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Roubini Says Commodity Super Cycle “Is Over,” but Optimistic on U.S.

For a man nicknamed “Dr. Doom,” economist Nouriel Roubini sounded almost giddy during a recent speech in which he said the reduced possibility of a euro zone breakup has lowered the risk in the global economy.

While the global economy is anemic and still fragile, he said over the next three years growth in the U.S. will be faster than Europe, Japan and China because “the fundamentals of the U.S. are much better in all technologies of the future.”

Roubini, a professor of economics at New York University’s Stern School of Business, received the Dr. Doom moniker after he accurately predicted the 2007 bust in the housing market and the ensuing fiscal crisis in 2008.

But as he stood before a crowd of more than 100 at last month’s Inside Commodities conference, the chairman of Roubini Global Economics said while the U.S. economy remains weak, especially the housing sector, it will get stronger, albeit slowly. Nor does he expect a crash in the bond market.

“How can we create inflation without wage inflation?” he asked the crowd.

He expects the Federal Reserve Bank to begin tapering its policy of quantitative easing and begin raising interest rates by early 2014, which will lead to a gradual strengthening of the dollar. Quantitative easing, or QE3, is the name given to the Fed’s $85 billion-a-month bond-buying program now in its third round. Roubini said by the end of 2017 U.S. interest rates will be as high as 4%.

Yet for the audience of commodity investors, Roubini’s comments were decidedly bad news. He said high interest rates and the stronger dollar will have an inverse relationship to commodity prices.

“The party as we know it is over. The commodity super cycle is over,” said Roubini. “When the dollar gets stronger, everything else being equal, commodity prices begin to fall.” In addition, a slow down in China’s growth will reduce demand for commodities.

The economist said energy prices will gradually lower over time, with oil hitting $90 a barrel, and precious metals will fall too. He predicted the price of gold could fall to $1,000 an ounce by 2015. Rising interest rates and lowered global risk are big reasons for the drop in gold. He also thinks European countries may sell some of their gold stocks to reduce their public debt.

Even though the risk of the European Union splitting has declines, he pointed out that many of fundamental problems there are not resolved. Some countries remain in economic crisis, potential growth is low and the recovery will be “extremely anemic,” between 0% and 1%, which is lethal for the unemployed.

He said the loss of competitiveness in the Euro zone hasn’t been resolved and a fiscal drag remains. The recovery in the Euro zone “will be fragile and always be behind the curve.”

Another big unknown is whether China will have a soft or hard landing. Roubini said China’s growth is unsustainable and its leaders know it. He said the bubble from too much development, housing and investment will fall, along with consumption, and that will bring down growth. He said China’s growth rate at the end of this year will be 7%, sliding to 6% next year and less than 6% in 2015. While not a true hard landing, it will be worse than people expect.

The slowdown in China will cause a drop in demand for commodities which will hurt many emerging market economies. Countries with weakening fundamentals include Indonesia, India, Hungary and Ukraine.

While the prices for all commodities won’t fall for the same reasons, he says geopolitical factors, such as the lowering of tensions with Syria and Iran as reasons for the price of oil to fall. In addition, the balance of supply and demand, will be evened out and prices will decline with new discoveries of oil, as well as the rise of other forms of energy, such as shale. In addition, “the green economy will raise new energy and reduce demand for old energy.”

He recommended that investors be underweight in bonds and overweight in U.S. equities as the economic recovery become more robust and moves into cyclical stocks. He also believes Japan’s economy will succeed under Prime Minister Abe. He said investors should be overweight in advanced economies compared to emerging markets, and that the U.S. and Japan will do better than Europe and United Kingdom.

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Currency Hedge ETFs Win Big at Global ETF Awards

Deutsche Bank’s family of Currency Hedge ETFs won the award for the Most Innovative ETF in the Americas for 2011 at the 8th Annual Global ETF Awards. The awards are given to industry participants for outstanding achievements in the marketplace. In Europe Deutsche Bank tied with the Nomura Voltage Mid-Term Source ETF for the top prize, while the Motilal Oswal Most Shares NASDAQ-100 ETF was named most innovative in the Asia-Pacific region.

The five ETFs under the Currency Hedge banner:
db-X MSCI Brazil Currency-Hedged Equity Fund (DBBR)
db-X MSCI Canada Currency-Hedged Equity Fund (DBCN)
db-X MSCI EAFE Currency-Hedged Equity Fund (DBEF)
db-X MSCI Emerging Markets Currency-Hedged Equity Fund (DBEM)
db-X MSCI Japan Currency-Hedged Equity Fund (DBJP)

The Most Innovative Exchange Traded Product (ETP) in the Americas went to the iPath S&P 500 Dynamic VIX ETN (XVZ), while the db Physical Gold SGD Hedged ETC won in Europe.

Held at the Grand Hyatt Hotel in New York last Thursday, the Global ETF Awards provide a window on how the global ETF industry views itself. Unlike the Capital Link awards, where a small committee of analysts and industry insiders choose the winners, the Global Awards is voted on by the entire ETF industry. Here 520 organizations from around the world voted on who they think are the industry’s leaders and innovators. The awards and ceremony were created and run by the operators of exchangetradedfunds.com.

The evening began with a new prize, the Nate Most Award. Named after the man who invented the SPDR, the first ETF, it’s awarded to the individual who has made the greatest contribution to the ETF Market.

“We honored to be able to celebrate Nate’s place as the father of the ETF and to honor achievements in the ETF industry,” said Arlene C. Reyes, chief operating officer of exchangetradedfunds.com.

The first winner of this new prize was James Rose, senior managing director of State Street Global Advisors, for his commitment to the industry and for setting a standard of excellence. In addition to running State Street’s ETF business he serves as the first chairman of the Investment Company Institute’s Exchange-Traded Funds Committee.

“Nate Most created a product that created an industry and a great product for investors,” said Ross upon receiving the award.

Here is the list of other winners:

Most Innovative ETF Index Provider

The Americas – Dow Jones Indexes
Europe – STOXX
Asia-Pacific – MSCI

Most Widely Utilized ETF Research (Statistical)
Deutsche Bank won in all three regions.

Most Widely Utilized ETF Research (Analytical)
The Americas – Bloomberg
Europe – Deutsche Bank
Asia-Pacific – Deutsche Bank

Best ETF Market Maker

The Americas – Knight
Europe – Flow Traders
Asia-Pacific – Flow Traders

Most Recognized ETF Brand

The Americas – SPDRs
Europe – (Tie) db x-trackers and iShares
Asia-Pacific – China 50 ETF

Best Service Provider
The Americas – BNY Mellon
Europe – (Tie) Northern Trust and State Street Fund Services (Ireland)
Asia-Pacific – SSgA

Most Informative Website

The Americas – SPDRS.com
Europe – etf.db.com
Asia-Pacific – hkex.com.hk

Most Informative Website – Media

The Americas – IndexUniverse.com

Webinar to Teach How to Evaluate Corporate Bond ETFs

Matt Hougan, IndexUniverse’s President of ETF Analytics, and Jason Bloom of Guggenheim Partners will lead a webinar on how to evaluate corporate bond ETFs and what special risks and opportunities should you be aware of? It will teach tactical approaches to corporate bonds such as managing the yield curve to enhance yield and evaluating credit spreads, duration and other key fixed-income metrics.

It will be held at 2 pm EST on Thursday, February 23.

The Russell Reconstitution And Your ETFs

The biggest event on the indexing calendar is the annual reconstitution of Russell Investments’ flagship Russell 3000E Index, of which the Russell 3000, Russell 2000, Russell 1000 and Russell MicroCap Index are subsets.

While changes to the Dow Jones Industrial Average and S&P 500 make big news, they’re few and far between, largely at the subjective discretion of the indexes’ custodians. You can’t plan for or truly predict the changes. Russell’s change can be seen from a mile away.

And it’s a big deal. With $3.9 trillion in managed assets benchmarked to its U.S. indexes, according to Russell (around $542 billion of that in indexed assets), the activity surrounding the annual reconstitution makes June 30—switchover day—one of the U.S. equity market’s largest trading days of the year. The rebalancing forces the movements of many stocks in and out of indexed portfolios as managers try to get the best price for their shareholders amid a huge amount of trading volume.

Negotiating The Transition

“We do a lot of work, months ahead of time, to anticipate the movement from the small-cap index to the large-cap index and vice versa,” said Greg Savage, managing director of iShares’ portfolio management.

According to BlackRock, iShares’ parent, at the end of March there was $83.9 billion in ETF assets following Russell indexes. And while iShares only sponsors 16 of the 70 ETFs tracking Russell’s U.S. indexes, it holds the lion’s shares of the money, with $74.4 billion in assets under management.

The biggest issue affecting passive funds replicating these indexes is the idea of a “free lunch” for traders and active funds that front-run the reconstitution.

You might assume that graduating from the small-cap Russell 2000 to the large-cap Russell 1000 is a good thing for a company. But from a flows perspective, it’s quite the opposite.

When a stock falls from the large-cap Russell 1000 Index to the small-cap Russell 2000, there can be buying pressure. As the smallest stocks in the large-cap index, they may be excluded from both optimized index and actively managed funds. However, when they move to the small-cap index, they tend to be the largest stocks in the new pool, granting them some of the largest weights in that index. Managers of the small-cap fund could potentially buy a lot more shares than the large-cap fund managers will sell.

Meanwhile, opposing high selling pressure occurs when a stock graduates from the Russell 2000 to the Russell 1000.

Consider Capitol Federal Financial (CFFN), a company with a market cap of $1.9 billion. It currently has a weight of 0.000036 percent in the Russell 1000, after falling more than 35 percent over the past 12 months. Given its low ranking, it will likely drop into the Russell 2000 during the rebalance. But what will be the impact?

Estimates say that $135 billion is benchmarked to Russell 1000-linked index trackers. Given CFFN’s weight, that means these funds own about $4.9 million of the stock. If and when it moves to the Russell 2000, it will become a bigger fish.

Based on current levels, it would represent about 0.15% of the index. With $44.2 billion tied to Russell 2000 trackers, those funds would have to buy $6.6 million of the stock. Much of that can slide over from Russell 1000 funds exiting the position, but given the current numbers, there would be a net $1.7 million purchase taking place at the close on the day of the rebalance. That’s the equivalent to 11% of the stock’s average daily volume—a significant, but not overwhelming buy order. However, mutliply that out over hundreds of stocks, and you get some major market-moving activity.

“Some fund managers want to offset the price movements that they think are part of the front- running,” said Joel Dickson, senior ETF strategist at Vanguard. The Valley Forge, Pa., fund company runs seven ETFs tracking Russell indexes. “However, passive managers don’t want to beat the index. They want to minimize the tracking error with respect to the underlying stocks. So, if the goal of the ETF is to provide exposure to the Russell index with low tracking error, then that is attained by doing all your trades on the day of the reconstitution. That way, the front-running doesn’t matter.”

For the full story to go IndexUniverse.com.

If Korea Becomes a Developed Nation

Index providers put a lot of time and effort into deciding whether countries are classified as developed or emerging nations.

The choice, to an outsider, seems simple. The U.S. is a developed country, and China is emerging. But breaking that down into a rule-set is more of a challenge. Each of the major index providers looks at a different set of criteria to make its determination.

With billions of dollars tied to each market, these classification systems matter, and countries lobby index providers hard to convince them that they meet this or that criteria.

For ETF investors, the index provider that matters most in this regard is MSCI, which dominates the market for both developed and emerging market international ETFs. MSCI has an annual review process for evaluating economic development status based on economic development, size and liquidity requirements, and market accessibility criteria. It maintains watch lists of countries that are under consideration for status changes.

In the middle of 2010, Israel jumped from emerging to developed status in the MSCI system, as it finally was judged to fully meet MSCI’s criteria for developed markets. Based on a 2008 consultation report from MSCI, the country’s graduation was primarily held up by concerns about market accessibility, but currently, the only remaining issue of concern, MSCI says, is the Tel Aviv Stock Exchange’s settlement cycle, which is shorter than is normal for a developed market. The issue is considered a minor one and did not prevent the country’s promotion to developed status.

Among other things, the promotion pushed Israel out of the broadly followed MSCI Emerging Markets Index and into the pre-eminent benchmark for measuring developed international equity performance, the MSCI EAFE (Europe, Australasia and the Far East).

Investors always want to know what will happen to a country’s market when a graduation event takes place. Viewed from a static ETF-only lens, the answer is simple. On April 30, 2010, there was roughly $60 billion in ETF money invested in the MSCI Emerging Markets Index via the Vanguard Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM). Israel had a 4 percent weight in the index, meaning the funds likely had in the area of $2.4 billion invested in Israeli equities at the time. When MSCI promoted Israel, those funds had to sell.

The next countries likely to graduate in the MSCI system may be bigger deals. In both 2009 and 2010, MSCI decided after careful review to leave both South Korea and Taiwan in the emerging markets index. They won’t be up for review again until June 2011. If chosen, they would make the switch in the middle of 2012. If that happens, MSCI would have to decide whether to make the transition over a period of time in a step process, or all at once.

Both countries meet many of the requirements MSCI has of developed nations. Korea satisfies the criteria in economic development, size and liquidity, but it fails on three levels: the lack of an offshore currency market for the Korean won; investor accessibility; and continued anti-competitive practices. With no active offshore currency market, investors need to exchange their money into won during Korean trading hours in order to trade. However, the limited trading hours means Korea’s market is mostly closed when Western markets are open. Meanwhile, a rigid identification system limits investor accessibility in the use of omnibus accounts. For instance, instead of Fidelity Investments having one account, it needs to set up separate accounts for each mutual fund that wants to trade in Korea, creating a very inefficient system. Finally, stock market data continues to be subject to contractual anti-competitive practices as a way to keep trades on the Korean market.

Taiwan also meets the economic development criteria, along with the size and liquidity requirements. However, market participants have said Taiwan’s overall market accessibility is comparable with that of Korea’s. MSCI said the “lack of full convertibility of the new Taiwan Dollar and restrictions associated with the Foreign Institutional Investors identification system were raised as areas where significant progress is still required.”

But if South Korea and Taiwan resolve these issues, the impact will be large.

For the full story go to IndexUniverse.com.

ETFs Cross $1 Trillion Milestone

Just another $10 trillion more to go.

The ETF industry crossed the $1 trillion in assets milestone for the first time yesterday. Actually, $1.027 trillion to be exact, according to BlackRock’s Global ETF Research and Implementation Strategy Team. It took 17 years for the industry, which includes all exchange-traded products classified as ETFs or ETPs, to achieve what took the mutual fund industry 40 years. The first ETF, the SPDR, launched Jan. 29, 1993, so just edged in under 18 years.

The modern mutual fund industry, which began with the Investment Company Act of 1940, crossed the $1 trillion mark in 1980. There are currently $11.51 trillion in assets under management in the U.S. mutual funds, according to the Investment Company Institute.

According to Blackrock, in the U.S., as of December 16, there were 894 ETFs with $887.2 billion in assets under management from 28 providers on two exchanges. Year to date, 171 new ETFs have been launched in the U.S., while 49 were delisted. Another 828 ETFs are in the regulatory pipeline. The $1 trillion comes when you add in the $115.5 billion from the 185 ETPs listed in the U.S. There are currently 20 providers and they all trade on one exchange. That’s ups from 142 ETPs with assets of $88.1 billion from 17 providers a year ago.

“Cost features make ETFs and ETPs among the most ‘democratic’ of investments, as a product’s pricing is consistent regardless of the type of investor or level of assets invested,” said Deborah Fuhr, the head of Blackrock’s ETF research team. She said the growth reflected the products expansion to retail investors. Providers are expanding into more specialized areas to cater to the growing number of professional and retail investors using ETFs as advanced portfolio construction tools. “The increasing availability of these highly-specialized ETFs and ETPs across the full spectrum of equities, fixed-income and alternative investments means that investors can use these vehicles to instantly deploy capital to take advantage of new investment opportunities – with complete transparency into the underlying investments as well as low cost.

Net new asset flows this year show increased interest in equities in both developed and emerging markets, compared to a drop off in net new asset flows among fixed income and commodities. Most striking was through November, net new flows into North American equity ETFs/ETPs jumped 950% to $21 billion, compared with just $2 billion in 2009. Over the same time period, flows into emerging markets equity ETFs/ETPs totaled $29 billion, up from $27 billion last year. Flows into fixed income products fell 30% to $31.2 billion, compared with $44.8 billion last year, while flows into commodity products plunged 65% to $11.4 billion from $32.6 billion a year ago. In November, ETF trading volume accounted for 24.1% of all United States equity turnover.

For more info check out Daisy Maxey’s piece in the Wall Street Journal and IndexUniverse.com.

How Guggenheim Partners Became a Player

With its purchase of Rydex SGI in February, a little-known asset manager by the name of Guggenheim Partners suddenly became the seventh-largest ETF provider in the U.S. Prior to its purchase of Claymore Securities just seven months earlier, Guggenheim had only been involved in one product for retail investors. The truly shocking part is the whole thing might have been an accident.

On Feb. 16, Guggenheim bought Security Benefit Corp., a struggling financial services firm out of Topeka, Kan., for an undisclosed sum. In the package, Guggenheim received four businesses: Security Financial Resources, a national provider of retirement plan services for more than 135,000 accounts, primarily in the education market; Security Benefit Life, a provider of fixed and variable annuities to 200,000 policyholders; se2, the administrator of more than 700,000 policies and $30 billion in assets for the insurance and financial services industry; and SGI Security Global Investors and Rydex SGI, an asset manager and ETF provider.

Right after the deal went down, Todd Boehly, Guggenheim’s managing partner in the office of the chief executive, told Investment News that purchasing Rydex SGI for its ETFs “wasn’t the primary consideration behind the acquisition of its parent company” but that it “presented to us an attractive opportunity.”

Yet, suddenly they’re a major player and the owner of two of the most innovative houses in the ETF industry.

Rydex SGI entered the ETF market in 2003 by launching the first ETF to use an alternative weighting methodology, the Rydex S&P Equal Weight ETF (NYSE Arca: RSP). Known for creating the inverse mutual funds, Rydex is also one of only three firms that offer leveraged and inverse ETFs. In addition, it created the first family of exchange-traded products to track individual currencies: The CurrencyShares currently give investors access to nine major currencies without the hassle of entering the actual foreign exchange market.

Meanwhile, Claymore has made a reputation for being the first in many high-concept thematic and tactical portfolios, such as the water industry with the Claymore S&P Global Water Index Fund (NYSE Arca: CGW); the popular emerging markets bloc known as BRIC (Brazil, Russia, India and China) with the Claymore/BNY Mellon BRIC ETF (NYSE Arca: EEB); and the solar power industry with the Claymore/MAC Global Solar Energy Index ETF (NYSE Arca: TAN).

At the end of February, Rydex SGI had about $22 billion in assets under management. Its 31 ETFs held $5.8 billion, making it the ninth-largest ETF sponsor in terms of assets, according to the National Stock Exchange. Together with the $2.74 billion in the 32 ETFs held by 13th-place Claymore, the combined ETF assets jump to $8.54 billion, leaping over BNY Mellon and WisdomTree to be the seventh-largest ETF firm behind iShares, State Street, Vanguard, Invesco PowerShares, ProShares and Van Eck. Claymore held $15.2 billion across all its product lines, which include closed-end funds and unit investment trusts, at the end of 2009.

What’s The Plan?

Considering Guggenheim now owns two of the most unique ETF houses, ETFR wondered about the firm’s strategy. How do ETFs fit into its overall business plan? Would the firm keep the Rydex and Claymore brands separate or merge them? And are there plans to buy more ETF providers? Guggenheim Partners declined requests for comment. Considering the fortuitous nature of the Rydex purchase, it may be that its strategy is still under development. But some in the ETF industry see interesting potential in the new firm.

“I think it’s an interesting combination buying both Rydex and Claymore. They both have different offerings in the ETF lineup,” said Reginald Browne, managing director of listed derivatives group at Knight Equity Markets. “Once Guggenheim determines its core strategy in the ETF space, combining the two entities I believe will be an interesting competitive advantage given their diverse lineup, and a compelling offering among ETF sponsors.”

In previous reports, Boehly said there are no plans to integrate Claymore and Rydex SGI, but “longer term, we’ll be looking at a lot of things related to how to optimize business” and that Rydex plans to launch “a lineup of new innovative products” within the next six to nine months.

“As promising as it looks, this is basically a low-margin business for a high-margin house,” said Ron DeLegge, editor and publisher of ETFguide.com, a San Diego-based Web site focused on ETFs. “I wouldn’t be surprised if they consolidated funds, getting rid of the ones with few assets and trying to gather assets and trading volume from a few strong funds.”

Well, a first look at the new line came with the recent launch by Claymore of a suite of ETFs designed to track broad market indexes, the Wilshire 5000 Total Market ETF (NYSE Arca: WFVK), the Wilshire 4500 Completion ETF (NYSE Arca: WXSP) and the Wilshire U.S. REIT ETF (NYSE Arca: WREI).

This was originally published in Exchange-Traded Funds Report. For the full story click here.