Fidelity Takes on State Street

Reading List for Monday, Jan. 7:

Fidelity’s new push into ETFs means it’s getting into the ring with cross-town rival State Street Global Advisors. The Boston Herald says Fidelity “is getting less and less business from investment advisers because it used to be that an investment adviser would pick a basket of mutual funds and Fidelity would be 30 percent or 40 percent of them.”

Wall Street Sector Selector does some technical analysis on the SPDR S&P 500 (SPY) and concludes “U.S. stocks and ETFs now face a moment of truth after the recent powerful rally.  Technical resistance and fundamental headwinds persist along with ongoing political uncertainty. “

Ari Weinberg explains in WSJ.com how ETFs lend out their securities for some extra cash. International securities regulators are in a tizzy over how this could cause potential disruptions in the market. But ETFs in the U.S. are much more stable than the derivative-based ETFs in Europe, so it’s not much of a concern on this side of the pond.

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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.

Rydex to be Part of Guggenheim by Year End

Last night at the Seeking Alpha cocktail party in Tribeca, I spoke with some staff members at Guggenheim Funds. First reported on this blog in December, it appears that Guggenheim Partners, the parent company, is still involved in talks to combine the former Claymore Funds, renamed Guggenheim Funds, with Rydex, another ETF company it bought last year. The staffers say Rydex should be made part of Guggenheim funds by the end of the year.

RGI Gives an Industrial-Strength Performance

Rydex S&P 500 Equal Weight Industrials ETF (RGI) offers investors an uncommon, but potentially lucrative, way to diversify their exposure to the stocks of large and midsize industrial companies.

This exchange-traded fund tracks the industrial sector of Standard & Poor’s 500-stock index. But instead of weighting the stocks by their market capitalizations, the approach used in most indexes, the Rydex fund assigns each stock an equal weighting.

In traditional market-cap-weighted benchmarks, large companies are much more influential than small firms. For example, the five biggest S&P industrials account for 32% of the index, with General Electric alone representing 11%. In the Rydex ETF, each stock counts for about 1.8%. The effect is to give smaller companies, such as Cintas and Masco, as much weight as Goliaths such as GE.

So far, Rydex’s approach has paid off. From the ETF’s November 2006 launch through May 6, it gained 6.2% annualized. That compares with 3.9% annualized for the Dow Jones industrial average and 5.2% for the market-cap-weighted S&P industrials. (The fund charges 0.50% in annual expenses.) And with manufacturing output having jumped at an annual rate of 9.1% in the first quarter of 2011, industrial stocks look appealing.

Big moves in individual stocks can throw an equal-weighted index out of whack. Rydex seeks to keep positions close by rebalancing its holdings quarterly.

For the full story with chart go to Kiplinger.com.

Quake Shakes Japan, Nuclear ETFs

Fears over the impact Friday’s earthquake and tsunami will have on Japan’s economy sent the benchmark Nikkei 225 stock average plunging 6.2% in its first day of trading since the 9.0-magnitude quake struck. This led U.S. investors to sell stocks. At Monday’s close, the Dow Jones Industrial Average recovered from its lows, to post a decline of 0.43% to 11993 and the S&P 500 slid 0.54% to 1296.

Here’s a brief look at how ETFs affected by the crisis reacted on Monday The iShares MSCI Japan Index Fund (EWJ) sank 7% to $10.05. The WisdomTree Japan Total Dividend ETF (DXJ) tumbled 7% to $35.620. The Rydex CurrencyShares Japanese Yen Trust (FXY) advanced 0.26% to $120.92.

Meanwhile, the trouble at Japan’s Fukushima Daiichi nuclear complex sent fears rippling through the U.S. nuclear industry. Officials said an explosion occured at the site’s Unit 3 reactor, while the fuel rods at the Unit 2 were fully exposed, causing fears of a nuclear meltdown at the reactor. PowerShares Global Nuclear Energy Portfolio (PKN) plunged 11% to $18.97 and the Market Vectors Uranium + Nuclear Energy ETF (NLR) plummeted 12% to $22.46.

UPDATE: Tuesday 12:09 am. The New York Times has reported the Nikkei index has plunged 13% on worries about the radiation fallout from a potential nuclear disaster. It looks like Tuesday will be a clustercuss.

Will Rydex Brand Disappear?

Rumors are floating around that Guggenheim Partners is in serious discussions about merging the Rydex ETF family with the Claymore ETF family under the brandname of Guggenheim Funds.

On December 23, I was scheduled to have a lunch meeting with Steve Baffico, who oversees the retail business including distribution, strategy, marketing, investment product development, and strategic initiatives for Guggenheim Funds, which is the new name for the ETF firm formerly known as Claymore Securities.

After cancelling a lunch in mid December, we had rescheduled for the day before the Christmas Eve. The PR guy confirmed the reservation the afternoon before. Around 11 am, the PR guy cancelled the lunch and said Baffico had been called into a last minute, emergency, all-day meeting.

Now really, what kind of company calls a last minute, all-day meeting the day before Christmas break? Pretty suspicious. I made a few calls and sources said Guggenheim Partners was holding a meeting to discuss merging the Rydex and Claymore families into one. Made a few more calls and found out Rydex had held a similar meeting earlier in the week.

No one is willing to go on the record to confirm the merger story, but expect to hear news of the merger in January.

How Guggenheim Partners Became a Player

With its purchase of Rydex SGI in February, a little-known asset manager by the name of Guggenheim Partners suddenly became the seventh-largest ETF provider in the U.S. Prior to its purchase of Claymore Securities just seven months earlier, Guggenheim had only been involved in one product for retail investors. The truly shocking part is the whole thing might have been an accident.

On Feb. 16, Guggenheim bought Security Benefit Corp., a struggling financial services firm out of Topeka, Kan., for an undisclosed sum. In the package, Guggenheim received four businesses: Security Financial Resources, a national provider of retirement plan services for more than 135,000 accounts, primarily in the education market; Security Benefit Life, a provider of fixed and variable annuities to 200,000 policyholders; se2, the administrator of more than 700,000 policies and $30 billion in assets for the insurance and financial services industry; and SGI Security Global Investors and Rydex SGI, an asset manager and ETF provider.

Right after the deal went down, Todd Boehly, Guggenheim’s managing partner in the office of the chief executive, told Investment News that purchasing Rydex SGI for its ETFs “wasn’t the primary consideration behind the acquisition of its parent company” but that it “presented to us an attractive opportunity.”

Yet, suddenly they’re a major player and the owner of two of the most innovative houses in the ETF industry.

Rydex SGI entered the ETF market in 2003 by launching the first ETF to use an alternative weighting methodology, the Rydex S&P Equal Weight ETF (NYSE Arca: RSP). Known for creating the inverse mutual funds, Rydex is also one of only three firms that offer leveraged and inverse ETFs. In addition, it created the first family of exchange-traded products to track individual currencies: The CurrencyShares currently give investors access to nine major currencies without the hassle of entering the actual foreign exchange market.

Meanwhile, Claymore has made a reputation for being the first in many high-concept thematic and tactical portfolios, such as the water industry with the Claymore S&P Global Water Index Fund (NYSE Arca: CGW); the popular emerging markets bloc known as BRIC (Brazil, Russia, India and China) with the Claymore/BNY Mellon BRIC ETF (NYSE Arca: EEB); and the solar power industry with the Claymore/MAC Global Solar Energy Index ETF (NYSE Arca: TAN).

At the end of February, Rydex SGI had about $22 billion in assets under management. Its 31 ETFs held $5.8 billion, making it the ninth-largest ETF sponsor in terms of assets, according to the National Stock Exchange. Together with the $2.74 billion in the 32 ETFs held by 13th-place Claymore, the combined ETF assets jump to $8.54 billion, leaping over BNY Mellon and WisdomTree to be the seventh-largest ETF firm behind iShares, State Street, Vanguard, Invesco PowerShares, ProShares and Van Eck. Claymore held $15.2 billion across all its product lines, which include closed-end funds and unit investment trusts, at the end of 2009.

What’s The Plan?

Considering Guggenheim now owns two of the most unique ETF houses, ETFR wondered about the firm’s strategy. How do ETFs fit into its overall business plan? Would the firm keep the Rydex and Claymore brands separate or merge them? And are there plans to buy more ETF providers? Guggenheim Partners declined requests for comment. Considering the fortuitous nature of the Rydex purchase, it may be that its strategy is still under development. But some in the ETF industry see interesting potential in the new firm.

“I think it’s an interesting combination buying both Rydex and Claymore. They both have different offerings in the ETF lineup,” said Reginald Browne, managing director of listed derivatives group at Knight Equity Markets. “Once Guggenheim determines its core strategy in the ETF space, combining the two entities I believe will be an interesting competitive advantage given their diverse lineup, and a compelling offering among ETF sponsors.”

In previous reports, Boehly said there are no plans to integrate Claymore and Rydex SGI, but “longer term, we’ll be looking at a lot of things related to how to optimize business” and that Rydex plans to launch “a lineup of new innovative products” within the next six to nine months.

“As promising as it looks, this is basically a low-margin business for a high-margin house,” said Ron DeLegge, editor and publisher of ETFguide.com, a San Diego-based Web site focused on ETFs. “I wouldn’t be surprised if they consolidated funds, getting rid of the ones with few assets and trying to gather assets and trading volume from a few strong funds.”

Well, a first look at the new line came with the recent launch by Claymore of a suite of ETFs designed to track broad market indexes, the Wilshire 5000 Total Market ETF (NYSE Arca: WFVK), the Wilshire 4500 Completion ETF (NYSE Arca: WXSP) and the Wilshire U.S. REIT ETF (NYSE Arca: WREI).

This was originally published in Exchange-Traded Funds Report. For the full story click here.

Goldman Talks About Rydex Closing 12 Funds

Rydex|SGI announced last Friday that it will close 12 of its 14 leveraged and inverse ETFs. Inverse ETFs essentially short an index and try to earn the negative return of the index it tracks. Leveraged ETFs seek to provide 200% or 300% of an index’s daily return or negative return.

“The premium reason is they hadn’t garnered a significant amount of investor interest,” said Richard Goldman, the chief executive officer of Rydex|SGI, in an interview with ETFsForTheLongRun. “It was a small percentage of the ETF assets under management.”

Including the affected funds, the Rockville, Md., firm offers a lineup of 40 exchange traded products (ETPs). The 12 funds held approximately $129 million in assets, or less than 2% of Rydex|SGI’s total $7 billion in ETF assets under management. Typically, an ETF needs $50 million in assets to remain viable. The ETP division represents 29% of Rydex’s total $24 billion under management. Closing these funds will allow Rydex to focus resources on the products with the most demand.

The consolidation is a bit of an ego bruise for Rydex as it invented the leveraged and inverse mutual fund. Even though Rydex was an early entrant in the ETF market, launching its first fund in 2003, Goldman acknowledged it had lost the first mover advantage on the inverse and leveraged funds. Because ETFs are sold on the stock exchange and not through financial advisors like mutual funds, there’s little need for replicating another fund’s strategy. Thus the first fund to track a market typically garners the most name recognition and hence, assets. ProShares, the market leader, launched its first inverse and leveraged ETFs in 2006. Direxion is the other main player in this space.

“I won’t say universally we’re getting out of the leveraged and inverse business,” said Goldman. “We leaving options open and won’t constrain ourselves to not participate in that space. The overall leveraged ETF business is still strong and there’s not a lot of degredation in the asset base.”

Goldman said that Rydex’s recent purchase by Guggenheim Partners had nothing to do with the closing of the funds, or problems at the firm. He said almost all the Rydex products had strong positive net inflows in 2009 and that total ETP assets grew about 30%. Rydex mutual funds also saw net cash inflows for the year, with tremendous growth in alternative investment strategies packaged as mutual funds, fundamental alpha strategies and fixed income formats.

The CEO added that he doesn’t believe Guggenheim has plans to merge Rydex with Claymore, the ETF firm Guggenheim bought last year. “We’re committed to growing our franchise and it’s an important growing piece of the business.”

Friday, May 21, will be the last day of trading on NYSE Arca for the following 12 funds.

Rydex 2x Russell 2000 ETF (RRY)
Rydex 2x S&P MidCap 400 ETF (RMM)
Rydex Inverse 2x Russell 2000 ETF (RRZ)
Rydex Inverse 2x S&P MidCap 400 ETF (RMS)
Rydex 2x S&P Select Sector Energy ETF (REA)
Rydex 2x S&P Select Sector Financial ETF (RFL)
Rydex 2x S&P Select Sector Health Care ETF (RHM)
Rydex 2x S&P Select Sector Technology ETF (RTG)
Rydex Inverse 2x Select Sector Energy ETF (REC)
Rydex Inverse 2x Select Sector Financial ETF (RFN)
Rydex Inverse 2x Select Sector Health Care ETF (RHO)
Rydex Inverse 2x Select Sector Technology ETF (RTW)

Between the close of trading on May 21, and May 28, the affected funds will liquidate their portfolio assets. Shares still held on May 28 will be redeemed automatically. Investors will receive a cash distribution equal to the net asset value of their shares as of the close of trading May 28. This amount includes any accrued capital gains and dividends, minus the costs to close the fund.

BlackRock Rumored to Buy BGI; BNY Could Enter the Fray

Kudos to Douglas Appell and Pension & Investments for breaking what may be the biggest scoop of the ETF industry this year.

Pension & Investments reported just before the market closed Friday that giant money manager BlackRock made a late day play for Barclays Global Investors. Unnamed sources say, “BlackRock is likely to announce an agreement to buy BGI, creating the world’s biggest institutional money manager.” The source expects the announcement within days. BGI owns the iShares exchange traded fund business.

Big British bank Barclays put the unit up for sale earlier this year in an effort to raise capital and stave off the British government either investing in or nationalizing the bank. CVC, a British private equity firm, offered in April to buy iShares for $4.2 billion. BlackRock is expected to trump that with a $10 billion offer. CVC holds the option to make a counter bid. But a source not directly involved in the deal said CVC wouldn’t be able to top the BlackRock offer.

I love how every story crediting Appell calls him a veteran journalist. What makes one a veteran journalist vs. a regular journalist? I’ve heard of rookie journalists. But after the first year, aren’t all journalists “veteran journalists”?

This morning, the New York Times confirmed the story. Negotiations appear stuck on the issue of price. Barclays wants “more than $12 billion.” Vanguard Group, the providers of a large family of ETFs and mutual funds, had previously been mentioned as a buyer.

This story cleared up one question in many people’s minds: Is this for iShares alone or all of BGI. The Time says all of BGI, which operates in 15 countries with more than $1 trillion in assets under management. If the deal goes through, Barclays could end up with a seat on BlackRock’s board.

The Financial Times confirms the story and raises the ante. FT.com reports Bank of New York Mellon is about to stage an 11th -hour challenge for BGI. FT predicts the deal could come in around $13 billion, with Barclays taking a 20% stake in Blackrock.

I want to know where is Fidelity, the mutual fund giant? Fidelity missed the boat the first time and here’s its chance to be one of the largest in the mutual fund and ETF businesses in one fell swoop.