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.

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When Is an Index Fund Not an Index Fund?

The coming transformation of ETFs into mutual funds.

At first glance, it seems like an unlikely marriage. Mutual fund leader BlackRock announced last week that it was purchasing Barclays Global Investors, which holds 49 percent of the exchange-traded fund market, for $13.5 billion. These have long been the opposite poles of investing: Most mutual funds try to make money by picking stocks, while ETFs try to make money by simply mimicking the market.

Perhaps the new megagroup will preserve both strategies. But it seems just as likely that BlackRock wants in on the business’s quiet but growing trend called the actively managed ETF. If that sounds like a contradiction in terms, well, it is.

In simplest terms, ETFs are index funds—passive, diversified portfolios that trade like a stock. For the past decade, ETF providers like BGI have touted their products as the antidote to the overpriced, underperforming actively managed mutual fund. Over the past six years, investors invested fewer assets in mutual funds and more into ETFs. The trend accelerated during the financial crisis, as investors grew disgusted at the inability of their active mutual funds to protect their assets. Last year, equity mutual funds saw net cash outflows of $245 billion, according to TrimTabs Investment Research, while equity ETFs posted net cash inflows of $140 billion, even as asset values tanked. With all the negative feeling around actively managed mutual funds, why would the ETF industry step backward to make a big push for the actively managed ETFs?

For the money.

Index funds charge lower fees compared with active funds, which means less money in the manager’s pocket. ETFs charge even less than comparable index mutual funds and offer the additional benefits of greater tax efficiency and transparency because they’re structured differently. In addition, ETFs offer the ability to buy or sell shares during market hours. These reasons led ETFs to capture more than $500 million in assets and grab a significant market share from the $9 trillion mutual fund industry.

The first active ETF appeared early last year in an inauspicious start. Bear Stearns launched the ETF just weeks before the bank went belly up. The fund closed soon afterward. A short time later, Invesco PowerShares launched a family of five active ETFs. But they have found it difficult to gain wide acceptance and attract assets. The financial crisis effectively took these funds off most investors’ radar.

However, a thaw in the financial blizzard shows that the industry had been waiting for the right moment to revive what many consider the industry’s Holy Grail. Coincidentally, a new entrant in the field named Grail Advisors launched the first post-financial-crisis active ETF last month.

“We are operating the ETF just like a fundamental mutual fund,” said Grail Chief Executive Officer Bill Thomas in an interview. This ETF, he added, is “similar to traditional actively managed mutual funds … because it allows portfolio managers unrestricted trading.”

And in a little-reported move that BlackRock didn’t miss, iShares, the brand name for BGI’s ETF family, last month began the registration process to launch two active ETFs.

Is this a good thing for the ETF industry? Possibly. Is it a good thing for investors? Definitely not.

For the full story see The Big Money.

Net Cash Inflows Double; Large-Caps Lose, Emerging Markets Win

Net cash inflows into all exchange-traded funds (ETF) and exchange-traded notes (ETN) grew to approximately $17.1 billion in May, doubling April’s total, according to the National Stock Exchange (NSX). Despite the huge inflow overall, ETFs holding large-capitalization indexes such as the S&P 500, Dow Jones Industrial Average and the Russell 1000 posted significant cash outflows. Meanwhile, emerging-market ETFs recorded huge net inflows.

iShares remained the top ETF firm with $290 billion in assets under management. State Street Global Advisors came in second with half that, $142 billion. Vanguard took third at $54 billion. PowerShares’ $31 billion came in fourth and ProShares $26 billion claimed fifth.

The SPDR Trust (SPY) remained the king with $63 billion in assets. SPDR Gold Shares (GLD) came in second with a distant $35 billion.

I noticed a trend of heavy net cash outflows from the large-cap U.S. equity funds. So, even as the market rose in May, the SPDR saw $146 million flow out in May. The PowerShares QQQ (QQQQ), which tracks the Nasdaq 100 and is the sixth-largest ETF, had outflows of $435 million. Meanwhile, $639 million was pulled out of the Dow Diamonds (DIA), which tracks the Dow industrials. Surprisingly, the iShares S&P 500, (IVV) which also tracks the S&P 500 and is the fifth-largest ETF, saw net cash inflows of $441 million. However, all the iShares ETFs that track the Russell 1000 or an offshoot also saw outflows. Does this mean that traders think the U.S. stock market has peaked and have taken profits? I wouldn’t be surprised.

That money appears to be moving into emerging markets. The iShares MSCO-Emerging Markets (EEM) took honors as the third-largest ETF upon receipt of $1 billion in cash inflows in May. The only ETF with more net inflows was the iShares MSCI Brazil (EWZ) with $1.5 billion.

Year-to-date net cash inflows totaled approximately $29.8 billion, led by fixed income, commodity, and short U.S. equity based ETF products, says the NSX. Assets in U.S. listed ETF/ETNs grew 10% sequentially to approximately $594.3 billion at the end of May. The number of listed products totaled 829, compared with 767 listed products a year ago. This data and more can be found in the NSX May 2009 Month-End ETF/ETN Data Report.

Stepping on the brakes

Much like other structured products that came of age during the past decade, the market crash of 2008 was the first serious test of how exchange-traded funds would react in a bear market. But while the surge in issuance has continued in Europe and Asia, growth rates in the US have slowed.

The exchange-traded funds (ETFs) industry outside the US has surged this year, with 253 funds launched by the end of September, a 69% increase on the same period last year and a figure that is already 27% bigger than all ETF issuance in 2007. During the two months to September 30 – one of the worst periods in recent stock market history – 83 ETFs were launched bringing the total to 1,499 funds on 43 exchanges worldwide, while assets under management hit $764.08 billion. Barclays Global Investors expects this figure …

This was originally published in Structured Products. For the full article click here.

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.

iShares Market Share Falls to 47% as SPDR Pulls in $28.6 billion in Assets

Morgan Stanley provides some of the best ETF research on all of Wall Street. Analysts Paul Mazzilli and Dominic Maister have been covering the industry for years. In light of the recent market turmoil and negative effects it has had on the ETF industry, as well as the rest of the economy, it’s worth perusing Morgan’s ETF report on the third quarter. All the data in this entry is from Morgan Stanley’s Nov. 14 report ETF Net Cash Inflows and Listings Growth Continues.

There are currently 724 ETFs or exchange-traded products trading in the U.S. This number does not include exchange-traded notes (ETNs). Currently, 408 ETFs provide exposure to the U.S. equity market; 224 provide exposure to international and global equity markets.

There are 56 ETFs that offer fixed-income exposure. They track indices for U.S. Treasury and agency bonds, investment grade debt, mortgage-backed securities, high-yield bonds, preferred stock, national and single state municipal bonds and foreign sovereign and emerging market debt.

There are 36 exchange-traded products (ETPs) that provide exposure to alternative asset classes including commodities and currencies. Three commodity ETPs hold physical gold or silver, while 15 other ETPs utilize futures for exposure to individual or baskets of commodities. There are 18 currency ETPs that invest in foreign time deposits, short-term securities or currency futures. Commodity and currency ETPs are not ETFs because strictly speaking they are not funds registered under the U.S. Investment Company Act of 1940.

Barclays Global Investors (BGI) family of ETFs, the iShares, remains the market leader with 164 U.S.-listed ETFs and $208 billion in assets under management. The company holds 47.3% of the market, down from 50.9% last quarter. The firm saw net cash inflows of $23.9 billion this quarter, the second highest in the industry.

With 80 ETFs and $116 billion in assets in the U.S., State Street Global Advisors, which runs the SPDR family, is the second largest ETF provider. It has a market share of 26.5% up from 23% in the second quarter. State Street garnered the most net cash inflows this past quarter with $41.8 billion, with $28.6 billion of that going into the SPDR (SPY). SSGA launched 10 new funds during the quarter.

I will list the rest in terms of size as measured by assets under management.

3) Vanguard is the third largest with 38 U.S.-listed ETFs and $35.8 billion in assets. That equals an 8.1% share. In the third quarter Vanguard had $5.5 billion in net cash inflows, but no new funds.

4) PowerShares Capital Management has 123 U.S.-listed ETFs with $21.4 billion in assets, or a 4.9% share. Net cash inflows equaled $4.6 billion; with $4.3 billion going into the PowerShares QQQ (QQQQ). PowerShares launched 8 new funds this past quarter. PowerShares active ETFs in April have not yet generated significant investor interest.

5) ProShares has 64 U.S.-listed ETFs with more than $19 billion in assets, or a 4.4% market share. Following a strong first half of the year, last quarter ProShares saw net cash outflows of $0.7 billion, largely from their leveraged funds that provide minus 200% daily returns.

6) World Gold Trust Services is the sixth largest ETF provider with only one ETF, the SPDR Gold Trust (GLD). That has $17.5 billion in assets and is the fourth largest US-listed ETF. GLD had net inflows this past quarter of $3.2 billion and has had the fourth largest net inflows of any ETF this year.

7) Even though HOLDRs are not funds, Morgan calls Merrill Lynch the seventh largest ETF provider. HOLDRs are grantor trusts with different tax structures than ETFs. Merrill’s 17 HOLDRs have assets of $4.5 billion and had net inflows of $2.9 billion this past quarter. Surprisingly, several HOLDRs continue to represent the largest or most liquid ETF-type product by which investors can access a given industry. HOLDRs haven’t released a new product since 2001,

8 ) Rydex Investments has 0.9% market share with 39 U.S.-listed ETFs and $4.1 billion in assets. It experienced net cash outflows of $0.6 billion this quarter, primarily because of its CurrencyShares Euro Trust, which tracks the performance of the euro versus the US dollar.

9) DB (Deutsche Bank) Commodity Services has 11 U.S.-listed ETFs with $3.5 billion in assets, or a 0.8% share. It saw net outflows of $1.2 billion in the third quarter, with half of that coming out of the PowerShares DB Agriculture Fund (DBA). DBCS did not launch any ETFs this past quarter.

10) WisdomTree Asset Management is the tenth largest ETF provider. It has a 0.7% market share with $3.0 billion in 49 U.S.-listed ETFs. It launched one new ETF last quarter, and the firm saw net cash outflows of $12 million.

11) Van Eck Associates’ Market Vectors family has 16 U.S.-listed ETFs with $2.6 billion in assets, or a 0.6% share. It launched 3 new funds last quarter and saw a total of $34 million in net inflows.

12) United States Commodity Funds (USCF), which products the U.S. Oil (USO) fund, has a market share of 0.4% with five U.S.-listed ETFs with $1.7 billion in assets. It saw net cash inflows in the second quarter of $2.3 billion.

13) First Trust Advisors lists 38 ETFs in the U.S. and holds $1.0 billion in assets, for a 0.2% share. This past quarter, it saw net cash inflows of $0.3 billion.

14) Claymore Advisors has $0.8 billion in assets in 33 U.S.-listed ETFs, for a 0.2% market share. It saw net cash outflows last quarter of $0.2 million.

Morgan says “nine other ETF providers have 38 ETFs combined with assets totaling roughly $319 million. Most of the ETFs issued by these ten firms have yet to gain meaningful traction.”

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.

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.

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.

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.