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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New ETF Tracks Long Term Corporate Market

State Street Global Advisors launched the SPDR Barclays Capital Long Term Credit Bond ETF (LWC) Wednesday on the NYSE Arca. It has an annual expense ratio of 0.15%.

The fund will track the Barclays Capital U.S. Long Credit Index. The index is comprised of dollar-denominated investment grade corporate and non-corporate credit bonds that have a remaining maturity of greater than or equal to 10 years. As of Dec. 31, 2008, the index held 965 issues with an average dollar-weighted maturity of 24.39 years.

“Demand for access to high quality, long term credit bonds is on the rise as investors search for alternatives to U.S. Treasuries that will improve the yield on their fixed income portfolios,” says Anthony Rochte, senior managing director at State Street Global Advisors in a written statement. “The SPDR Barclays Capital Long Term Credit Bond ETF is the longest-maturity credit bond ETF available to investors and a key addition to our growing family of fixed income SPDRs, which have attracted more than $800 million in net inflows in just the first two months of 2009.”

Currently, there are six long-term bond ETFs on the market. While those focus on Treasuries, the LWC follows corporate bonds, with the possibility of government bonds.

Amid Turmoil, ETF Firms Bring Out New Funds

Well it seems that even amid the turmoil in the broader market and the closing of funds in the ETF industry, new funds are launched every week. Over the previous two weeks, we’ve seen a new airline ETF from Claymore Securities, State Street Global Advisors and BGI both launching two new bond ETFs and Barclays Bank launching two new exchange-traded notes.

This week, Van Eck Global’s ETF family, the Market Vectors, launched two funds. The Market Vectors High-Yield Municipal Index ETF (HYD) launched today on the NYSE Arca, following on the heels of Tuesday’s launched, the Market Vectors Pre-Refunded Municipal Index ETF (PRB) with an expense ratio of 0.24%

HYD will track the Barclays Capital Municipal Custom High Yield Composite Index. This high yield index is a market-size weighted index comprised of publicly traded municipal bonds covering the high-yield long-term tax-exempt bond market.

Van Eck says PRB is the nation’s first ETF to focus on the pre-refunded segment of the municipal bond market and will track the Barclays Capital Municipal Pre-Refunded—Treasury-Escrowed Index. This market-size weighted index holds publicly traded tax-exempt municipal bonds. The unique part about it is the index is comprised of “pre-refunded and/or escrowed-to-maturity bonds.” Heather Bell of Index Universe describes the bonds this way: “Say a city issues $100 million worth of bonds to fund a water facilities project. A few years ago, the deal came to market with interest payments to investors of 6%. But now, with interest rates for 30-year triple-A munis hovering around 5%, the city decides to cut its costs. So it reissues more bonds at the lower rates covering the exact same project. The municipality then takes the proceeds from that second issue and buys similar-termed Treasuries. Since most munis have call features prior to maturity, the Treasuries are put in an escrow account to fully fund the interest and principal of the munis on their first call dates.”

I will address the new ETNs in a later posting.

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.

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.

Emerging Market ETFs Compared

With the economies of the U.S. and Western Europe falling into or nearing recession, the idea of diversifying one’s portfolio into emerging markets takes on greater significance.

Emerging markets are countries that often fall under or have fallen under the Third World umbrella. They are not fully developed, but rather developing, so continued growth is likely in their future. The fact that emerging markets are usually on a growth path creates the potential to post positive returns, even when developed countries fall into recession.

That’s not to say emerging markets aren’t risky. They’re very risky. These markets are typically small or new economies with a variety of political systems, some of which may be volatile. So markets in emerging countries are subject to greater political, economic and currency risks than those of developed nations. But, the big reason for holding securities from emerging markets (in addition to the possibility of outsized returns) is they have historically had little correlation to developed markets. Even if the individual markets are risky—when used for diversification purposes—emerging markets can reduce a portfolio’s overall risk.

For the full story click here.

ETFs in 401(k) Plans

A June survey conducted by State Street Global Advisors and Knowledge@Wharton determined that financial advisors think the biggest potential growth area for the exchange-traded fund industry is in 401(k) plans. Of the survey’s 840 respondents, 43% said that 401(k)s would be the biggest area of growth for the ETF industry going forward, compared with 27% for actively managed ETFs and 20% for unified managed accounts.

Ironically, this perspective was soundly rebutted in a July 2008 article in Journal of Indexes. The article, “Why ETFs And 401(k)s Will Never Match” (by David Blanchett and Gregory Kasten), outlined a variety of reasons why ETFs may never gain a large foothold in the 401(k) industry. Among the reasons listed were transaction costs, including the bid/ask spread and the brokerage commission associated with every purchase and sale of ETF shares. Another disadvantage noted was the inability to buy fractional shares of ETFs. The fact that the tax advantage ETFs offer in taxable accounts disappears in a tax-deferred plan such as a 401(k) was another highlighted drawback.

It’s been nearly two and a half years since I first reported that the industry is devoting resources to the idea of incorporating ETFs into the 401(k) platform. It seems like a perfect time to evaluate the current state of ETFs in defined contribution plans in general, and in 401(k)s specifically.

This story was originally published on Index Universe. For the full article click here.

Why Are RIAs Still Slow To Adopt ETFs?

Earlier this month, State Street Global Advisors (SSgA) held a one-day conference called SPDR University, in honor of its flagship ETF product. While the conference featured sessions on the outlook for the global economy and how to help clients make better investing decisions, its main focus was to convince registered investment advisors to use exchange-traded funds.

This story was originally published on Index Universe. For the full story click here.