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.

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Got Them By The Shorts

Barron’s recently examined how the double-leveraged and double-inverse leveraged ETFs out of ProShares, Rydex and Direxion can create startling and distressing results for investors who correctly pick the direction of the market.

In the four months following the end of the Beijing Olympics, the Chinese stock market plunged 34%. Investors who bought the ProShares UltraShort FTSE/Xinhua China (FXP) right after Olympics and held on expected to see a return of 68%. Instead they received a 56% loss.

The devil is in the details. The leveraged funds only guarantee double the return on a daily basis. So, if the fund falls 20% one day and rises 20% the next, the investor isn’t even. That’s because the initial base on the second day is only 80% of the first day’s total. The Barron’s piece, One-Day Wonder, gives a good simple explanation. For more details on how this works, check out Chapter 9 of ETFs for the Long Run.

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.

Talking About ProShare on the Radio Again

I guess my October appearance on The Vince Rowe Show, the Online Trading Academy, was a success.

I’m talking on the radio again about ProShares and short ETFs today, Thursday, at noon, eastern time. I will also talk about Rydex and the new Direxion short ETFs.

You can listen live online at Vince Rowe.com, on Live360, or on the BizRadio Network.com.

Or on these radio stations:
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

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.

Commodity, Currency Short Funds Launched

ProShares Funds, the creator of inverse and leveraged ETFs, launched eight new funds on the NYSE Arca Tuesday.

ProShares Ultra DJ-AIG Commodity (UCD)
ProShares UltraShort DJ-AIG Commodity (CMD)
ProShares Ultra DJ-AIG Crude Oil (UCO)
ProShares UltraShort DJ-AIG Crude Oil (SCO)
ProShares Ultra Euro (ULE)
ProShares UltraShort Euro (EUO)
ProShares Ultra Yen (YCL)
ProShares UltraShort Yen (YCS)

ProShares offers 64 ETFs that provide investors with short and leveraged exposure to a wide variety of stock and bond indexes.

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.”

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

Where Does Short Ban Leave Short ETFs?

Where does the short-selling ban leave the ETFs that short the financial markets?

ProShares Financial ETFs resumed trading just around noon, after a two-hour halt in the shares of both the Short Financials ProShares (SEF) and UltraShort Financials ProShares (SKF). At 9:33 a.m., the American Stock Exchange halted trading in the UltraShort ETF after it tumbled $22.44, or 19.4%, to $93 and the Short ETF fell $5, or 8%, to $66. Trading in both resumed about 11:40 a.m.

The sharp decline was a direct result of the Security and Exchange Commission’s early Friday ban on the short selling of financial stocks. Short selling is when investors sell shares first in the expectation that they can buy them back later at a lower price. The ban prevents the shorting of 799 financial stocks. CNBC later reported that General Electric and CIT might be added to the list.

The ProShares ETFs give investors the opportunity to short the financial sector in one trade through a long instrument, or as the company says, buying long to go short. The Short ETF gives the inverse return of the Dow Jones U.S. Financials Index and the UltraShort tries to give investors double the negative return on a daily basis.

It appears the halt was caused by ProShares refusal to create new shares. After trading resumed ProShares released a statement saying because of the SEC ban on short selling it did not “expect to accept orders from Authorized Participants to create shares until further notice.” Shares will continue to be redeemed. However, the company added that these shares “may trade at prices that are not in line with their intraday indicative values.”

Ironically, the ProShares ETFs should be a great way for market players to short the financial markets in the wake of the SEC ban, but the halt and the decision, or inability, to issue more creation units throws this into doubt.

ETFs are like mutual funds in that they are both open-end investment companies. They create shares when demand increases and they redeem shares when demand drops. The difference is the mutual fund sells its shares directly to individual investors, but ETFs only sell shares to brokers, dealers and market specialists called Authorized Participants, or APs. The specialist needs to buy all the shares in the index, then trades them with the ETF for an equal number of ETF shares. This is called the “creation unit”. The trade is called the “in-kind trade,” because it’s shares for shares. The AP then sells the ETF shares on the stock market to investors like you and I. If there’s more investor demand for shares of an ETF, the AP will buy the stocks to trade for more ETF shares, then sell the new shares into the secondary market in the hopes of making a profit.

However, ProShares short funds don’t hold the stocks or short the stocks in the indexes they track. They hold futures contracts that short the indexes and swap agreements. Swaps are contracts between two parties, in this case the ETF provider and a counter party, to exchange a revenue stream. According to ProShares May 13 annual report, the UltraShort ETF held swap agreements equally 200% of its net assets.

Bob Pisani on CNBC said early this morning that with the short restrictions it’s harder for the counter parties to satisfy their obligations. “With restrictions on the short side, firms either cannot provide the swaps or the price of providing them has increased dramatically because dealers who sell the swaps hedge by shorting.” Pisani added that there are now fewer counter parties available. He said there were just four.

As of May, those four were Bank of America, Credit Suisse, J.P. Morgan Chase and UBS Warburg and Lehman Brothers. But Lehman went bankrupt on Monday and its demise left ProShares scrambling to find someone to take on those swaps.

So, if the cost of the swaps goes way up, the only way to hedge is to charge far more for the hedge option. This could significantly increase the costs on these funds, which already charge the extremely high expense ratio of 0.95% annually.

IndexUniverse reported an interesting tidbit. It said the Rydex 2X Inverse Select Sector SPDR Financials (RFN) ETF, which also gives a negative 200% return, traded even as the ProShares ETFs were halted. Rydex said its creation/redemption mechanism continued to function normally. IndexUniverse attributed this to RFN using mostly options to gain exposure to the financial market instead of swaps. Historically, swaps have given investors a more efficient way to track the market, but the deleveraging of swaps has been a large component of what is gone wrong with the financial markets this week. And the short-selling ban has only exacerbated that. Meanwhile, the options market continues to function normally.

So, where does that leave the ETFs that short the market? Will they give short sellers the necessary outlet they need to short the markets? Doubtful, because in the end, the funds try to give investors the return of the index. And the index won’t fall much if the component stocks don’t fall much. And the components won’t fall much because, well, they can’t be shorted. However, this shorting ban puts an artifical floor on the financial sector, and the broader market in general.

The first question to ask is can this ban become permanent. Doubtful. There are too many institutional investors that rely on shorting and this essentially removes from them a significant way to hedge their positions. So, if the ban will be removed, what happens when the SEC removes it? Obviously, it’s a big unknown, but if the values are not there and today’s rally is on false pretenses, the shorts could come back and put significant pressure on the market. And when one considers how this came about with no warning and totally screwed all the short sellers, they will be out for revenge. Cold blooded revenge. And you may see the worst market decline since 1929. If that happens. These next two weeks may give investors a nice opportunity to pick up the SEF, SKF and RFN at a low price amid low volatility and just wait for floodgates to open. Geronimo!