Tag Archives: Xshares

Making Money on Smog

I apologize for not posting in a week. I realize one needs to keep the copy flowing to keep the readers coming. But, I’ve been under the weather, flu-like symptoms with a sore throat. It’s funny, you really don’t think about the air or your breathing until it’s labored with a sore throat or out-of-breath lungs. But the fact is, we spend all our time in the air. Like fish swimming in the sea, our bodies exist surrounded by the air. And the air can mess you up, through heavy wind, rain or snow. But sometimes it’s the little stuff; the stuff in the air you breathe in and out every day. Some of that stuff, like carbon, is poison and can kill you

So, I found it a nice coincidence that as I spend my days contemplating the texture of the air on my throat more than usual, Xshares Advisors launched the first of its new family of ETFs, the AirShares EU Carbon Allowances Fund (NYSE Arca: ASO). Xshares says it’s the “first U.S. traded product that provides exposure to the fast growing carbon market by holding European Union Allowances futures contracts.”

True, but it’s not the first to track the European carbon market. Barclay’s came out with the iPath Global Carbon ETN, an exchange-traded note in June. It tracks the Barclays Capital Global Carbon Index Total Return, which measures the performance of the most liquid carbon-related credit plans. These are the European Union Emission Trading Scheme or EU ETS Phase II and Kyoto Protocol’s Clean Development Mechanism. But it hasn’t been a big hit. Since ETNs are unsecured debt instruments, not funds, investors have been shying away because of the credit risk. While Barclays seems solid, credit risk left investors in Lehman’s ETN holding in line to collect pennies on the dollar. Well, that and the fact, the fund is down 41% since its inception.

AirShares EU Carbon Allowances Fund is an interesting product very different from the ETN. Still, it’s not a true fund regulated by the Investment Company Act of 1940, the SEC regulation that governs mutual funds and ETFs. It’s an exchange-traded vehicle, but it doesn’t track an index. Rather, it’s a commodity pool, like most of the commodity ETVs, such as USO. Commodity pools are regulated under the securities acts of 1933 and 1934.

This one tracks the performance of a basket of exchange-traded futures contracts of European Union Allowances (EUAs) for carbon. A EUA is an entitlement to emit the equivalent of one metric ton of carbon dioxide into the air under the European Union Greenhouse Gas Emissions Trading Scheme (EU ETS).

The fund’s initial portfolio holds unleveraged long positions in ICE Futures (Intercontinental Futures Exchange) or European Climate Exchange Carbon Financial Instrument Futures Contracts (ECX CFI Futures Contracts). Each contract provides for delivery of 1000 EUAs at a specified price, says Xshares. These contracts will expire each December in the years 2009 through 2012.

Like any other futures contracts, in order to keep a position in the market, the fund will need to roll over the contracts. This means as the expiration approaches, the fund sells the contract and buys the next future in line. This rolling over process increases transaction costs. The fund charges an expense ratio of 0.85%, compared to 0.75% for GRN. The rolling process can also result in contango or backwardation. I wrote a good explanation of how contango can affect an exchange-traded commodity pool when the first oil ETF came out in Contango and Cash.

This ETF is a play on global warming and offers investors an entry into the world market for trading carbon. According to IndexUniverse, “Such so-called carbon emission credits are traded by companies who get tax breaks and other incentives for lowering pollutants into the air. These standards are designed to set limits on the amount of a pollutant that can be released into the atmosphere and allocate credits among companies creating emissions. Those that do not use all their emissions credits can sell them to companies that need them.”
“The global carbon market grew 81% to $87 billion for the first nine months of 2008 and is on track to clear $100 billion by year end, according to an October 2008 research report from New Carbon Finance. The report also noted that the carbon market has a very low correlation to other financial markets.

An addition to regular market risk there are a lot of other risks that don’t come with your typical ETF. First, there is currency risk. While ASO shares trade in dollars, the fund’s assets are denominated in Euros. So, on top of market risk, you have to worry about losses from currency fluctuation and of course, in this day and age, political and economic uncertainty. I don’t really understand how the dollar’s strength affects the shares, but Xshares says in its materials, “changes in the value of the euro relative to the U.S. dollar alone may cause the trading price of the shares to decline. Funds focusing on a single commodity generally experience greater price volatility than a diversified commodity pool.”

On top of that, Xshares says, “If the member states of the European Union fail to adhere to their obligations under the Kyoto Protocol or the EU ETS, the value of the shares may be adversely affected. Depending upon the performance of the fund, including the interest rate environment and the amount of interest the fund earns on its fixed income securities, the expenses of the fund alone could result in losses to your investment. Plus, there is a risk that the calculation of the NAV of the fund will not accurately reflect the realizable market value of such futures contracts.”

As we learned with exchange-traded notes and in the wake of the financial collapse of many structured instruments. These risks are not to be taken lightly.


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.

Court Dismisses XShares Lawsuit

Jeffrey Feldman and the rest of the XShares executive suite caught a break.

The Supreme Court of New York dismissed the lawsuit XShares Group, the ETF firm he founded, filed against Feldman, his former partner Anthony Dudzinski, its former and current chief executive officers, and seven other company managers or officers.

In a story first reported on this blog, Donald Aven, a former executive vice president of national sales for the XShares Group, the parent company of XShares Advisors, the ETF sponsor; and his brother, Samuel Aven, an investor in the company; filed the suit in August. They alleged that the 11 defendants committed breach of fiduciary duty, breach of loyalty duty, theft of business opportunity, fraud, and other actions that enriched the officers to the detriment of the company.

According to a written statement XShares released Tuesday, Supreme Court Justice Charles E. Ramos stated on Nov. 25 that no proper amended complaint had been put before the court. Judge Ramos also found that the caption was incorrect in naming XShares Group, as the plaintiff instead of the Avens’ as plaintiffs individually and on behalf of the company, said XShares. As a result, the court ordered that the caption be changed accordingly and that the action be dismissed outright,

“We are pleased with the Court’s decision,” said Feldman, founder and chief strategist at XShares, in a written statement.

And why wouldn’t he be. It’s the first good news the firm has had all year.

One should note, the lawsuit wasn’t dismissed for lack of cause, but rather on a technicality. Still, it’s an early Christmas present for a firm that hasn’t had much to cheer about this year.

Just a few weeks ago, the firm closed the four remaining HealthShares ETFs that had been the firm’s flagship product. Launched in January 2007 with 19 ETFs tracking narrow niches of the health care industry, HealthShares was XShares first family of ETFs. Earlier this summer, XShares also closed down its family of ETFs that tracked the real estate market.

XShares continues to manage the TDAX lifecycle ETFs for TD Ameritrade. These funds are currently outperforming the S&P 500 according to a TD Ameritrade spokesperson.

Xshares to Liquidate Last Four HealthShares

XShares Advisors announced on Wednesday that it plans to liquidate the four remaining HealthShares ETFs at the end of the year and subsequently dissolve the HealthShares registered investment company.

The four ETFs are the HealthShares Cancer Exchange Traded Fund (HHK), HealthShares European Drugs ETF (HRJ), HealthShares Diagnostics ETF (HHD), HealthShares Drug Discovery Tools ETF.(HHV).

The funds’ board of directors decided to take the action in light of the current market conditions. Since their inception the HealthShares funds had been unable to attract significant market interest. Launched in January 2007 as a family of 19 funds, HealthShares offered portfolios that tracked extremely narrow, highly specialized areas of the health-care industry, such as cardiology, orthopedics and dermatology.

In August, with only a total of $100 million in assets under management, Xshares, the investment advisor to the fund, closed 15 of the 19 ETFs. The four remaining funds held about half the total assets. Then in October, the benchmark indexes for the surviving four were redesigned to hold between 28 and 35 stocks, up from the 22 with which they originally launched. All four also lowered their expense ratios to 0.60%, except for European Drugs, which charged 0.72%. This move came on the heels of Xshares closing its AdelanteShares family of seven real estate ETFs in June. In their nine months of existence they accumulated only $17 million of assets under management. Also in June, Xshares sued its chairman, founders, current and former CEOs and others for fraud and other charges.

The HealthShares board on Wednesday said the funds’ future viability and prospects for growth in assets in the foreseeable future were not encouraging. Thus, the board determined that it was in the best interests of the funds and their shareholders to liquidate
“We continue to believe in the fundamentals of the healthcare industry. Unfortunately under these tough market conditions, the Funds were unable to achieve meaningful investor traction,” said Joseph L. Schocken, chairman and chief executive officer of XShares Group, parent company of Xshares, in a written statement. “We remain strongly committed to bringing our products now under review to market. In 2009, we expect to launch additional products related to the environment and infrastructure.”

The TDAX series of lifecycle ETFs that XShares launched in partnership with TD Ameritrade continue to trade.

The HealthShares last day of trading on the NYSE Arca and the last day share may be purchased or redeemed will be Dec. 23. Trading will halt before the open Dec. 24. From Dec. 24, through Dec. 31, shareholders may sell their Shares to certain broker-dealers who may determine to continue to purchase such shares, but there can be no assurance that any broker-dealer will be willing to purchase the shares or that there will be a market for the shares. All shareholders remaining on Dec. 31, 2008 will receive cash equal to the amount of the net asset value of their shares that day.

For additional information about the liquidation, shareholders may call XShares at 1-800-925-2870.

XShares Sues Founders, CEOs and Managers

XShares Group, the ETF sponsor of the HealthShares family of ETFs, filed a lawsuit against its own founders, Jeffrey Feldman and Anthony Dudzinski, its former and current chief executive officers, and seven other company managers or officers, alleging actions that enriched the officers to the detriment of the company.

According to a filing with the Supreme Court of New York state Donald Aven, XShares executive vice president of national sales, and Samuel Aven, charged the 11 defendants with breach of fiduciary duty, breach of loyalty duty, theft of business opportunity, corporate mismanagement, misappropriation of corporate assets, self-dealing, and fraud.

The lawsuit lists a series of charges:

  • That former CEO William Henson and current interim CEO Joseph Schocken received bonuses and other compensation that represented a conflict of interest with XShares
  • That the defendants diverted a corporate opportunity by allowing investor Grail Partners to misappropriate XShares business model.
  • That the company failed to meet capital and regulatory requirements by not maintaining separate books and records for XShares and its subsidiaries.
  • That the directors failed to provide adequate or not misleading disclosures to investors.
  • That the defendants failed to secure proper legal opinions for corporate actions.
  • That the defendants allowed the payment of excessive compensation to the officers.
  • That the defendants provided liquidation and other preference to third party investors to the detriment of XShares.

Representatives for XShares declined to comment on the lawsuit.

It’s been a rough year for the small ETF sponsor. At the end of the first quarter, after just five months on the job, CEO Henson left the firm for an unexplained leave of absence. Then in July, Dudzinski unexpectedly left “to pursue some other opportunities.” He had served as president and board member of XShares Group, the parent company, and as chief executive officer of XShares Advisors, the ETF provider. Around the same time the firm cut a large part of its sales staff.

The turmoil in the executive suite was mirrored on the product line. The firm closed its AdelanteShares family of seven real estate ETFs in June. In their nine months of existence they accumulated only $17 million of assets under management. Then in August, the firm’s flagship ETF family, the HealthShares, underwent a major overhaul. XShares closed 15 of the 19 ETFs focuses on highly specialized areas of the health-care industry. At the time of the reorganization, the 19 HealthShares held a total of $100 million in assets under management, with about half of that in the four surviving funds.

The four remaining ETFs:

  • HealthShares Cancer Exchange Traded Fund (HHK)
  • HealthShares European Drugs ETF (HRJ)
  • HealthShares Diagnostics ETF (HHD)
  • HealthShares Enabling Technologies ETF (HHV), which will be renamed HealthShares Drug Discovery Tools ETF.

In October, the benchmark indexes for all four were redesigned to hold between 28 and 35 stocks, up from the 22 with which they originally launched. All four also lowered their expense ratios to 0.60%, except for European Drugs, which charges 0.72%. The TDAX series of lifecycle ETFs that XShares launched in partnership with TD Ameritrade continue to trade.


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.