Claymore Cashes Out

It looks like the rumors were true.

For about year, rumors swirled around that ETF firm Claymore Securities had put itself up for sale. Well, it finally found a buyer. Guggenheim Partner, a privately held institutional money manager, on Friday agreed to acquire the entire Claymore Group. The Lisle, Ill., company includes the ETF firm Claymore Securities, as well as Claymore Advisors and Claymore Investments in Canada. All will become wholly owned subsidiaries of Guggenheim Partners. Terms of the transaction were not disclosed. The deal is expected to close at the end of the third quarter.

The deal gives Guggenheim, an institutional financial services firm with more than $100 billion in assets, its first retail operation. According to the National Stock Exchange, as of June 30, Claymore was the 13th-largest U.S. ETF provider, with 35 ETFs and more than $1.6 billion in assets under management. With more than $740 million in assets, its largest fund is the Claymore/BNY BRIC ETF (EEB)

In 2001 Claymore began as a creator of unit investment trusts (UITs) and closed-end funds. It began selling ETFs in 2006. At the end of the second quarter, all the Claymore entities combined managed $12.9 billion in assets, with more than $2 billion in Canada.

For more than a year, rumors have abounded that Dave Hooten, the Claymore Group chairman and chief executive, was looking to cash out of the firm he created, in a fashion similar to his old friend and ETF rival, Bruce Bond, the founder of PowerShares. In 2006, mutual fund giant Invesco bought PowerShares for $100 million and the possibility of contingency payments.

Claymore created some of the most original ETFs in the industry, such as the Claymore/KLD Sudan Free Large-Cap Core, the Claymore/Clear Global Vaccine Index and the Claymore/NYSE Arca Airline ETF (FAA). But many funds had a hard time acquiring assets because of their niche appeal. Claymore became the first ETF firm to close funds when it shut the Sudan and Vaccine funds along with nine others in February 2008.

Most ETFs are index funds. And Claymore has struggled because of the indexes its funds track. Unable to link up with a major index provider and working in an industry that makes it difficult for two funds to track the same index, Claymore’s basic large-cap, small-cap, value and growth funds failed to attract a huge audience. Claymore’s biggest index providers are Zacks and BNY/Mellon Bank.

While the Claymore deal comes on the heels of Blackrock’s purchase of iShares, Barclays ETF company, the trend isn’t obvious. Barclays, a giant British bank, was forced to sell its market-leading ETF firm, a huge moneymaker, in order to avoid a British government takeover due to depleted cash reserves from the financial crisis. While Claymore didn’t give a reason, a few come to mind.

1) The current market environment has hurt all fund companies. Over the past year, many investors pulled out cash and remain fearful of putting money back in the market.

2) The ETF business has been a struggle for all small independent firms. Unable to latch onto a major index provider, all the independent firms, like Claymore, have needed to create niche products. And while some have been great ideas, they nonetheless have had to work harder to attract attention to these less than obvious portfolio ideas. In a market full of fear, investors don’t want to invest in offbeat ideas. They tend to gravitate to conservative and well-known indexes. Many small ETF firms have gone out of business over the past two years.

3) In light of the combination of the above reasons, I think the upper management of Claymore wanted to cash out while their firm still had a good reputation and a sizeable amount of assets.

What this all means for investors remains unclear.

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Amid Turmoil, ETF Firms Bring Out New Funds

Well it seems that even amid the turmoil in the broader market and the closing of funds in the ETF industry, new funds are launched every week. Over the previous two weeks, we’ve seen a new airline ETF from Claymore Securities, State Street Global Advisors and BGI both launching two new bond ETFs and Barclays Bank launching two new exchange-traded notes.

This week, Van Eck Global’s ETF family, the Market Vectors, launched two funds. The Market Vectors High-Yield Municipal Index ETF (HYD) launched today on the NYSE Arca, following on the heels of Tuesday’s launched, the Market Vectors Pre-Refunded Municipal Index ETF (PRB) with an expense ratio of 0.24%

HYD will track the Barclays Capital Municipal Custom High Yield Composite Index. This high yield index is a market-size weighted index comprised of publicly traded municipal bonds covering the high-yield long-term tax-exempt bond market.

Van Eck says PRB is the nation’s first ETF to focus on the pre-refunded segment of the municipal bond market and will track the Barclays Capital Municipal Pre-Refunded—Treasury-Escrowed Index. This market-size weighted index holds publicly traded tax-exempt municipal bonds. The unique part about it is the index is comprised of “pre-refunded and/or escrowed-to-maturity bonds.” Heather Bell of Index Universe describes the bonds this way: “Say a city issues $100 million worth of bonds to fund a water facilities project. A few years ago, the deal came to market with interest payments to investors of 6%. But now, with interest rates for 30-year triple-A munis hovering around 5%, the city decides to cut its costs. So it reissues more bonds at the lower rates covering the exact same project. The municipality then takes the proceeds from that second issue and buys similar-termed Treasuries. Since most munis have call features prior to maturity, the Treasuries are put in an escrow account to fully fund the interest and principal of the munis on their first call dates.”

I will address the new ETNs in a later posting.

Claymore Calls Airline ETF a “Trading Product”

The basic investor take on the airline industry is that it’s a money pit, a sinkhole where money disappears into the sky, invisible and far out of reach, like the jets themselves. So, it seems odd that anyone would create a fund for investing in this sector of despair. But that’s exactly what Claymore Securities did Monday, launching the first U.S. airline ETF, the Claymore/NYSE Arca Airline ETF (FAA) based on the NYSE index of the same name.

While Claymore Securities offers some vanilla funds, the Wheaton, Ill., firm is the poster boy for the ETF industry trend of niche portfolios. Examples of Claymore’s family include the Clear Spin-Off ETF (CSD), which is comprised of companies that have been spun-off in the last two years; the Robb Report Global Luxury Index ETF (ROB), which tracks providers of luxury goods and services; and the Clear Global Timber Index ETF (CUT), which tracks companies that own or lease forested land or harvest timber for wood-based products. So, if anyone was going to produce the airline ETF, it would be Claymore.

With at least one airline seeming to be under bankruptcy protection or filing for protection each year, it’s not a great sector to be a shareholder.

“You really can’t make the case” for investing in airlines, Morningstar analyst Brian Nelson, told the International Herald Tribune last summer. He said he was more concerned about airlines staying in business than making a profit. “We’re not talking about long-term entities here. There is a probability that equity holders could be completely wiped out in bankruptcy in many carriers’ cases.”

Last year was an extremely hard year for the airline industry as jet fuel jumped from $2.70 a gallon at the beginning of 2008 to a historical high of approximately $4.25 by July. Add to that horrible customer service which includes the worst-on-time performance in history and surcharges for everything from higher fuel costs to basic services and amenities such as baggage check in, food and even pillows and blankets. The Amex Airline Index plunged 80% from its high in January 2007 to its July 2008 low.

But the industry itself isn’t going to disappear. It appears airline stocks have seen resurgence with the dramatic plunge in the price of oil. Since the July lows, the Amex Airline Index has climbed 53% through Tuesday. So, Claymore may have actually lucked out by launching their fund at one of the few good times to be entering the space.

Christian Magoon, Claymore’s president, says analysts are predicting that many airlines will post profits this year after huge losses in 2008. He points to three factors: the falling price of oil; aggressive reductions in capacity, 10% to 15% in some places, which have kept pace with falling demand and even created scarcity on some routes; and finally the fees for extra bags and other amenities are beginning to become a significant source of revenues for the carriers. Some are even saying this could be a banner year for the industry.

“The primary reason we brought this out is because this is a market with a large amount of volatility,” says Magoon. Still, he’s aware of the industry’s reputation and the possibility that oil prices will rise again dramatically. “We look at this as a trading product because of the huge volatility in the airline shares. It’s just a coincidence to have the renewed interest in the business.”

Magoon says the airline sector has huge trading volume because the trading community buys shares to take advantage of swings from “spike events.” He says he expects this to be more of a institutional product with a shorter hold time than less volatile ETFs.

That volatility has been on display most of this month. By Jan. 8, the Amex Airline Index had surged 97% from its July low, but over the last three weeks has fallen 22%. Last week, both AMR, the parent of American Airlines, the nation’s 2nd-largest carrier; and UAL, the parent of the third-largest, United Airlines, posted huge losses. AMR reported fourth-quarter losses surged to $340 million from $69 million a year earlier. Its shares fell 24% in one day. UAL posted a fourth-quarter loss of $1.3 billion vs. $53 million in the year-ago quarter, partly on poorly placed jet fuel hedges. Both blamed the continuing slump in air travel demand and suggested the global economic downturn would hurt their profit potential this year.

Then on Tuesday, Delta Airlines, the world’s largest carrier, posted a wider-than-expected fourth-quarter loss. $1.4 billion, compared with a loss of $70 million a year earlier. Delta’s shares fell 20% on Tuesday, sending the entire sector into a tailspin and dragged the Amex Airline Index down 7%

Robert Herbst, a commercial pilot who runs Airline Analysis says labor/contract issues, fuel cost instability and consumer demand will continue to be big issues for the industry this year.

Still, Claymore thinks this product will help it increase its market share in the ETF market. Claymore has the dubious distinction of being the first firm to close a significant amount of funds, sparking a slew of industry consolidation in 2008. Last February, it closed 11 underperforming ETFs. It was a mixed year for the firm as assets under management fell, but shares outstanding grew 20% with the launch of six new funds last year.

Still rumors have floated around that the firm is up for sale and had been in talks with closed-end fund giant Nuveen where Claymore chief executive David Hooten used to work. Magoon refused to comment on the rumors but said Claymore, which also runs closed-end funds and unit investment trusts, is committed to the ETF business for the long-term. He said many companies in the asset management business are evaluating their business models to see what partnerships can be implemented in order to become more successful in raising assets and they are looking at ETFs. Across the industry there are an unprecedented amount of conversations going on and Claymore has held talks with many firms in the search for new opportunities.

Magoon says the ETF industry will see more fund closings this year and fewer product launches. However, he adds that while people like to focus on the death of ETFs, he predicts a record amount of mutual funds will close in 2009, making this a much broader story.

With the airline fund, it’s first launch of 2009, Claymore currently has 34 ETFs on the market.