm could create a bitcoin exchange-traded product. It could create an exchange-traded fund that owns and stores actual bitcoins, similar to the SPDR Gold Shares ETF (GLD). GLD tracks the spot price of gold by holding physical gold bricks in bank vaults in London. The second way is a bitcoin futures ETF, which approximates the price of bitcoin by owning bitcoin futures products. That’s been the dominant paradigm for SEC filings, including the ones recently pulled, due to the recent uptick in bitcoin futures contracts offered by major U.S. exchanges and securities firms.

“I think using the ETN structure to launch a bitcoin product was a good fit,” said Arlene Reyes, chief operating officer of Exchangetradedfunds.com, a website that reports on global ETFs. “ETNs are unsecured instruments backed by the credit of the issuer, and it tracks the performance of the underlying asset. … XBT Provider holds bitcoins equal to the value of ETN shares issued and tracks the performance of the price of bitcoin. I can see how this structure would be attractive to regulators.”

“I don’t know why an ETN hasn’t been done yet. We know other people are in discussions to make one, but it’s not us. We know it’s being talked about.” -Garrett Stevens, chief executive officer of Exchange Traded Concepts

This past October, XBT came out with two more ETPs to track the second most highly used cryptocurrency, ether, in both Swedish krona and euros: Ether Tracker One (COINETH) and Ether Tracker euro (COINETHE). These also are listed on the Nasdaq Stockholm for European investors.

One of the ETF companies that filed for a bitcoin ETF has looked at the ETN route and says others have been talking about it as well.

“We have considered notes with regards to bitcoin, but we have not had the opportunity,” said Garrett Stevens, the chief executive officer of Exchange Traded Concepts, which worked with REX ETF on a rejected bitcoin futures fund. “But we are a white-label company and we do what someone else wants. That’s what the REX guys wanted, so that’s what we created. I don’t know why an ETN hasn’t been done yet. We know other people are in discussions to make one, but it’s not us. We know it’s being talked about.”

There is one product that currently gives U.S. investors access to the bitcoin market — the Bitcoin Investment Trust (GBTC), managed by Grayscale Investments. However, GBTC is not an ETF, despite press reports. It’s not SEC-registered, and it trades on the Nasdaq over-the-counter markets. It’s highly volatile and can trade at an extreme premium to the price of bitcoin. Some brokers, including Merrill Lynch, are refusing to sell GBTC and other bitcoin-related securities to their clients.

Because they trade on an exchange, products like ETFs and ETNs are not only priced using a net asset value (NAV) — the value of securities held minus liabilities and divided by shares outstanding — that is calculated at the end of each day and by intraday NAV (iNAV) throughout the day. They also have a current market price, which can be more (a premium) or less (a discount) to actual value. The more volatile a market, the more likely there is to be a premium/discount issue.

“The [XBT] products are very well designed for what they do. They deliver, unlike GBTC,” said Matt Hougan, the chief executive of Inside ETFs, an ETF education company. “They give exposure to the returns of bitcoin and ether pretty well. I think they were well executed and they’ve done their job.”

But Michael Sonnenshein, managing director of Grayscale Investments, remains positive. “We are thrilled about the response of the market to the Bitcoin Investment Trust since it became publicly quoted in 2015,” he said. “My team is looking forward to bringing our second vehicle, the Ethereum Classic Investment Trust, to the OTCQX market in second quarter of 2018.”

Some ETF experts believe the chances remain good for a bitcoin ETF to be approved this year.

Before the crash, ETNs were more popular in the US

ETNs were once among regular exchange-traded product launches in the United States, though never at the level of exchange-traded funds in number of portfolios or assets raised. They were more popular with banks as issuers — which had the existing debt businesses to structure the credit side of the investment — than with standalone asset-management companies.

Before the financial crash, there were dozens of ETNs that covered commodities sectors, and many still exist today. But ETNs became less popular after the financial crash, based on the theoretical risk that a failure like Lehman Brothers could expose ETN investors to severe credit risk. While the theoretical risks did not play out, ETNs waned in popularity among new launches.

At the end of 2008, near the depths of the fiscal crisis, there were 74 ETNs, totaling $3.6 billion in assets under management. By the end of 2017, there were 204 ETNs, with combined assets of $24.9 billion, according to ETF.com

ETF companies that have filed for bitcoin ETFs, including REX, Proshares, Van Eck and Direxion declined to comment. Gemini, the investment company of the Winklevoss twins, did not respond to a request for comment.

Like the U.S.-based GBTC, the XBT bitcoin ETNs typically trade at a premium or discount to the actual price of bitcoin, but the range has been much smaller than in the case of GBTC, between 1 percent and 3 percent.

According to Bloomberg, the 52-week average percent premium is 0.46 percent, but it has been as high as 21 percent and as low as negative 16 percent. Still that’s a far cry from the 65 percent premium seen on GBTC.

“What Laurent has proven is the ETN structure has worked and been able to deliver that pattern of returns that’s different from the two paradigms filed with the SEC, which is the physical and the bitcoin futures products,” Hougan said. He also thinks the premium/discount issue is being handled fairly well in the case of XBT’s bitcoin portfolios.

“Bitcoin is an expensive product to trade, custody, store and service at this point. So I don’t think a 3 percent premium in the ETN is absurd,” he said. “That makes the ETN a viable approach.”

Currently, the two Bitcoin Trackers combined (krona and euro) have total assets of $900.8 million, and the two Ether Trackers have total assets of $439.3 million.

—By Lawrence Carrel, special to CNBC.com

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Why Buy A More Expensive ETF When A Similar Cheaper One Is Available?

The lowering of expense ratios is one of the biggest trends in the exchange traded fund industry today.

 

Yet two of the biggest ETF providers, BlackRock’s iShares and State Street Global Advisors, offer funds that charge significantly more than other funds they offer with similar exposures. Why would an investor choose the more expensive fund?

A prime example is iShares MSCI Emerging Markets (EEM), which tracks the MSCI Emerging Markets Index, the most widely followed benchmark in the emerging-market sector. It charges an expense ratio of 0.72%.

But the company offers a very similar fund, iShares Core MSCI Emerging Markets (IEMG), which only charges 0.14%. What’s the difference? While the MSCI Emerging Markets Index is primarily made up of large-cap stocks, the cheaper fund follows a multicap index, the MSCI Emerging Markets Investable Markets Index, which holds more than twice as many components, including all the stocks in the first index plus midcap and small-cap stocks.

With broader market exposure and a lower expense ratio, IEMG, which was launched in October 2012, is the more popular fund, with $40 billion in assets. But even with its drawbacks, EEM (which dates back to April 2003) still weighs in with $37.7 billion in assets.

Why does iShares continue to offer such an expensive fund — and why does it still attract investors?

Five years ago, iShares launched its Core Series of ETFs, a suite of 10 equity and fixed-income funds aimed at the buy-and-hold investor with dramatically lowered expense ratios. There are now 25 Core ETFs. The majority have expense ratios lower than 0.1%, and none is higher than 0.25%.

“IShares launched their Core Series at a time when they were losing market share to Vanguard because many of their core products chiefly were not priced competitively,” said Ben Johnson, Morningstar’s director of global ETF research. “It was part defense, part offense to stop the bleeding of the market-share losses to Vanguard.”

And fees play a major but not absolute role in the returns of the similar but not identical emerging-market ETFs, much as one would expect. In the year ended Oct. 31, EEM actually inched higher with a 25.64% return vs. 25.58% for IEMG. But over time, the cheaper fund has posted better results: an average annual 5.6% vs. 5.06% for the past three years and 4.92% vs. 4.22% for the past five years. The difference is practically the difference in the expense ratios.

Funds like EEM that track established benchmarks seem to be attracting traders and institutional investors who hold ETFs for shorter periods of time and aren’t as concerned about the expense ratio. Traders may use these ETFs because they are more available for borrowing to sell short and have a much deeper options and swaps ecosystem.

“There is an appeal for that product, which they are more familiar with and continue to use,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA Research. “For others the appeal is the considerably more volume and greater liquidity.” EEM trades 49 million shares a day, while IEMG has an average daily volume of 7 million shares.

Rosenbluth says the situation is the same with iShares MSCI EAFE (EFA), which tracks the widely followed benchmark for the developed nations, the MSCI EAFE Index, and has an expense ratio of 0.33%. That compares with iShares Core MSCI EAFE (IEFA). The core fund tracks the broader MSCI EAFE IMI Index and charges only 0.08%.

EFA is much more liquid, with average daily volume of 15 million shares vs. IEFA’s 4 million shares.

Meanwhile, State Street, realizing it was already late to the game where investors were demanding lower fees, decided that it would take too long to build assets and get onto important trading platforms if it created a new line of funds, said Matthew Bartolini, head of SPDR Americas research.

Instead, the firm decided to restructure a group of existing funds that already had assets and a user base. They rebranded 15 funds to make a consistent suite called the SPDR Portfolio, cut the fees, split the share prices so that they all started at $30, and if needed changed the index. Well-known funds such as SPDR S&P 500 (SPY) and SPDR S&P MidCap 400 ETF (MDY) weren’t changed for the same reasons EEM still exists.

“In order to be successful and have an impact for clients in a low-cost arena, you can’t just cut fees,” said Bartolini. “So we restructured 15 funds across every key asset class in equity and fixed income and aggressively cut costs to be the lowest or match the lowest price in the marketplace.”

The upshot is that traders might prefer the older indexes even if they’re a bit more expensive, while buy-and-hold investors might prefer the cheaper versions.

How To Find An Advisor Who Focuses On ETFs

Given the explosive growth in exchange traded funds with their vast investment offerings, low cost and tax-efficiency, chances are your financial advisor has at least considered using them in part or all of your portfolio.

But what if he or she doesn’t? It might be time to ask them why not. And if the answer is unsatisfactory, look for one that does.

ETFs might not be right for every part of your portfolio, but they could be a good fit in various areas.

For example, does your investment plan call for some exposure to the broad stock market? There are many ETFs that track the S&P 500 and broader indexes offered by the big ETF providers, BlackRock’s iShares, State Street Global Advisors’ SPDRs and Vanguard. If your advisor chooses a more expensive way to gain exposure to the stock market, there might be a reason, but there should be an explanation.

If you’re unsatisfied with the answer or are just beginning your search for an advisor, where do you start?

You can ask friends and family for referrals. You should also check out the National Association of Personal Financial Advisors, or NAPFA. It’s a professional association of fee-only financial advisors that started in 1983. They have a registry of advisors and chances are there are several near you.

If you have at least $500,000 to invest, you can also try Schwab Advisor Network. Other brokerages can also help refer you to financial advisors.

But if you start your conversation with an advisor by asking if he or she invests in ETFs, be prepared to get a question or two thrown back at you before you get an full answer. That’s because advisors are trained to look at your investment goals and risk tolerance before choosing investments that fit your needs.

Nik Schuurmans, the founder of Pure Portfolios, a registered investment advisor (RIA) in Portland, Ore., says to get an ETF-focused advisor you need to go with an independent RIA who doesn’t have a relationship with a mutual fund family, so he or she doesn’t have to push mutual funds. He says if you’re willing to embrace technology you can also try a robo-advisor. NerdWallet’s top 2017 robo-advisor picks include Betterment, Wealthfront, Wealthsimple, WiseBanyan, Charles Schwab and Fidelity Go.

“I don’t believe a consumer should use ETFs vs. other products as the criteria for using advisors,” said Matthew S. Clement, president of Emerald Retirement Planning Group in Stony Point, N.Y., an RIA that uses ETFs in its client portfolios. “I don’t mean it shouldn’t be part of the conversation. But it would be misguided to be the main reason. And it misses the fundamental issues for some hiring an advisor in the first place.”

Clement said the fundamental question when choosing one advisor over another is: “What do I expect this advisor to do for me?”

“There’s no book with the title ‘Advisors That Use Only ETFs,’ ” said Steve Dunn, executive director of ETF Securities, a specialist commodity exchange traded product provider. “But, it’s becoming much more common to find them. You have to find an advisor with a consistent philosophy of what you expect.”

Dunn suggests a group of advisors called the Zero Alpha Group, or ZAG.

“Their website lists firms that buy into this passive low-cost alternative.”

But the best known resource is a site called the Paladin Research & Registry. Started in 2003, the site is run by founder Jack Waymire, the author of “Who’s Watching Your Money?: The 17 Paladin Principles for Selecting a Financial Advisor.”

Advisors pay a membership fee to join the registry, which then vets them before they are listed in the registry.

Paladin reviews and documents financial advisors’ credentials, education, experience, ethics, business practices, services, certifications, associations and continuing education.

“Most advisors present themselves in the form of sales pitches,” said Waymire. “We require transparency. If an advisor is telling people he’s an expert, where did that expertise come from?”

It looks at advisors’ fiduciary status, license, registration and compliance record at finra.org.

The registry lists what services advisors provide, how they are compensated, and how they communicate with clients. And for our person looking for an ETF-focused advisor, it lists a manager’s strategy, whether passive or active.

“Passive and ETFs are virtually synonymous,” said Waymire.

After checking the data, it rates the advisor’s quality. An advisor needs to achieve a specific score to get into the registry.

Waymire said investors could query Paladin for another level of detail such as “I’m looking for an advisor that uses passive management with ETFs.” He said if they want to do research that goes one level deeper they need to go the advisor’s website. He also recommends that investors check out the advisor on finra’s brokercheck.

This was originally published in Investor’s Business Daily.

Passive Index Funds Pushed To Be More Active Voice For ESG

Until recently, socially responsible investing has been a backwater in the investing world. But investors — particularly activist groups — now demand more environmental, social and governance (ESG) responsibility from corporations.=

According to a survey by Brown Brothers Harriman and ETF.com, 51% of investors say ESG carries some level of importance, up 14 percentage points from last year. There are 169 ESG mutual funds and 56 ESG ETFs, according to Morningstar.

“It’s definitely being driven by investor feedback or the appearance that you want to be ahead of the game on this,” said Scott Sacknoff, chief executive of SerenityShares, which manages the ESG-focused SerenityShares Impact ETF (ICAN). ICAN, which launched in April, has $4 million in assets and an expense ratio of 0.5%.

ESG’s increasing popularity has raised questions about whether stock and bond index fund managers could and should be doing more to use proxy votes to steer companies in the indexes toward higher ESG standards.

Morningstar recently published a paper examining the issue, “Passive Fund Providers Take an Active Approach to Investment Stewardship.”

The paper found that while European managers have been active for years through the two stewardship tools of engagement with corporate management and proxy voting, index managers in the U.S. and Japan have only recently begun this process.

Of the five U.S. fund managers surveyed, BlackRock, Vanguard, State Street Global Advisors, and Fidelity Investments said they were increasing their engagement efforts, despite the costs. Only Charles Schwab (SCHW) said it would not.

“While we don’t meet with individual companies, we do engage with issuers in a systematic way through our proxy voting,” a Schwab spokeswoman told IBD. “We have yet to see evidence that with a portfolio as large as ours (by number of companies), direct engagement would provide measurable improvements for shareholders.”

The Morningstar paper addresses the main issue: “It may be tempting to assume that (since) index managers are passive owners (they) have little incentive to devote resources to monitoring companies; after all, they tend to compete on fees and their primary objective is to match the performance of indexes.”

Another issue is that since index managers have no choice in the stocks they hold, why should they care what the companies do?

“That’s why we say they have a duty to influence these companies to promote better ESG policies,” said Hortense Bioy, Morningstar’s director of passive fund research in Europe and the report’s co-author. “Because they are stuck with these companies. They are long-term investors, and they own everyone in the market. So they have a unique responsibility to change these companies for the better. That is the whole argument. As opposed to active managers, who if they disagree with the way a company is run, they could just divest it and not care, and only invest in the ones they believe will outperform the market.”

While for the most part, index managers vote with corporate management, sometimes their huge shareholdings can result in visible change. In 2016, a shareholder proposal asking ExxonMobil to be transparent and disclose its risk to climate change wasn’t backed by BlackRock. Instead, BlackRock held private discussions with the oil company’s management asking for the same thing as the activists. But it saw no results, so in 2017, when shareholders put forth the same proposal, BlackRock publicly voted for it, helping it pass.

“BlackRock believes that engagement is the best way to drive change on important environmental, social and governance issues,” said BlackRock spokesman Ed Sweeney, adding the firm has been doing this since 2011. “As a long-term investor, we are willing to be patient with companies when our engagement affirms they are working to address our concerns. However, our patience is not infinite — when we do not see progress despite ongoing engagement, or companies are insufficiently responsive, we will vote against management. We view a vote against management as a sign of a failed engagement, not as the start of the process.”

While large asset managers are favorite targets of activist groups, their pressure doesn’t always bear fruit. In November, an activist shareholder group proposed that Vanguard Group divest itself of PetroChina and Sinopec Shanghai, two Chinese energy firms doing business in Sudan. The group accused the companies of genocide. Vanguard recommended its shareholders vote against the proposal. The proposal failed.

But what about returns?

“ESG started not to improve the world, it was started by big banks to get a handle on risk,” said Janet Brown, president of FundX, a San Francisco RIA, and manager of the FundX Sustainable Impact Fund.

“Research shows higher ESG scores lead to more efficient, better earning companies,” Brown said.  “About 2,000 academic studies show a positive correlation between higher ESG and positive returns.” She was citing a study in the Journal of Sustainable Finance & Investment published in 2015.

It’s not just academic studies. A 2017 survey by State Street found that more than 68% of institutional investors reported that integrating ESG into their process had “significantly improved their returns.”

Money Managers Lure Millennials With Low Minimums, Live Advice

The traditional financial advisor rarely takes on new clients with a nest egg smaller than $100,000.

But the financial advisory industry is coming up against two large speed bumps that could spark a paradigm shift: the rise of the robo-advisor and the fact that the second half of the millennial generation is entering the workforce and starting to invest.

This has led one registered investment advisor to rethink its strategy for acquiring clients. M&R Capital Management is a 24-year-old firm with $500 million under management. The New York-based RIA — which manages money for individuals, institutions and charities — typically requires $250,000 to open a separately managed account (SMA). Its average SMA rose 13.05% in the past year and for the past three and five years returned an average annual 2.89% and 6.26% respectively, M&R says.

However, the firm’s members realized their growth strategy needed to focus on the millennial generation. With many millennials still in their early to mid-20s, few have the nest egg to open an SMA. Most don’t even have savings.

But the few sophisticated enough to invest are looking at the same place where they do their shopping and banking — the computer — and opening accounts with robo-advisors.

So M&R Capital decided to lower its account minimum. It created Prime Funds, a set of ETF-based model portfolios in which people could open an account with as little as $500.

“This is our way to compete with the robo-advisor,” said Paul DeSisto, director and senior portfolio manager at M&R. “The idea was to get young workers. People who don’t have much money to invest and get them invested right away with some safety and growth.”

DeSisto said the idea is to make them clients when they are small investors, help them grow large portfolios, then 15 or 20 years later move them into an SMA.

“We feel that people still want to talk to somebody,” said DeSisto. “They can call at any time and have access to the portfolio managers.”

M&R is able to accept such small accounts by keeping costs low. Prime Funds clients only have a choice of three portfolios. M&R uses the Pershing FundVest ETF platform, which lets M&R trade ETFs commission-free. The clients can’t trade ETFs on their own. M&R charges each account an annual fee of 1%. That’s on top of the fees that the ETFs charge, which range from 0.15% to 0.57% of assets a year.

The three portfolios currently available are: growth, value, and equity income.

The growth portfolio consists of a 42.5% allocation of PowerShares Dynamic Large Cap Growth Portfolio (PWB), 15% SPDR S&P 400 Mid Cap Growth (MDYG), 32.5% SPDR S&P 600 Small Cap Growth (SLYG), and 10% PowerShares S&P International Developed Quality Portfolio (IDHQ).

The value portfolio consists of PowerShares Dynamic Large Cap Value Portfolio (PWV), Oppenheimer Mid Cap Revenue ETF (RWK), SPDR S&P 600 Small Cap Value (SLYV), and IDHQ.

The high-distribution equity-income portfolio is comprised of PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD), SPDR S&P 400 Mid Cap Value (MDYV), PowerShares S&P SmallCap Low Volatility Portfolio (XSLV), and IDHQ.

The funds have been up and running since July 31. Through the end of September, the growth portfolio has a return of 6.1% and $95,000 in assets. The others don’t have assets yet.

While it’s not a full-blown trend, M&R isn’t alone in taking on clients with small accounts. Some, like Jeremy Torgerson, the founder of nVest Advisors, an RIA in Denver, has been taking on small accounts for two years because he sees how the robo-advisor technology is overrunning the industry. He offers his clients five ETF-based model portfolios.

“I’ve structured my practice to be a touch of robo and a touch of human to hold their hands,” said Torgerson. “If you get these people on the ground floor and be there for them, you will have a lifelong client.”

Hunter von Unschuld, the founder of Fractal Profile Wealth Management, an RIA in Albuquerque, N.M., retired as an attorney in 2013 and has been managing money since. He won’t turn anyone away — and offers eight ETF-based portfolios.

“We take small accounts because it’s my belief that everyone that needs help with their finances and retirement planning should be able to get help no matter their account size,” he said.

This was originally published in Investor’s Business Daily.

Schwab Survey Shows Which Generation Has Taken to ETFs the Most?

Investors’ knowledge and use of exchange traded funds nearly doubled over the past five years, and 42% expect ETFs to become their primary investment vehicle in the future, according to Charles Schwab’s 2017 ETF Investor Study.

The seventh annual study interviewed 1,264 investors in June between the ages of 25 and 75. They needed to have purchased an ETF in the last two years and have at least $25,000 in investable assets.

Eight percent of the investors said their portfolios already consist of only ETFs and 43% would consider holding only ETFs instead of individual securities.

The millennials generation has taken to ETFs the most — 56% of them say they’re their investment vehicle of choice. Among the members of Generation X, 44% said ETFs were their favorite vehicle; for baby boomers it was 30%; and for matures, those older than baby boomers, it was 23%.

Of millennials, 60% expect ETFs to be their primary investment vehicle in the future. That drops to 45% among Generation X, 23% among baby boomers and 17% for matures.

At least some financial advisors are scratching their heads over the survey results.  “I haven’t found that to be the case,” said Robert Karn, president of Karn Couzens & Associates, a registered investment advisor in Farmington, Conn. “Many of our clients have heard about ETFs, but they don’t know what they do. I don’t see millennials leading the charge. I don’t see in my practice what they’re saying in the survey.”

A low expense ratio is the most important factor in choosing an ETF, according to 62% of the respondents. Total cost was second, followed by, in declining order, the ETF provider’s reputation; how well it tracks its index; its historical returns; its liquidity/trading volume; if it’s commission-free; its exposure to a specific part of the market; its Morningstar rating; and finally, its total assets.

Investors are placing increased importance on the ability to trade ETFs without commissions. This year 55% said working with a brokerage that offered commission-free ETFs was very or most important, up from 38% in the 2012 survey.

Only 1 in 10 currently invest in socially responsible investments (SRI), 55% say they’ve heard about SRI and 35% don’t even know what SRI is. However, interest in SRI is growing. About 51% of the respondents said they would invest in SRI strategies if more education on products or asset allocation were provided.

Still, almost half of the ETF investors said it was important to them to invest in funds that align with their beliefs, 30% said they would actively seek out socially responsible funds and 42% preferred a strategy that was tailored to their values. About 53% said they had a “pretty good understanding” of how socially responsible their investments are and 46% said it was important to invest in socially responsible funds because they want their investments to align with their beliefs.

Interest in SRI investing is highest among millennials at 48%. Only 32% of Gen X investors seek out SRI strategies. That drops to 14% for baby boomers and 9% for matures.

“It surprised me how it reinforced my understanding of the demographic tilt toward ETFs,” said Steven Schoenfeld, founder and chief investment officer at BlueStar Indexes, which provides the benchmarks for the VanEck Vectors Israel ETF (ISRA) and the ETF Managers Trust BlueStar TA-BIGITech Israel Technology ETF (ITEQ). “It shows the appeal when people see they can do almost as well, if not as well, by aligning their values. It just makes them feel better and might make them better investors if their connection is more than just better returns. Then when the market gets volatile they might stick with it.”

With smart beta, 29% of the respondents said they currently invest in smart beta strategies and 59% said they planned to increase their investments in smart beta in the next year. About two-thirds of ETF investors have reduced active exposures over the last three years and replaced them with smart beta exposures.

This was originally published in Investor’s Business Daily.

ETFs That Track Gold Having A Better Year Than The Stock Market

fter a midsummer rally, gold is now having a better year than the S&P 500 index. And that’s good timing for some new gold ETFs that launched this year.

SPDR Gold Shares (GLD), the largest and oldest ETF in the world which tracks the price of gold, has surged more than 10% since July 7 for a year-to-date return of 16.9% through Sept. 7, according to Morningstar Direct. Meanwhile, SPDR S&P 500 (SPY), which tracks the stock market benchmark, is up 11.5% this year. IShares Gold Trust (IAU), GLD’s main competitor, is also up nearly 17%.

The main reason for the rally is the falling U.S. dollar, which has dropped nearly 10% this year. Some blame comments from President Trump, who said in April that the dollar was “getting too strong.”

But others think it has more to do with interest rates.

“Real interest rates started to go negative and that hurts the dollar. Both the five-year and the two-year (Treasury notes) are now negative,” said Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors, which launched U.S. Global Go Gold & Precious Metal Miners (GOAU) in June. “When the dollar falls, gold goes up.”

GOAU holds companies engaged in the production of precious metals either through mining or production and specialized financial firms called royalty companies. These royalty companies provide capital to fund exploration and production projects, and in return, receive a stream of royalties. GOAU is up 14% since its launch. It carries an expense ratio of 0.60%.

GraniteShares Gold Trust (BAR) also launched this year, on Aug. 31. Just like GLD and IAU, it holds actual gold bars to track the price of gold. Founded by Will Rhind, who managed GLD for 2-1/2 years before starting GraniteShares, BAR’s big selling point is it’s the lowest-cost gold ETF. It charges an expense ratio of 0.20%, vs. 0.40% for GLD and 0.25% for IAU.

“When you own gold as a hedge, you want the lowest-cost hedge,” said Rhind.

People flock to gold as a hedge when there’s uncertainty in the market. And there had been a lot of uncertainty lately, including deadlines to keep the government funded and raise the debt ceiling.

The Senate on Thursday approved a bill to avert a government shutdown and raise the debt ceiling for three months, as well as $15.25 billion in hurricane relief aid. In August, the president had said he was willing to risk shutting down the government unless he obtained funding for the wall he promised to build between Mexico and the U.S.

Gold hit its all-time high of $1,900 in 2011, during the last government shutdown threat.

“Another key motivation is we’re entering crash season, September and October,” said Brandon White, gold analyst at Bullion Management Group in Toronto. “We haven’t had a (stock market) correction for a number of years. So, people think we may be due for a downturn. So, take money off the table and move it into something that does well in market downturns, and precious metals do well.”

He added that annual gold production is expected to decline 40% going into 2018.

Then there is the saber rattling between Trump and North Korea, which is testing nuclear bombs and firing missiles. Wars always make gold prices go higher and geopolitical tensions are rising between the two countries.

All this has pushed the price of gold through the technical resistance line of $1,300, to $1,349 an ounce.

“A lot of people watching gold have been waiting for gold to challenge the $1,300-resistance line. It was tested three times last week,” said White. “When money managers consider an asset to revert to the upside from a downtrend, they will often wait for a 20% move. The resistance line was a key technical indicator that needed to be broken before sentiment turned. Now interest is back. It’s not so much a speculative trade as a defensive trade.”

And interest is definitely back.

Gold-backed ETFs saw net inflow of $1.6 billion in August, according to the World Gold Council. North American ETFs drove global inflow. GLD led inflow with $1.03 billion, or 3.2% of its assets under management, and IAU received $266 million, or $3.1% of AUM.

What Happens When HACK Gets Hacked By Insider

Investors in the PureFunds ISE Cyber Security ETF (HACK) woke up Aug. 1 to find their fund had a new name, ETFMG Prime Cyber Security ETF, and tracks a new index.

a stunning development, the fund’s advisor, ETF Management Group, had rebranded the entire family of PureFunds ETFs with the ETFMG name, and began following indexes from a new firm called Prime Indexes.

Since the change, $36 million has flowed out of HACK, which has $1.1 billion in assets, according to Morningstar Inc. The outflow has coincided with a pullback in cybersecurity stocks and the ETFs that invest in them.

While HACK’s old and new indexes both track the same securities, there were some slight changes in the new index to conform with a new methodology and improve implied liquidity, said Sam Masucci, chief executive of ETF Management Group. The change had little effect on the share price.

The story highlights the issues small asset managers without infrastructure can run into. ETF MG is known as the advisor. It provides the infrastructure for operating the ETF and portfolio management, as well as manages the third-party relationships with outsourced services, such as custodians, legal and auditing. ETF MG has 13 funds on the market.

PureFunds was the sponsor, covering most of the costs. Typically, the sponsor’s role is branding, marketing and consumer education. ETF MG is now the sponsor.

Unlike the ETFs of most small asset managers, when HACK launched in 2014 it was an immediate hit. It quickly gathered $1 billion in assets. Andrew Chanin, Pure Funds’ chief executive, was lauded as an ETF wunderkind. Altogether, PureFunds launched eight funds with ETF MG, six of which will continue under the ETF MG name. The other two were closed in July.

“People come to us with ideas that we turn into ETFs and operate. We are a comprehensive service company,” said Masucci. “Their role is market education. With more than a dozen partners, we’ve only had one that went this direction.”

Masucci said the dispute started in April when the board voted to lower the fund’s expense ratio to 0.6% from 0.75% in order to better compete with First Trust Nasdaq Cybersecurity ETF (CIBR), which charges 0.6%. At the point, HACK had $950 million in assets, while CIBR had $218 million.

“I alerted Andrew, and the Nasdaq and Andrew sued us,” said Masucci. “When Andrew sued us he violated provisions in our agreement precluding him from taking any actions that interfered with the operation of the fund. We would have not terminated them if they had not sued us.”

Masucci also said that Chanin did not originate the idea for the fund. He said that came from Kris Monaco and his team at ETF Ventures, a division of ISE, which was later acquired by Nasdaq. Masucci said Nasdaq disbanded the ETF Ventures team. Monaco, who was instrumental in creating the index that PureFunds ISE Cyber Security tracked, is one of the founders of Prime Indexes, which is providing the new index for the fund.

Chanin disputes the claims by ETF MG. He said PureFunds and ISE were partners and they hired ETF MG, not the other way around. And that it was PureFunds and its partners that helped cover the fund’s expenses.

In the complaint filed in the Superior Court of New Jersey, PureFunds claims that ETF MG was retained to “empower” PureFunds to launch their ETFs. PureFunds alleges that ETF MG “trumped up false securities violations” with the purpose of obtaining control of the PureFunds business to pocket millions in annual revenue. It also alleges that ETF MG reduced the “profit” that PureFunds was to receive from “their ETFs.”

“The pressure on asset managers to reduce their fees is as great as it’s ever been,” said Ben Johnson, Morningstar’s director of global ETFs research. “The vast majority of flows are going into the ones with absolute rock-bottom expense ratios. That’s the trend.”

HACK has risen 10.4% this year, but is down 4.8% in the past three months. CIBR, which was launched in June 2015, is up 8.3% this year, but also down 4.8% the past three months.

CIBR now has $275.6 million in assets.

The two funds have similar top holdings. HACK’s 39 holdings as of Aug. 15 were topped by Cisco Systems at 4.75%, Palo Alto Networks at 4.49% and Symantec at 4.12%. CIBR top holdings were Palo Alto Networks at 6.87%, Cisco Systems at 6.31%, and Akamai Technologies at 6.09%.

The other funds affected by the change, with assets and expense ratios:

• PureFunds ISE Mobile Payments is now ETFMG Prime Mobile Payments ETF (IPAY), with $152 million in assets and an expense ratio of 0.75%.
• PureFunds ISE Junior Silver (Small Cap Miners/Explorers) is now ETFMG Prime Junior Silver ETF (SILJ), with $53.1 million and 0.69%.
• Pure Funds Video Game Tech is now ETFMG Video Game Tech ETF (GAMR), with $29.7 million, 0.75%.
• PureFunds Drone Economy Strategy is now ETFMG Drone Economy Strategy ETF (IFLY), $23.3 million, 0.75%.
• Pure Funds ETFx HealthTech is now ETFMG ETFx HealthTech ETF (IMED), $2.8 million, 0.75%

This was originally published in Investor’s Business Daily.

Why Shark Tank’s Mr. Wonderful Puts Most Of His Cash In ETFs

When people see Kevin O’Leary, Mr. Wonderful on the TV show “Shark Tank,” they see a man willing to invest thousands of dollars in risky startups based on only a 10-minute presentation.

But the truth is, O’Leary’s a man who’s invested the bulk of his fortune in ETFs. In addition to “Shark Tank,” he heads O’Shares, an ETF family created to meet his specific investing needs.

The seven ETFs track indexes created by FTSE Russell that follow O’Leary’s investing criteria. Each company in the indexes must have 1) attractive operating metrics as defined by return on assets; 2) 20% less volatility than the market; 3) pay dividends. The portfolio must have no more than 5% in any one company and no more than 20% in a sector.

“People see me on ‘Shark Tank’ and think I’m the Wild West,” said O’Leary. “But I’m not. I’m an extremely conservative investor. My concern is preservation, and I want to make 5% a year forever. It’s not easy to do.”

O’Leary made his millions as a founder of Softkey, a publisher and distributor of CD-ROM-based software. It later bought Learning Co. and took its name. In 1999, Mattel acquired the company for $4.2 billion.

He put most of that money into a trust for his children that would pay out 5% every year in perpetuity. He wanted the trust invested 100% all the time and rebalanced every January back to 50% equity and 50% fixed income. He used the five investing criteria he would later use for the ETFs and said there could be no leverage or derivatives.

The annual 5% payout couldn’t come from return of capital, only interest, dividends or capital appreciation. When bonds paid 6.5%, the target 5% payout was easy to make. But as the yield on U.S. Treasuries fell, making 5% became a challenge without inordinate risk.

“Over the years, I’ve used every asset class: private equity, hedge funds, even alternative asset classes like owning forests,” said O’Leary. “You name it, I’ve done it.”

He said he found it interesting and frustrating that no matter who he hired or how successful, after about seven years, the manager’s strategy would blow up or go flat. He then decided to build his own mutual funds, and noted that his managers were using ETFs to “plug holes in periods where they needed to do allocations.” He tried to use ETFs for his trust, but every index violated at least one of his criteria, usually an outsize weighting in one stock.

He then went to the folks at FTSE Russell and asked them to make an index based on his criteria that would cover the equity portion of the stock/bond portfolio. They said “no.” They don’t make indexes for individuals, but they would test his idea to see if it had market potential. Out of that came O’Shares FTSE U.S. Quality Dividend ETF (OUSA). While capital preservation and yield are the fund’s mandate, not benchmark outperformance, in 2016 it beat the S&P 500: 12.3% vs. 11.96%. The yield on OUSA is 2.3%, compared with the S&P’s 1.9%. The expense ratio is 0.48%.

“Kevin’s approach to looking at dividend growth and cash flow is something that we think adds benefit to our equity weightings,” said Rob Stein, chief executive at Astor Investment Management, a Chicago RIA with $2 billion under management. The firm builds portfolios exclusively out of ETFs. “We believe O’Shares’ approach makes sense for analyzing stock selection, so we don’t have to drill down in individual stock selection. It’s a concept that makes sense to us and it’s being done rigorously.”

For geographic diversification, O’Leary asked FTSE Russell to build O’Shares FTSE Europe Quality Dividend ETF (OEUR) and a currency-hedged version O’Shares FTSE Europe Quality Dividend Hedged ETF (OEUH), which removes the effect of currency fluctuations. Then came O’Shares FTSE Asia Pacific Quality Dividend ETF (OASI) and its hedged version O’Shares FTSE Asia Pacific Quality Dividend Hedged ETF (OAPH). In 2016, OASI beat the MSCI AC Asia Pacific Index 7.82% to 5.21% and yielded 2.8%.

O’Leary then asked Russell to build O’Shares FTSE U.S. Small Cap Quality Dividend ETF (OUSM).

While on “Shark Tank,” O’Leary has invested in 40 companies, but he said he wouldn’t put any of them in his trust. They are too high-risk.

“I love the ETF industry and the innovation that is going on in it,” said O’Leary. “And I’m proud to be a part of it.”

Originally published in Investor’s Business Daily.

She is Belle of ETF.com Awards

Women might not have broken the ultimate glass ceiling in American politics, but they took the top prizes at the ETF.com Awards.

Yes, it’s awards time again for the ETF industry and starting off the festivities was ETF.com, a Web site full of stories, tools and fund analysis.

The SPDR SSGA Gender Diversity Index ETF, with the ticker (SHE), swept the ceremony by walking away with four of the top awards, more than any other ETF has taken home in the history of this specific award ceremony. The fund won Best New ETF, Most Innovative New ETF, Best New U.S. Equity ETF and Thematic ETF of the Year.

Fearless girl courtesy of SSGA

Were the judges trying to soften the blow women took on the political plane this year? Possibly. State Street Global Advisors, the sponsor of the fund, is responsible for installing the “Fearless Girl” statue near Wall Street on International Women’s Day last month. The statue represents the lack of gender diversity on Wall Street and the executive suites of U.S. corporations in general.

State Street said it created SHE, as the Gender Diversity Fund is affectionately known, to “invest in large-capitalization companies that rank among the highest in their sector in achieving gender diversity across senior leadership. SHE offers a means to invest in companies that have demonstrated greater gender diversity within their sector, providing investors with a tool to inspire change and make an impact.”

According to a 2015 paper from MSCI ESG Research, companies in the MSCI World Index with strong female leadership saw a return on equity of 10.1% per year compared with 7.4% for companies lacking suck leadership. We would be remiss if we failed to point out that on State Street’s board of directors only three of the 11 are women.

It appears the “Fearless Girl” is creating a lot of buzz too, as she stands facing the famous “Charging Bull” statue of Wall Street. The Bull’s creator thinks the girl statue violates his artistic rights and changes the meaning of his statue, which represents the strength of America and the market.

The Best ETF of 2016 was actually the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL). This award is given to a fund that did its job particularly well in a particular year. In 2016, this fund surged 25%, at least 10 percentage points more than its main competitors in a year when high-yield bonds were posting great returns.

I’ll just let ETF.com explain how the fund works: “Typically, investors hold bonds at different tranche levels, and as soon as a bond falls out of the investment-grade bucket, every insurance company must sell all of it, pushing these bonds into oversold territory, the result is that these downgraded bonds tend to outperform almost immediately after being downgraded – the very juice ANGL is extracting. What’s more these newly downgraded bonds don’t carry that much more default risk.”

For full list of ETF.com awards click here.