Tag Archives: Wall Street Journal

ETFs Cross $1 Trillion Milestone

Just another $10 trillion more to go.

The ETF industry crossed the $1 trillion in assets milestone for the first time yesterday. Actually, $1.027 trillion to be exact, according to BlackRock’s Global ETF Research and Implementation Strategy Team. It took 17 years for the industry, which includes all exchange-traded products classified as ETFs or ETPs, to achieve what took the mutual fund industry 40 years. The first ETF, the SPDR, launched Jan. 29, 1993, so just edged in under 18 years.

The modern mutual fund industry, which began with the Investment Company Act of 1940, crossed the $1 trillion mark in 1980. There are currently $11.51 trillion in assets under management in the U.S. mutual funds, according to the Investment Company Institute.

According to Blackrock, in the U.S., as of December 16, there were 894 ETFs with $887.2 billion in assets under management from 28 providers on two exchanges. Year to date, 171 new ETFs have been launched in the U.S., while 49 were delisted. Another 828 ETFs are in the regulatory pipeline. The $1 trillion comes when you add in the $115.5 billion from the 185 ETPs listed in the U.S. There are currently 20 providers and they all trade on one exchange. That’s ups from 142 ETPs with assets of $88.1 billion from 17 providers a year ago.

“Cost features make ETFs and ETPs among the most ‘democratic’ of investments, as a product’s pricing is consistent regardless of the type of investor or level of assets invested,” said Deborah Fuhr, the head of Blackrock’s ETF research team. She said the growth reflected the products expansion to retail investors. Providers are expanding into more specialized areas to cater to the growing number of professional and retail investors using ETFs as advanced portfolio construction tools. “The increasing availability of these highly-specialized ETFs and ETPs across the full spectrum of equities, fixed-income and alternative investments means that investors can use these vehicles to instantly deploy capital to take advantage of new investment opportunities – with complete transparency into the underlying investments as well as low cost.

Net new asset flows this year show increased interest in equities in both developed and emerging markets, compared to a drop off in net new asset flows among fixed income and commodities. Most striking was through November, net new flows into North American equity ETFs/ETPs jumped 950% to $21 billion, compared with just $2 billion in 2009. Over the same time period, flows into emerging markets equity ETFs/ETPs totaled $29 billion, up from $27 billion last year. Flows into fixed income products fell 30% to $31.2 billion, compared with $44.8 billion last year, while flows into commodity products plunged 65% to $11.4 billion from $32.6 billion a year ago. In November, ETF trading volume accounted for 24.1% of all United States equity turnover.

For more info check out Daisy Maxey’s piece in the Wall Street Journal and IndexUniverse.com.

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.

Blackrock Buys BGI for $13.5 Billion

In a deal sure to create major changes in the ETF industry, asset-management giant Blackrock agreed to buy Barclays Global Investors (BGI) from Barclays PLC for $13.5 billion late Thursday.

BGI, which coined the term exchange-traded fund, has been the industry’s market leader since the emergence of its iShares family of ETFs in 2000. It remains the industry leader with more funds than any other ETF sponsor and a little less than 50% market share.

With more than $2.7 trillion in assets under management, The Wall Street Journal says this creates a “money-management titan twice the size of its closest competitor,” such as State Street, another ETF provider, and mutual fund giant Fidelity Investments.

The most interesting tidbit comes out of The New York Times. The Times reports Barclays’ president Robert Diamond had first discussed a potential deal with BlackRock approximately seven years ago, but decided the timing was not right.

My favorite nugget, the boys at BGI won’t have to change the initials on their luggage. The firm will continue to be called BGI as the new company takes the name BlackRock Global Investors.

Suspected Front Running Cost USO $120 Million in February

The Wall Street Journal today reports that U.S. Oil (USO) has lost 20% of its value year-to-date, while the price of crude fell just 2.2%. The fund, which has grown from $7 million three years ago to $3.8 billion, is essentially losing money, and unable to track the crude oil market, because traders are front-running the roll. The roll is the movement from the first month contract that is soon to expire to the second month and soon-to-be front month contract.

Regulators are paying attention because it appears the fund is actually moving the market. Since U.S. Oil is so big and announces the day it will make the roll it appears speculators are making bets on these moves before they happen. The Journal says this is “adding to the costs of U.S. Oil’s roll and raising concerns among regulators that traders may be manipulating prices.”

“It’s like taking candy from a baby,” said Nauman Barakat, senior vice president at Macquarie Futures USA in New York, told the Journal. And this is hurting the fund’s investors.

The Journal reports that on the last roll, Feb. 6, U.S. Oil moved 80,000 contracts out of March into April. Thirty minutes before the New York Mercantile Exchange closed, the spread between the two month’s oil contracts jumped from $4 to $5.98, which cost the fund $120 million more than it would have a day earlier. At the same time, a trader could have pocketed $1,390 on each spread trade, which costs $810 to place.

The Journal says U.S. Oil complained to Nymex the following week. Last week, the Commodity Futures Trading Commission began investigating the trading.

U.S. Oil to Change Roll Policy

Aha! The Wall Street Journal obviously read my interview with John Hyland about its take on the U.S. Oil Fund’s (USO) influence on the futures market and is fighting back. Or did someone read my post and get to Hyland?

OK. I might be giving myself too much credit. But then again …

I’m not quite sure what to make of the fact that the day after I spoke with Hyland, the WSJ reported that the exchange-traded product with $3.4 billion in assets will abandon its practice of rolling its entire oil future position in one day. USO now says it will renew the expiring contracts over the course of four days.

The New York Mercantile Exchange says that last Tuesday USO held 19% of all the crude for April delivery. Meanwhile, the ICE Futures Europe exchange says the fund holds 30% of its April contracts.

The Journal says the size of the fund was affecting oil prices and hurting the fund’s investors. With the fund announcing what day it would roll, oil traders would front-run the fund by selling the front-month futures contract before that date. This would push the price down, hurting the fund’s investors. With oil for delivery currently higher than the spot price, USO would then need to pony up more to buy the second month contract.

WJS says “U.S. Oil paid anywhere from a $4 to $6.10-a-barrel premium when it sold March and bought April futures contracts, as robust oil supplies and weak demand pushed down near-term prices relative to outer months.” It also reported analysts at Goldman Sachs published a note saying long-term holdings in near-term commodity contracts are “not investable,” citing the large roll cost. According to WSJ, the USO’s share price had fallen 71% over the 52-weeks ending Wednesday.

USO said it will continue to hold the front-month contract, as that is the structure of the fund.

Debating the WSJ’s Assessment of USO

In a continuation of yesterday’s post, It Takes Two (Months) to Contango, I want to focus a little more on the roll. The roll is what an investor, or speculator, in the futures market needs to do to keep their investment open and avoid taking delivery of the commodity in question. Remember, futures are an obligation to buy or sell a commodity at a certain price on the day the contract expires. If you don’t close the futures contract before it expires, you can expect a big truck to unload 1,000 barrels of oil on your lawn in a few days. Unless you’re running an oil refinery, this is not a good move.

Before expiration, investors betting on a commodity need to sell the contract for next month and buy the contract for the second month out. When the first month expires, the second month contract, becomes the new first month contract. Yesterday’s post dealt with the cost involved with the roll and how when the price of oil is rising, a trend called “contango,” you will earn less than the total movement in the spot price of the commodity. However, unless you want to take delivery, this is the closest way to play the spot price.

Last week I highlighted an article in the Wall Street Journal. It said the U.S. Oil Fund (USO), the exchange-traded product that is a pure play on the first month oil futures contract, is getting so large it’s affecting the oil market. The Journal writer Carolyn Cui says the $3.3 billion in assets held by USO accounts for 22% of the outstanding front-month contracts. According to Cui the fund is so large that on the day it moved from the March to the April contract, Feb. 6, it had a visible affect on the oil market.

I called John Hyland, the portfolio manager of the U.S. Oil Fund, to get his take on this. Hyland says you can’t blame a huge one-day move solely on USO without looking at the trend three days before the roll and three days after.

“The people who look just at the day we roll and say the spread was “X”, that doesn’t tell you anything,” says Hyland. “You have to look at the days leading up to and the days after. You might miss the trend going on if you just look at USO.”

For instance, if the three days before the roll, the spread on the contract was $1 and the day of the roll the spread jumped to $2, then you can say there was an affect.

According to Hyland, the three days before Feb. 6, when USO rolled over its contract, the spread between the March and April contracts were $3.99, $3.87 and $3.88. The day USO rolled it jumped to $4.55. However, the next day the spread grew to $4.76 and over the next few days jumped to $4.81, $5.24 and $6.06, eventually widening to $8.19.

“The spread is tending to move wider as you get into the middle of the month, as March gets closer to expiration. Is that USO’s doing? How are we doing it after our roll?” asks Hyland. “It looks to me that as we get closer to expiration, it’s more of an inventory issue. The people who say it must be USO are not really looking at everything.”

Inventories are rising. If demand for oil drops off a million barrels a day and OPEC produces the same amount of oil, then inventory goes up million barrels a day. A lot of oil in the tanks is not bullish for the March contract. With supply rising and inventories hitting 52-week highs, one would expect the oil price to weaken. If OPEC cuts production, the shortfall will be made up from the current inventory. As inventories get smaller, the front month contract will stop trading at a big discount to the contracts further out.

People are assuming inventories will not build up indefinitely. OPEC will have to reduce production, if for no other reason than they will run out of storage tanks. Since the cheapest place to store oil is in the ground before you pump it out, they will cut production. At that time, inventories will start to shrink.

Market Folly, the blog posting I ragged on yesterday, actually has an interesting slide presentation from the International Energy Agency from November called The Era of Cheap Oil is Over. It’s a good read for anyone investing in oil.

USO Affects Futures Market

The U.S. Oil Fund (USO), an exchange-traded vehicle with $3.3 billion in assets, is getting so large it’s affecting the oil market, according to Carolyn Cui of The Wall Street Journal. Cui says “the sheer size of USO’s position, which accounts for about 22% of outstanding front-month contracts, is sending tremors through futures markets and contributed to oil’s dip below $40 a barrel in intraday trading Friday.” She says the volume of crude-oil futures on New York Mercantile Exchange was “nearly double the average volume posted so far this year.”

Most ETVs that track the oil market are commodity pools that hold futures contracts. While many investors think USO tracks the spot price of oil, it actually tracks the price of the future contract one month in the future. As the futures contract nears its expiration it must roll over the contract, that is sell the current contract and purchase the next month, or else take delivery of the oil. As oil prices sank from $145.29 a barrel in early July, the fund more than tripled in size, as investors predicted the price of oil would bounce. The National Stock Exchange says in December and January alone the fund received net cash inflows of $3.46 billion.

For more on USO see page 185 of ETFs for the Long Run.