Survey Finds Nearly Half of Advisors Don’t Do Monthly Reviews

Rydex Investments, the sponsor of leveraged ETFs and the CurrencyShares, exchange-traded products that track foreign currencies, released its Advisor Benchmarketing Supplemental Survey this week. Here are some highlights:

· Most of the advisors (55%) surveyed review the ETF universe and their clients’ ETF holdings monthly.

That may be the majority, but is a little more than half really most advisors? Is this a positive statistic? Well, let’s flip it around. Nearly half (45%) of all advisors DON’T review the ETF universe and their clients’ ETF holdings monthly. So, the odds are nearly 50/50 that your advisor isn’t on top of things. That’s not what I want to hear. Let’s hope your advisor isn’t one of them.

· Open-ended mutual funds and ETFs will be a primary vehicle or product focus for 2009 for investments, according to 98% and 83% of advisors respectively.

That agrees with what I’ve been saying for months. In fact, I think ETFs will surpass mutual funds in the cash inflows for 2009.

· When selecting ETFs for their clients’ portfolios, investment objective and index exposure are the most important criteria, according to 60% of advisors surveyed. The second and third most important decision making criteria are fees (45%) and benchmark tracking accuracy (35%), respectively. It’s interesting to note that more than a third of advisors (38%) do not find Morningstar rankings (or rankings from other research providers) important as decision criteria for ETF investment.

It makes sense that you have to decide what you want before you look at fees. I’m curious to know why so many advisors don’t use the Morningstar rankings.

· Most (80%) of the advisors surveyed said that they are knowledgeable on the differences between ETNs and ETFs, with almost all of them declaring themselves ‘very knowledgeable’ on the tax consequence differences between ETNs and ETFs (97%). Only about a third (30%) are knowledgeable on tracking error differences between the two.

Tracking error is the difference in return between an index fund and the index it follows. This typically results from the costs required to create and hold a portfolio of securities. Index funds should shoot for a tracking error of less than 10 basis points. Since ETNs don’t hold securities, they don’t incur any costs to create or hold a portfolio. They are merely a promise by the issuing bank to pay the return of the index. Thus, a well run ETN should have no tracking error.

· When advisors research different ETF choices, more than half (55%) use the Morningstar ETF center, 40% use the Yahoo! Finance ETF Center and about one third (34%) use ETF provider sites.

For my list of the best sites for researching ETFs check out How to Decide Which ETFs Are Best for You.

· Despite the current economic situation, ETF assets grew to more than $725 billion globally by the end of 2008, according to consulting firm Strategic Insight, and are expected to continue growing in assets over the next few years.

According to the Investment Company Institute, the trade group for the mutual fund and ETF industries, in 2008 U.S. mutual fund assets fell 20% year-over-year to $9.6 trillion, while U.S. ETF assets slid 12.7% to $531.3 billion. I will address the growth in ETF assets in another posting, but that attests to the growth of ETFs outside the U.S.

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ETFs See Cash Inflows Even as Asset Values Fall

ETFs and ETNs continue to see net cash inflows even as total assets under management fall. The conclusion is this is a function of just falling asset values.

According to the National Stock Exchange (NSX), at the end of November, total U.S. listed ETF and ETN assets fell 16.8% to $487.6 billion from $585.8 billion in November 2007. However, net cash inflows for the month were $26.4 billion, bringing the total net cash flow for the 11 months through Nov. 30 to $136.8 billion. In November, 315 ETFs saw net cash inflows, while 179 saw outflows. ETNs split at 16 each.

Notional trading volume in both ETFs and ETNs fell 33% in November from October to $2.2 trillion. Surprisingly, this represents a record 43% of all U.S. equity trading volume, up from 38% in October. That just shows how much total equity volume must have fallen off. At the end of November 2008, the number of listed products totaled 843, compared with 650 listed products one year ago and 806 in October.
According to the NSX, the only ETF firms that saw assets grow are State Street Global Advisers, ProShares, Van Eck and

Ameristock/Victoria Bay. All those firms saw net cash inflows for the year through Nov. 30 increase compared with the first 11 months of 2007. Vanguard did as well. ProShares’s assets under management rocketed 112% to $20.9 billion. SSGA’s assets grew 8.3% to $142.9 billion. This really shouldn’t be a surprise. ProShares sponsors the inverse and leveraged ETFs that have proved hugely popular in the market turmoil. SSGA sells the largest, most liquid ETF, the SPDR (SPY), which tracks the S&P 500. Many investors making a flight to safety or seeking a place to hold cash on a temporary basis will move to the S&P 500. Even as the S&P 500 sinks, the SPDR’s 2008 net cash inflows have surged 86% year-over-year through Nov. 30 to $18.23 billion.

Meanwhile, BGI’s iShares saw assets tumbled 29% to $229.3 billion.

Firms with net cash outflows in November included PowerShares, $309 million, and Merrill Lynch’s HOLDRs, which saw redemptions of $889 million. Surprisingly, the HOLDRs saw net cash outflows of $3.6 billion in 2007, but are up $1.2 billion so far this year. Other firms that experienced outflows in November were WisdomTree, FirstTrust, and SPA-ETF. Firms with net outflows year-to-date include Bank of New York, Rydex, X-Shares, Ziegler, FocusShares and BearStearns. The last two have gone out of business this year. Rydex is suffering as the strengthening dollar hurts its CurrencyShares.

As for ETNs, Barclay’s iPath family saw assets plunge 36% to $2.6 billion. In November, iPath saw outflows of $39 million. Morgan Stanley/Van Eck ETNs recorded outflows of $16 million in November. Meanwhile, Goldman Sach’s ETNs net cash outflows grew to $97 million year-to-date. Comparisons are not relevant for many of the other ETN firms as they had few funds, if any, last year.

Among the top ten ETFs and ETNs, the SPDR (SPY), iShares MSCI EAFE Index Fund (EFA), SPDR Equity Gold (GLD), iShares S&P 500 Index Fund (IVV), iShares Russell 1000 Growth Index Fund (IWF) and iShares Russell 2000 Index Fund (IWM) all saw net cash inflows in November, according the NSX. Of the 10 largest funds, these saw outflows last month: iShares MSCI Emerging Markets Index Fund (EEM), PowerShares QQQ (QQQQ), iShares Barclays Aggregate Bond Fund (AGG) and the Dow Diamonds (DIA).

The NYSE Group also releases volume data for its exchanges. Average daily matched volume for ETFs, or the total number of shares of ETFs executed on the entire NYSE Group’s exchanges surged 93.5% to 672 million shares from 347 million shares in November 2007. Total matched volume for the month totaled 12,765 million shares, a 75.1% increase. Total volume year-to-date through Nov. 30 jumped 74.7% from the same period last year to 102,583 million shares.

Handled volume, which represents the total number of shares of equity securities and ETFs internally matched on the NYSE Group’s exchanges or routed to and executed at an external market center, totaled 14,813 million shares last month, a 77.6% surge over the year-ago month. Average daily handled volume rocketed 96.3% to 780 million shares from 397 million shares a year ago. Year-to-date total volume climbed 78.1% to 117,629 million shares.

The NYSE also reported total ETF consolidated volume for the month leapt 92.1% to 45,151 million shares, while total average daily volume soared 112.3% to 2,376 million shares. Year-to-date, total consolidated ETF volume surged 119.4% over the first 11 months of 2007 to 355,133 million shares. I think those refer just to the NYSE Group.

Not Nyet, Barney Ruble

ETF firms have had a rough time over the past year. Launching new products during a major market meltdown is problematic. Investors watching their investments plunge in value are hardly looking for new products to invest in. Innovative products all around have been smeared with the scandal and dirt coming off of derivatives such as credit default swaps. And if investors are looking at ETFs, they are moving toward more conservative investments. They aren’t necessarily willing to take a risk on some new index of an obscure sector or other out-of-the-box ideas.

So, it’s into this atmosphere that Rydex Investments launched the latest in its CurrencyShares family of exchange-traded products, or ETPs. On Thursday, Rydex’s CurrencyShares SM Russian Ruble Trust (XRU) began trading on the NYSE Arca. This new ETP is the first to offer time currency exposure to the Russian economy by tracking the daily price movement of Russia’s currency, the ruble, in U.S. dollars.

It couldn’t have come at a worse time. The ruble has been in a sharp decline as the Russian stock market and economy enter a freefall coinciding with the plunge in oil prices. The day before the ETP launched, Russia’s central bank spent $2 billion to defend the currency. According to the Wall Street Journal, on Tuesday, the Russian central bank “widened its target band for the currency’s rate against a dollar/euro basket by about 1% in each direction. Investors quickly pushed the ruble to the lower limit.” This move reversed “weeks of rigid defense that fueled a $112 billion decline in reserves since the summer.” Then on Thursday, Russia’s two chief stock exchanges were shut down after stock prices plummeted.
WSJ quoted Renaissance Capital economist Alexei Moiseyev saying, “Today’s move achieves nothing.” The modest decline in the ruble “has only served to raise market expectations of a further devaluation.” While industry leaders want to let the ruble weaken further to lower the cost of Russian exports, while increasing the prices of imports, government officials rule out a sharp devaluation. Such a move could send the nation into a panic.
The eight CurrencyShares ETPs track the euro, Australian dollar, British pound, Canadian dollar, Japanese yen, Mexican peso, Swedish krona and Swiss franc. They are pure plays against one currency, and they trade like a regular ETF, with shares on a stock exchange. This is a big improvement over investing in the forex market. That popularity can be seen in the approximately $2.2 billion in assets under management they have acquired. This is 45% of the industry’s total currency ETP assets, according to Citigroup Global Markets’ Oct. 31 ETF Flow Report.

Over the past three years, the CurrencyShares have been a very popular way for investors to profit on the falling U.S. dollar. But with the dollar’s recent rise, suddenly, it’s not such an easy trade. Of course, Rydex couldn’t have predicted oil prices would plunge when it filed to register this ETP with the SEC more than six months ago. Still, the mantra among ETF companies is that there is a demand for these products because investors are requesting these funds. It might be time to stop listening to these investors.