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.

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Industry Leaders Address Credit Crisis

Some of the biggest names in the ETF industry came together this week to discuss how the current credit crisis and stock market crash has affected the exchange-traded fund industry for better or worse. All these industry leaders sit on the editorial board of the Journal of Indexes, which held its first public meeting Tuesday at the Nasdaq Stock Market in front of a group of financial journalists.

Because most of the major trends in the indexing industry are directly related to ETFs, the Journal offers in depth coverage of the ETF industy. With ETFs now comprising between 35% and 40% of all the daily trading volume on the equity markets, the major conclusions of the meeting were that the ETFs are tackling a lot of these issues affecting funds because they are so transparent. But soon, investors will be asking the managers of their active funds, what exactly they’re doing to earn the high fees they’re charging.

The other main conclusion came from Lee Kranefuss, the head of Barclays Global Investors, which produces the iShares ETFs. He said that every time there was a problem in the markets, it tended to help ETFs. The technology bubble, the mutual fund timing scandal, the accounting scandal, have all inadvertantly extolled the virtues of the transparency of ETFs.

A big way the credit crisis has affect the indexing and ETF industries is by reducing the seed capital to start new ETFs, said Steven Schoenfeld, the head of Northern Trust, with produces the NETS family of ETFs. He added it’s also reduced the ability to facilitate large trades.

ETFs Transform Into Closed-End Funds

It appears some large, liquid ETFs are trading more like closed-end funds than ETFs. More to the point, the shares prices of bond ETFs are separating from their net asset values, which is the true value of the underlying assets.

“Almost anywhere you look, bond exchange-traded funds are trading at fire-sale prices,” says Murray Coleman in IndexUniverse. “In some cases, the distorations are shattering historic levels.”

Coleman is following up on a trend I noticed in the equity ETFs after the market’s Sept. 29 plunge. AT the time I saw equity ETFs were trading at a premium to their NAVs, and seeing larger tracking error than typically associated with the more liquid funds. IndexUniverse blames the disruption in the credit markets

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.

PowerShares Takes on Van Eck During Market Mayhem

Amidst the mayhem on Wall Street, Invesco PowerShares Capital Management launched six new ETFs on the Nasdaq Stock Market. If you wonder why, it’s because it can take so long to get an ETF through the regulatory process, that when the SEC approves your application, you pretty much go ahead with the launch, even if the market is crashing all around you .

It appears that PowerShares is taking on Van Eck in the area of commodity stock, killing Van Eck’s monopoly on steel, gold and coal stock funds.

* PowerShares Global Agriculture Portfolio (PAGG) seeks investment results that correspond to the price and yield performance of the NASDAQ OMX Global Agriculture Index.

* PowerShares Global Coal Portfolio (PKOL) will track the price and yield performance of the NASDAQ OMX Global Coal Index.

* PowerShares Global Steel Portfolio (PSTL) follows the NASDAQ OMX Global Steel Index.

* PowerShares Global Gold and Precious Metals Portfolio (PSAU) will track the NASDAQ OMX Global Gold and Precious Metals Index.

* PowerShares Global Progressive Transportation Portfolio (PTRP) seeks results that correspond to the Wilder NASDAQ OMX Global Energy Efficient Transport Index(sm).

* PowerShares Global Biotech Portfolio (PBTQ) follows the NASDAQ OMX Global Biotechnology Index.

With these six new ETFs, PowerShares has listed 12 ETFs on the Nasdaq this year. Currently, 27 PowerShares ETFs list on the Nasdaq.

This Kid is Gonna Have Nightmares Tonight

Checkout this commercial talking about how you don’t have to worry about your financial future if you keep your investments with AIG. HA!. This kid wakes up in the middle of the night scared about his parents taking care of finances. They say, “Don’t Worry, buddy. We have AIG.” In light of what went on with AIG and the stock market in the wake of the Federal government bailout, this kid is gonna have nightmares tonight.

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.

Dudzinski Out at Xshares

Anthony Dudzinski is out at XShares, the exchange-traded fund provider he co-founded in 2006.

Dudzinski left his positions as chief executive officer of XShares Advisors, the ETF provider, and as president and board member of XShares Group, the parent company, on July 15. XShares also laid off a large part of its sales staff around the same time.

“I have decided to pursue some other opportunities,” said Dudzinski. “While no longer an employee, I have signed a consulting agreement to help them implement their business plans. I have a long-term interest in their success. This new relationship allows me to do a lot of different things.”

He said he would continue to bring in new clients who would like to get into the ETF marketplace.

XShares is best known for the HealthShares ETF family, a group of funds that sliced and diced the health care industry into 19 specialized categories, such as cardiology, cancer, dermatology and orthopedic repair.

Dudzinski’s departure marks a low point in a tumultuous year for the small New York firm. At the end of the first quarter, William Henson, the parent company’s CEO, left for an extended leave of absence. A member of Grail Partners (itself an early investor in XShares), Henson lasted less than five months on the job with XShares. The reason for his departure was never given.

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.