Category Archives: Exchanges

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

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

9 ETFs Make Up 18% of Total U.S. Volume

Abel/Noser, an agency-only broker, released a market liquidity study for July saying ETFs dominated trading on the U.S. stock markets, with nine ETFs representing 18% of the total daily domestic volume, reports

Those nine ETFs were: the SPDR (SPY), iShares Russell 2000 Index (IWM), PowerShares QQQ (QQQQ), iShares MSCI Emerging Markets Index (EEM), SPDR Gold Shares (GLD), UltraShort S&P500 ProShares (SDS), iShares MSCI EAFE Index (EFA), Financial Select Sector SPDR (XLF) and Direxion Daily Financial Bull 3X Shares (FAS).

According to the July ETF Report released by the National Stock Exchange today, the top five ETF providers in terms of volume, in descending order, are State Street Global Advisors, BlackRock, ProShares, Direxion and Invesco/PowerShares. Together, their share volume for the month of July was 27.6 billion shares, or 54% of the NYSE Group Volume in all stocks traded, 50.6 billion shares. This number doesn’t include Nasdaq volume.

In addition, Abel/Noser said six stocks accounted for more than 10% of the domestic principal traded. The six stocks: Apple, Bank of America, Citigroup, Microsoft, Exxon Mobil and Intel.

The top 105 stocks represented more than half of the day’s volume, says the study, while the top 975 names accounted for 90% of all the volume. The renaming 17,399 securities accounted for just 10% of the daily volume on the market. These numbers were little changed from June.

Select Sector SPDRs Sue Over Shadow Symbols

The Select Sector SPDR Trust sued INVESCO PowerShares Capital Management over ticker symbols. Filed Thursday in U.S. District Court in Houston, the suit charges PowerShares with trademark infringement and misappropriation.

Select Sector SPDRs offers a family of ETFs that divides the S&P 500 into nine individual sector funds. In April, PowerShares launched a family of nine sector ETFS for the small-cap market based on the S&P 600, a small-cap index. (Blog Postings: Small-Cap Investors Get Sector Funds and Sector ETFs Help You Avoid Single-Stock Risk)

The PowerShares funds, which trade on the Nasdaq Stock Market, use four-letter ticker symbols that add an “S” to the end of the ticker for the Select Sector SPDR funds covering the same industry. Those trade on the NYSE Arca.

“This is a deliberate and unconscionable act on the part of PowerShares to confuse both institutional and retail investors,” said Dan Dolan, director of wealth management strategies for the Select Sector SPDR Trust in a written statement. “PowerShares has succeeded in casting an unfortunate shadow on Wall Street’s efforts to eliminate financial opacity.”

Dolan noted that 101 out of 102 ETFs previously launched by PowerShares have tickers that start with “P.” The sector funds in question are the only products in PowerShares ETF family that begin with an “X.”

Below is a list of the funds side-by-side:

Sector SPDR Consumer Discretionary (XLY)
PowerShares S&P SmallCap Consumer Discretionary Portfolio (XLYS)

Sector SPDR Consumer Staples (XLP)
PowerShares S&P SmallCap Consumer Staples Portfolio (XLPS)

Sector SPDR Energy (XLE)
PowerShares S&P SmallCap Energy Portfolio (XLES)

Sector SPDR Financials (XLF)
PowerShares S&P SmallCap Financials Portfolio (XLFS)

Sector SPDR Health Care (XLV)
PowerShares S&P SmallCap Health Care Portfolio (XLVS)

Sector SPDR Industrials (XLI)
PowerShares S&P SmallCap Industrials Portfolio (XLIS)

Sector SPDR Materials (XLB)
PowerShares S&P SmallCap Materials Portfolio (XLBS)

Sector SPDR Technology (XLK)
PowerShares S&P SmallCap Information Technology Portfolio (XLKS)

Sector SPDR Utilities (XLU)
PowerShares S&P SmallCap Utilities Portfolio (XLUS)

Calling the PowerShares symbols “astoundingly similar,” Dolan told the Wall Street Journal: “I don’t think there’s any other way of looking at it than they’re trying to jump on our back.”

He’s right, of course. If PowerShares planned to latch onto this already understood product, it was a brilliant marketing strategy. The Select Sector SPDRs are probably the most recognizable ETFs in the world. Their marketing campaign of spiders making webs in the shapes of industry icons, such as an oil rig for its energy ETF or a stethoscope for the health care ETF, has been a huge success, both in explaining that ETFs are financial products and what a select sector is. Traders, large and small, call stocks by their tickers not their company names. So, if you wanted the small-cap fund for energy, instead of XLE, you would simply remember the “S” for small.

The question becomes who owns a ticker symbol and can you trademark the first two or three letters of a ticker symbol? Currently, the Intermarket Symbols Reservation Authority, run by the Options Clearing Corp., or OCC, assigns ticker symbols to companies and ETFs. “The ISRA operates a uniform, transparent system for the selection, reservation, assignment and transfer of securities trading symbols by NMS Plan participants.”

Since there are only so many possibilities for three- and four-letter combinations, aren’t there always going to be tickers similar to yours? For instance, most people assume INTL is the ticker for Intel, but it’s not; it’s INTC. Surprisingly, among the many media outlets that reported this story, no one seems to have called the OCC for its opinion.

I did, but the OCC hasn’t gotten back to me.

Meanwhile, I would say the amount of market confusion is minimal. The Journal says the nine Select Sector SPDRS have $31 billion in assets under management. Meanwhile, the nine PowerShares funds in question hold only $50 million. Most hold less than $6 million, and have an average daily trading volume of less than 10,000 shares a day. The Select Sector SPDRS see average daily volumes in the tens of millions.

June ETP Volume Sinks on NYSE Euronext

ETPs saw June trading volumes on the NYSE Euronext tumble 31% from May, the exchange reported today.  ETP volumes also posted declines at least 50% greater that stock volumes.

Last month, the average daily volume for U.S. matched exchange-traded products was 382 million shares, a 16.1% decline from June 2009 and a 31.2% drop compared to the previous month. This includes volumes for Tape B and Tape C.

The average daily volume for the second quarter fell to 418 million shares, 20.1% below prior year levels. Year-to-date, average daily volumes have sunk 34.3% from the same period last year to 372 million shares.

In comparison, the exchange reported June average daily volumes for U.S. cash products, which I assume to be stocks, decreased 6.9% from June 2009 and sank 21.5% from May.  In the second quarter, the average daily volume fell 11.8% from prior year levels, while year-to-date, the year-over-year decline was 24.7%

Big ETF Moves on Goldman News

Exciting day on Wall Street as the Securities and Exchange Commission sends a shot across the bow of Goldman Sachs.

The stock market started out mildly higher, when midmorning, the SEC charged Wall Street’s most influential bank with fraud over its marketing of a subprime mortgage product designed to fail. The SEC says a Goldman vice president was also charged with fraud for his responsibility for creating the questionable mortgage product, known as ABACUS. Surprisingly, criminal charges were not filed.

However, this makes many question whether the bull run of the last year is over.

According to Reuters, the SEC alleged that Goldman structured and marketed ABACUS, a synthetic collateralized debt obligation that hinged on the performance of subprime residential mortgage-backed securities. However, Goldman allegedly didn’t tell investors “vital information” about ABACUS, including that the hedge fund Paulson & Co helped choose the securities in the portfolio. Run by John Paulson, the hedge fund made billions of dollars betting that the housing market would crash. The SEC also alleged that Paulson took a short position against the CDO in a bet that its value would fall, reported Reuters. “This included an estimated $1 billion from the transaction detailed in the SEC lawsuit, which the agency said cost other investors more than $1 billion,” said Reuters.

Many people on Wall Street have said this is a politically motivated moved as Congress begins debating reform of financial industry regulation.

Goldman denied the charges. Its stock fell $23.57, or 12.8%, to $160.70, and it brought down the entire market with the Dow Jones Industrial Average losing 126 points, or 1.1% to 11018.66. The S&P 500 dropped 19.5 points, or 1.6%, to 1192.13.

Obviously, this means a lot of movement among ETFs.

The Direxion Daily Financial Bear 3x (FAZ) jumped $1.14, or 10.3%, to $12.18, posting the third-largest volume of the market gainers, 209.7 million shares.

ProShares UltraShort S&P 500 (SDS) gained 94 cents, or 3.3%, to $29.72.

ProShares UltraShort Financials (SKF) jumped $1.15, or 6.8%, to $18.11.

The Financials Select Sector SPDR (XLF) fell 62 cents, or 3.7%, to $16.36.