Tag Archives: ETFs

XShares Sues Founders, CEOs and Managers

XShares Group, the ETF sponsor of the HealthShares family of ETFs, filed a lawsuit against its own founders, Jeffrey Feldman and Anthony Dudzinski, its former and current chief executive officers, and seven other company managers or officers, alleging actions that enriched the officers to the detriment of the company.

According to a filing with the Supreme Court of New York state Donald Aven, XShares executive vice president of national sales, and Samuel Aven, charged the 11 defendants with breach of fiduciary duty, breach of loyalty duty, theft of business opportunity, corporate mismanagement, misappropriation of corporate assets, self-dealing, and fraud.

The lawsuit lists a series of charges:

  • That former CEO William Henson and current interim CEO Joseph Schocken received bonuses and other compensation that represented a conflict of interest with XShares
  • That the defendants diverted a corporate opportunity by allowing investor Grail Partners to misappropriate XShares business model.
  • That the company failed to meet capital and regulatory requirements by not maintaining separate books and records for XShares and its subsidiaries.
  • That the directors failed to provide adequate or not misleading disclosures to investors.
  • That the defendants failed to secure proper legal opinions for corporate actions.
  • That the defendants allowed the payment of excessive compensation to the officers.
  • That the defendants provided liquidation and other preference to third party investors to the detriment of XShares.

Representatives for XShares declined to comment on the lawsuit.

It’s been a rough year for the small ETF sponsor. At the end of the first quarter, after just five months on the job, CEO Henson left the firm for an unexplained leave of absence. Then in July, Dudzinski unexpectedly left “to pursue some other opportunities.” He had served as president and board member of XShares Group, the parent company, and as chief executive officer of XShares Advisors, the ETF provider. Around the same time the firm cut a large part of its sales staff.

The turmoil in the executive suite was mirrored on the product line. The firm closed its AdelanteShares family of seven real estate ETFs in June. In their nine months of existence they accumulated only $17 million of assets under management. Then in August, the firm’s flagship ETF family, the HealthShares, underwent a major overhaul. XShares closed 15 of the 19 ETFs focuses on highly specialized areas of the health-care industry. At the time of the reorganization, the 19 HealthShares held a total of $100 million in assets under management, with about half of that in the four surviving funds.

The four remaining ETFs:

  • HealthShares Cancer Exchange Traded Fund (HHK)
  • HealthShares European Drugs ETF (HRJ)
  • HealthShares Diagnostics ETF (HHD)
  • HealthShares Enabling Technologies ETF (HHV), which will be renamed HealthShares Drug Discovery Tools ETF.

In October, the benchmark indexes for all four were redesigned to hold between 28 and 35 stocks, up from the 22 with which they originally launched. All four also lowered their expense ratios to 0.60%, except for European Drugs, which charges 0.72%. The TDAX series of lifecycle ETFs that XShares launched in partnership with TD Ameritrade continue to trade.


Industry Leaders Address Credit Crisis

Some of the biggest names in the ETF industry came together this week to discuss how the current credit crisis and stock market crash has affected the exchange-traded fund industry for better or worse. All these industry leaders sit on the editorial board of the Journal of Indexes, which held its first public meeting Tuesday at the Nasdaq Stock Market in front of a group of financial journalists.

Because most of the major trends in the indexing industry are directly related to ETFs, the Journal offers in depth coverage of the ETF industy. With ETFs now comprising between 35% and 40% of all the daily trading volume on the equity markets, the major conclusions of the meeting were that the ETFs are tackling a lot of these issues affecting funds because they are so transparent. But soon, investors will be asking the managers of their active funds, what exactly they’re doing to earn the high fees they’re charging.

The other main conclusion came from Lee Kranefuss, the head of Barclays Global Investors, which produces the iShares ETFs. He said that every time there was a problem in the markets, it tended to help ETFs. The technology bubble, the mutual fund timing scandal, the accounting scandal, have all inadvertantly extolled the virtues of the transparency of ETFs.

A big way the credit crisis has affect the indexing and ETF industries is by reducing the seed capital to start new ETFs, said Steven Schoenfeld, the head of Northern Trust, with produces the NETS family of ETFs. He added it’s also reduced the ability to facilitate large trades.

NETS Complete Move to NYSE Arca, Claymore Shifts 21

Since the New York Stock Exchange bought the American Stock Exchange it has been steadily moving ETFs off of the Amex, now renamed the NYSE Alternext US, to its chief ETF exchange the NYSE Arca. The move continues as Claymore Securities transferred the primary listing of 21 of its ETFs and Northern Exchange Traded Shares (NETS) transferred the primary listing of six of its ETFs to the NYSE Arca from the NYSE Alternext. With the recent moves off the Alternext, one wonders whether any ETFs will trade on it when the NYSE is through.

Founded in 1889, Northern Trust currently offers 16 ETFs that track foreign-based indexes. With today’s move, all now trade on the NYSE Arca. As of September 30, Northern Trust had $3.5 trillion assets under custody and $652.4 billion in assets under investment management.

Claymore offers 33 stock and bond ETFs. Claymore also sells unit investment trusts (UITs) and closed-end funds (CEFs). As of September 30, Claymore supervised approximately $13.8 billion in assets.

Including all 16 NETS listings and 30 of the Claymore ETFs, NYSE Arca has 318 primary ETF listings, 79 exchange-traded notes. According to NYSE Arca the exchange-traded products listed represent nearly $353 billion, or 59%, of ETF and ETN assets under management in the U.S., the most of any exchange.

The six NETS ETFs that moved:

· NETS FTSE 100 Index Fund (LDN), which tracks the benchmark index of the London Stock Exchange.
· NETS DAX Index Fund (DAX), which tracks the German market’s benchmark index.
· NETS FTSE/JSE Top 40 Index (JNB), which follows South Africa’s benchmark.
· NETS FTSE Singapore Straits Times Index Fund (SGT)
· NETS S&P/MIB Index Fund (ITL) follows the Italian market.
· NETS S&P/ASX 200 Index Fund (AUS) covers the Australian stock market.

The 21 Claymore ETFs that moved.

· Claymore/AlphaShares China Small Cap Index ETF (HAO)
· Claymore/S&P Global Dividend Opportunities Index ETF (LVL)
· Claymore/BNY BRIC ETF (EEB), which tracks Brazil, Russia, India and China.
· Claymore/Clear Spin-Off ETF (CSD)
· Claymore/Clear Global Timber Index ETF (CUT)
· Claymore/Clear Global Exchanges, Brokers & Asset Managers Index ETF (EXB)
· Claymore/Great Companies Large-Cap Growth Index ETF (XGC)
· Claymore/Ocean Tomo Patent ETF (OTP)
· Claymore/Ocean Tomo Growth Index ETF (OTR)
· Claymore/Robeco Developed International Equity ETF (OTR)
· Claymore S&P Global Water Index ETF (CGW)
· Claymore/Sabrient Defender ETF (DEF)
· Claymore/Sabrient Insider ETF (NFO)
· Claymore/Sabrient Stealth ETF (STH)
· Claymore/SWM Canadian Energy Income Index ETF (ENY)
· Claymore/Zacks Yield Hog ETF (CVY)
· Claymore/Zacks Mid-Cap Core ETF (CZA)
· Claymore/Zacks Dividend Rotation ETF (IRO)
· Claymore/Zacks Sector Rotation ETF (XRO)
· Claymore/Zacks Country Rotation ETF (CRO)
· Claymore/Zacks International Yield Hog Index ETF (HGI)

Talking About ProShares on The Radio

I will be speaking about ProShares ETFs on The Vince Rowe Show, the Online Trading Academy, at noon eastern time, today, Friday. Here is the radio schedule, or you can listen live at Vince Rowe.com or BizRadio Network.com.

BizRadio Network 1110AM Dallas: 11:00 am – 12:00 pm Monday – Friday
BizRadio Network 1110AM Houston: 11:00 am – 12:00 pm Monday – Friday
CNN Radio 1190 Dallas: 12:00 pm – 1:00 pm Monday – Friday

Face to Face with PowerShares’ Bruce Bond

Recently, I had the chance to speak with Bruce Bond, the president and chief executive officer of Invesco PowerShares Capital Management, to get his thoughts on major issues in the ETF market today. Since starting out with just two ETFs in 2003, PowerShares has become the ETF industry’s second-largest sponsor in terms of number of funds. Currently, PowerShares is the only ETF provider to offer and actively-managed ETF.

Q: What do you think of the consolidation going on in the ETF industry?

Bond: Consolidation is a natural process of a rapidly growing industry. I’m not surprised by that. It’s actually a healthy thing. Investors are savvy about what they want to participate in. It shows it’s a difficult business to attract assets in and it’s not just as if you can bring anything out and it will sell. You need distribution, marketing and the underlying investment plan to be a sustainable idea.

It’s a natural cleansing of the industry. Investors vote with their dollars and non-feasible concepts just won’t work. It’s a serious and very challenging business.

Q: How do you think ETFs will fare after this bear market?

Bond: I think the ETF will come out of the current environment doing exceptionally well. I believe they have proved to be a very effective investing tool for investors during this market cycle. Investor’s s use of ETFs in this market is establishing the ETF going forward as a mainline investment tool.

Q: What does the near future hold for actively managed funds?

Bond: They tell the same story as Index-based ETFs about flexibility, liquidity, and transparency. And market conditions like this will make them shine ever brighter. Just like it took the SPDR a long time to get traction, it will take the actively-managed ETF a while to get traction.

ETFs Transform Into Closed-End Funds

It appears some large, liquid ETFs are trading more like closed-end funds than ETFs. More to the point, the shares prices of bond ETFs are separating from their net asset values, which is the true value of the underlying assets.

“Almost anywhere you look, bond exchange-traded funds are trading at fire-sale prices,” says Murray Coleman in IndexUniverse. “In some cases, the distorations are shattering historic levels.”

Coleman is following up on a trend I noticed in the equity ETFs after the market’s Sept. 29 plunge. AT the time I saw equity ETFs were trading at a premium to their NAVs, and seeing larger tracking error than typically associated with the more liquid funds. IndexUniverse blames the disruption in the credit markets

Barclays Says It’s Well Capitalized

As the world-wide liquidity crisis deepened, rumors floated around that Barclays, the creator of the iShares ETFs and iPath ETNs was planning on asking the British government for capital.  On Oct. 7, Barclays CEO John Varney denied it.

Today, Barclays released an Oct. 8 statement from the British government about discussions between the bank and the U.K. Financial Services Authority (FSA) and British Treasury.

Barclays says it is well capitalized, profitable and has access to the liquidity required to support its business. The bank said given the strength of its well-diversified business and the existing capital base, the regulators expect that Barclays can raise additional capital from investors and not need help from the government funding offered to other U.K. Banks.

Barclays seems pretty stable amidst the turmoil at other banks. So, investors in iPath ETNs should be safe. However, other financial institutions did say things were just hunky dory just before they went belly up, so let’s see how the market takes this.

My Presentation at the Nasdaq Gets Write Up

My presentation at the Nasdaq on Oct. 8 was the highlight of this story in the Financial News.

Executives remain optimistic about ETFs

Cardiff de Alejo Garcia in New York

Executives who oversee exchange traded funds at asset management firms and others in the industry said they’re optimistic about the future of exchange traded funds and believe their prevalence has mitigated some of the damage from the recent market turmoil.

Speaking at a panel hosted by exchange operator Nasdaq OMX, Lawrence Carrel, author of a recent book about ETFs, said that the instruments were the direct result of the 1987 stock market crash when the Securities and Exchange Commission began searching for a basket product that could absorb some of the extreme volatility and uncertainty in the US stock market.

Carrel pointed out that in recent months, as the stock market has become increasingly volatile, ETFs have hovered at between 30% to 40% of the dollar-weighted trading volume in the US equity market.

Carrel said: “Did ETFs achieve what the SEC wanted: to absorb some of the market shock? Yes, they have lessened volatility because the baskets are being traded rather than the individual shares.”

For the rest of the article click here.

How Did ETFs Fare in Market Turmoil


With cries of financial Armageddon and headlines screaming “heaven help us,” it shouldn’t have surprised anyone that the stock market took a head dive today.  The refusal of the House of Representatives to pass the $700 billion Wall Street bailout sent shivers through Wall Street. Everyone realizing the golden days are over made a mad dash for the exits.


“The first problem is the administration gave it the wrong name,” says Jerry Slusiewicz, president of Pacific Financial Planners of Newport Beach, Calif. “They should have called it the ‘economic stabilization plan’ or ‘liquidation enhancement plan,” instead they called it a ‘bailout’ and that was bad news. No one wants to bail out Wall Street.”


So, how did exchange-traded funds hold up amid the market turmoil?


“The ETFs followed the market,” says Kevin Mahn, chief investment officer of SmartGrowth Mutual Funds, which runs funds of ETFs. “The SPDR Gold Shares (GLD) was up as well as a lot of the short products from ProShares.” 


The truth of the matter is the ETF is only as good as the assets it’s holding. And if your ETF tracks the Dow Jones Industrial Average the day it plunges 777 points, like it did Monday in the largest one-day decline in history, you’re going to feel some pain, $6.40, or 5.76%, to be exact. Surprisingly, the Diamonds Trust, the ETF which holds every stock in the Dow, actually performed better than the index itself, which sank 6.98%. Who knew tracking error could work in your favor?


The same thing happened with the SPDR (SPY), the most heavily traded ETF on the market today, with 460 million shares trading hands. While its tracking index, the S&P 500 plummeted 8.79%, the SPDR tumbled just 7.84%, or $9.47.


The iShares S&P 500 Value Index Fund (IVE) beat the broader benchmark, and the growth sector, falling 6.76% to $57.85, on volume of 3.6 million shares, while the iShares S&P 500 Growth Index Fund (IVW) also beat it, sliding 7.1% to $54.66. And both closed at a premium to their net asset value, which was $56.34 for the value fund and $53.93 for growth, according to iShares.


And what of the fundamentally-focused ETFs which claim to do better than market-cap ETFs? How did they perform? PowerShares FTSE RAFI 1000 Portfolio (PRF) narrowly beat the S&P 500, with a decline of 7.46% to $44.02 on volume of 251,884 shares. The WisdomTree LargeCap Dividend Fund (DLN) slid 6.4% to $45.13 on 38,000 shares and the Spa MarketGrader LargeCap 100 (SZG) dropped just 5.34% to $17.55, with only 400 shares traded. All the fundamental ETFs also closed significantly higher than their NAVs.


“The House vote was basically a vote of no confidence for the credit markets,” says Slusiewicz. “Credit is drying up for short-term cash for the economy. We’ve backed ourselves into a corner.”


Overall the flight to quality led to an interesting divergence in the bond ETFs.


“The 0.4% move in the BIL was a hefty move,” says Jim Porter, the portfolio manager of Aston/New Century Absolute Return ETF Fund (ANENX).  “It broke out four days ago as there was definitely a sign of movement into the T-Bill ETFs. Meanwhile the Vanguard Intermediate Term Bond was actually down today. It’s obvious that no one wants to own the Intermediates. But the T-Bills and the long bonds are OK.”


n      The SPDR Lehman 1-3 Month T-Bill ETF (BIL) gained 20 cents, or 0.43%, to $46.24. This sent the yield down to 1.46% from 2.73% on Aug. 31.


n      The iShares Lehman 1-3 year Treasury Bond ETF (SHY) edged up 0.6% to $83.89, yielding 3.69%, up from 3.48% on Aug. 31.


n      The iShares Lehman 20+ year Treasury Bond ETF (TLT) climbed 2.9% to yield 4.68%, up from 4.53% on Aug. 31.


n      Meanwhile the Vanguard Intermediate Term Bond (BIV) fell 31 cents, or 0.42%, to 74.37. Since Aug. 31, when it yielded 4.63%, the BIV’s yield has plunged to a negative 1.64%.


So, what can we expect for the rest of the week? With the Jewish New Year occurring Tuesday and Wednesday, Congress won’t tackle any business until Thursday. In addition, with many market participants out, volume will probably be low, but that could create large price moves. The third quarter ends on Tuesday, so it should be an interesting day for mutual fund managers who need to shore up their portfolios for end-of-quarter reports.


“A lot of what we saw erased today will come back when the bill gets passed,” says SmartGrowth’s Mahn. “But there will be a lot of trepidation over the next few weeks to see if another bank fails and if this bailout works and how quickly it works.”   


Slusiewicz of Pacific Financial Planners thinks Congress will try to revive the deal because everyday that passes without one will see more market declines. He says the CBOE Volatility Index, or VIX, posting on Monday was “one of the top ten days for the fear index. The big fear number is an indication of a bottom. And the bottom will come with the passing of a new bailout bill.”


But, if there’s no bill Slusiewicz expects more days like Monday. With no bill, he predicts potential declines of 100 points on the S&P 500, 200 points on the NASDAQ and 700 points on the Dow.

Why didn’t the oil ETFs surge when oil spiked $25?

Oil prices saw the biggest one-day jump ever on Monday as the front month crude-oil contract rocketed more than $25 a barrel to $130 in midday trading on the New York Mercantile Exchange. By the end of the day, the October contract for light, sweet crude fell off its highs to close at $120.92, a 13.8% jump of $16.37.

So why did the oil ETFs and ETNs post percentage gains much less than half that?

· United States Oil (USO), a commodity pool which holds futures, leapt 6.03% to $87.62.
· iPath S&P GSCI Crude Oil Total Return Index (OIL), an exchange-traded note, jumped 5.6% to $64.57.
· Macroshares $100 Oil (UOY), which bet on the oil market through U.S. Treasurys, climbed 4.1% to $26.68
· PowerShares DB Oil Fund (DBO), a commodity pool which holds futures, rose 2.5% to $40.99
· The Energy Select Sector SPDR (XLE), which holds oil stocks, actually fell 1.8% to $70.

There were a multitude of reasons for the oil spike. Fears over the government’s $700 billion bailout plan and the potential inflation sent the dollar plunging. And lately, oil has been moving inversely to the dollar.

“Basically, there’s a strong negative correlation between the dollar and oil,” says Douglas Hepworth, director of research at Gresham Investment Management, a New York money manager. “It becomes a self fulfilling trading artifact. When the dollar is up, operators sell oil, and when oil is up, people sell the dollar. And the dollar was sold in the sentiment that if this new $700 billion dollar bailout is socialism, do we really want to hold dollars?”

In addition, oil fields in Texas and Louisiana are still shut down because of Hurricane Ike. Platforms are still out of commission in the Gulf of Mexico and companies need to check the pipelines to make sure they’re not leaking. These are coming back on line slowly. So, there was a real short-term squeeze on inventory and companies were tapping into the strategic oil reserve.

In addition, Monday, was the day the October contract expired. So, if you wanted oil for delivery on Oct. 1 you needed to get in the market. And if you wanted to not be holding, you needed to sell or close a position. This was the last chance for refineries and other oil companies to buy and get delivery next week. It created a short squeeze and sent the price of crude soaring.

At the end of Monday’s session, the November contract was scheduled to become the front-month contract, so some investors thought there might be a play to profit on here.

So, why didn’t the oil ETFs see a similar rise?

They didn’t own the October contract.

“USO along with the other commodities ETFs doesn’t own the contract up until the expiration,” says John Hyland, the portfolio manager of USO. So, while the October contract closed up 14.78%, USO owned the November contract which only rose 6.44%. At the end of the day, USO’s NAV was up 6.46%

Hyland says all the commodity ETFs had sold the contract one or two weeks ago. The commodities ETFs don’t hold the front-month contract until the expiration because it’s too risky. He says “unless you’re an oil company and you want to take deliver you would never want to hold them the last week. The last week is mostly trading by oil companies and revenue, someone who will actually get delivery.” If the ETF held the contract on Monday, it was going to have to take delivery of actual oil and none of them want to do that. Where do you store it?

So, it’s normal for the ETF to roll out of the front-month contract and into the second-month in the last two weeks to the movement.

“You won’t see anyone on the last day of trading a contract who is not in the physical market,” says Gresham’s Hepworth. “You basically play a game where you have to make or take delivery. You might occasionally see someone inexperienced who has a position on the last trading day. Well, they will never do that again.”

Hepworth says the October market was an illusion with just a few players playing a high stakes game of poker. The ETFs mirrored the real market, which was the November contract.

Anonymous sources said that high stakes poker game was being played by Chevron, ExxonMobile and BP. Rumor has it that BP was short and needed oil for its October operations and that the other two took them to the cleaners.