Category Archives: State Street

ING Likes Value Stocks, Emerging Markets and Europe in 2013

Just like the Christmas season, forecast season rolls around this time of year with investment advisors predicting what the new year holds and where we should all be putting our investment dollars. Ahead of us looms the fiscal cliff, a combination of tax increases and large government spending cuts that could chop as much as 4% out of the gross domestic product. Should the fiscal cliff go into effect it could put the current tepid economic recovery into jeopardy.

In a press briefing at ING’s offices Tuesday, Paul Zemsky, ING Investment Management’s chief investment officer of multi-asset strategies, said he expects the fiscal cliff to be resolved by the end of this year, with a negative impact of just 1% to 1.5% to GDP. He expects to see an end to the payroll tax holiday and the Bush tax cuts for the highest-income brackets. He also expects capital gains taxes to rise to 20% and dividend taxes to revert back to taxpayers’ regular rate from 15% now. Should the Congress wait until after the new year, Zemsky expects to see a major sell off in the equity markets. “It could be as much as a 10% drop, but we would expect this to be a V-shape bounce because the government would have to fix the problem. We would consider this a buying opportunity should it happen.”

Stocks remain cheap relative to bonds, said Zemsky, and both U.S. and global equities are attractive investments right now with price-to-earnings ratios around 15. Zemsky said the housing market has bottomed and is poised to rise, however investors have not yet realized this. As housing prices bottom, this makes collateral stronger, said Zemsky, adding now is the time to increase investments in U.S. financial stocks.

Overall, ING expects 2013 will bring modest growth in the U.S., continued growth in emerging markets and the end of the European recession. Zemsky’s overall forecast predicts U.S. GDP to see 2% to 3% growth next year, which will lead to 5% to 7% earnings growth in the S&P 500. He expects the S&P 500 to grow 8% to 10% next year with a year-end target price between 1550 and 1600. U.S. value stocks and emerging market equities look especially attractive in 2013.

The most popular ETFs tracking these areas of the market are the SPDR S&P 500 (SPY), the Financial Select Sector SPDR (XLF) and the Vanguard MSCI Emerging Markets ETF (VWO). Click here for a list of ETFs that track U.S. value stocks.

Zemsky added that it might be time to begin overweighting European equities. He said people are too negative on Europe. While there is still risk in there, he said the Euro Zone is beginning to stabilize and this could lead to higher equity prices. Click here for a list of ETFs that track European stocks.

As for the bond market, Christine Hurtsellers, ING’s chief investment officer of fixed income and proprietary investments, said the U.S. market is not pricing in any changes in policy from the U.S. Federal Reserve Bank. She says it’s time to underweight U.S. Treasury bonds and high quality investment grade U.S. credit. She recommends moving into emerging market debt, especially high-grade sovereign debt. The PowerShares Emerging Markets Sovereign Debt Portfolio (PCY) covers this market.

U.S. Large-Caps’ Net Cash Inflows Top Bonds

Net cash inflows in U.S.-listed ETFs surged to $55.8 billion in the third quarter, far exceeding the average quarterly inflows of $33.8 billion seen over the last three years, according to the ETF research team at Morgan Stanley Smith Barney. With $133.4 billion for the first three quarters of the year, ETF net cash inflows are “on pace for the biggest year on record,” says Morgan Stanley. This would beat the $174.6 billion that poured into U.S.-listed ETFs in 2008.

Investors made a big switch to risk as ETFs following U.S. large-cap indices received $11.0 billion, the largest net cash inflows for the quarter, compared with $8.1 billion for fixed income ETFs. This was a big change from the previous quarter when fixed income ETFs received about $19 billion. ETFs tracking high-yield corporate bonds topped the fixed-income segment with inflows of $4.4 billion, according to Morgan Stanley.

With 20 new ETFs launched in the third quarter, and another 11 in October, the number of ETFs stands at the extremely cool total of 1,234. Total assets in the U.S. ETF market, as of Oct. 25, were $1.3 trillion, a 21% increase since the beginning of the year.

The top three funds in terms of net cash inflows were the SPDR S&P 500 ETF (SPY), with net inflows of $7.4 billion, the SPDR Gold Trust (GLD), with $4.1 billion, and the Vanguard MSCI Emerging Markets ETF (VWO), with $3.9 billion, according to Morgan Stanley. Currency ETFs experienced the largest net cash outflows for the quarter, at $71 million. For the first nine months of the year, currency ETFs have seen outflows of $2.0 million. Most of the outflows came from ETFs bullish on the U.S. dollar, while most of the inflows went into funds bullish on the euro vs. the dollar.

Blackrock continues to be the market leader with 280 U.S.-listed ETFs and $528.4 billion in assets. This accounts for a 41.7% share of the market, says Morgan Stanley, down from 48% at the end of 2008. State Street Global Advisors, with $235.8 billion in 116 ETFs holds 18.6% of the market, down from 27% at the end of 2008. Vanguard had $231.6 billion in 65 ETFs, giving it a market share of 18.3%, up from 8% at the end of 2008. Through the first three quarters of the year, Vanguard has had net cash inflows of $41.2 billion, the most of any provider, says Morgan.

ETFs to Buy on Outcome of Election

Election season always brings out investment professionals offering advice on how to best invest for both a Republican and Democratic outcome.

SPDR University, the ETF information arm of State Street Global Advisors, released a report yesterday, Election 2012: A Time of Polarizing Politics & Heightened Uncertainty, outlining the best ETFs to hold depending on who you think will win. Written by David Mazza, State Street’s head of ETF investment strategy, it’s no surprise that all the recommended funds comes from SPDR.

In this low interest rate environment, high yielding equities have been a favorite among investors. Under a Mitt Romney win, Mazza expects favorable tax treatment for dividends to continue, thus companies that pay dividends would be big beneficiaries. Certain sectors and industries would also benefit under a Romney administration. Increased domestic production would help the energy sector, while less regulation would boost the metals and mining sector. A less restrictive tax environment would help the transportation industry and an increase, or at least few cuts, in defense spending would help the aerospace and defense sector.

The ETFs SPDR suggests for a Romney win:

SPDR S&P® Dividend ETF (SDY)
Utilities Select Sector SPDR Fund (XLU)
SPDR S&P Telecom ETF (XTL)
Energy Select Sector SPDR Fund (XLE)
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
SPDR S&P Metals and Mining ETF (XME)
SPDR S&P Transportation ETF (XTN)
SPDR S&P Aerospace & Defense ETF (XAR)

Under another four years of President Obama taxes are likely to rise. Mazza suggests municipal bonds to investors in higher tax brackets. If taxes rise on dividends, REITs would offer a better choice for investors seeking income. However, increased government spending could spark a rally in the infrastructure sector. The healthcare industry should also “react favorably” to the president’s reelection.

The ETFs SPDR suggests for an Obama win:
SPDR Nuveen Barclays Capital Short Term Municipal Bond ETF (SHM)
SPDR Nuveen Barclays Capital Municipal Bond ETF (TFI)
SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB)
SPDR Dow Jones REIT ETF (RWR)
SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII)
Health Care Select Sector SPDR Fund (XLV)
SPDR S&P Health Care Services ETF (XHS)
SPDR S&P Biotech ETF (XBI)

Should the political paralysis that has gripped Washington over the past two years continue in the future, preventing major changes, Mazza suggests non-dollar denominated assets and those with low to no correlation to dollar-denominated assets. This could lead to a broad move away from U.S. assets to those in high growth emerging markets. For those looking to invest in local currencies, he suggests non-US fixed income. Gold would continue to rise if countries continue to devalue their currencies to boost exports or the U.S faces another debt crisis. And with increased government spending leading to a long-term inflationary environment, assets with a real return should rally.

The ETFs SPDR suggests for an political paralysis:

SPDR Barclays Capital Emerging Markets Local Bond ETF
(EBND)
SPDR Gold Trust (GLD)
SPDR SSgA Multi-Asset Real Return ETF (RLY)

Homebuilder ETFs Surging; Silver Could See Rally

Reading List – a sample of what’s going on in ETF Land:

Homebuilder ETFs Surging This Year

Homebuilder ETFs have surged this year and could get a boost from reports on the U.S. housing market this week. The iShares Dow Jones US Home Construction (ITB) is the best-performing sector ETF year-to-date, surging 50% as of Friday, according to ETF Trends. The SPDR S&P Homebuilders (XHB) is up 36%.

Demand for Gold ETFs Rises as Metal’s Price Declines

Even though the price of gold is down 12% from its $1,900 peak a year ago, demand for gold bullion ETFs has continues unabated.

Sunny Days Ahead for Silver ETF

Hoarding of physical silver should give the iShares Silver Trust (SLV) a boost. In addition, commodity guru Jim Rodgers says silver is a better play than gold.

SuperDividend ETF’s Assets Hit $100 Million

The Global X SuperDividend ETF (SDIV), a high income equity ETF, has acquired $100 million in assets since launching little more than a year ago. A big reason is the fund’s 12-month dividend yield of 7.92%, one of the highest among US-listed dividend ETFs.

You Can Do Better Than Your Pension Fund

Seeking Alpha contributor creates an ETF portfolio that can easily outperform the San Francisco Employees’ Retirement System (SFERS), a pension fund recently told by a court to change its strategy.

High Yield ETFs Take a Tumble

High-yield corporate bond ETFs tumbled today.

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

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

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

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

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

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

Currency Hedge ETFs Win Big at Global ETF Awards

Deutsche Bank’s family of Currency Hedge ETFs won the award for the Most Innovative ETF in the Americas for 2011 at the 8th Annual Global ETF Awards. The awards are given to industry participants for outstanding achievements in the marketplace. In Europe Deutsche Bank tied with the Nomura Voltage Mid-Term Source ETF for the top prize, while the Motilal Oswal Most Shares NASDAQ-100 ETF was named most innovative in the Asia-Pacific region.

The five ETFs under the Currency Hedge banner:
db-X MSCI Brazil Currency-Hedged Equity Fund (DBBR)
db-X MSCI Canada Currency-Hedged Equity Fund (DBCN)
db-X MSCI EAFE Currency-Hedged Equity Fund (DBEF)
db-X MSCI Emerging Markets Currency-Hedged Equity Fund (DBEM)
db-X MSCI Japan Currency-Hedged Equity Fund (DBJP)

The Most Innovative Exchange Traded Product (ETP) in the Americas went to the iPath S&P 500 Dynamic VIX ETN (XVZ), while the db Physical Gold SGD Hedged ETC won in Europe.

Held at the Grand Hyatt Hotel in New York last Thursday, the Global ETF Awards provide a window on how the global ETF industry views itself. Unlike the Capital Link awards, where a small committee of analysts and industry insiders choose the winners, the Global Awards is voted on by the entire ETF industry. Here 520 organizations from around the world voted on who they think are the industry’s leaders and innovators. The awards and ceremony were created and run by the operators of exchangetradedfunds.com.

The evening began with a new prize, the Nate Most Award. Named after the man who invented the SPDR, the first ETF, it’s awarded to the individual who has made the greatest contribution to the ETF Market.

“We honored to be able to celebrate Nate’s place as the father of the ETF and to honor achievements in the ETF industry,” said Arlene C. Reyes, chief operating officer of exchangetradedfunds.com.

The first winner of this new prize was James Rose, senior managing director of State Street Global Advisors, for his commitment to the industry and for setting a standard of excellence. In addition to running State Street’s ETF business he serves as the first chairman of the Investment Company Institute’s Exchange-Traded Funds Committee.

“Nate Most created a product that created an industry and a great product for investors,” said Ross upon receiving the award.

Here is the list of other winners:

Most Innovative ETF Index Provider

The Americas – Dow Jones Indexes
Europe – STOXX
Asia-Pacific – MSCI

Most Widely Utilized ETF Research (Statistical)
Deutsche Bank won in all three regions.

Most Widely Utilized ETF Research (Analytical)
The Americas – Bloomberg
Europe – Deutsche Bank
Asia-Pacific – Deutsche Bank

Best ETF Market Maker

The Americas – Knight
Europe – Flow Traders
Asia-Pacific – Flow Traders

Most Recognized ETF Brand

The Americas – SPDRs
Europe – (Tie) db x-trackers and iShares
Asia-Pacific – China 50 ETF

Best Service Provider
The Americas – BNY Mellon
Europe – (Tie) Northern Trust and State Street Fund Services (Ireland)
Asia-Pacific – SSgA

Most Informative Website

The Americas – SPDRS.com
Europe – etf.db.com
Asia-Pacific – hkex.com.hk

Most Informative Website – Media

The Americas – IndexUniverse.com

ETFs End Rough 2011 Stronger

The Financial Times came out with a special report on ETFS today. It said the industry’s breakneck growth rate slowed as it faced adversity last year in the form of weak stock markets, and media hostile for the first time and “unprecedented criticisms from regulators.” And while net inflows of cash fell year-over-year, it still market a striking contrast to the “substantial net outflows” mutual funds saw on both sides of the Atlantic.

Even as investors sold moved out of stocks, especially in Europe, exchange traded products (ETPs) moved into the role of a risk reducer as they were used as a way to buy gold. Gold ETFs in Europe saw inflows of 730 million euros. So are this year, the SPDR Gold Shares (GLD) in the U.S. has seen inflows of $1.32 billion, compared with net outflows of $518 billion for all of last year.

State Street Undercuts Vanguard Expense Ratios

ETF reading list for today:

SSgA Undercuts Vanguard On Sector ETFs – State Street Global Advisors goes after Vanguard’s status as the low-cost provider by slicing the expense ratios on its nine “select sector” funds.
Each State Street fund is now 0.01% cheaper than the Vanguard fund tracking the same sector.

U.S. News and World Report finally discovers ETFs.

Stock, Treasury ETFs Send Mixed Messages on Economy. Even as the stock market rallies, the iShares Barclays 20+ Year Treasury (TLT) has gained about 3% over the past week.

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

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

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

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

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

It’s no surprise who tops the list:

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

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

FT Says ETFs Are Reaching Saturation Point

The U.S. ETF market may be getting saturated, says the Financial Times, as the appetite for new funds wanes. Last year, a record 302 exchange traded products were launched, a little less than the 389 funds that made up the entire market in 2007. At the end of 2011, there were 1,369 ETPs with more than $1 trillion in assets under management.

However, of the 190 ETFs launched in the first six months of 2011, 79% failed to reach the profitability mark of $30 million in assets under management, according to XTF, an ETF-focused research house. This was up from 62% in 2010 and less than half in 2009.  Fewer assets in the funds means less liquidity and wider bid-ask spreads.

Mel Herman, the head of XTF, says, said: “Most popular indices already have an ETF tracking them, so issuers are launching more and more niche products.”

I’ve been saying this for two year. A big difference between mutual funds and ETFs is that you don’t see many ETFs tracking the same index while each mutual fund sponsor can have their own set of index funds that track the S&P 500, the MSCI or any other popular index. The reason is twofold. Many mutual fund companies run 401(k) plans. So, they need to offer a wide range of options in the plan. Since plan participants are usually trapped and unable to buy funds outside the plan sponsor, these copy-cat index funds can build up significant assets. Also, many mutual funds are sold by investment advisors who receive a commission, or load, from the fund company. Thus, competing funds tracking the same index can build up assets as advisors direct investors which fund to go into.

Typically, the first ETF to track an index claims that market segment for itself. By the time a second fund launches, the first ETF has made a reputation and gathered a large amount of assets, making it much more liquid than any newcomer. For instance the SPDR S&P 500 (SPY), which launched in 1993, has net assets of $95.4 billion, while the iShares S&P 500 Index Fund, which launched seven years later, has only $26.2 billion.

This syndrome where the first ETF grabs all the assets and attention is called “first-mover advantage.” Since ETFs don’t have the captured audience of 401(k) plans or loads to pay to advisors, no one is there to push smaller funds, hence there are few funds tracking the same index or asset.  This means ETF sponsors need to find new indexes to track. But after a while, the indexes get so specialized they only attract a small audience. In addition, in volatile times, investors are less willing to risk investing in an offbeat concept. They want proven indexes that track broad markets. So, until investors are willing to take on more risk, unless an ETF concept is compelling, new funds will continue to struggle for assets.