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.

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Lessons, or Lesions, from 2008

I’m back after an extended vacation from the blog. I’ve been a bit busy, so I’ll start with some good assessments of the year in ETFs and what we can learn from this historic period in investing.

Index Universe puts up two good stories evaluating the past year. Murray Coleman takes a deep look at how ETFs performed last year and decides that they defied stereotypes. Meanwhile, Larry Swedroe, the director of research of the Buckingham family of financial services and author of “Wise Investing Made Simple” looks at the lessons of 2008.

Originally, I had typed that lesions of 2008. I wonder if maybe that wasn’t a typo after all.

Talking About ProShares Gabe Wisdom

Here is a podcast of my Oct. 15 interview with Gabe Wisdom on Business Talk Radio Network’s Gabe Wisdom Show. A large part of this interview is devoted to the ProShares short and double short ETFs, like SKF.

RevenueShares Launches 5th Fund

RevenueShares Investor Services launched its fifth ETF under the family name RevenuesShares. The RevenueShares ADR Fund ETF (RTR) tracks the RevenueShares ADR Index which holds the same securities as the S&P ADR Index, but re-weights the constituent securities according to the revenue earned by the companies. ADRs, or American depositary receipts, trade in the U.S. but represent shares of stocks that list in foreign markets.

The ETF provider, which launched its first three ETFs in February, uses an innovative index strategy, that, not surprisingly, weight indexes by revenue instead of market capitalization. This follows last week’s launch of the RevenueShares Financials Sector Fund (RWW). That ETF tracks the the S&P 500 Financials Index, but rebalances it according to revenues.

“Rebalancing by revenue offers less exposure to the impact of inefficiencies that occur in a market capitalization-weighted index, while adding the potential for excess returns,” said Sean O’Hara, president of RevenueShares Investor Services, in a press release. “We believe strongly in the buy low, sell high philosophy and RWW is coming out at a time when we believe the sector is near all-time lows. It is contrary to what many other fund companies might offer at this time.”

RevenueShares follows a trend in the ETF industry in which new fund providers must created innovative indexes with the goal of beating market benchmarks in order to garner investor interest and assets. The RevenueShares aren’t the first ETF sponsor to use revenues, or any fundamental metric, as a basis for index weightings. Research Affiliates created the first fundamentally-based index, the Research Affiliates Fundamental Index, or RAFI, in 2005. It’s based on four fundamental factors, of which one is revenue. PowerShares launched the first RAFI-based ETF, the FTSE RAFI US 1000 Portfolio (PRF), which tracks 1000 large-cap stocks, the same year. There are now 22 FTSE RAFI ETFs. WisdomTree also uses fundamentals as the basis for its indexes, but these are weighted according to dividends. Spa’s MarketGrader ETFs chooses index constituents based on fundamental metrics, but uses an equal weighting instead.

Since their February 22 inceptions, the net asset values of the RevenueShares Large Cap Fund (RWL) has fallen 10.6%, the RevenueShares Mid Cap Fund (RWK) has dropped 10.2%, and the RevenueShares Small Cap Fund (RWJ) is down 4%.

Including today’s listings, NYSE Arca has 641 primary ETF listings, 84 ETNs and 25 certificates. Total exchange traded products listed on NYSE Arca represent 61% of ETF and ETN assets under management in the U.S., or nearly $304 billion.

Buffalo Gets Turned On to ETFs

The Buffalo News in Buffalo, N.Y. gave “ETFs for the Long Run” and myself a nice writeup in advance of tomorrow’s talk at the University of Buffalo. (In the photo, I’m in the blue shirt.) The News asks “Are exchange traded funds the future of investing?” on top of the fold of the paper’s business section.

I will be in Buffalo signing books; speaking at UB

I will be signing copies of my book, ETFs for the Long Run, today, Friday, Nov. 14, from 6 p.m. to 8 p.m., at the Barnes & Noble bookstore at 4401 Transit Road in Clarence, 716-634-1011. Then on Monday, Nov. 17, I will be giving a lecture at the University of Buffalo Amherst campus about why ETFs are the best investment vehicle available for individual investors. The lecture will be held at the School of Management complex in Room 122 of Jacobs Hall at 5:30 p.m. There will be a reception afterward where he will be signing books. Both events are open to the public and are free.

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.

ETNs Vs. ETFs

The media has been comparing exchange-traded notes and exchange-traded funds since the first ETN launched in 2006. By now, the outlines of the argument are clear.

ETNs claim to have three big advantages over ETFs: zero tracking error, access to difficult-to-reach markets and greater tax efficiency. Likewise, they come with one major drawback: They are credit instruments and, as such, subject to credit risk.

The reality is that, for most investors and in most situations, the question of which is the better product is moot. The majority of ETNs exist in markets where ETFs do not exist, and vice versa, so weighing issues like tracking error vs. credit risk is pointless. If you want to invest in certain commodities, countries or strategies, ETNs are the only choice.

That is slowly changing as both markets expand, however: ETFs are honing in on territory previously the sole domain of ETNs, while ETNs are intruding on territory formally occupied only by ETFs. And some of the biggest ETNs do compete in areas where ETFs exist. As a result, the question of which is better is becoming very real.

This is made all the more important by the fact that it is often easier and faster for companies to launch ETNs than ETFs. Some wonder if ETN issuers are rushing products into the space just to be the first one out of the box.

“Time to market is always a factor in decision making, so if you could track the same asset in a fund or a note, there could be a competitive advantage to getting it out more quickly with a note,” said Kevin Rich, managing director in Global Markets Investment Products at Deutsche Bank. “From the issuer’s perspective, notes can offer a more expedient process in the way you interact with the regulators on listing, and investors benefit by having [access] to the product sooner. At the end of the day, if a better product comes out, people will vote with their assets.”

“In general, the first-mover advantage is helpful,” said Philippe El-Asmar, managing director of Barclays Bank’s iPath family of ETFs. “But it doesn’t determine success. It matters whether investors want to take the tracking error vs. the credit risk.”

So which should they want?

This story was originally published in ETF Report. For the full article click here.

ETF/ETN Assets Drop 17.6% From Last October

U.S. listed exchange-traded fund and exchange-traded note (ETN) assets fell 17.6% year-over-year to $493 billion in October from $598 billion at the end of October 2007, according to the National Stock Exchange, or NSX. The NSX, the former Cincinnati Exchange moved to Jersey City, N.J. earlier this year. Net cash inflows were $6.8 billion, bringing the total net cash flow year-to-date through Oct. 31 to more than $109 billion.

The NSX said notional trading volume for ETFs/ETNs totaled a record $3.3 trillion during October, representing 38% of all U.S. equity trading volume. At the end of the month, the number of listed products totaled 806, up 28.5% from the 627 listed one year ago. The NSX monthly statistics include shares of open-end exchange-traded products, encompassing listed shares of investment companies, grantor trusts, ETNs and commodity pools. For the full report go to http://www.nsx.com/content/market-data

Alternext (Amex) to Lose All ETF Listings

It’s definitely going to happen.

NYSE Euronext will transfer to the NYSE Arca all the ETF listings from the former American Stock Exchange, renamed the NYSE Alternext US after its purchase by the NYSE. On Monday, the Arca began trading 74 PowerShares ETFs after the ETF sponsor transferred their primary listings to the NYSE’s electronic stock exchange. With the new PowerShares ETFs, the NYSE Arca has primary listings for 423 ETFs and 82 ETNs. According to the NYSE, the NYSE Arca holds 59% of the ETF and ETN assets under management in the U.S., or nearly $353 billion. When the transfer is done, the NYSE Alternext will only trade equities that had listed on the Amex.