Six New Funds Track Emerging Markets

Updated 10 p.m.

In light of the huge inflows moving into emerging markets over the past two months, this past week saw the launch a total of six new ETFs to capture the trend. Typically, it takes three to six months for the Securities and Exchange Commission to approve a new ETF from a current ETF provider. So, these funds are a mixture of good foresight and the luck of good timing.

Two weeks ago, this blog reported that large-cap U.S. equity ETFs experienced heavy outflows last month, while emerging market ETF saw huge cash inflows.

Emerging markets go one step beyond with the first U.S. ETF to track the Peruvian markets. The iShares MSCI All Peru Capped Index Fund (EPU) began trading today on NYSE Arca. The fund tracks the index of the same name, which holds the top 25 Peruvian equity securities by free-float adjusted market cap. The index components are either in Peru, headquartered in Peru or have the majority of their operations based in Peru. Thirteen constituents are materials producers, providing significant exposure to commodities. Top three index constituent names as of March 31 are Buenaventura Minas, Southern Copper, and Credicorp. The expense ratio is 0.63%.

iShares quotes the IMF World Economic Outlook Database which this month said Peru has the fastest growing economy in Latin America and one of the lowest inflation rates in the region. The IMF also said Peru has the third lowest Emerging Market Bond Index spread in Latin America and an estimated economic growth rate of 3.5% in 2009. Peru’s Minister of Finance this month said Peruvian capital markets posted the best performance globally year to date in 2009. Can anyone verify this?

Friday saw the launch of the iShares S&P Emerging Markets Infrastructure Index Fund (EMIF) on the Nasdaq Stock Market. The eponymous index holds 30 of the largest publicly-listed companies in the infrastructure industries — energy, transportation and utilities — with the majority of their revenues derived from emerging market operations. Each constituents had a minimum market capitalization of $250 million. As of May 29, the index was comprised of companies from Argentina, Brazil, Chile, China, the Czech Republic, Egypt, Malaysia, Mexico, South Korea and the United Arab Emigrates. The annual expense ratio of 0.75%.

Meanwhile, if you think emerging market are due for a tumble, ProShares gave international investors a chance to short these markets with leveraged short ETFs that offer -200% returns. Thursday’s launches on the NYSE Arca doubled ProShares ultrashort international ETFs to eight:

• ProShares UltraShort MSCI Europe (EPV)
• ProShares UltraShort MSCI Pacific ex-Japan (JPX)
• ProShares UltraShort MSCI Brazil (BZQ)
• ProShares UltraShort MSCI Mexico Investable Market (SMK)

Earlier this month, ProShares launched the first of its 200% leveraged international ETF series with four similar funds. The new ETFs charge a managament fee of 0.95%.

For the four months ended April 30, iShares received 65% of all ETF and mutual fund emerging markets flows year-to-date, according to Strategic Insight. That shouldn’t have been difficult considering more than 70 of the more than 180 U.S. listed iShares ETFs have an international bent. This gives iShares the largest continent of international ETFs in the industry. Trading volumes in iShares emerging markets funds surged 119% for the five months ended May 30, compared with the same period last year to 16 billion shares.

According to iShares and Bloomberg, the ETFs with the hightest net inflows in May were

• iShares MSCI Brazil Index Fund (EWZ) with $1.5 billion in net new assets under management.
• iShares MSCI Emerging Markets Index Fund (EEM) with $1.08 billion new AUM.
• iShares FTSE/Xinhua China 25 Index Fund (FXI) with $1.02 billion new AUM.

Here’s an interesting tidbit about the lack of info coming from ProShares. IndexUniverse reportes that “ProShares’ Web site only provides data of the underlying indexes. Besides the prospectus for each, that’s the most recent detailed information available. And the benchmark data is only through March 31. Daily holdings are listed in totals of swaps held in the underlying index and cash.”

IndexUniverse does a nice break down of the ProShares international shorts.

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When Is an Index Fund Not an Index Fund?

The coming transformation of ETFs into mutual funds.

At first glance, it seems like an unlikely marriage. Mutual fund leader BlackRock announced last week that it was purchasing Barclays Global Investors, which holds 49 percent of the exchange-traded fund market, for $13.5 billion. These have long been the opposite poles of investing: Most mutual funds try to make money by picking stocks, while ETFs try to make money by simply mimicking the market.

Perhaps the new megagroup will preserve both strategies. But it seems just as likely that BlackRock wants in on the business’s quiet but growing trend called the actively managed ETF. If that sounds like a contradiction in terms, well, it is.

In simplest terms, ETFs are index funds—passive, diversified portfolios that trade like a stock. For the past decade, ETF providers like BGI have touted their products as the antidote to the overpriced, underperforming actively managed mutual fund. Over the past six years, investors invested fewer assets in mutual funds and more into ETFs. The trend accelerated during the financial crisis, as investors grew disgusted at the inability of their active mutual funds to protect their assets. Last year, equity mutual funds saw net cash outflows of $245 billion, according to TrimTabs Investment Research, while equity ETFs posted net cash inflows of $140 billion, even as asset values tanked. With all the negative feeling around actively managed mutual funds, why would the ETF industry step backward to make a big push for the actively managed ETFs?

For the money.

Index funds charge lower fees compared with active funds, which means less money in the manager’s pocket. ETFs charge even less than comparable index mutual funds and offer the additional benefits of greater tax efficiency and transparency because they’re structured differently. In addition, ETFs offer the ability to buy or sell shares during market hours. These reasons led ETFs to capture more than $500 million in assets and grab a significant market share from the $9 trillion mutual fund industry.

The first active ETF appeared early last year in an inauspicious start. Bear Stearns launched the ETF just weeks before the bank went belly up. The fund closed soon afterward. A short time later, Invesco PowerShares launched a family of five active ETFs. But they have found it difficult to gain wide acceptance and attract assets. The financial crisis effectively took these funds off most investors’ radar.

However, a thaw in the financial blizzard shows that the industry had been waiting for the right moment to revive what many consider the industry’s Holy Grail. Coincidentally, a new entrant in the field named Grail Advisors launched the first post-financial-crisis active ETF last month.

“We are operating the ETF just like a fundamental mutual fund,” said Grail Chief Executive Officer Bill Thomas in an interview. This ETF, he added, is “similar to traditional actively managed mutual funds … because it allows portfolio managers unrestricted trading.”

And in a little-reported move that BlackRock didn’t miss, iShares, the brand name for BGI’s ETF family, last month began the registration process to launch two active ETFs.

Is this a good thing for the ETF industry? Possibly. Is it a good thing for investors? Definitely not.

For the full story see The Big Money.

BGi’s Diamond Scores $36.5 Million; Vanguard Investors Pissed Off

Here’s a round-up of second day stories about the Blackrock purchase of BGI.

The Wall Street Journal says more than 400 top executives at Barclays will walk away from the deal pocketing a total of $630.3 million. It seems there was some sort of unusual management incentive plan in place at BGI that would have started to expire in 2010. They needed to do something quick to cash out. Barclays President Robert Diamond alone will walk away with $36.5 million.

WSJ’s Jason Zweig reports that Vanguard’s investors are furious with the mutual fund/ETF company for even making a bid on iShares. Zweig says this could have been a good move for Vanguard and I agree. Already the No. 3 ETF provider, Vanguard could have become the market leader. More important, Vanguard would have probably cut the expense ratios on the ETFs, which could have brought in even more investors. Few people realize that Vanguard doesn’t have an ETF to partner with its S&P 500 fund. Vanguard came to ETFs late in the game and wanted to make an ETF for its flagship index fund. However, S&P had already given an exclusive license to BGI for the iShares S&P 500 Index (IVV).This would have given Vanguard the S&P 500 ETF they’ve always wanted. Also, S&P sued Vanguard over basing the ETF on the index without giving S&P any additional licensing money That full story is in ETFs for the Long Run.

The Financial Times says Larry Fink, Blackrock’s CEO, has been trying to buy BGI for eight years, and capitalized on the financial crisis to make his dream come true.

Reuters’ Svea Herbst-Bayliss suggests the BGI deal will spark a buying spree as envious rivals figure out how to compete. Bank of New York Mellon (does that taste as good as a honeydew melon?) is expected to be the next buyer. BNY already plays a big part in the ETF industry as a trustee and custodian of many funds. BNY is the trustee and administrator of the second ETF, the MidCap SPDR (MDY).

DealJournal’s Michael Corkery says besides CVC, the big loser is Goldman Sachs, which advised CVC.

Jim Wiandt of IndexUniverse.com says by using an ETF company to create the largest asset manager in the world is a huge boost for the ETF industry and proves how big basis-point-linked passive assets have gotten. He asks a lot of questions, but doesn’t give any anawers. Questions like will Blackrock keep the ETF expense ratios low and what does this mean for the active ETFs?

What are your thoughts? I would love to hear them.

Blackrock Buys BGI for $13.5 Billion

In a deal sure to create major changes in the ETF industry, asset-management giant Blackrock agreed to buy Barclays Global Investors (BGI) from Barclays PLC for $13.5 billion late Thursday.

BGI, which coined the term exchange-traded fund, has been the industry’s market leader since the emergence of its iShares family of ETFs in 2000. It remains the industry leader with more funds than any other ETF sponsor and a little less than 50% market share.

With more than $2.7 trillion in assets under management, The Wall Street Journal says this creates a “money-management titan twice the size of its closest competitor,” such as State Street, another ETF provider, and mutual fund giant Fidelity Investments.

The most interesting tidbit comes out of The New York Times. The Times reports Barclays’ president Robert Diamond had first discussed a potential deal with BlackRock approximately seven years ago, but decided the timing was not right.

My favorite nugget, the boys at BGI won’t have to change the initials on their luggage. The firm will continue to be called BGI as the new company takes the name BlackRock Global Investors.

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.

PowerShares/Van Eck Tie for Most Innovative U.S. ETF

Invesco PowerShares and Van Eck’s Market Vectors shared the 2008 award for the Most Innovative ETF the Americas at the 5th annual Global ETF Awards recently. Daiwa FTSE Sharia Japan 100 won Most Innovative ETF in Asia, while db x-trackers and Lyxor Asset Management tied in Europe.

The actual ETFs weren’t listed, as voters aren’t required to mention the fund’s name, just the firm’s. It’s probably just as well. I surmise that PowerShares won for producing the first family of active ETFs in the U.S. rather than any particular fund. PowerShares’ Active Alpha Multi Cap Fund (PQZ), Active AlphaQ Fund (PQY), Active Low Duration Fund (PLK) and the Active Mega-Cap Fund (PMA) were all launched on April 11, 2008. Does any one fund stand out as more innovative than the others? I don’t think so. I suggest they won more for bringing the active concept to the U.S. market.

PowerShares actually didn’t launch the first active ETF. It had been in a race to come out with the first active ETF, but lost to Bear Stearns by just a matter of weeks. However, when Bear Stearns died, so did its active fund, leaving PowerShares with the first viable active ETFs in the U.S.

Meanwhile, Market Vectors launched five ETFs last year. If I had to guess, I would say they won for their funds covering frontier markets, Africa Index ETF (AFK) and Gulf States Index ETF (MES).

The SPDRs brand of ETFs from State Street Global Advisors again won Most Recognized ETF Brand in the Americas. This is probably due to the fact that the SPDR (SPY) was the first ETF and is the largest and most liquid ETF on the U.S. market. But I’m sure a lot of this has to do with the ad campaign for Select Sector SPDRs.

These commercials, which run often on CNBC, show spiders building webs in the industry-signifying shapes such as an oil derrick for the Energy Select Sector SPDR (XLE), a hard hat for the Materials Select Sector SPDR (XLB) or light bulb for Utilities Select Sector SPDR (XLU). The ad makes a really good connection between the name SPDR and that fact that these are funds to invest in. SPDR also surprised many people by winning Most Informative Website, SPDRS.com. The site is a big advancement over the previous incarnation and much easier to use.

The Global ETF Awards are like the Oscars of the ETF industry. They are unique on Wall Street, because as far as I know these are the only awards in which an industry is invited to vote on itself. This makes winning extremely special because it’s your competitors who say you’ve done a good job, rather than a few individuals.

Some people who read my previous note about the awards seemed to think the conference and awards deal only with the international market. That’s not right. As I clearly stated previously, it’s the only conference that deals with BOTH U.S. AND INTERNATIONAL issues. Nearly every company in the U.S. ETF industry attended and many had representatives speaking on panels. However, unlike other ETF conference I’ve attended, which are completely focused on the U.S., this conference also addresses issues affecting ETF providers outside the U.S.

It was a great opportunity to network with not just State Street, Bank of New York Mellon, ProShares, PowerShares and Barclays, to name a few, but also representatives from the Bank of Ireland, France’s Lyxor, the London Stock Exchange and China Asset Management.

The conference and awards dinner are presented by ExchangeTradedFunds.com and were held at the Grand Hyatt Hotel in New York City.

For the complete list of winners go to ExchangeTradedFunds.com.

iShares Might Really be Sold

It looks like iShares might really be sold.

“Barclays has started exclusive negotiations with CVC Capital Partners, the private equity group, to sell the exchange traded funds business of its iShares subsidiary in a deal expected to be worth about £3bn,” reported the Financial Times.

This comes on the heels of the FT’s report that Barclay’s was in talks with three suitors.

I’m still digesting this. More to come.

Barclays Looking to Sell iShares

Barclays PLC shares is trying to sell its iShares exchange-traded-fund business in an effort to raise the necessary money to avoid being taken over by the British government. However, the list of possible buyers is very short.

More on this later.

Here are reports from The New York Times and The Wall Street Journal.

SPA ETF to Close All 6 of its Funds

Another one bites the dust.

SPA ETFs announced late Monday that it plans to close all six of its SPA MarketGrader ETFs. Their last day of trading on the NYSE Arca will be March 25 and they will be liquidated March 30. The six funds trade separately in the U.S., United Kingdom and Italy.

The six funds affected:
SPA MarketGrader 40 Fund (SFV)
SPA MarketGrader 100 Fund (SIH)
SPA MarketGrader 200 Fund (SNB)
SPA MarketGrader Small Cap 100 Fund (SSK)
SPA MarketGrader Mid Cap 100 Fund (SVD)
SPA MarketGrader Large Cap 100 Fund (SZG)

The funds’ board of trustees has been in consultations with SPA ETFs, the investment advisor to the funds, for the past few weeks, to discuss the future of the ETFs. Two weeks ago, the board came close to deciding to shut down the funds, but chose instead to seek further information, according to sources. While it’s unknown what new data forced this decision, SPA said in a written statement that the “board determined current market conditions are unsuitable for a long-only equity investment strategy, such as the one employed by the SPA MarketGrader ETFs.” They decided closing the funds would be in the best interest of the shareholders.

As of Friday, the six U.S. funds assets totaling $10.4 million, while the European funds held $7.5 million, reported IndexUniverse.

“In light of the current market environment keeping the SPA MarketGrader Funds open would compromise investors and increase costs,” said Daniel Freedman, managing director of SPA ETFs, in a written statement. However, the company plans to stay in the ETF market. “The SPA ETF Trust remains open and we plan to partner with other institutions to bring new ETFs to market in Europe and the U.S. in 2009. Additionally, when market conditions improve we may reintroduce the MarketGrader strategy.”

SPA is a sister company to 22-year-old British money manager London & Capital. The U.S. funds launched in October 2007, a month after the British funds, and made SPA the first foreign company to launch ETFs in the U.S. Barclays Global Investors, a unit of Barclays, a British bank, is headquartered in San Francisco. The SPA funds are based on indexes from MarketGrader which uses 24 fundamental factors to grade every stock in the U.S. market and pulls the ones that score best in four key areas — growth, value, profitability and cash flow. While the index uses fundamental criteria to pick stocks, the indexes are not fundamentally weighted, like the ETFs from WisdomTree and PowerShares’ FTSE RAFI series.

Ironically, from their inception until June 2008, the MarketGrader funds consistently outperformed the S&P 500 and often beat comparable funds from WisdomTree and PowerShares.

Qubes Celebrate 10th Birthday

The Qubes, one of the most famous ETFs in the world, celebrated its 10-year anniversary yesterday.

The PowerShares QQQ (QQQQ), formerly known as the Nasdaq 100 Index Tracking Stock, hit the market March 10, 1999, in what remains the biggest most successful launch of a single U.S. ETF. Today, it is one of the most actively traded securities in the world.

“It is the most traded security in shares and dollar volume over the last ten years,” says John Jacobs, executive vice president of NASDAQ OMX Global Index Group and the man who created the fund.

While it currently trades on the NASDAQ Stock Market, originally it launched on the American Stock Exchange with the ticker symbol QQQ. This gave the ETF, then called a tracking stock, the nicknames of the “QQQ”, the “Triple Q” and the “Qubes.”

Launched at the height of the Internet stock market bubble, the Qubes fed the investing public’s desire for an easy to trade instrument that held the fastest growing stocks in the world. The NASDAQ 100 index holds the 100 largest non-financial stocks listed on the NASDAQ. That’s a lot of technology, biotechnology and retail.

It’s first day, it traded 2.6 million shares, 53 percent more than the record set two years earlier by the DIAmond Trust (DIA), the first ETF to track the Dow Jones Industrial Average. After just two hours, the NASDAQ 100 ETF, blew away the DIAmond’s first-day total volume of 1.7 shares. Within two weeks, it had traded 30 million shares. At the end of 2000, the Qubes held more than $6 billion in assets. A little more than two months later, on its first anniversary, the Qubes held more than $12 billion.

For a while, it surpassed the assets and daily volume of the first ETF, the Standard & Poor’s Depositary Receipts, or SPDR Trust, (SPY). Yesterday, it held $10.26 billion in assets.

“The Qubes stellar rise signaled to Wall Street that exchange-traded funds were not just a one-hit wonder. It showed potential sponsors there was a market for these products if the index was right.” (For more on the birth of the Qubes, the history of the ETF industry, and why the NYSE refused to let this ETF use the single “Q” ticker symbol, grab a copy of ETFs for the Long Run.) A little more than a year later, Barclays Global Investors launched its iShares family of ETFs. By the end of 2000, there would be 55 iShares.

Ironically, on the Qubes’ first anniversary, March 10, 2000, the NASDAQ Composite Index, which tracks every stock on the NASDAQ, hit its all-time high of 5048.62. The Qubes posted a 12-month return of 125%. The next trading session, the Internet bubble popped, sending the entire stock market into a two-year decline.

On the tenth anniversary, the Nasdaq soared 89.64 points, or 7.1%, to 1358.28, and the ETF jumped $1.59, or 6.2% to $27.33 on volume of 175 million shares. Did the excitement over the Qubes anniversary spark a huge rally in the market? Don’t laugh so quickly. Currently, the NASDAQ-100 Index is the basis for more than 900 products in 34 countries with about $490 billion dollars in notional value tied to it. To date, the index has traded more than 600 million futures contracts with a notional value of more than $25 trillion. Options experts SchaeffersResearch.com says the Qubes saw call buying activity early yesterday.

Of course, Citigroup (C), one of the country’s largest banks, did raise its head from its deathbed to say it was doing very well the first two months of the year, sparking a huge rally in the financial sector. The Dow Jones Industrial Averaged surged 5.8% to 6926 and the S&P 500 leapt 6.4% to 720.

Invesco PowerShares bought the NASDAQ’s ETF business in 2006. It changed the name of the ETF to the PowerShares QQQ in honor of what most people called the fund. However, the ticker has changed to QQQQ because it trades on the NASDAQ Stock Market, which uses four letters in its tickers. The NASDAQ says its market share of U.S. ETFs is more than any other U.S. exchange. In January 2009, volume grew 22% year-over-year to 655 million shares.

The NASDAQ OMX Global Index Group, a unit of the NASDAQ’s parent company, the NASDAQ OMX Group, remains a global leader in creating and licensing strategy indexes. Its most recent being the Government Relief Index and the European Government Relief Index, which include companies currently being bailed out by their governments.