Options traders are paying the most in two months to protect against drops in the largest Chinese exchange-traded fund in the U.S. on concern a local money-market cash crunch will deepen a slump in Asia’s biggest economy.

The cost of three-month puts on the iShares FTSE China 25 Index Fund (FXI) soared to the highest since September last week, option data compiled by Bloomberg showed. The 4.3-point premium of puts over calls was the widest since April 17. The Bloomberg China-US Equity Index of the most-traded Chinese stocks in the U.S. slumped the most in four months last week, led by a 16 percent drop in Yanzhou Coal Mining Co.

The Hang Seng China Enterprises Index declined the most in a month last week after Morgan Stanley joined banks from UBS AG to Barclays Plc in lowering predictions for China’s economic growth. The Finance Ministry failed to sell all of the debt offered at an auction for the first time in 23 months and the one-year interest-rate swap climbed to the highest level since 2011 as banks hoarded funds, causing a cash squeeze in the interbank market.

“People are pretty nervous about what we’ll find out once liquidity is withdrawn,” Derrick Irwin, a portfolio manager of the Wells Fargo Advantage Emerging Markets Equity Fund, who helps manage $10.9 billion of assets in Boston, said June 14. “We haven’t seen action from China’s central bank and there’s curiosity from investors on what happens to the liquidity from the Federal Reserve as well. Markets that have really thrived on large amounts of global liquidity have struggled.”

ETF Plummets

The iShares China ETF plunged 4.7 percent last week in New York to $33.98, the steepest slump in a year. The Standard and Poor’s 500 Index lost 1 percent for the week to 1,626.73 as investors scrutinized economic data to determine whether growth in strong enough to prompt the Fed to scale back stimulus measures before its two-day policy meeting this week.   FOR THE COMPLETE BLOOMBERG LP STORY, PLEASE CLICK HERE

Companies that buy back their own shares have tended to be good stocks to buy in recent years, a trend that has benefited PowerShares Buyback Achievers   (NYSE: PKW).

The returns of this exchange-traded fund, whose 200-plus U.S. stocks mirror the Nasdaq US Buyback Achievers Index, have beaten the Standard & Poor’s 500-stock index since early 2009, and during the 2008 meltdown. Companies represented in the index and fund are those that have repurchased at least 5% of their shares over the previous 12 months.

Corporations are eager to buy back their publicly traded shares. When there are fewer available shares and investor demand is strong, the combination can boost a company’s stock price.

Famed investor Warren Buffett pointedly uses Berkshire Hathaway Inc.’s cash to take its shares off the market when he doesn’t see ways to put the money to better use. Michael Rawson, a fund analyst at investment researcher Morningstar Inc., observes, “Companies that consistently buy back their own shares tend to be good stewards of capital.”

Some investors would prefer dividends, but research and performance lend support to buybacks.

While the 0.71% expense ratio of the PowerShares fund is costly for an ETF, the fund has delivered a 10.2% annualized gain over the past five years, trouncing the S&P 500′s 5.4% average gain including dividends.

So far this year, the ETF is up 20.2% versus a 15.4% total return for the S&P 500.

The $611 million ETF weights its shares by market cap. Around 23% of assets are in tech giant Oracle Corp., oil major ConocoPhillips, biotech leader Amgen Inc., insurer American International Group Inc. and media giant Time Warner Inc.

Mr. Burton is a writer and editor at MarketWatch in San Francisco. He can be reached at jburton@marketwatch.com.

IPO research and investment specialist Renaissance Capital is to launch its first exchange-traded fund, according to a regulatory filing made with the US Securities and Exchange Commission (SEC).

The proposed fund, the Renaissance IPO ETF, will track the firm’s own index of newly-listed securities on US exchanges and will normally invest up to 80 per cent of its total assets in securities that make up the benchmark index.

According to the regulatory filing, the index is comprised of common stocks, depositary receipts and operating units of newly public US exchange-listed companies. These companies may include foreign companies that are listed on a US exchange. Companies are considered to be newly public if they have completed an IPO in the last 500 trading days.

Corporate bond exchange-traded funds attracted investors in record numbers during the credit bull run of the past three years. They also attracted criticism for trading with more volatility than the bond markets they were designed to track. With the selloff in Treasury bonds rattling credit markets, those concerns are proving well founded.

BlackRock’s iShares iBoxx $ Investment Grade Corporate Bond Fund has delivered a one-month total return of negative 2.98%, according to Morningstar. That compares to a total return of negative 2.06% for the widely followed Barclays Investment Grade Corporate Bond Index. An index of more liquid investment grade bonds run by iShares delivered a negative 2.67% return over the same period.

The higher volatility of the ETFs in softer bond markets reflects the “inherent limitations of the ETF investment vehicle,” says James Lee, a senior analyst covering high yield at Calvert Investment Management Inc.

Because ETFs cannot hold large cash positions to cushion market swings, they become forced sellers of bonds when investors sell out and forced buyers when investors buy new shares. That dynamic lends itself to heightened ETF volatility in bond markets where securities trade less often, and with wider bid-ask spreads, than exchange-traded stocks and commodities.

A proposal to reform the taxation of financial instruments would dramatically change the tax treatment for options strategies, potentially decimating trading volumes by as much as 40%. And it is not the so-called ‘fat cats’ of Wall Street that will be impacted by the proposal; instead, the biggest impact will be felt by asset managers and Mom and Pop investors.

The US listed options market is under attack. And if Washington politicians have their way, it is destined to become a mere shadow of its current form, with far-reaching implications for the financial industry and end users such as retail and institutional investors.

The danger lies in a proposal put forth by Representative David Camp (R-Mich.), Chairman of the House Ways and Means Committee, that contains a number of provisions intended to reform the taxation of financial instruments. Of particular interest to options market participants are proposals that dramatically change the tax treatment for strategies incorporating the use of options that have been a mainstay of the business since its inception in 1973.

The proposal will potentially decimate trading volumes, with total industry volumes seeing a decline of as much as 40% if the proposal is implemented in its current form. And it is not the so-called “fat cats” of Wall Street that will be impacted by the proposal. It is also not targeted at toxic flow that is perceived as having a discernible edge over other investors.

The Camp proposal impacts both retail and institutional demand for options. The biggest impact will be felt by asset managers and Mom and Pop investors that are increasingly using options to earn premium income and manage price risk in their equity holdings. TABB Group estimates that in 2012 retail investors accounted for 14% of total US options volume, with traditional asset managers and hedge funds accounting for an additional 38% of the total. It is volume from these two segments that will be impacted the most by the new tax scheme and, given their critical role in the options market, any tax law changes impacting demand from these two segments needs to be closely analyzed.

Rep. Camp’s proposal may be well-intended, but it is the unintended consequences that will decimate the options market. Surprisingly, it is not exotic options strategies designed to avoid taxes that are the focal point of the reform. Instead, the proposal targets plain vanilla listed options strategies used by main street investors that have begun to embrace options as a way to earn income or to hedge equity ownership.

Under current law, losses and gains resulting from options trading are treated as either long- or short-term capital gains, depending on the type of option and strategy. However, the Camp proposal treats these same transactions using a drastically different framework and includes a number of provisions that will result in many common options strategies triggering a taxable event on underlying holdings of equities. For example, if an investor holding appreciated stock writes a call, the stock will be treated as sold and tax would be due on the gain. The same situation occurs when the investor buys a put to hedge against a decline in the stock.

The Camp proposal, however, treats losses somewhat differently than gains. If there is a loss in the stock when an option transaction occurs, the loss cannot be realized until the underlying stock is sold. It seems that Washington wants to have its cake and eat it, too.

Clearly, investors will think twice about using options to either earn premium or hedge their risk, something the proposal seems not to take into account. Not only will investors be subject to immediate tax liabilities, they will also need to maintain scrupulous records for year-end tax and accounting purposes. Once the taxable event occurs, the cost basis for the stock needs to be adjusted. Imagine the level of recordkeeping a stock holder using a monthly covered call writing program would need to collect and maintain? The complexity only gets worse. How does an investor allocate shares if he only buys puts or writes a call on a portion of his position?

The recordkeeping nightmare associate with current tax laws will seem like utopia if these new rules were to kick in. The prospect of the new rules alone is enough to create mind-numbing fear for investors and send chills up the spine of accountants who will certainly see added business in the months and years following any potential implementation of such a rule.

Even though the Camp proposal may not dissuade all investors from using these options strategies, it will have a chilling effect on retail and institutional investors. Although the use of puts as a hedging tool accounts for a minor portion of activity for these sectors, the use of covered call strategies accounts for a much greater share of activity. Under the new rules, there will be little benefit in using premium strategies to earn income and even less desire to use puts to hedge a portfolio.

US options markets are deep, liquid and provide a vast array of market participants with a powerful tool they can use to manage exposures. Volume has remained strong throughout the financial crisis, as investors flocked to the market as a way to manage risk and earn income, and as an efficient way to take directional exposure. But US options market’s very existence is being threatened by misguided tax policy contained in Representative Camp’s proposal.

The options industry needs to continue its efforts to educate Washington on the valuable benefits listed options provide to investors. One such effort is being driven by a coalition of exchanges and the OCC, which are actively working to educate politicians and staffers that are drafting the proposed tax legislation. Its comment letter delves in much greater detail into the types of options strategies impacted by the Camp proposal and is a must-read for all options market participants.

Yield generation has been a hot topic as investors look for alternative income sources in a low-rate environment. ALPS with Rich Investment Solutions recently launched an exchange traded fund that seeks to provide income through a sophisticated options strategy.

The U.S. Equity High Volatility Put Write Index Fund (HVPW) tries to reflect the performance of the NYSE Arca U.S. Equity High Volatility Put Write Index, which tracks a portfolio of exchange-traded put options on the largest capitalized stocks that have listed options with the highest volatility.

HVPW has a 0.95% expense ratio. The fund was launched early March and made a roughly $0.38 distribution on April 29. Distributions will be made every two months, six times per year. If distributions remain relatively the same, the ETF could generate a 9% annual yield.

“HVPW is an income-generating fund,” Kevin Rich, president and founder of Rich Investment Solutions, the subadvisor of HVPW, said in an Investor’s Business Daily article. “The fund creates income by selling 15% out-of-the-money put options every two months on 20 underlying stocks with the highest implied volatility and market capitalization over $5 billion. Selling puts is a very efficient and popular way to generate income in the equity markets.”

Put options allow a buyer the right, but not the obligation, to sell a specific quantity of a security at a set strike price, or exercise price, on or before an agreed expiration date. The put option buyer would pay the seller a premium for this right to sell. HVPW generates income through these premiums.

HVPW holds T-bills and sells options on 20 high-volatility stocks — high volatility helps maximizes the potential income or premiums garnered through put options. Specifically, the put options sold are 15% “out of the money” — the strike price is lower than the market price — in each of the 2 month periods.

For the full article courtesy of SeekingAlpha, please click here

Central bankers are planning on continuing to boost equity exposure via exchange traded funds. The Bank of Japan, among many others, plans to double exposure to stock ETFs over the course of the year, as falling bond yields disappoint.

Central bankers around the world have been putting direct investments into equity markets. This accounts for about $11 trillion in foreign exchange reserves, reports ETF Guide. A survey taken last month of 60 central bankers revealed that about 23% of them expect to raise their level of stock exposure, according to the Royal Bank of Scotland Group.

For example, The Bank of Japan, second-largest holder of reserves, plans on doubling investment into the iShares MSCI Japan ETF (NYSEArca: EWJ) to 3.5 trillion yen, equal to $35.2 billion, by 2014. In addition to the exchange traded fund purchase,  the BOJ will also buy Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of about 1 trillion yen and about 30 billion yen respectively.

Other central bankers that are hot on equities include the Bank of Israel, Czech National Bank and Swiss National Bank. All three have already raised equity exposure to about 10% of reserves so far.

For the full story courtesy of ETF Trends, please click here

Chris Hempstead, WallachBeth Capital

This week we saw 2 large creates in funds we don’t hear much about. The first was FBG (FI Enhanced Big Cap Growth ETN) with what looks to be about a $600mm creation on Monday. The second worth mentioning was the ESR (iShares MSCI Emerging Markets Eastern Europe) with a roughly $100mm creation on Tuesday.

There were some very heavy directional flows today despite lighter volume on the pre-holiday Friday.
Equities: Inflows today were clear in VUG (Vanguard Growth), VTV (Vanguard Value), IJH (iShares Core S&P MidCap and XLP (Consumer Staples Select Sector SPDR).

Where there are inflows there are also outflows and here they are: EEM (iShares MSCI Emerging Markets), VWO (Vanguard FTSE Emerging Markets), FXI (iShares FTSE China 25), AAXJ (iShares MSCI Asia Ex-Japan), EPP (iShares MSCI Pacific Ex-Japan) and EWH (iShares MSCI Hong Kong).

Fixed Income: The fun didn’t stop at the equities level. MINT (Pimco Enhanced Short Maturity), SHY (iShares Barclays 1-3 Year Treasury) and HYG (iShares Iboxx High Yield Corp); all had nice inflows today.
On the flip side, we saw heavy outflow in EMB (iShares JP Morgan Emerging Market Bond), SHV (iShares Barclays Short Treasury) and JNK (SPDR Barclays High Yield).

Given the Memorial Day Weekend and Holiday, I wanted to be one of those stock market guys who throw out stats that don’t actually tell you anything except what markets did in the past.  So I looked at the S&P performance for 1 month following the Memorial Day Holiday back to 2005. Do you know what I saw?  Nada!  Except for a rough patch in 2008 (-7.5%), I wasn’t really sensing anything worth analyzing and little or no trend. SO, just in case you were wondering, now you know.

My gift to you for the start of grilling season is a special dish I invented during a power outage (I had to cook the stiff that was defrosting): A few lbs of thick cut or slab bacon, seasoned heavily with Cajun spices.

·        Place the seasoned and dry rubbed bacon slices on a grill over medium heat and slowly cook, and regularly flip.

·        Move the slabs and lower the heat if flare ups get out of control. You can also use foil to avoid flare ups but you will lose some charring if you choose this method. Do your best to avoid burning these babies. The true magic is the slow and steady cooking.

·        Bring a cold beer outside and work the grill. You will not believe how delicious a well-done seasoned piece of slab bacon tastes.

I am reading a book about anti-gravity. I can’t put it down.
Happy Memorial Day!

MidAtlantic Trust Company said it had resolved record-keeping problems that have kept exchange-traded funds from being part of holdings in 401(k) and other retirement plans.

The state-chartered trust company said it has resolved a problem with fractional shares that result from trading in ETFs that have kept such funds from being kept in retirement plans. The firm said it will buy and sell whole shares in the market and hold fractional shares as necessary. This will allow “dollar certain” transactions that until this have prevented the information systems that keep track of funds from recognizing and tracking ETF shares.

Shares will be bought at end-of-day prices, allowing same-day settlement for record-keeping purposes. Mutual funds historically have determined the value of their assets at the end of each trading day, for their investors. ETFs, however, follow the three-day settlement cycle of equities markets.

In postings to its Web site, MidAtlantic said this will “allow record keepers the ability to handle ETFs using the same systems and processes they already have in place for trading mutual funds.’’

A technology unit of the company, Mid Atlantic Financial Platforms, has introduced what it calls the ETFxChange, to resolve the record-keeping issues and spur their use in retirement plans.

Shares of ETFs from BlackRock’s family of iShares products, as well as ETFs from PowerShares, Wisdom Tree, State Street and Vanguard also can be handled by the system. Stadion Money Management in Watkinsville, Ga., confirmed that it will use the platform on behalf of its customers.

Roughly 90% of the assets under management at Stadion are placed into exchange-traded funds, according to vice president and portfolio manager Will McGough. But, until now, participants in the plan only see that a portion of their assets are held in the Stadion 2010 Target Date Fund, for instance. Now, investors will see the individual ETFs being bought and sold, as McGough or another manager allocates the purchases or sales across all participants.

Two-thirds of the assets placed in funds managed by Stadion are held in qualified retirement plans, McGough said.

MidAtlantic also launched a related ModelxChange that allows money managers, investment advisors and plan record-keepers to create and maintain investsing models for 401(k) plans that mix ETFs with mutual funds.

BOX Options Exchange, the third- smallest of 11 U.S. options venues, will be the first to begin trading larger-size contracts on the most-active U.S. equity derivatives product, according to a company executive.

BOX will list and trade contracts based on 1,000 shares of the SPDR S&P 500 ETF Trust starting May 10, according to Ed Boyle, senior vice president for strategy at the Boston-based exchange. The so-called jumbo options, approved May 3 by the Securities and Exchange Commission, will be 10 times larger than existing contracts on the Standard & Poor’s 500 Index exchange- traded fund, known by the ticker symbol SPY.

The contract is designed to give institutional investors another way to trade the S&P 500 at a time when many asset managers are increasing their use of ETFs as part of their investment strategies. Institutions often use larger-size contracts like S&P 500 options that enable them to buy or sell bigger positions without signaling their intentions and moving the market.

“We see customer demand for the product because it offers flexibility to institutions and traders looking for larger notional size in trades,” Boyle said by phone. “It also provides additional price competition across indexes and ETFs.”

The contracts, which will be a separate product from the regular-size options based on 100 shares of the S&P 500 ETF, also offer an alternative to indexes such as the S&P 500, which trades exclusively on the Chicago Board Options Exchange, Boyle said.    For the full story from Bloomberg LP, click here.