Guggenheim to Close FAA and 8 Other ETFs

And the death knell continues.

Guggenheim Investments announced Friday it will liquidate in March nine exchange traded funds that have under performed in terms of gathering assets. The New York firm said it will focus resources on products that have demonstrated the most demand. The nine ETFs together hold a total of $144 million, roughly 1% of Guggenheim’s $13.7 billion in ETF assets. That’s an average of $16 million in assets per fund.

“Guggenheim remains committed to the ETF business,” said William Belden, head of product development. Guggenheim Investments, the investment management division of Guggenheim Partners, has become the eighth-largest ETF provider since purchasing the Claymore and Rydex ETF families.

The nine funds to close:

Guggenheim ABC High Dividend ETF (ABCS)
Guggenheim MSCI EAFE Equal Weight (EWEF)
Guggenheim S&P MidCap 400 Equal Weight ETF (EWMD)
Guggenheim S&P SmallCap 600 Equal Weight ETF (EWSM)
Guggenheim Airline ETF (FAA)
Guggenheim 2x S&P 500 ETF (RSU)
Guggenheim Inverse 2x S&P 500 ETF (RSW)
Wilshire 5000 Total Market ETF (WFVK)
Wilshire 4500 Completion ETF (WXSP)

The most shocking of the bunch is the Guggenheim Airline ETF, the only ETF to track the airline industry. And of course, the disappearance of that great ticker, FAA. Granted the airline industry is a notoriously risky investment. Still, it’s pretty shocking that this fund has only $20.7 million in assets under management and an average daily volume of just 9,000 shares considering it surged 33% in 2012, twice the gain of the S&P 500. And year to date, FAA is up 13.6% vs. the 7.6% rise in the S&P, according to Morningstar.

Most ETF liquidations occur in funds that have a small-niche appeal. So, it’s disheartening that an ETF following the index that tracks the entire stock market, the Wilshire 5000 Total Market ETF (WFVK), couldn’t garner more than $9 million in assets.

The liquidating funds’ last day of trading on the NYSE Arca and the final date for creation and redemption activity is expected to be Friday, March 15, 2013. The ETFs will be delisted, Monday, March 18. Shareholders remaining in the affected ETFs as of close of business March 21, will have their shares liquidated as of that date’s closing net asset value. The liquidation proceeds will be distributed on or about March 22. The net asset value of each affected ETF on March 21 will reflect expenses encountered in closing the ETF.

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Flying High with Airline Stocks

The skies have been unusually friendly of late for investors in the fickle airline industry. Over the past year through October 28, the NYSE Arca Global Airline Index surged 83.9%, walloping Standard & Poor’s 500-stock index by 68 percentage points. The Guggenhiem Airline ETF (FAA), which tracks the airline index, leapt 79.7%, giving it a tracking error of 420 basis points, or 4.2 percentage points.

Can the sector keep it up? Don’t bet on it.

One big reason for the airlines’ big move is that they are classic cyclical stocks. When the economy takes a dive, travel is one of the first expenses cut by both businesses and vacationers. As the economy picks up, airline profits rebound robustly as businesses reinstate travel budgets and start filling planes with passengers paying full freight, as opposed to leisure travelers who buy the cheapest tickets they can find. The International Air Transport Association, a trade group, recently boosted its estimate for the industry’s 2010 profit, from $2.5 billion to $8.9 billion. The industry lost $9.9 billion last year, according to IATA.

For the full story go to Kiplinger.com.

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.

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.

Airline ETF Takes Flight

Claymore Securities launched the the first airline ETF on the NYSE Arca Monday. The Claymore/NYSE Arca Airline ETF (FAA) offers investors a way to bet on the global airline industry. I would say the coolest thing about this ETF is the ticker symbol: FAA.

The ETF tracks the newly created NYSE Arca Global Airline Index (AXGAL). The index is comprised of approximately 70% U.S. passenger airline companies, with the remaining 30% international passenger airlines. Companies must derive at least 50% of their revenue from passenger operations, have a market capitalization of at least $100 million and a 100-day average daily trading volume of at least $1 million. As of Dec. 31, 2008, the top five index constituents were AMR (AMR), Continental Airlines (CAL), Southwest Airlines (LUV), JetBlue Airways (JBLU) and Delta Airlines (DAL).