WisdomTree Wins ETF of Year at ETF.com Awards As ProShares Walks Away With 4 Statues

It’s award time again.

Much like Spring follows Winter, although reports of more snow this weekend are leading some to question that, the ETF industry starts its period of self-congratulations on the heels of the Oscars, Grammys and Golden Globes.

ETF.com, the self-proclaimed world’s leading authority on exchange-traded funds, started the season off with their second annual awards banquet.

“Our awards try to recognize the products that make a difference to investors,” said Matt Hougan, president of ETF.com. “The ones finding new areas to put money to work.” The awards are determined by a panel of experts chosen by ETF.com.

Held at The Lighthouse restaurant at New York’s Chelsea Piers March 19, ETF.com wins the prize for best party location. With picture windows overlooking the Hudson River, guests of the cocktail hour took in the sunset over New Jersey before the ceremony started.

The WisdomTree Europe Hedged Equity (HEDJ) was the big winner, grabbing the prize for ETF of the Year, while the Market Vectors ChinaAMC China Bond (CBON) won Best New ETF. Not quite sure what the difference is between those two awards, but obviously both funds stand out from the crowd of 117 ETFs issued in 2014.

However, ProShares swept the evening, as the single provider that won the most awards. The twin funds ProShares CDS North American HY Credit (TYTE) and CDS Short North American HY Credit (WYDE) claimed the awards for both Most Innovative New ETF and Best New Fixed-Income ETF.

“We designed these ETFs for investors who want high yield credit exposure that is isolated from interest rate risk,” said Steve Cohen, ProShares managing director.

The fund was also nominated for Best Ticker of the Year with its homophones for “tight” and “wide”. However, the awards announcer had a chuckle by claiming they really were pronounced “tighty whitey”, a reference to his jockey shorts. Best Ticker was awarded to HACK, the PureFunds ISE Cyber Security ETF.

ProShares also won Best New Alternative ETF for the ProShares Morningstar Alternative Solution (ALTS) and Most Innovative ETF Issuer of the Year.

“We are always striving to deliver new and innovative products to allow investors to build better portfolios,” said ProShares Chief Executive Michael Sapir.

Lee Kranefuss, the man who created the iShares brand of ETFs and built them into the largest ETF issuer in the world won the 2014 Lifetime Achievement Award.

In the only speech of the night — thank goodness — Kranefuss said, “ETFs allow people to take control.” He likened ETFs to iTunes, saying “no longer are you limited to what the record company puts out.” He said he’s often been asked if he thought the ETF industry would take off like it has in the 15 years since iShares launched.

“Not really,” said Kranefuss, “we just put out the best products we could put out.”

The other award winners:

Best New U.S. Equity ETF – iShares Core Dividend Growth (DGRO)
Best New International/Global Equity ETF – Deutsche X-trackers Harvest MSCI All China Equity (CN)
Best New Commodity ETF – AdvisorShares Gartman Gold/Euro (GEUR) and AdvisorShares Gartman Gold/Yen (GYEN).
Best New Asset Allocation ETF – Global X /JPMorgan Efficiente (EFFE)
ETF Issuer of the Year – First Trust
New ETF Issuer of the Year – Reality Shares
Index Provider of the Year – MSCI
Index of the Year – Bloomberg Dollar Index
Best Online Broker for ETF-Focused Investors – TD Ameritrade
Best ETF Offering for RIAs – Charles Schwab
Best ETF Issuer Website – BlackRock

Fed Ready? New Sit ETF Hedges Hikes In Interest Rates

Nobody should invest in bond exchange traded funds without understanding that when interest rates increase, the bond’s price declines. With significant improvements in the economy and unemployment rate, the Federal Reserve is expected to raise rates before 2015 ends. This will affect securities across the entire bond market.

So, what is a bond ETF investor to do? A new exchange traded fund from ETF Managers Group seeks to help investors hedge rising interest rates by using a concept called negative duration that actually creates price appreciation when interest rates advance.

Sit Rising Rate ETF (RISE) holds a portfolio of futures and options contracts weighted to achieve a targeted negative 10-year average effective portfolio duration. Because it holds futures, the ETF is structured as a commodity pool.

Sam Masucci, founder and chief executive of ETF Managers Group, said the ETF should be used as a hedge, or insurance, to protect a bond portfolio from interest-rate volatility. “A small allocation of 10% to 20% in RISE can significantly reduce the interest rate risk within a bond portfolio.”

Duration calculates a bond’s sensitivity to interest-rate volatility. It measures how much the price of a bond is expected to fall when interest rates rise 1% — and rise when rates fall 1%. The longer the duration, the greater the interest rate risk. Negative duration determines how much the price will go up when rates rise. RISE tries to get a 10-to-1 ratio. So if rates rise 1%, the price should go up about 10%.

Bryce Doty, the senior fixed-income portfolio manager at Sit Investment Associates, manages the ETF based on the Minneapolis firm’s strategy.

Where RISE Fits In

Doty said an investor with a bond portfolio with an average duration of four years might choose to sell 20% of the portfolio and invest that money in the negative 10-year duration ETF. This cuts the interest rate risk by almost 70%.

The ETF achieves this effect by holding only four positions. Focused on the risk to short-term rates, 85% of the ETF’s portfolio is in short positions tied to 2-year U.S. Treasury and 5-year U.S. Treasury futures contracts. It also buys a put option on the 10-year U.S. Treasury futures contract. This means if rates rise on the 10-year note, the ETF gets price appreciation. But if rates fall, the EFT is only out the price of the put.

Compared with bond index ETFs, which typically charge expense ratios of less than 10 basis points, RISE, which is an active ETF, charges an expense ratio of 50 basis points. With other expenses factored in, the true cost can rise as high at 1.5%, although the fund is targeting a cost around 85 basis points.

“When you rebalance every month and short new Treasury futures to get target duration, you might get a tax hit at the end of the year,” said Thomas Boccellari, an analyst at Morningstar. “The benefit of the active management is, you pay the manager to control the duration for you and to get it right. But you need to understand that you are giving up a lot of yield to get this product and you need to be sure that is what you want to do.”

Two negative duration ETFs tracked by ETF.com are WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund (AGND) and WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund (HYND) has $32 million in assets, average daily volume of about 11,000 shares, an expense ratio of 0.28% and is up 0.44% year to date. HYND has $6.5 million in assets, average daily volume of about 9,000 shares, a 0.36% expense ratio and is up 2% this year.

Originally published in Investor’s Business Daily.

DoubleLine Joins State Street On Active Bond ETF

ETF giant State Street Global Advisors teamed up with DoubleLine Capital, the firm of famed bond investor Jeffrey Gundlach, to launch SPDR DoubleLine Total Return Tactical ETF (TOTL) last week.

The actively managed ETF is DoubleLine’s first foray into the ETF space.

One of the most respected bond fund managers in the market, Gundlach ran $12 billion TCW Total Return Bond Fund until 2009. At the time, Morningstar said it was in the top 1% of all funds invested in intermediate-term bonds for the five years ended in 2009.

Gundlach left TCW after a management dust-up and formed DoubleLine in 2010. He’s DoubleLine’s CEO and chief investment officer.

“It’s not a clone of any existing strategies,” said Jeffrey Sherman, a DoubleLine portfolio manager, during a webcast this week. Sherman will co-manage the ETF with Gundlach and firm President Philip Barach. “It’s a new product created just for this offering, but it draws upon the views of Jeff Gundlach and the DoubleLine team.”

While not identical to the firm’s flagship DoubleLine Total Return Bond Fund , ETF investors will be getting a deal. The ETF charges an expense ratio of just 0.55%, compared with the fund’s 0.72% fee for retail investors.

By going with a name-brand fund manager, State Street (NYSE:STT) is making a calculated effort to take advantage of the problems at Pimco. It looks like it wants to become the leading bond ETF in the country by taking on $2 billion Pimco Total Return Bond ETF (BOND).

BOND has seen more than $1 billion in outflow since Bill Gross, Pimco’s bond maven, left the firm in September. This caused BOND to fall to second-largest active bond ETF.

TOTL’s investment objective contains elements of both DoubleLine’s total return and core fixed-income strategies. The ETF aims to have a low interest-rate risk profile.

At the same time it expects to maximize returns through active allocation and selection of securities its analysis determines to be mispriced in the market.

DoubleLine Total Return Bond Fund has focused on mortgage-backed securities. But the ETF can hold any bond, including U.S. Treasuries, investment grade corporate credit, high-yield bonds, collateralized loan obligations, asset-based securities, bank loans and sovereign debt from both developed and emerging markets.

The portfolio must contain a minimum of 20% in mortgages, but it isn’t required to hold anything else. While high-yield, emerging market and CLO securities can each only take up as much as 25% of the portfolio, as much as 85% can be held in government bonds.

The duration of a single bond can range from one to eight years and no security can have a bond rating below BBB-.

State Street Getting Active

State Street, which has a reputation for running passively managed funds, has slowly moved into the active ETF arena. The new fund is its third active bond ETF and 10th overall.

While active equity funds have a hard time beating their benchmarks, the less transparent bond market creates more opportunities for managers to beat their index.

“Passive does best in U.S. equities, but in investment grade fixed-income 65% of managers outperform their benchmark,” said Dave Mazza, head of research at SPDR ETFs. “A skilled fixed-income portfolio manager can find inefficiencies across the market because it is illiquid and opaque.”

Exec’s Departure Latest In Pimco’s Bad Year

Paul McCulley’s announcement last week that he would be stepping down as chief economist at Pacific Investment Management Co. was just the latest note in the giant bond fund company’s annus horribilis.

Early last year, Chief Executive Mohamed El-Erian, Pimco’s heir apparent, left over disagreements with Bill Gross, Pimco’s founder and portfolio manager of the firm’s flagship Total Return Fund . At the time, Total Return was the largest bond mutual fund in the world and Gross the most famous bond investor on the planet.

Then in September, after the fund shrank by $65 billion over the previous 16 months, Gross also abruptly quit, shocking the mutual fund world and sending Pimco into turmoil. He’s now at Janus.

McCulley, a close friend of Gross, had left Pimco in 2010, but returned in May to help Gross calm investors’ nerves amid the outflow.

“McCulley had been brought in by Gross when things were unraveling in the management ranks,” said Jeff Tjornehoj, head of Lipper Americas Research. “Bringing Paul in was like bringing the band back together. He came back so Bill could show ‘It’s not as bad as the newspapers say.'”

With Gross’s departure, there wasn’t much reason for McCulley to stay, and management made that clear with the recent hiring of Joachim Fels, Morgan Stanley’s chief economist, as the new global economic adviser.

New Pimco Team

In the wake of Gross’s departure, Daniel Ivascyn, who has been at Pimco since 1998 and is head of the mortgage credit portfolio team, was named group chief investment officer. In 2013, Morningstar named him Fixed-Income Fund Manager of the year.

Pimco also named deputy chief investment officers Mark Kiesel, Scott Mather and Mihir Worah as portfolio managers of Total Return Fund.

Kiesel, named Morningstar’s Fixed-Income Fund Manager of 2012, is the global head of corporate bond portfolio management with oversight for the firm’s credit research. Mather was previously head of global portfolio management, and before that led portfolio management in Europe.

Before running the real return and multi-asset portfolio management teams, Worah was a postdoctoral research associate at the University of California, Berkeley, and the Stanford Linear Accelerator Center.

In the four months since Gross left, Pimco said, the fund delivered a net after-fee return of 3.99%, outperforming its benchmark by 1.11 percentage points.

Will Inflow Follow?

“The strong performance of the Total Return Fund since Scott Mather, Mark Kiesel and Mihir Worah took over management of the fund is a reflection of the talent of our seasoned portfolio management team,” said Douglas Hodge, Pimco’s CEO, in a statement January.

Still, it doesn’t look like the new team is instilling much confidence in investors. January was the 21st consecutive month of withdrawals, with net outflow of $12.5 billion, although this was significantly lower than the $32.3 billion pulled out the month after Gross left, according to Morningstar. Over the past 21 months, Total Return Fund lost $159.3 billion in net assets, down 54% from its 2013 peak of $293 billion, according to Morningstar. It is now the world’s second-largest bond fund.

For the full story go to Investor’s Business Daily.

Selling An Advisory Practice May Take Time

As a financial adviser gets older, an issue that begins to loom large is how to successfully sell his or her practice and retire. It’s not a question that can be left to the last minute. Most strategies require a financial adviser to take a big step out of his or her comfort zone, and some can take 10 years to execute.

“It’s very infrequent where I see one small adviser sell to another small adviser, or even a larger adviser,” said Jay W. Penn, managing partner at Tru Independence, a consulting firm that provides services for financial advisers. “Even a one-man practice with $1 million in gross revenue isn’t worth that much because the revenue stream is totally dependent on one guy. If that guy leaves, how do you value that business?”

Penn says that an outright sale rarely succeeds because the client base for small advisers is a reflection of the adviser. Finding another firm with a culture that will mesh with his clients is very hard.

Use Partnership Approach

The most successful strategy is to gain scale and join with multiple partners. One partner can buy out the other partner, or the older partners bring in junior partners who will buy the firm over a period of five to 10 years. During that time, the new partners meet and become comfortable with all the clients.

Tom Sudyka, managing director of Lawson Kroeker Investment Management in Omaha, Neb., started as one of two young advisers hired to work for the firm. Over a 10-year period, the young advisers became junior partners, then bought out the founding partners. Sudyka and his partner are now bringing in two new junior partners to start the process again.

The founders structured the firm as a small corporation with 2,000 shares of stock. Each year, the founders had the firm independently valued on a formula that looked at revenue and cash flow. Then the two junior partners would together buy 10% of the shares out of their savings or with a loan.

“You want a nice continual flow and continuity for your clients,” said Sudyka. “We tried to get away from the broker mentality. From the time I got here, I went to meetings with Lawson and met all the clients. By the time we transitioned over, the clients were comfortable with the next generation of managers.”

Sudyka says that acquiring the next generation of advisers is a big issue for the industry. “They need to have the same philosophical investment approach and concern for clients as the firm in order to be a match and bring them on.”

Another way to get bigger is to partner with a company like Tru Independence. The consulting firm can take over back-office operations and noncore activities for a small firm. This practice gives advisers more time to prospect for clients and find potential partners. Tru Independence, which works with many small firms, often plays the role of matchmaker by finding potential partners from its large network of clients.

The challenge with this approach is that one- or two-person firms often can’t afford to bring someone on at full salary. To do it right, the firm needs to get bigger. One way is to acquire smaller advisory firms with younger talent. These younger advisers bring an existing book of clients with them and agree to buy the larger firm over a set number of years. The younger advisers have the desire to grow a firm but don’t have a large, established business. The older advisers have the larger business but have stopped growing. By marrying the two, the established firm gets a younger team to drive the growth.

However, often the established firm may not have the money to buy the smaller firm.

Succession Plan

“It’s difficult to get financing from a bank on an unsecured basis for financial advisory firms that are small businesses with revenues of $3 million to $7 million,” said Bob Jesenik, chief executive of Aequitas Capital, a financial services firm in Portland, Ore. Aequitas can provide loans or purchase a minority stake to give an established firm the capital to acquire a smaller one.

The two firms value each other by assets under management, then get proportional shares when they come together as a partnership. Typically, the more established firm will have a higher ownership percentage, such as 70%, which the younger partners will eventually buy out. By bringing the younger team in as partners, the older advisers get a succession plan and seamless transition at the same time.

For full story go to Investor’s Business Daily.

Good Debt, Bad Debt: It’s Mostly Bad For You

After six years, the era of deleveraging household debt is over, according to the Federal Reserve Bank.

Since the fiscal crisis, Americans have reduced their household debt by $1 trillion, from $12.7 trillion in the third quarter of 2008 to $11.7 trillion in the third quarter of 2014.

But in November, the Fed reported that the trend reversed during the third quarter of 2014, when Americans increased their debt by $78 billion, or 0.7%.

While many signs show the economy to be growing, there is enough conflicting evidence to leave Americans uncertain about what 2015 will bring for their financial plans. Given the state of the economy, it’s prudent to reduce borrowing to as close to zero as possible.

When taking on debt, it’s important to remember the basic concept of what it is. It’s borrowing money that you have not yet earned, with the promise to pay it back with interest. The big risk is whether you will be able to pay it back. Should you suffer some kind of financial hardship, such as a layoff or reduction in income, will you still be able to make the debt payments?

“Even if they have a good job, most people have budgets that rely on everything going well,” said Kathryn Moore, certified consumer credit counselor at GreenPath Debt Solutions, a nonprofit consumer credit counseling service based in Farmington Hills, Mich. “But what if something happens that the budget can’t handle? For that reason, pay down the debt to leave yourself flexibility.”

Moore says that even if people don’t lose their jobs or suffer a salary cut, sudden price hikes in necessities such as food, energy, health care or rent may cause them to have trouble paying their bills.

Having too many liabilities, especially credit card debt, can be a symptom of having lost control of the management of one’s household finances.

“When we don’t have control over our money, it causes a lot of stress and anxiety,” said Donna Skeels Cygan, author of “The Joy of Financial Security” and owner of Sage Future Financial, an Albuquerque, N.M., advisory firm. “People need to make a commitment to eliminate credit card debt as quickly as possible.”

Cygan says that people don’t know where to start, so they put their heads in the sand and hope their situation will get better, but it won’t. She recommends that people start by creating a net-worth statement, listing all their assets and liabilities. “Many people have no idea what they have. Looking at the bottom line gets your head out of the sand,” she said.

“There are only two ways to cut the debt,” said Moore. “Either bring in more money with another job, or cut expenses.”

In addition to cutting back on entertainment spending, getting rid of premium cable channels, eating out and going to bars, Moore says that other ways to find money are to stop smoking, refinance a mortgage, lower insurance premiums and cut back on saving for retirement until the debt is eliminated. Cygan suggests not buying any new clothing for the next three months, not replacing technology gadgets for a whole year, keeping a car for 12 years and taking inexpensive vacations within your state.

And, of course, stop using your credit cards.

“The best way to pay off debt is to roll it into cheaper debt, like home equity,” said Adam Thurgood, a managing director at HighTower, a Chicago wealth management firm with $25 billion in assets under management. “But you need the discipline to pay it off. Still, it’s risky, because it allows you the opportunity to rack up more high-interest credit card debt.”

But he opposes using home equity loans to purchase items with short useful lives.

Not all debt is bad. The experts say debt that helps acquire an asset — especially one with a long life or benefit, such as a mortgage, car loan or student loan for college — is good debt. Still, bad choices can be made with these loans.

Thurgood says that mortgages with variable rates around 1.5% have been perfect for the past five years. But, he adds, this “Goldilocks” period is coming to an end, and it now makes sense to transition to a fixed-rate, 30-year loan, even at a higher rate. That’s because interest on adjustable-rate loans could shoot above current fixed-rate mortgages.

Car loans with low rates can be a good move, but if these loans start charging 6%, Thurgood says, it’s better to borrow the money from your portfolio, pay the car loan off and pay yourself back with interest in monthly installments over a four-year period.

For the full story go to Investor’s Business Daily.

Target-Date Funds Are Cruise Control Of Investing

Target-date, or life cycle, funds are the cruise control of investing. After you choose which fund to invest in, the fund does all the work for you. You don’t have to think about it again until retirement.

Many target-date mutual funds are funds of funds. They hold a selection of equity funds, such as large-cap, small-cap and international funds, and a selection of fixed-income funds of multiple durations and yields.

The appeal of target-date funds is that they take care of all the asset allocation and rebalancing for you. It’s a balancing act of managing market risk, inflation risk and longevity risk.

Typically, an investor picks a target date around the time he plans to retire. When the investor is young, the fund focuses on growth and mostly holds stock funds. But as the investor gets closer to retirement, the fund’s asset allocation becomes more conservative and focuses on fixed income. The changing asset allocation is called the glide path.

Target-date funds hit the public consciousness after the Pension Protection Act of 2006. The legislation allowed 401(k) plan sponsors to make life cycle funds the default investments for participants who didn’t choose their own funds. The logic was that since investors were now in charge of their own retirement funds, sitting in cash wasn’t going to get them there.

“For the past nine years that we’ve been keeping track, there has been double-digit growth in assets, ever since Pension Protection came out,” said Janet Yang, Morningstar’s target-date fund analyst.
In 2006, of all the 401(k) plans, 57 offered target-date funds. In 2012 the number had jumped to 72, according to the Investment Company Institute.

In 2006, only 19% of 401(k) plan participants held target-date funds. Six years later it was 41%. Also, in 2006 target-date funds made up only 5% of 401(k) assets. By 2012 that had jumped to 15%.
By the end of Q2 2012, target-date mutual funds held $678 billion, said Sarah Holden, the ICI’s senior director of retirement and investor research. The majority of those assets were held in retirement accounts. Defined contribution plans held 68% of the total, and individual retirement accounts 20%. The rest was in the personal accounts of investors looking for the glide path approach.
Vanguard, Fidelity and T. Rowe Price have the largest target-date funds.

Families of target-date funds can have different philosophies, which can lead to wide dispersions in the holdings, returns and fees for funds with the same target year. Recently, fees have become a big issue, and that has helped move plan sponsors toward index-based funds.

“Each client’s needs are going to be different,” said Don Wilson, chief investment officer at BrightWorth, an Atlanta asset manager. “Some target-date funds will be too risky, while others won’t be risky enough.”

Wilson said that if the investor picks his 65th birthday as the target date, he may have 20 years of retirement ahead of him. He may need to have more equities to help his account grow and outpace inflation. The target-date fund may not be taking this into account.

The only ETF provider with target-date portfolios now is Deutsche X-trackers.

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