BGi’s Diamond Scores $36.5 Million; Vanguard Investors Pissed Off

Here’s a round-up of second day stories about the Blackrock purchase of BGI.

The Wall Street Journal says more than 400 top executives at Barclays will walk away from the deal pocketing a total of $630.3 million. It seems there was some sort of unusual management incentive plan in place at BGI that would have started to expire in 2010. They needed to do something quick to cash out. Barclays President Robert Diamond alone will walk away with $36.5 million.

WSJ’s Jason Zweig reports that Vanguard’s investors are furious with the mutual fund/ETF company for even making a bid on iShares. Zweig says this could have been a good move for Vanguard and I agree. Already the No. 3 ETF provider, Vanguard could have become the market leader. More important, Vanguard would have probably cut the expense ratios on the ETFs, which could have brought in even more investors. Few people realize that Vanguard doesn’t have an ETF to partner with its S&P 500 fund. Vanguard came to ETFs late in the game and wanted to make an ETF for its flagship index fund. However, S&P had already given an exclusive license to BGI for the iShares S&P 500 Index (IVV).This would have given Vanguard the S&P 500 ETF they’ve always wanted. Also, S&P sued Vanguard over basing the ETF on the index without giving S&P any additional licensing money That full story is in ETFs for the Long Run.

The Financial Times says Larry Fink, Blackrock’s CEO, has been trying to buy BGI for eight years, and capitalized on the financial crisis to make his dream come true.

Reuters’ Svea Herbst-Bayliss suggests the BGI deal will spark a buying spree as envious rivals figure out how to compete. Bank of New York Mellon (does that taste as good as a honeydew melon?) is expected to be the next buyer. BNY already plays a big part in the ETF industry as a trustee and custodian of many funds. BNY is the trustee and administrator of the second ETF, the MidCap SPDR (MDY).

DealJournal’s Michael Corkery says besides CVC, the big loser is Goldman Sachs, which advised CVC.

Jim Wiandt of IndexUniverse.com says by using an ETF company to create the largest asset manager in the world is a huge boost for the ETF industry and proves how big basis-point-linked passive assets have gotten. He asks a lot of questions, but doesn’t give any anawers. Questions like will Blackrock keep the ETF expense ratios low and what does this mean for the active ETFs?

What are your thoughts? I would love to hear them.

Advertisement

Study: Self-Directed Investors Use ETFs 20% More than Advised Investors

Cogent Research, a research firm I’ve never heard of, agrees with the assessment Bruce Bond, the CEO of PowerShares, made on this blog last week.

“We think that what is happening in the broader market has truncated the adoption of the ETF among the investment professional community,” said Bond.

Cogent says self-directed investors are playing an increasingly significant role in defining the ETF product landscape. In ETF Investor Brandscape, a recently published national study of 4,000 affluent Americans, the firm says “interest, usage and commitment to ETFs is significantly higher among self-directed investors who manage their own portfolios.”

According to Cogent, these are the study’s major findings:

* Self-directed investors’ awareness of several top ETF providers is almost twice that of advised investors.

* Equal proportions of self-directed and advised investors use ETFs, however, self-directed investors allocate 20% more of their portfolio to ETFs (The actual numbers were 17% average allocation to ETFs among self-directed vs. 14.1% average allocation to ETFs among advised).

* Among current ETF owners, self-directed investors are far more loyal to their primary ETF provider than are investors who purchase and own their investments through an advisor.

* Usage of ETFs is expected to increase significantly in 2009 among current owners and non-owners alike. On average, one out of every four (25%) current ETF owners plans to increase their ETF holdings. Among self-directed investors, the proportion of likely increased use rises to 35%, representing a 40% higher increased adoption rate.

* iShares and Vanguard are fighting for the number one spot in overall customer experience, which will payoff in loyalty and increased investments. Meanwhile, PowerShares, State Street Global Advisors, and ProShares must work harder to inspire existing clients to increase investments. Furthermore, challenger brands like WisdomTree and Rydex need to focus on the basics–increasing investor awareness of their offerings.

“Everything we see in the data suggests that there is real ‘home-grown’ passion among investors–both advised and self-directed–for ETFs,” says Christy White, founder and principal of Cogent Research in a written statement. “Providers that are committed to promoting and supporting a dual distribution strategy will prevail in this growing marketplace.”

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.”

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.