Monthly Archives: June 2012

UBS breaks ETF launch record Reply

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UBS is aiming to break into Europe’s exchange-traded fund big league following the listing of 64 of its funds on the London Stock Exchange, the largest number ever admitted to the LSE on a single day.

According to the LSE, the launch, which follows the listing of a suite of products by Vanguard Asset Management, has taken the total number of ETFs listed in London to 1,000.

The total value of ETF trading on the LSE has exceeded £500bn since the launch of the first fund in 2000, the exchange said.

UBS is carrying out the launch through its UBS Global Asset Management business. Its ETFs offer ‘A’ shares to retail investors and ‘I’ shares to institutional investors. Global head of ETFs Clemens Reuter said the unit size of ‘I” shares is a thousand times larger than ‘A’ shares: “Because they are dealt in bulk, the total cost of ownership becomes smaller.”

Of its London offerings, 17 will replicate the movement of indices through swap arrangements and a further 49 will operate in physical markets through the purchase and sale of underlying stocks. They will cover a range of equity sectors, plus investments in more esoteric areas such as infrastructure, rare earths and hedge funds.

For the full story, click here

Exchanges Duel With Newcomers Over Trading Transparency; Payment for Order Flow Debate Reply

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June 26, By Nathaniel Popper

MarketsMuse Editor Note: In what might prove to be the catalyst for even greater scrutiny of securities industry practices re market transparency, below extracts of article from front page of NY Times June 26 Business Section i.e. profile “lit” v. “dark” liquidity centers–and the nuances by which investor order flow is administered, and the impact on market integrity makes for a good read.

While most people trading stocks at home imagine their orders zipping from their brokers onto one of the nation’s stock exchanges, almost none of the trades go anywhere near those public markets.

In reality, most trades placed through online brokers like TD Ameritrade and Scottrade are sold to Wall Street firms, which accumulate and trade against tens of millions of these shares a day, rather than send them to a regulated exchange like Nasdaq or the New York Stock Exchange. The Wall Street firms then quickly flip them and turn an easy profit because they have more resources and market knowledge than mom-and-pop investors.

The trading, which takes place away from the gaze of regulators and the public in what are known as the dark markets, has taken off in recent years and steadily eaten into the portion of all stock trading that takes place on the public exchanges. Now, though, the exchanges are fighting back by looking to create dark markets of their own.

NYSE Euronext, the company that owns the exchange, is asking regulators to approve a new platform that would attract orders from ordinary investors and then divert them away from the normal exchange with the aim of getting the investor a better price. Nasdaq and the exchange company Direct Edge said they have similar plans in the works.

The proposal looks like a technical tweak to help ordinary investors. But it has become the front line in a battle over what the nation’s stock markets should look like after nearly a decade of fragmentation has resulted in over a third of all stock trades occurring in the dark, up from 15 percent in 2008, according to Rosenblatt Securities, a brokerage firm.

In the past, the exchanges have pushed regulators to force the dark markets to become better lit, but James Allen, the head of capital markets policy for the CFA Institute, said that with the new proposals the exchanges are acknowledging “that if you can’t beat them, join them.”

The practice [payment for order flow] took off after a series of regulatory changes over the last decade made it easier to trade off exchanges and more expensive to trade on exchanges. Today, four firms — Knight Capital Group, UBS, Citigroup and Citadel — have made a business out of paying for retail trades and trading against them. These firms generally pay retail brokers 15 cents for every 100 shares they are sent to trade against, industry experts say.

“…The retail brokers contend that the internalizers allow them to get the quickest and best execution for their customers…” More…

MLPs: What You Didn’t Know-ETP Insight From An Expert Reply

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Chris Hempstead, WallachBeth Capital

It took only 18 months for assets in MLP exchange traded products to grow from almost nothing to nearly $7.5bb.

What’s more amazing is that while the number of ETPs available in the market has grown significantly, nearly all of the inflow of assets into MLP ETPs has been captured by only 2 funds:

AMJ-JPMorgan Alerian MLP Index ETN $4.2bb assets under mgmt.

AMLP-Alerian MLP ETF $3.25bb assets under mgmt.

This success story has recently attracted more funds into the space and we expect that trend to continue.

The most recent launches in the MLP space are YMLP (Yorkville High Income MLP ETF) and the MLPA (Global X MLP ETF).

Here is the twist that precipitated this note: JPMorgan has announced (June 14) that they will cap the issuance in AMJ at 129mm notes.

This will bode well for the ETFs tracking the MLP space. A brief explanation below may help shed light on this.

When an ETP no longer allows for creations, the fund starts to trade like a closed end fund. The reasoning behind this is that the arbitrage mechanism which allows market makers to sell the ETP is no longer available. Without the ability to create, market makers may be less inclined to sell the fund short versus a hedge of the underlying assets.

It should be noted that this is only a cap of notes issued. Should the fund reach the cap (we expect it will very soon) and redemptions follow, the fund would allow creates until it reached the cap again.

So what happens now?

We simply wait and see. When AMJ reaches the maximum threshold, we will closely monitor the availability of AMJ notes available in stock loan as well as any premium in the funds pricing on the secondary market.This could bode well in the short term for existing holders of AMJ as the fund will likely trade at a premium once the creation facility is shut down. Early investors would not have expected this so it’s a win for them.

That being said, once this happens I expect investors looking at MLP ETPs will be drawn away from the AMJ ETN and towards the ETFs mentioned above. Why? With the creation facility wide open in ETF funds like AMLP, YMLP and MLPA we expect them to trade and track at or close to their respective net asset values. More…

ETFs Passive No More in Challenge to $7.8 Trillion Market Reply

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By Christopher Condon on June 26, 2012

Exchange-traded funds are posing a new threat to the $7.8 trillion market for active mutual funds by challenging the notion ETFs are only good for tracking benchmarks.

The $552 million First Trust Health Care AlphaDex Fund (FXH) (FXH), offered by Wheaton, Illinois-based First Trust Portfolios LP, follows an index that selects and weights U.S. health-care stocks based on a proprietary mix of financial measures such as sales growth and return on assets. Since its creation in 2007, the ETF has beaten the S&P 500 Health Care Index — 52 stocks chosen to broadly represent the industry — by almost 6 percentage points a year, and the actively managed Fidelity Select Health Care Portfolio by 3 percentage points annually.

“This isn’t an ETF that’s trying to track a benchmark,” Todd Rosenbluth, an analyst at research firm S&P Capital IQ in New York, said in an interview. “Its aim is to beat it.”

The AlphaDex fund is one of 155 ETFs, collectively holding about $12 billion, that are blurring the line between active and passive investing and threatening to further erode the market share of traditional stock and bond mutual funds. Unlike their passive peers, which use broad indexes to match a benchmark’s return, their goal is to capture outperformance, or alpha. While their assets are still a tiny slice of the fund industry, the payoff for such ETFs is potentially enormous: The pool of money chasing market-beating returns is almost four times larger than the $2.1 trillion held by investors in passive products.

Pimco ETF

Asset managers for years have pondered how to effectively combine the security-selection element of actively managed mutual funds with the tradability, tax advantages and other efficiencies of ETFs. Most have been dissuaded by the product’s necessity to reveal its holdings daily, which allows dealers to create new shares by delivering large baskets of a fund’s underlying securities to the ETF.

Active managers, especially those focused on equities, say that transparency would make it too easy for others to front-run their movements or simply copy them without paying to be in their fund. Some firms, including BlackRock Inc., the world’s biggest ETF provider, have asked permission from the U.S. Securities and Exchange Commission to introduce active ETFs that don’t reveal holdings daily. The agency hasn’t approved any such plans. More…

J.P. Morgan Alerian Fund ETN (AMJ) Already Shows Premium Reply

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  • Brendan Conway, June 22, 2012, 11:16 A.M. ET

The popular exchange-traded note whose share issuance was capped last week by J.P. Morgan Chase (JPM) is already trading at a premium. Investors who hold the JPMorgan Alerian MLP Index exchange-traded note (AMJ) can either cash out now with unexpected profits or they can ride the note’s unusual mechanics higher in hopes of even bigger gains.

But the outcome behind Door #2 is unpredictable. Nobody wants to be holding the bag if JPM suddenly reopens new shares. J.P. Morgan hasn’t said whether it will take that step. But if it does, the investment’s premium, which resembles what you see in closed-end funds, would collapse in a hurry. That’s a risk that investors will bear if they stick with this tracker of rich-yielding master limited partnerships.

The crux of the issue is that AMJ is no longer just a bet on master limited partnerships. It’s also a bet on what other investors who hold or want to hold the same J.P. Morgan note will do.

At the moment, there’s a 45-cent premium in AMJ’s market price versus the underlying assets, or about 1.2%. It will get bigger if more investors pile in.

“This is a free gift. But how long do you watch the premium build before you sell the shares out? It’s a question that the owners of AMJ have to ask themselves,” Chris Hempstead, a director at WallachBeth Capital tells Barrons.com.

Blackstone’s GSO Preps Leveraged-Loan ETF With State Street Reply

ETF News

Published June 21, 2012

Dow Jones Newswires

Blackstone Group (BX) unit GSO Capital Partners has filed paperwork to launch the first actively managed exchange-traded fund dedicated to high-yield corporate loans, apparently sensing demand for floating-rate loans secured on company assets amid exaggerated price swings in fixed-rate “junk” bonds.

GSO, based in New York, filed preliminary registration papers for the “leveraged” loan ETF and is waiting for the Securities and Exchange Commission to approve the project. The manager of $51 billion in credit assets is acting as a sub-adviser to giant ETF provider State Street Global Advisors.

Peter Rose, a spokesman for GSO, declined to comment. Marie McGehee, a spokeswoman for State Street, also declined to comment.

According to an April 20 filing, the investment objective of the SPDR Blackstone/GSO Senior Loan ETF is to outperform a commonly used loan index, the S&P/LSTA U.S. Leveraged Loan 100, by “normally investing at least 80% of its net assets … in senior loans.”

Short TVIX: The Ultimate VIX Contango Trade Reply

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ETF Edge pictureJune 19, 2012

Contango is Back

The volatility futures curve is back in strong contango, and with it an opportunity to profit from the short trade on volatility linked ETFs/ETNs. For a primer on this trade, see previous articles here and here, but in short it’s an attempt to profit from the bias of investors to believe that market volatility in the future will be greater than it is in the present – essentially a fear of the “unknown unknowns”.

A Better Way to Play

In the past, I have advocated the use of short (VXX) or long (XIV) as ways to profit from steep contango, but there is, in my opinion, a more compelling way to profit from contango, short (TVIX).

is a 2x leveraged version of the VXX which should, in theory, return 2x the daily gains or losses of VXX or similarly structured funds.

However, as many have observed the TVIX had a pretty wild ride this spring. For those not familiar with the fund, in February the fund’s sponsor Credit Suisse temporarily halted creation of new units of the fund in response to skyrocketing demand and ballooning risk exposure for CS. Halting the issuance of new shares broke the mechanism that tends to keep funds trading in line with underlying value, and in a tulip mania moment, the market bid the price up to an 89% premium to fair value in just a few weeks. About a month later, when the sponsor resumed issuing shares on a limited basis, shares traded down sharply and more in line with fair value. More…

State Street Introduces 2 New Corporate Bond ETFs Reply

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By Benzinga.com

State Street’s STT -0.55% State Street Global Advisors unit, the second-largest U.S. ETF sponsor, will introduce two new bond ETFs on Tuesday.

The SPDR BofA Merrill Lynch Crossover Corporate Bond ETF will track an index that offers exposure to dollar-deonominated U.S.-issued BBB and BB-rated corporate debt. BBB is the lowest investment grade rating and BB is a non-investment grade rating.

Qualifying securities must have at least one year remaining term to maturity, a fixed coupon schedule and a minimum amount outstanding of $250 million. Original issue zero coupon bonds, 144a securities, both with and without registration rights, and pay-in-kind securities, including toggle notes, qualify for inclusion. Callable perpetual securities qualify provided they are at least one year from the first call date. Fixed-to-floating rate securities also qualify provided they are callable within the fixed rate period and are at least one year from the last call prior to the date the bond transitions from a fixed to a floating rate security, according to XOVR’s prospectus.

SSgA will also introduce the SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF . Other ETF sponsors have already found success with emerging markets corporate bond ETFs, a fact that could either bode well for the SPDR BofA Merrill Lynch Emerging Markets Corporate ETF or indicate the ETF is late to the party.

The WisdomTree Emerging Markets Corporate Bond Fund EMCB +0.42% , which debuted in March, now has almost $60 million in assets under management. The iShares Emerging Markets Corporate Bond Fund (bats:CEMB), which debuted in April, has over $10 million in AUM.

Expense ratios were not included in the prospectus for either XOVR or EMCD.

Junk ETF Bond Volumes Signal Electronic Demand Reply

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by Lisa Abramowicz

Trading of exchange-traded funds that focus on junk bonds is soaring while volume in the underlying securities slumps as dwindling dealer holdings prompt investors to seek electronic platforms.

Volumes in the two biggest ETFs in June have climbed 22 percent above the six-month average while overall trading for the debt has sunk 9 percent, according to data compiled by Bloomberg. A record $1.67 billion of shares was traded May 31 in the funds from BlackRock Inc. (HYG) and State Street Corp. (JNK), equivalent to 35 percent of the day’s total volume for U.S. junk debt.

“Hedge funds and individual investors recently may be able to articulate a trade more efficiently” through ETFs rather than the actual bonds, said Jason Rosiak, head of portfolio management at Pacific Asset Management, an affiliate of Pacific Life Insurance Co. in Newport Beach, California. “That could be considered an indictment on the bid-offer spread increasing due to dealers not taking a significant amount of risk.”

As trading becomes more difficult in the bonds, people will say trading in ETFs is more efficient,” said Chris Hempstead, director of ETF execution at WallachBeth Capital LLC in New York. “By trading the ETF, you’re transferring the onus for trading the bonds onto someone else.” More…

Goldman Highlights ETF Correlations (XLF, XLK, XLU) Reply

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By Benzinga.com

In a note out today, Goldman Sachs GS +1.96% said investors are continuing to increase usage of ETFs as hedging tools, a move that is “creating unintended consequences to their portfolios.” Goldman notes that managers and analysts are increasingly creating less-than-desirable hedges due, in part, to surprisingly high correlations among some sector funds.

“We see high trailing 3-month daily correlations among less-than-obvious pairs of sectors, including: Financials & Industrials, Tech & Discretionary and Materials & Discretionary,” Goldman said.

The recent performances of the various Select Sector SPDR funds indicate that Goldman’s note highlights valid points. In the past three months, the Financial Select Sector SPDR XLF +1.43% is down 9.7% compared to 8.8% for the Industrial Select Sector SPDR XLI +0.86% . The three-month gap is wider between the Technology Select Sector SPDR XLK +1.06% and the Consumer Discretionary Select Sector SPDR XLY +0.98% , which are down 5.8% and 3.3%, respectively. Over the past three months, the Materials Select Sector SPDR XLB +1.16% is down 7.5%.

“Indeed, of the 36 sector ETF pairs we examined, correlations on a 3-year basis are higher than 70% for 31 of the instances, emphasizing the importance for portfolio managers to choose sectors wisely when hedging at specific points in time,” Goldman said in the note. More…