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SPA ETF to Close All 6 of its Funds

Another one bites the dust.

SPA ETFs announced late Monday that it plans to close all six of its SPA MarketGrader ETFs. Their last day of trading on the NYSE Arca will be March 25 and they will be liquidated March 30. The six funds trade separately in the U.S., United Kingdom and Italy.

The six funds affected:
SPA MarketGrader 40 Fund (SFV)
SPA MarketGrader 100 Fund (SIH)
SPA MarketGrader 200 Fund (SNB)
SPA MarketGrader Small Cap 100 Fund (SSK)
SPA MarketGrader Mid Cap 100 Fund (SVD)
SPA MarketGrader Large Cap 100 Fund (SZG)

The funds’ board of trustees has been in consultations with SPA ETFs, the investment advisor to the funds, for the past few weeks, to discuss the future of the ETFs. Two weeks ago, the board came close to deciding to shut down the funds, but chose instead to seek further information, according to sources. While it’s unknown what new data forced this decision, SPA said in a written statement that the “board determined current market conditions are unsuitable for a long-only equity investment strategy, such as the one employed by the SPA MarketGrader ETFs.” They decided closing the funds would be in the best interest of the shareholders.

As of Friday, the six U.S. funds assets totaling $10.4 million, while the European funds held $7.5 million, reported IndexUniverse.

“In light of the current market environment keeping the SPA MarketGrader Funds open would compromise investors and increase costs,” said Daniel Freedman, managing director of SPA ETFs, in a written statement. However, the company plans to stay in the ETF market. “The SPA ETF Trust remains open and we plan to partner with other institutions to bring new ETFs to market in Europe and the U.S. in 2009. Additionally, when market conditions improve we may reintroduce the MarketGrader strategy.”

SPA is a sister company to 22-year-old British money manager London & Capital. The U.S. funds launched in October 2007, a month after the British funds, and made SPA the first foreign company to launch ETFs in the U.S. Barclays Global Investors, a unit of Barclays, a British bank, is headquartered in San Francisco. The SPA funds are based on indexes from MarketGrader which uses 24 fundamental factors to grade every stock in the U.S. market and pulls the ones that score best in four key areas — growth, value, profitability and cash flow. While the index uses fundamental criteria to pick stocks, the indexes are not fundamentally weighted, like the ETFs from WisdomTree and PowerShares’ FTSE RAFI series.

Ironically, from their inception until June 2008, the MarketGrader funds consistently outperformed the S&P 500 and often beat comparable funds from WisdomTree and PowerShares.

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.