Tag Archives: ETFs

ETF News, People Profiles

James Grant: Short $LQD Before Bonds Fall

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indexuniverseCourtesy of Olly Ludwig

Sooner or later the bond market is going to start falling, and a perfect exchange-traded vehicle to play the unraveling of the more than three-decade rally in fixed-income markets is “LQD,” a corporate bond fund that happens to be one of the largest fixed-income ETF in the world, James Grant told attendees at IndexUniverse’s Inside ETFs conference this week.

But Grant, the editor and publisher of Grant’s Interest Rate Observer, said that while he is short the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD), it’s terribly difficult to time such trades, as markets are “unreliably efficient” and “reliably inefficient” and, moreover, the Federal Reserve’s loose-money policies since 2008 essentially mean that interest rates are not in a free market.

Grant’s comment about LQD came in response to a question from IndexUniverse Chief Executive Officer and founder Jim Wiandt, who introduced Grant and asked what investors—faced with the prospect of the end of a secular bull market in bonds since the early 1980s—should now do.

“Short,” said Grant. “I’m short something called LQD.”  The ETF, the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD) is quite liquid and has $24 billion in assets under management.

Grant, a longtime critic of the Fed and a proponent of a return to the gold standard, was the grand finale at the 6th Annual Inside ETFs conference, which took place in Hollywood, Fla. from Feb. 10-12. The event, which has become the see-and-be seen event in the world of ETFs, was attended by nearly 1,300 people, most of them financial advisors and fund sponsors. Continue reading →

ETF News

BlackRock Chief Says Investors Using ETFs to Buy Stocks

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etftrends logo imagesCourtesy of Tom Lydon

Exchange traded funds are one of the most popular vehicles that investors are using to buy stocks. Passive funds tracking U.S. stocks are gaining popularity as equity markets are on the mend, according to BlackRock’s chief executive.

“What we are seeing, and the industry overall, are still a majority of flows moving more into passive,” Larry Fink, CEO of New York-based BlackRock (NYSE: BLK), said in a recent report. [BlackRock Sees Secular Shift to ETFs]

BlackRock’s ETF suite iShares had attracted $759 billion in ETF inflows. Stock ETFs for iShares drew in $30.1 billion in inflows over the fourth quarter of 2012 alone, reports Alexis Leondis for Bloomberg. Active stock funds lost $5.4 billion over the same time period. [ETFs Boost BlackRock Profit]

Last week, equity based mutual funds drew in $17.8 billion in new money, the highest since 2007. The U.S. equity market had been dodged since the financial crisis in 2008. Institutional investors generally favor ETFs, while retail investors still favor mutual funds. This pattern is expected to tilt with more individual investors using ETFs as the tax benefits and lower fees become more evident.

“Analysts agree the big sums moving into stock-based mutual funds represent a change from last year, when investors yanked a total of $129 billion out of equity funds while pouring $258 billion into fixed-income funds,”Johanna Bennett wrote for Barron’s.

“I’m not here to say people are bullish and rerisking,” Fink said. “If they’re not bearish on the world, but not bullish, they probably have overallocation to bonds, and they’re probably looking and re-orienting that.” Continue reading →

ETF News, Strike Price

ETF New Rules: SEC Says Derivatives for Actively-Managed ETFs…

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etfdb images Courtesy of Back in March of 2010, the SEC began a review of the use of derivatives by ETFs, specifically actively-managed and leveraged funds. Norm Champ, Director of the SEC’s Division of Investment Management, stated that “The use and complexity of derivatives have grown significantly over the past two decades and have given rise to many interpretive and policy issues under the 1940 Act.”

But after over two years of analysis and review, the SEC finally made its decision last week: fund companies are now able to seek regulatory permission to include derivatives in actively-managed ETFs. There are, however, explicit stipulations that fund managers must adhere to [see also Actively-Managed ETFdb Portfolio ETFdb Pro Members Only]:

  1. The ETF’s board must periodically review and approve the ETF’s use of derivatives and how the ETF’s investment advisor assesses and manages risk with respect to the ETF’s use of derivatives.
  2. The ETF’s disclosure of its use of derivatives in its offering documents and periodic reports is consistent with relevant Commission and staff guidance.

The SEC stressed that it will continuously review this issue, but in regards to decisions concerning the use of derivatives by leveraged exchange-traded funds, they are still hesitant to grant permission. Champ expressed his concern over these powerful products, stating that “Because of concerns regarding leveraged ETFs, however, we continue not to support exemptive relief for such ETFs.”

What Does This Mean For ETF Investors?

Derivative use has been a touchy subject for many investors, as these powerful instruments have led to some of the worst financial disasters of all time. On the other hand, they have also provided lucrative opportunities for those with the knowledge and in-depth understanding of how exactly these products work. But will using derivatives in actively-managed ETFs do more good or harm for investors? Unfortunately, the most reasonable answer is that only time will tell. Below we outline the top five actively-managed funds that investors may want to keep a close eye on [filter by active/passive and other fields with the free ETF Screener]:

Ticker ETF Expense Ratio AUM
BOND Total Return Exchange-Traded Fund 0.55% $3.9 billion
MINT Enhanced Short Maturity Strategy Fund 0.35% $2.1 billion
ELD Emerging Markets Local Debt Fund 0.55% $1.5 billion
ALD Asia Local Debt Fund 0.55% $462 million
CEW Dreyfus Emerging Currency Fund 0.55% $276 million
 *As of 12/13/2012

[For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb P

ETF News

Knight Capital and ETFs.. Setting the Stories Straight.

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indexuniverseexcerpt from Olly Ludwig’s Nov 30 column

You might think that having Knight Capital in play could be a threat to ETF trading. Luckily it’s not.

Still, it struck me that thinking through the possibilities surrounding an acquisition of Knight by Getco or Virtu is a worthwhile exercise.

After all, Knight is the biggest ETF market maker out there, and if Knight’s transition to new ownership is fraught with unexpected twists and turns, does that mean that many exchange-traded funds, especially the smaller, less liquid ones Knight shepherds, won’t get the love they need to trade cleanly?

Specifically, I found myself wondering if ETF trading would be adversely affected if Reggie Browne and his team at Knight don’t land on their feet but rather somewhere else on the Street.

If you’re wondering who Reggie Browne is, you need to read Ari Weinberg’s story in Forbes about Browne. Calling Browne “The Godfather of ETFs” did elicit derisive guffaws in some pockets of the ETF industry, but the piece makes an important point: Knight and Browne are big fish in ETF trading.

Knowing that makes the acquisition of Knight by Getco or perhaps Virtu entirely understandable. What upstart trading firm wouldn’t want that feather in its cap? It would be a strong signal that whoever ends up buying Knight has grown up and moved out of the sandbox and into the shark tank.

Incidentally, our thinking here at IndexUniverse on this potential acquisition of Knight is that this is pretty much a corporate story, that Browne and his team are likely to make a smooth transition to wherever they end up, and the world of ETF trading really won’t be affected whatsoever (MarketsMuse editor note: MAYBE)

Still, as I said, I thought it might be worthwhile to look at the story behind the story.

And the crux of that story is that the ETF trading operation—that is, Reggie and his team—is a huge piece of the motivation to do this deal.

MarketsMuse Editor Note–the full IndexUniverse article can be viewed here—but before clicking away..read  a superb comment on that article–and its worth re-broadcasting:

One critical observation that has NOT been made re: role of ‘Godfather Knight’ (or any proprietary trading firm) within the ETF landscape: Knight is a Market-Making firm–NOT a broker. Brokers work as fiduciary agents For customers, market makers (aka MMs) trade Against customers’ best interests. This is NOT a slanted bash on MMs. Having been one for many years (as well as having been a major exchange specialist—a now antiquated role that mandated putting customer interests ahead of all else), MMs Absolutely Do Perform an Integral Role within the ecosystem….. But, MMs (Knight and all others) trade at risk when it suits THEIR profit purpose, not because of an altruistic desire to simply facilitate a customer’s investment/trading strategy.

Given the massive institutional use of ETFs, PMs and RIAs, as well as their custodians should [hopefully] hold themselves to a particularly high fiduciary obligation to secure the best available price in the marketplace when buying/selling. If only evidenced by the ongoing attention on Knight, it would seem that many investors (or maybe its just the media) have yet to focus on the notion of aggregated prices and better brokers who systematically canvass all ‘liquidity centers” to capture the best aggregated price based on all of the players interests. It really is that simple, but few people want to deliver this message for various political reasons.

In the ETF world, MMs “accommodate” a customer order ONLY if/when (i) they have first determined that they can capture a risk-free ‘spread’ that exists either at a ‘dark pool’ accessible by the market-maker but not the customer, or (ii) when there is a risk free spread between the cash ETF and the underlying components thanks to the fragmentation of screen-based markets. More simply—if the MM is selling the cash ETF to a customer, the MM will concurrently be buying each of the underlying components –effectively ‘creating’ the ETF-but  only when the aggregate price of the underlying components is less than the price of the cash ETF. Could the customer do the same arbitraging? That depends. But they can certainly use a broker that canvasses the market properly.  

Any market that relies on, or has come to depend exclusively on one primary player is not a marketplace. More importantly- when one player is perceived as the dominant in the space, any snafu will wreak havoc on the market itself and the credibility of the product. In Knight’s case we can look to 2 recent events that created temporary havoc—which is presumably why this firm is about to come under new ownership (again).  

ETF News, People Profiles

Axing the Taxes Using ETFs

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By Ryan Issakainen

Ryan Issakainen is an exchange-traded fund strategist for ETF provider First Trust.

WHEATON, Ill. (MarketWatch) — One of the biggest attractions of exchange-traded funds is that they are often considerably more tax-efficient than mutual funds. Many ETFs regularly take steps to avoid the annual capital gains distributions that can disrupt the tax planning of investors in traditional mutual funds. With year-end tax considerations coming into focus, this is a factor investors should consider.

The process by which ETF shares are created and redeemed is the key to the tax efficiency they enjoy. For most equity-based ETFs, the creation/redemption of shares is a function of large institutional investors making so-called in-kind exchanges of shares in an ETF’s underlying holdings for large blocks of ETF shares known as “creation units.”

Through this process ETFs are able to grow and contract without the necessity of buying or selling securities, a move that could result in capital gains, thus triggering taxable distributions to investors.

Yet when it comes to taxes, investors should always remember that not all ETFs are the same. The tax efficiency associated with “plain vanilla” ETFs does not carry through for all exchange-traded products.

For example, levered and inverse ETFs are often less tax-efficient because these funds generally use a high level of portfolio turnover to achieve their objectives. They increase and decrease exposure to various asset classes on a daily basis via derivatives, such as swaps and futures contracts. As a result, many levered and inverse ETFs have historically made substantial capital gains distributions.

Additionally, there are a few odd cases in which ETFs may produce less tax-efficient exposure than their underlying holdings. Such is the case for ETFs that track master-limited partnership (MLP) indexes. When an ETF allocates more than 25% of its portfolio to MLPs, it no longer qualifies as a tax-exempt, regulated investment company; instead, these funds are subject to federal corporate income tax. This tax liability is reflected in the daily calculation of a fund’s net asset value, which has often resulted in significant tracking error between MLP ETFs and the indexes that they follow. Continue reading →

ETF News

Why Actively Managed Mutual Funds Are Investing in ETFs

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   Courtesy of Stan Luxenberg

 

09/28/12 – 10:23 AM EDT

NEW YORK (TheStreet) — Actively managed mutual funds traditionally earned their fees by picking the most attractive stocks and bonds. But these days more portfolio managers are investing in ETFs.

According to Morningstar, hundreds of mutual funds have taken the plunge. More than 130 active mutual funds own SPDR S&P 500 (SPY). Investors in the S&P 500 ETF include Columbia Dividend Income (LBSAX), Hartford Growth Opportunities (HGOAX) and AllianceBernstein Dynamic All Market (ADAAX). More than 80 funds have invested in iShares MSCI EAFE (EFA), including PIMCO Global Multi-Asset (PGMAX), Sterling Capital Strategic Allocation Equity (BCAAX) and USAA Global Opportunities (UGOFX).

Not so long ago, active mutual funds stayed clear of ETFs. After all, active managers were supposed to outdo benchmarks — not load up on index funds. But gradually portfolio managers have discovered that ETFs can play useful roles. “ETFs can be convenient ways to gain market exposure quickly,” says Cory Banks, managing editor of ETF Report.

Portfolio managers use ETFs in a variety of ways. While some managers take big positions in ETFs, many funds have only limited stakes. Vanguard Windsor (VWNDX), an active large value fund, has 0.9% of its assets in Vanguard Value ETF (VTV), and Vanguard Morgan Growth (VMRGX) has 0.8% in Vanguard Growth (VUG).

For such active funds, ETFs can offer easy ways to manage cash. Say investors suddenly pour money into a fund, and the portfolio manager can’t decide which stocks to buy. To avoid sitting in cash — which could be a drag on returns — the manager could hold an ETF as a temporary measure.

ETFs can also be used to manage taxes. Say a manager has a loss in a stock but doesn’t want to give up on the holding. The fund can sell the shares, book the loss, and put the proceeds in cash. Under IRS rules, the manager must wait more than 30 days to buy back the shares. Instead of keeping cash, the fund may decide to hold an ETF for a few weeks and then repurchase the original stock. Continue reading →

ETF News

ETFs move into long-term investing mainstream

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By Murray Coleman

–Evidence mounts that ETFs aren’t just trading tools

–More retirement funds, endowments adopting ETFs

–ETF advisers remain largely long term in focus

Since turning to exchange-traded funds to build investment portfolios for high-net-worth and institutional clients more than a decade ago, adviser Rob DeHollander says he has seen a stigma form around the industry.

Contrary to popular views that ETFs contributed to the “flash crash” in May 2010 and other high-frequency trading mishaps, a growing number of conservative investors managing endowments and large pension funds are turning to ETFs, notes the co-founder of DeHollander & Janse. The firm in Greenville, S.C., manages about $100 million in assets.

“There’s no doubt ETFs are popular with hedge funds and day traders,” Mr. DeHollander says. “But they’re also finding broader acceptance among institutional investors and wealth managers with longer-term investment strategies.”

How much is a source of rising industry debate. A recent Deutsche Bank study found that advisers with discretionary control over client portfolios and more than $100 million in assets in 2011 overwhelmingly accounted for the biggest chuck of ETF assets held by big, institutional-level investors. Continue reading →

ETF News, People Profiles

Buying an ETF for More Than The Ticker

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Courtesy of Forbes Contributor Ari Weinberg

July 30

If you invest in exchange-traded funds, you’ve probably heard about the forthcoming service from IndexUniverse.

If you really follow ETFs, you’ve probably wondered what took them so long.

Years in the making, publisher IndexUniverse is finally rolling out its own ratings and analysis service for ETFs. Currently in commercial beta for financial advisers, institutions and other professionals, ETF Analytics takes a different tack than uber, fund-rating firm Morningstar (MORN).

IndexUniverse rolls up its individual ETF analysis into both letter and number grades, while leaning on its current ETF classification system for sectors, themes, styles and more. The service is launching with evaluations on all equity-based ETFs and will eventually cover fixed income, currencies and alternatives.

But Zagat of ETFs it’s not. And, at an initial price of $3000, the service is not for the faint of heart or light of wallet.

For top-level insight on what an individual investor can glean from the new product, I sent over a few questions to Matt Hougan, President of ETF Analytics for IndexUniverse.

AW: What is the biggest or most common mistake investors make when evaluating an ETF?

MH: Just buying tickers.

We see far too many investors just buying the ETFs they are familiar with, or trusting how ETFs are marketed, without looking under the hood.

Take the iShares FTSE China 25 Index Fund (FXI). It has the bulk of the assets for ETF investing in China. But the truth is: It does a terrible job capturing China. FXI has no exposure to technology and very little exposure to consumers.  Eighty percent of the portfolio is invested in old-school, ex-government firms, with none of the entrepreneurial, middle-class-driven growth that most investors want from China.

A fund like SPDR S&P China (GXC) gives you much better exposure, but investors don’t bother to look.

AW: Should buyers differentiate between products for “traders” and “investors?” Continue reading →

ETF News

SEC Punts on Payments to ETF Market Makers

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Courtesy of Rosalyn Retkwa

 

The Securities and Exchange Commission has decided not to decide yet whether to approve proposals by Nasdaq and the New York Stock Exchange to pay market makers to make better markets in thinly traded ETFs. The proposals would require an exemption from a current prohibition against such payments.

Rather than approving or rejecting the idea, the SEC decided last Wednesday, July 11, to seek another round of comments on pilot projects put forth by Nasdaq and NYSE Arca (the electronic exhange formerly known as Archipelago). In its 83-page order instituting proceedings to determine whether to approve or disapprove the proposed pilots — posted on the SEC’s web site last Thursday — the SEC listed 27 questions asking for more input on specific points. “They’re keying up the issues,” said a source who asked not to be named.

Under the law, the SEC has 45 days to respond to these kinds of regulatory filings by the exchanges, with an automatic right to extend the initial deadline by another 45 days.

July 11 was the 90-day mark for the Nasdaq’s proposal, and while the SEC had until August 14 to respond to NYSE Arca, it decided to consider both proposals with a joint order — a suggestion made by Vanguard, the mutual fund and ETF sponsor headquartered in Valley Forge, Pennsylvania, which filed separate comment letters on both proposals. Continue reading →

ETF News

June ETF Short Report: ‘Q’s’ Shorts Drop 42%

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Courtesy of Olly Ludwig

Short-sellers last month significantly cut their bets against an array of the broadest U.S. stock indexes, which looks quite sensible in the rearview mirror considering both the S&P 500 and the Dow Jones industrials average rallied by nearly 4 percent in June.

While financial markets are again on tenterhooks over the dismal fiscal situation in Europe—and Spain’s in particular—last month marked something of a respite from the three-year-old eurozone debt crisis, as short interest on non-U.S. stocks fell as well.

Most conspicuously, the number of shares short on the PowerShares QQQ Trust (NasdaqGM: QQQ), the Nasdaq 100 ETF, dropped 42.6 percent in June, compared with a nearly 9 percent rise in the prior month. The decline left short interest on the “Q’s” at 10 percent of the ETF’s outstanding long float, compared with more than 18 percent at the end of May, according to data compiled by IndexUniverse.

Shorts on the SPDR S&P 500 ETF (NYSEArca: SPY) meanwhile fell by almost 23 percent in June, compared to a 13 percent jump in May. Also, short interest on the iShares Russell 2000 Index Fund (NYSEArca: IWM) fell by more than 7 percent last month, after holding about steady in the prior month.

Dark Clouds Ahead? Continue reading →

ETF News, People Profiles

ETFs Are Duking It Out Over Fees

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By LIAM PLEVEN

Exchange-traded funds have lured many investors away from mutual funds by offering lower fees. But increasingly, some ETFs are also using fees to compete with other ETFs.

In a handful of high-profile cases, particularly in commodities and stocks, investors can choose between two ETFs that are virtually identical except for their fees. Gold bugs, for instance, can buy into a bar of bullion by holding shares in either SPDR Gold Shares GLD +3.88% or iShares Gold Trust IAU +3.94% . But the SPDR fund charges 0.4% of assets a year in fees, compared with the iShares fund’s 0.25%.

Disparities like that point to the rising importance of price as a distinguishing factor in what has become a crowded and confusing ETF marketplace for many individual investors. It isn’t clear yet how effective the tactic will be in the long run—there may be good reasons in some cases for investors to stick with or buy a higher-priced fund. But it seems to hold promise as a marketing tool.

ETF News

Exotic ETFs Going Mainstream

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Leveraged and inverse exchange-traded funds received a lot of scrutiny during the volatility of last year. But now that volatility is down and equities are on the rise, investors are more and more viewing these once exotic products as just another way to take positions on the direction of the markets.

That was the opinion of ETF insiders speaking on the panel “Volatility and Leveraged ETFs” at the Security Traders Association of New York conference on Thursday. ETFs that are leveraged two, three times, or even more, or that move in an inverse relationship to indexes like the S&P 500, are slowly becoming more accepted.

Stephen Sachs, head of capital markets for ProShares, said that while ETFs drew a lot of attention during high-volatility periods last year, the actual evidence suggests those instruments did not cause the volatility. Leveraged and inverse products were only a small part of trading during those periods, and important macro events were also very much in play, he said.

“At the end of the day, volatility is not an asset,” Sachs said. He added that unlike actual asset classes, investors don’t take buy and hold positions on the VIX. Investors in VIX ETFs need to understand that the product exists for taking positions on risk, not for long-term investments.

Chris Hempstead, director of ETF execution at WallachBeth Capital, said inverse and leveraged products have gotten more than their fair share of press. However, they too serve a specific purpose, and the investment community needs to learn more about them.  “If you trade anything, you should be paying attention to the ETF market,” Hempstead said. “It [the market] is a lot harder [to understand] than it was five years ago.” Continue reading →

ETF News

Conflict-Of-Interest Charges Roil Bankers-What About Those “Step-Out” Ticket Charges?

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Fast on the heels of that New York Times op-ed by a former GoldmanSachs derivatives trader, who in a public farewell tribute to the employer he had just “fired” (claiming said employer caused both the culture and very corpuscles of the firm’s ecosystem to become polluted with the toxic virus “Conflicts-of-Interest Syndrome”),  another, and potentially more blistering conflict-of-interest issue is beginning to bubble.

Before revealing the team logo(s) associated with the latest event,  its important to first look at the update to the saga of the former Goldman trader–who is now actively shopping a new order–for a soon-to-be-written tell all.

In statements released to the press, Goldman, as well as Morgan Stanley have publicly proclaimed the same-sounding, back-handed response re: the Op-Ed author’s revelations regarding conflicts of interest on Wall Street:  The respective bulge bracket PR statements read pretty much like this: “..In connection with ongoing compliance procedures, [our] investment banking unit will be doing a full review of all conflict of interest policies as they pertain to the firm’s internal guidelines, as well as any/all regulatory guidelines.”

Given the compression of the investment banking industry over the past 5 years, its almost impossible to envision that any IB deal administered by any of the few remaining Wall Street banks could be done without some kind of conflict, someplace!

Now to the new shoe that may about to drop, its aimed at the heart of  administrative epicenter for the $3.5 trillion investment advisory space:

According to one agnostic brokerage industry expert (who chooses to remain anonymous because his/her life insurance policy is capped at $1million), those concerned about conflict of interest might be more concerned about a  different conflict: the one that could embroil the $3.4 Trillion (that’s trillion with a “T”)  investment advisory space, which to a great extent, is administered by four or five large, and several smaller “custodians”, whose services typically include reporting, back office administration and trade execution.

Some believe custodians may be reaping  “tens, if not hundreds of millions of dollars in “preference payments” from Wall Street bank trading and “facilitation desks”, in consideration for directing their client orders to those bank trading desks for execution.

In the vast majority of those cases, those trading desks may not actually be providing the best price available in the market, and are also betting against the custodian’s customer, if only for a brief moment in time, to hopefully profit from those bets.  Let us not forget to caveat the important part of the claim: the clients are not receiving any portion of the payments made to their custodian, as the payments may not necessarily be in the form of cash.

The “payment-for-order flow” topic, and more poignantly, the imposition of usurious “step-out fees”  on clients who would rather “trade-away” from their custodian and secure best execution via “agency-only” brokers is an issue that has occasionally sprouted up across the Industry in the form of small brush fires, but most have been quickly extinguished by those having an agenda to brush the issue under the table.

Times may be changing.

Once commission-centric, custodians have since given up the brokerage industry’s race to zero by competing for institutional (and retail) customer in the form of cheaper trading commissions. Instead, fees for execution, research, and other fungible services,  are now based on assets under management, enabling the custodians to to perform a sleight of hand and promote this new message: “Trade commission free, all fees are fixed based on AUM.”

Nothing is free, other than maybe air. According to some, the more recent conflict-of-issue narrative is creating sparks that could turn into a barn-burner–especially for very, very short list of Tier 1 custodians who dominate the hosting of the aforementioned $3.4 trillion in assets; assets managed by RIAs and institutional managers who in turn, actively manage tens of thousands of end-customer sub-accounts via the buying and selling of of single stocks, ETFs, listed options and fixed income products.

Some insist they know, while many others can only suspect, that certain custodians are enhancing their revenue streams at the expense of their own clients, who are otherwise handcuffed to the custodians’ order execution desk.

The handcuff is in form of  “step-out ticket charges”, a fee similar to a ‘corking charge’ that you might be subject to when bringing in your own bottle of wine to the restaurant that you are dinging at. These ticket charges, which range from $15-$25, are  imposed on each sub-account when the custodian’s client wants their order executed “away” by any “agency-0nly”  firm who  specializes  in seeking out the most competitive price, or best execution in that particular asset class.

To illustrate: Joe RIA intends to purchase a block of 50,000 shares of EMG-ETF on behalf of his 100 clients. After execution, he will pro-rate 500 shares to each of the 100 client sub-accounts that Joe RIA manages.  When Joe executes through “Clark His Custodian”, there is no commission charged on the trade, and no ticket fees imposed to allocate to sub-accounts managed by Joe and held in custody by Clark . Great deal, right?

If you missed the (*) asterix that pointed to the small print in your clearing agreement,  “If you want to step-out your order to a third party broker in an effort to secure a better price execution, please note: you will be subject to a fee of $15-$25 for every sub-account that you want your block trade allocated to.”

This is where the burning rubber meets the road: When Joe RIA discovers he can execute the 50,000 shares 5 cents ‘better’ via a third-party broker (a savings of $2500 that goes directly to Joe’s Alpha), Joe also discovers that he’s subject to a $25 ticket charges per account,  wiping out the cost savings that Joe could have captured for his clients.

Executing at a ‘better price’ is actually not that hard accomplish for seasoned execution experts in the course of trading a majority of ETF products (or other products, such as  option spreads)–especially those who take a systematic approach to canvassing a broad assortment of liquidity providers.  Clark the Custodian has no incentive to spend time/effort to canvass the market. His only obligation is to deliver prices back to his clearing customer within the context of the NBBO.

Its a strange story, for sure. Something is certainly amiss when it costs “nothing” to execute “in-house”, but if you go out of house for a better price execution, you find yourself in the proverbial out-house,  without any TP.

Stay tuned.

ETF News, Tech Talk

2 More Studies Say: ETFs NOT to Blame for Market Volatility

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Here’s a wake-up call to critics of the ETF world: two more unrelated and just-published research studies have acquitted the ETF industry of charges leveled by critics who have claimed ETFs are at the root of heightened market volatility.

In a newly-released report from the Investment Company Institute, which interrogated market volatility over the past 25 years, ICI’s experts (let’s presume their unbiased, OK?) concluded that ETFs have unfairly been cast as the dog wagging the tail, and accusations that “ETFs were the ‘match that ignited the Flash [Crash]’, or have in any other way been responsible for any unusual market volatility, are simply inaccurate and unjustified.

According to the report, “Heightened periods of volatility existed before ETFs (the most volatile during Black Monday ’87)”…more importantly,  “The market volatility that started before the financial crisis in mid-2007 and has continued through today has [simply] coincided with the rapid growth of the ETF market, as assets have grown from about $600 billion to more than $1 trillion.”  The report points out that “over the same time period, there was a prolonged global financial crisis that threatened to take down the international banking system and threw financial markets worldwide into turmoil.”

This report comes on the heels of a joint report issued by the SEC and the CFTC which determined that ETFs were not the cause of the May 2010 “Flash Crash”.  (Even if Editors here reserve comment on any potential conflicts these agencies might have), ICI’s report coincides with an earlier report study from Morningstar Inc., which investigated  and dismissed the notion that leveraged ETFs were causing increased turbulence late last year. The Morningstar report also pointed out that if leveraged ETFs were the cause of market volatility, the assets in the funds would rise and fall with volatility, but assets remained mostly steady from March 2009 to November 2011.

READ THE FULL STORY COURTESY OF INVESTMENT NEWS:

ETF News

High Yield Bond ETFs: InFlows “Off the Wall”

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In a column filed through SFGate, Bloomberg LP’s Joe Ciolli reports, “Junk Bond ETFs are drawing the biggest inflows on record from investors seeking easier access to higher-yielding assets. According to Lipper Analytics, ETFs that track junk-bond indexes have tapped $5.5 billion of investments since the beginning of this year, almost quadruple the $1.4billion during the same period of 2011.

While exchange-traded funds comprise 2 percent of the $1 trillion in U.S. corporate speculative-grade debt outstanding, they accounted for more than a third of the total $14.8 billion of inflows this year into mutual funds and ETFs that buy junk bonds.

The use of ETFs makes the market more efficient than investing in mutual funds because they trade throughout the day and give investors a “more appropriate way to tactically approach high-yield,” said Jeff Tjornehoj, head of Americas research at Denver-based Lipper, whose parent company, Thomson Reuters Corp., competes with Bloomberg LP for financial news and information.

Click here for the full story:

ETF News

UK Wrap Platforms Wrapping Arms Around ETFs

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As reported by FT.com, retail investors in the UK are rapidly wrapping their arms around ETF products, and platform providers are ramping up their offerings to facilitate the burgeoning growth in what is already a ubiquitous product in the US.

  According to the FT.com story, David Bower, head of iShares UK, said the ETF industry  would be a major beneficiary of RDR which will ban commission payments to financial advisers from the beginning of 2013. ETFs, unlike many other investment funds, do not pay commissions to advisers.

Mr Bower said the strong growth that iShares saw on wrap platforms in 2011 suggested that ETF usage amongst financial advisers and discretionary fund managers would continue to rise.

BlackRock saw assets held in iShares ETFs across six wrap platforms used by IFAs increase 34 per cent in 2011 to £746m at the end of December.

The six platforms are run by Ascentric, Novia, Nucleus, Raymond James, Standard Life and Transact.

Novia saw assets held in iShares ETFs increase 96 per cent last year while Ascentric reported an 88 per cent rise.

Paul Boston, sales and marketing director at Novia, said that ETFs were playing an increasingly important role in both advisory and discretionary portfolios on the Novia platform.

“This is proving to be a well-trodden investment strategy that significantly reduces the overall cost of a client’s portfolio,” Mr Boston said.

Further affirming this trend, UK-based institutional broker North Square Blue Oak (NSBO) has recently aligned with US-based ETF market expert WallachBeth Capital to form WallachBeth International, whose role, according to NSBO principal Laurie Pinto, “will include servicing institutional portfolio managers as well as leading wrap account administrators in the course of their securing best execution in a market place that is still catching up to the level of transparency that is available for US-centric ETF products.”

Added Pinto, whose firm is headquartered in London with an affiliate office in Beijing, “We certainly expect the demand for ETF products in the European market will emulate the growth trajectory which the US market has experienced over the past several years. To the extent that we can introduce best practices for true best execution, we believe we’ll be adding significant value to institutions that are utilizing these products.”

ETF News, Tech Talk

“Navesis-ETF” Launches Today: 1st Euro-based Alternative Trading System for ETFs

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A joint partnership between Normua Holdings and inter-dealer broker Tradition PLC formalized the launch of the ETF industry’s first electronic exchange platform.  Based in London and designed for the European theatre, where ETF transparency is often problematic, “Navesis-ETF” is  intended to provide “qualified customers” the ability to trade ETFs in real-time, and enable investors to create and redeem ETF units based on the fund’s net asset value (NAV). The initial launch of the platform will facilitate trade in upwards of 100 different Euro-centric ETF issues.

According to Rupert Hodges, managing director of  TFS Derivatives, the brokering division of Compagnie Financiere Tradition that has partnered with Nomura, ” Up until now, institutional investors in ETFs on the primary market could only buy and sell units via market makers and other ‘authorised participants, accepting an indicative price determined by the supply and demand for the ETF offered. By offering the ability to trade based on NAV, Navesis-ETF is a game changer.”

Lee Burrows, Head of Delta One, EMEA for Nomura added, “Listing on a MTF will allow us to provide more liquidity and maximise efficiency in pricing.” Navesis-ETF has been in development for almost a year and according to the joint venture press release, the platform has been beta-tested for the past two months by clients that include Credit Suisse, HSBC and UBS.  Burrows stated there will be a minimum order size for units of 25,000-100,000 ETF shares and will operate in two phases. From 0900-1200 GMT it will operate a continuous call phase, accepting bids and offers. Then, from 1200-1215 GMT, there will be a “dark option” phase similar to dark pool trading. It will also provide an auction process once a day.

 

 

ETF News, People Profiles

Bogle Boggles and Balks re: ETFs

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In the category of  “He who speaks with forked tongue…” Index Icon and Vanguard Group founder John Bogle once again threw a curve ball while speaking at today’s Bloomberg Portfolio Manager Mash-Up.

John Bogle, Vanguard Group founder

Stating “ETFs are the greatest trading innovation of the 21st century,” what the Midas of Mutual Funds added with a big (*) was : “But the question is,  ‘Are they the greatest investment innovation?’ and the answer is ‘no.”

According to coverage of the event, fully credited to InvestmentNews, Bogle pulled no punches by calling out BlackRock for “just making a muddy pool muddier” in reference to BlackRock’s aggressive product launches. Bogle, who is also known as the “Midas of  Mutual Funds”, reminded the Bloomberg conference attendees “There’s something like 2000 ETFs now. That’s almost as many stocks as there are.”

One attendee then asked Mr. Bogle, “How many mutual funds are there?” In lieu of replying, he headed to the loo, where the self-proclaimed Buffet-like Market Bull took a bio break.