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ETF News

The US’s Deep Freeze Gives Temporary Boost to Natural Gas ETFs

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MarktMuse update courtesy of extract from ETF Trends’ Tom Lydon.

After natural gas futures dipped below $3 for the first time in two years, the commodity and related exchange traded funds are warming up on cold weather next week, but any gains may be brief as temperatures could remain above normal for the rest of the month.

The United States Natural Gas Fund (NYSEArca: UNG) was up 1.4% Friday whileiPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (NYSEArca: GAZ)was 1.0% higher. Over the past year, UNG declined 28.6% while GAZ fell 20.2%.

NYMEX natural gas futures surged in early trading Friday but settled just shy of $3 per million British thermal units.

Natural gas futures were heating up from a 27-month low on speculation that a cold snap could stoke demand for  heating fuel next week. According to Commodity Weather Group, “a sizable chunk of arctic air” will cover the Midwest, South and East next week, reports Naureen S. Malik for Bloomberg.

However, while temperatures will drop next week, the weather will likely warm up and continue to weigh on natural gas prices after next week.

While the cold outbreak “is occurring on the anniversary of last year’s polar vortex big event, we do not expect it to reach those levels,” Matt Rogers, president of Commodity Weather, said in a note. “The other big story is the warmer pattern shift for the 11-15 day,” raising temperatures up to seasonal norms across most of the lower 48 states from January 12 to 16.

Additionally, supply remains robust due to new hydraulic fracturing techniques in shale oil beds, further weighing on natural gas prices through the season.

“We don’t look for this rally to carry above the $3 mark in today’s session despite some possible cold updates to the temperature views,” energy-advisory firm Ritterbusch & Associates said, the Wall Street Journal reports. “Production has been running at a near-record clip.”

For Lydon’s full article on ETF Trends, click here.

Global Macro Strategy, slider

Most Professional Investors Headed The Wrong Way First: A Global Macro Strategy View

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MarketsMuse editor note: below insight courtesy of Rareview Macro LLC’s global macro strategy newsletter “Sight Beyond Sight” is a great read for investment professionals who want to start off 2015 on the right leg.

 

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Wrong Way First (“WWF”) Trading

An astute market practitioner that we are fond of once coined the trading phrase “Wrong Way First” (“WWF”). WWF refers to the risk the professional investment community is exposed to at the beginning of every New Year – that is, the first trade will be a reversal in the consensus positioning and inflict severe PnL duress.

While it is true that substantial wealth is only really created over time (i.e. by investing), the money management business is beholden to the Gregorian calendar and that means performance resets at the close of business on December 31st. Put another way, if you manage money for a living you’re only as good as your last best trade.

Therefore it should be of little surprise that professionals begin each January more focused on not getting caught up in a New Year’s malaise rather than trying to take advantage of opportunities by adding new risk or pressing 2014 positions. The memory of last January, a month which included the unwind of the long Japanese Nikkei and Chinese Yuan carry trade strategies and inflicted severe PnL duress, is still too fresh to forget. This is especially true considering it took the macro strategy six months to climb out of its negative PnL hole and it was only saved when the US Dollar theme sent down a ladder to climb up.

While there are many key discussions underway to start 2015 it is important to highlight that the dominant theme emerging from our discussions with any risk takers is concern over a WWF trading theme materializing. Such is the nature of this business, especially for absolute return strategies.

Our interpretation of these conversations is that the tolerance level to withstand PnL duress around any theme that is currently at a momentum and sentiment extreme – such as long Equities, fixed income duration, and the US Dollar, short Crude Oil, and underweight Emerging Markets – is very low.

As way of background if you apply this theme to actual positioning it reveals that the top WWF candidates across the major asset classes are: Continue reading →

ETF News

Fed Does Walk Back On Leveraged ETFs; Now Endorsed in US Govt Study

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MarketsMuse editor note: For those not familiar with leveraged ETFs, before reading this special column, you’ll want to get up to speed with Investopedia’s defintion, otherwise, ETF industry experts and observers have new ammunition in which to debate the pros and cons of leveraged ETF products. If you find that your debate with peers becomes too spirited, you might change the channel and duel about the merits of shale oil fracking..

Leveraged and inverse ETFs, which some industry experts have labeled “Weapons of Financial Destruction” aka “WFDs” have come under heavy criticism as potentially exacerbating volatility in financial markets, are not the danger that critics have made them out to be, concludes a preliminary study from U.S. Federal Reserve researchers.

“..Leveraged and inverse exchange-traded funds (ETFs) have been heavily criticized for exacerbating volatility in financial markets because it is thought that they mechanically rebalance their portfolios in the same direction as contemporaneous returns. We argue that these criticisms are likely exaggerated because they ignore the effects of capital flows on ETF rebalancing demand. Empirically, we find that capital flows substantially reduce the need for ETFs to rebalance when returns are large in magnitude and, therefore, mitigate the potential for these products to amplify volatility. We also show theoretically that flows can completely eliminate ETF rebalancing in the limit.”  US Federal Reserve study, November 2014
 Continue reading →

ETF News

Winklevoss Twins’ Bitcoin Trust ETF Makes Progress to go Public

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MarketMuse update courtesy of extracts from Tom Lydon’s 31 December ETF Trends story.

The Winklevoss twins, Cameron and Tyler, famed for suing Mark Zuckerburg, claiming he stole Facebook from their own social networking site ConncetU, have started another new venture.  In April 2013, they claimed that they owned of 1% of all Bitcoins in existence. The Winklevoss twins now prepare to sell their Bitcoin shares on the Nasdaq.

Slowly but surely, Cameron and Tyler Winklevoss’ Bitcoin Trust is putting the final touches on its proposed cryptocurrency-backed exchange traded fund, filing for shares on the Nasdaq.

On Wednesday, the Bitcoin Trust filed with the Securities and Exchange Commission to sell 20.1 million shares on the Nasdaq exchange, reports Ciara Linnane for MarketWatch. The filing did not include a launch date or expense ratio, indicating the Bitcoin Trust is not close to coming to market.

In May, a regulatory filing revealed the Winkelvoss Bitcoin Trust will trade on the Nasdaq. In July, a Form S-1 filing with the Securities and Exchange Commission reveled the ETF, assuming it comes to life, would trade under the ticker “COIN.”

“The investment objective of the Trust is for the Shares to reflect the performance of the price of Bitcoins, as measured by Winkdex, less the expenses of the Trust’s operations,” according to the SEC filing.

The brothers have also introduced the bitcoin index, or so-called Winkdex, which will also be used to price the value of assets held by the Winklevoss Bitcoin Trust.

The trust’s sponsor is Math-Based Asset Services LLC, which was formed in mid-2013. The company will run the new benchmark, tracking bitcoin prices based on “qualified bitcoin exchange transaction data… over a trailing two-hour period,” according to the SEC filing.

Bitcoin is one of the more popular digital currencies available. The cryptocurrency can be stored and traded electronically. The currency is stored in a digital wallet and is traded through a downloadable software or through a third party provider. The main thing traders should understand is that the Bitcoin is itself is considered a form of currency and not just an online service to transfer U.S. dollars.

Many users utilize the currency because the bitcoin is decentralized – there is no central bank issuing or monitoring the currency. Every transaction is validated by a Bitcoin miner – miners are entities within the Bitcoin network that validate the transaction by solving a mathematical proof. This system prevents double counting of Bitcoins and keeps a record of all transactions.

Bitcoin prices have gained widespread attention when the value of the currency skyrocketed above $1,000. However, the cryptocurrency has stumbled in 2014, declining 58.7% year-to-date to about $315.

For Lydon’s original article from ETF Trends, click here.

ETF News, People Profiles, Strike Price

2015 Buy Side Trader Resolutions:Be More Targeted When Using Sell-Side Executioners; These Experts Would Know

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MarketsMuse update courtesy of extracts from 31 December story in industry mag Markets Media.com

marketsmedia logoThe buy side is becoming more targeted with sell-side firms, employing a rifle rather than a shotgun approach as liquidity continues to shrink. A big factor behind this newfound independence has been the lessening of liquidity in 2014 in derivatives and fixed income markets, which has forced buy-side institutions to be more resourceful in sourcing liquidity

“The buy-side is more empowered and understandably, taking greater ownership of their execution and process,” Jennica Ross, managing director at execution firm WallachBeth Capital, told Markets Media. “Within those segments they are obviously narrowing the relationships that they have. They don’t need to have the plethora and the sheer numbers of external sell-side relationships that they had before, and the relationships they do have are now much more consultative.”

“The most surprising thing was how many market making firms basically closed up,” said Dave Beth, president and chief operating officer at WallachBeth. “The lessening of liquidity throughout the whole derivative landscape, both listed and the OTC, we see happening at a broad stroke. Clients should expect [spreads] in derivative markets to widen a little bit. I think it has a lot to do with regulation and with balance sheet usage in the bigger institutions.”

In WallachBeth’s ETF market making business, liquidity remains at high levels. “As far as the ETF cash business, one could say the liquidity is as great as ever and it continues to grow,” Beth said. “Whereas in the listed and OTC options space, there’s been an express decrease in immediately actionable liquidity. I think that it’s affected us no different than any other player. I think clients also recognize that the playing field is changing, and that it’s okay to pay a little bit of a wider spread to get their business done.”

WallachBeth continues to diversify its business in order to take up the slack left by the exit of larger sell-side institutions.

“While there’s been contraction of liquidity within the derivatives space, we’ve seen an increased opportunity from more clients who are getting involved in our other business units, whether that be equity, program trading or fixed income trading,” said Ross.

For the full story from Markets Media, please click here.

 

ETF News

European ETFs Look Promising for 2015

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MarketMuse update courtesy of extract from ETF Trends’ Tom Lydon.

European equities and related exchange traded funds could outperform in 2015, capitalizing on lower energy prices, an improved export outlook and potentially more European Central Bank easing.

For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and the SPDR EURO STOXX 50 (NYSEArca: FEZ) both focus on Eurozone countries.

Alternatively, investors seeking to capture Eurzone market exposure can also consider a hedged-equity ETF that will help diminish the negative effects of a depreciating euro currency. For example, the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU)and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) hedge against the euro currency and would outperform a non-hedged Europe equity ETF if the euro currency continues to depreciate.

DBEU, though, takes a slightly broader approach to the European markets, including about a 40% combined tilt toward the United Kingdom and Switzerland. HEZU and HEDJ only cover Eurozone member states.

Wall Street analysts believe that European equities could be one of the best places to invest in 2015, reports Sara Sjolin for MarketWatch.

“Europe was a market ‘darling’ this time last year, then became a pariah,” economists at Morgan Stanley said in a research note. “[Now] we like European equities, (especially cyclicals) and European ABS.”

Mislav Matejka, chief European equity strategist at J.P. Morgan, even predicts that Eurozone stocks could outperform U.S. equities next year.

Specifically, the investment banks are pointing to three factors that will support the region: the ECB, a cheap euro currency and low oil prices.

ECB President Mario Draghi has hinted that the central bank could introduce further stimulus in early 2015 and even enact a bond purchasing program.

“The mantra is ‘Don’t fight the ECB’ — the central bank is set to inject €1,000 billion and to add sovereign bonds to its buying program,” analysts at Société Générale said in a research note.

While the euro currency has depreciated 10% against the U.S. dollar so far, analysts believe there is more room to fall after the ECB enacts further easing. Consequently, the weak euro will help bolster the Eurozone’s large exporting industry, making goods cheaper for foreign buyers. Morgan Stanley predicts the cheap currency could add at least 2% to earnings per share for European companies next year.

Lastly, lower energy prices will have an immediate effect on consumers, allowing Europeans to spread around their cash for discretionary purchases and spur growth. Additionally, the cheap oil will lower input costs for companies’ profit margins and lift earnings.

Furthermore, analysts believe that if the ECB begins a quantitative easing plan, the financial sector will be a key beneficiary. Most major Eurozone banks are already in good shape and should capitalize on improved credit supply and loan demand. For targeted Europe financial exposure, investors can take a look at the iShares MSCI Europe Financials ETF (NYSEArca: EUFN). However, the ETF does not hedge against currency risks.

 

 

 

ETF News

Record Amounts Flow Into Energy-Related ETFs

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MarketMuse update courtesy of extract from Bloomberg’s Jim Polson

Bargain-seeking investors have turned bullish on embattled energy stocks, plowing record amounts into the industry.

More than $3.13 billion went into exchange-traded funds holding stakes in Exxon Mobil Corp. (XOM), Schlumberger Ltd. (SLB)and other energy stocks this month, even as the price of oil fell 22 percent, according to data compiled by Bloomberg. That’s four times the average for the year and more than the prior record in December 2007, when oil was trading near $91 a barrel.

“There definitely seems to be evidence of investors seeking to bottom-fish this market and pre-position for 2015,” David Mazza, head of ETF research at State Street Corp., said in a phone interview. “Some investors we’ve spoken with don’t believe the negative picture on energy that’s become consensus.”

Investors are betting on a higher long-term price for crude oil. Brent, the global benchmark, has traded around $60 a barrel since mid-month, after dropping by half from its June high. A stabilization in futures prices since Dec. 15 has helped energy stocks rebound for the past two weeks.

Oil slipped to a five-year low of $56.74 in London. Brent futures have plunged 51 percent from their June high.

“Longer-term investors, two to three years from now, will look back on this and say, ‘God, that was a good buying opportunity,’” said Fadel Gheit, a New York-based energy analyst for Oppenheimer & Co. For short-term investors, “it’s not going to be very pretty for the next few months.”

ETFs are increasingly seen as a bellwether of investor sentiment because they allow broad bets across a sector with lower transaction costs than buying individual stocks. Year-to-date, energy ETFs have attracted $9.25 billion of new money, the most of any sector behind real estate funds and more than triple the same period in 2013.

For Jim Polson’s entire article from Bloomberg, click here

ETF News

ETFs See Large Growth in Recent Years

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MarketMuse update courtesy of extract from ThinkAdvisor

Assets invested in U.S.-listed exchange-trade funds/exchange-traded products reached the $2 trillion milestone.

ETFGI is reporting that, as of Dec. 22, ETP assets have increased 18% this year from $1.698 trillion to $2.007 trillion based on positive market performance and net new assets.

David Mazza, head of research for SPDR ETFs and SSgA Funds, put into context how significant this milestone really is.

“It took 18 years for ETFs to reach $1 trillion and three years for it to reach the additional $1 trillion, with the $2 trillion that has been achieved today,” Mazza said in an interview with ThinkAdvisor. “We can see in real time, a ramp up in growth which highlights how more and more investors have come to embrace ETFs as not just a niche product but one that plays a prominent role in the construction of portfolios.”

According to ETFGI, the U.S.-listed ETF/ETP industry has gathered a record setting $232 billion year-to-date in net new assets beating the prior full year record of $190 billion in 2013. In November, the Investment Company Institute reported the combined assets of the nation’s exchange-traded funds (ETFs) were $1.889 trillion as of the end of October. Current data has yet to be released from ICI.

“This is one of the strongest years for ETF growth on record, and most likely when we head into the final days of 2014 we’ll close the books on ETF flows being the strongest that we’ve ever seen,” said Mazza in the interview.

Mazza considers investor sentiment after global financial crisis as a primary driver in the uptick in growth.

“The financial crisis has a lingering impact that we continue to see today,” he said. “Investors began to look for products that delivered them cost efficiency, transparency and liquidity – of which ETFs by their very nature do.”

For complete article from ThinkAdvisor, click here

ETF News, Strike Price

Option Traders Aim For More Declines in Junk Bond ETFs

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MarketsMuse update courtesy of extract from ETFtrends.com column by Senior Editor Todd Shriber..

ETFTrends-logoExchange traded funds holding high-yield debt have stumbled this year due in large part to sliding oil prices. Some options traders are betting on further declines for the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG), the largest junk bond ETF.

Options hedging against swings in HYG “cost the most since 2010 versus those on an ETF following Treasuries and were at an almost six-year high relative to contracts on a Standard & Poor’s 500 Index fund,” report Inyoung Hwang and Jonathan Morgan for Bloomberg.

HYG is off 3.1% this year, but the ETF’s declines and those of its rivals have worsened in the back half of the year as oil’s slide has gained speed. HYG is off 5.6% over the past six months as the United States Oil Fund (NYSEArca: USO) has plunged nearly 47% over the same period.

The message from the options market regarding HYG is clear: More declines are on the way.

“About 56,000 bearish and bullish options changed hands daily on average in December, compared with an annual mean of less than 23,000 through the end of November,” according to Bloomberg.

As oil prices have tumbled, high-yield corporate bond investors have become skittish due to the rising influence of the energy sector within the U.S. junk bond market. Energy issuers account for 15% of the U.S. high-yield market, up from less than 10% seven years ago. [Oil Will Drag Junk Bond ETFs Down]

Oil and gas issuers account for 13.5% of HYG’s weight, the ETF’s second-largest sector allocation behind a 14.9% weight to consumer services.

Then there is the matter of increased leverage. At the end of the second quarter, U.S. shale producers had a total of $190.2 billion in debt, up from less than $150 billion at the end of 2011, according to Bloomberg data.

For the entire story from ETFtrends.com, please click here.

Mr. Shriber has been involved with financial markets for over a decade and has been writing about ETFs for over seven years. Prior to joining ETF Trends, Mr. Shriber was the chief ETF analyst at Benzinga. His written work has appeared on MarketWatch, Minyanville and Investopedia, among other web sites and major daily newspapers such as the New York Times and Washington Post.

ETF News

Cumberland Advisors’ Kotok Talks 2014’s Market and Positive Outlook for 2015

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MarketsMuse is pleased to re-distribute below thoughts courtesy of David Kotok, Chairman and CIO of Cumberland Advisors, the ETF-centric RIA:

US markets hit successive new highs in 2014. The economic recovery seems to stay on track while gradually improving and increasing its rate of growth. Labor-force-related problems seem to be healing at an improving pace. Inflation appears under control. Interest rates remain extraordinarily low. The federal budget deficit continues to shrink and is approaching 2.5% of GDP (gross domestic product). The deficit may reach $400 billion in 2015. Note that it was $1.4 trillion at its annual run rate in the worst quarter of the Great Recession in 2009.

This combination of gradual improvement, low interest rates, low inflation, and rising profitability has led the stock market to an incredible and unexpected run of success. Most of Cumberland Advisors’ US ETF (exchange-traded fund) related separate accounts have been fully invested most of the time. The results speak for themselves. Cumberland Advisors’ clients are familiar with the actual outcome.

In 2015, we expect the stock market to confront less easy conditions. US economic growth rates are picking up.  That’s good for stocks.  There is only a minor threat of upward movement in inflation and the upward threat is still only a threat.  That’s good for stocks.  Interest rates cannot go any lower, and they may begin to work their way higher as the year progresses. But they are likely to remain very low.  That’s good for stocks.  We do not expect any recession in the US. That’s good for stocks.  We (the United States) are benefiting generally from the very low oil prices that are now spreading throughout the world. That’s good for most stocks (not energy).  Low energy prices should encourage more economic activity in the US as American households begin to raise their consumption levels. That’s good for stocks except for the energy sector.

Our outlook for 2015 and 2016 is positive but tempered. We do not expect the stock markets to continue to rally with the momentum that has been in place for the last two years. Double-digit returns year after year are unlikely to repeat in year three and are very rare for four successive years.

A more tempered US stock market outlook for the rest of the decade suggests something along the lines of a mid- to high-single-digit compounding rate. Whether that is 4% or 8% remains to be seen. A low compounding rate in single digits is an attractive investment return in a low-interest-rate bond climate. We expect bond interest rates to work their way slightly higher over time as the US economy continues to improve. Absent a shock or an inflation flare-up, rising interest rates will reflect better economic conditions. We do not expect interest rates to spike wildly higher.

We are bullish for the rest of the decade and anticipate a compounded single-digit rate of return for the US stock market.  A longer term target for US stocks at the end of the decade is 2600 to 3000 with end of decade estimated annualized earnings for the S&P 500 index between $160-$180.  We end this year nearly fully invested in our separately managed US market ETF accounts.  Our largest over weight positions are in two domestic industries, utilities and transportation.

For all of Cumberland Advisors’ commentary check out their website here and follow them on Twitter @CumberlandADV

 

ETF News

ETF Issuer Spanked by SEC; CEO Present No Longer Present

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MarketsMuse update courtesy of extract from 22 December edition of  Bloomberg, with reporting by Dave Michaels. 

F-Squared Investments Inc. agreed to pay $35 million over U.S. regulatory claims that it misled investors about the performance of a trading strategy used by exchange-traded funds.

The firm admitted that performance data used to market the strategy to mutual funds and other clients was based on historical models for a seven-year period before the product existed, the Securities and Exchange Commission said in a statement today. Investors were told that the performance represented actual results from 2001 through 2008, the SEC said.

Investigators also found that the hypothetical data contained an error that further inflated the performance results by about 350 percent, the SEC said. F-Squared is the largest active-ETF strategist with about $28.5 billion invested under its index strategies, according to the agency.

“Investors must be able to trust that performance advertisements are accurate,” said Andrew Ceresney, director of the SEC’s enforcement division. “F-Squared has admitted that it misled its clients over a number of years about the existence and success of its core strategy.”

In a statement, F-Squared said the strategy, known as AlphaSector, has performed as expected since it was launched in 2008 and “clients have seen the results” in their returns. Following the strategy told investors when to buy or sell nine ETFs, the SEC said.

‘Downside Protection’

“We greatly appreciate the continued support of our clients who have maintained confidence in F-Squared’s ability to deliver downside protection in down markets and upside participation in rising markets,” Chief Executive Officer Laura Dagan said in the statement.

F-Squared explicitly advertised AlphaSector’s performance as “not back-tested,” the SEC said. An F-Squared analyst tried to inform former CEO Howard Present about a mistake in the performance model in 2008. The formula continued to be used for the next five years, according to the agency.

The SEC also sued Present, alleging that he made false statements when he claimed AlphaSector was based on a strategy that had been used to invest client assets since 2001. In a statement, Present’s attorneys said they would challenge the allegations, which they called “misdirected and meritless.”

For the entire article by Michaels from Bloomberg, click here

ETF News

Investors’ Misuse and Abuse of ETFs

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MarketsMuse update courtesy of extract from 18 December edition of  Reuters, with reporting by James Saft

Here is the thing about investing: wherever you go, there you are.

Which is another way of saying that we carry our problems, weaknesses and foibles as investors around with us, no matter how we approach the discipline or what tools we use.

While the investment world is constantly creating new, opaque and high-cost ways of separating investors from a portion of their capital, avoiding the obvious land mines is far from a guarantee of success.

Because we are human, and as such unique mixtures of such winning attributes as overconfidence, risk-blindness and hyperactivity, we have the capacity to take even great investing ideas and turn them into losers.

Take exchange-traded funds, which surely must be one of the most investor-friendly innovations of the past 20 years. ETFs, and here I am talking about those which passively track an index, are just brilliant: they facilitate diversification while providing liquidity and all at a low cost. In theory ETFs are a tool which allow investors to overcome many of their most common errors, and as an investment vehicle they have surely contributed greatly to the fall in average fees.

Like a sharp knife in the hands of a careless child, however, index ETFs as used by most investors are powerful tools which do more harm than good.

That, at least, is the conclusion of one new study, which found that not only did ETFs, as used by actual investors, not improve performance but dragged returns lower by an economically significant amount.

The paper, by Utpal Bhattacharya of Hong Kong University of Science & Technology, Benjamin Loos and Andreas Hackethal of Goethe University and Steffen Meyer of Leibniz Universität, looked at outcomes for nearly 7,000 German investors between 2005 and 2010 who used index ETFs. The upshot: the average ETF investor sees his net raw return lowered by 2.1 percentage points annually, and with a lower risk-adjusted return as well. (here)

Not only that, but the ETF users managed to use ETFs in such a way as to make their portfolios less efficient, implying that they are not getting the diversification benefit that is one of the main points of index ETF investing. So how did these investors take a good tool and use it to nail their own feet to the floor? It wasn’t even so much that the investors used the wrong ETFs, picking the wrong asset class or over-paying in fees. Instead these investors lost more by playing, badly, at being

market-timers. Their fault was that they bought and sold at the wrong time, just like the human beings they are.

For the Saft’s entire article, click here

 

 

 

ETF News, slider

SEC Probes ETF Pricing Structures; HY Bond ETFs and Other “Less Liquid” Products of Concern to Regulator

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MarketsMuse update courtesy of extract from 19 December edition of FT.com, with reporting by Tracy Alloway

Extreme movements in the prices of bonds, commodities and other assets have prompted regulators at the Federal Reserve Bank of New York to take a closer look at the inner workings of exchange traded funds.

Wall Street’s top regulator has been talking to the firms responsible for ensuring the smooth functioning of such ETFs as it seeks to gauge the resilience of the structures to sharp fluctuations

Two “authorized participants” aka “APs” [investment banks and other trading firms whose role includes administering the ETF creation and redemption processes] that were contacted by the New York Fed said the regulator was concerned that prices of ETF units might significantly diverge from the value of their underlying holdings, particularly if the funds tracked less liquid assets or if they experienced heavy redemption requests.

A spokesperson for the New York Fed declined to comment.

Authorized participants said ETFs had performed well even in the face of oscillations in the price of assets such as currencies, commodities and corporate bonds.

“ETFs have been a good tool for price discovery,” a senior trader at one of the largest authorized participants said. So many investors were using the structures to dart in and out of hard-to-trade assets that the ETFs had become a better representation of pricing than the underlying cash market, he said.

But relationships between prices and asset values have been volatile. Shares in the iShares iBoxx high-yield bond ETF recently traded at a discount of almost 1 per cent to net asset value before surging to a premium of 1.3 per cent last week.

The Market Vectors Russia ETF saw its discount to net asset value jump to 5.8 per cent earlier this month, before moving to a premium of 9.5 per cent last week. The SPDR S&P Russia ETF this month reported both the biggest discount and largest premium since the fund was started about four years ago.

ETF market-makers cautioned that discrepancies might occur because the asset values were calculated at specific times, whereas the shares traded continuously.

To continue reading, please visit FT.com

ETF News, slider, Tech Talk

Bloomberg Couples With State Street: ETF Fixed Income Basket Tool Launch

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MarketsMuse update courtesy of  press release issued by Bloomberg LP

NEW YORK–(Business Wire)–Bloomberg today introduced the Bloomberg Fixed Income ETF Basket Tool in order to further automate the workflow and construction of fixed income exchange traded funds (ETFs). The new offering provides the first comprehensive solution for clients of State Street Global Advisors (SSGA) to automate the process of creating and redeeming baskets of fixed income ETFs.

“Unlike equity ETF products, fixed income ETFs are highly customized. The Bloomberg Fixed Income ETF Basket Tool helps the basketing and negotiating process by introducing efficiencies that have not existed for these products,” said Ben Macdonald, Bloomberg’s Global Head of Product. “Our solution integrates our pre-existing technology and helps SSGA’s authorized participants and market makers to gain access to the liquidity necessary to create and redeem fixed income ETFs.”

“Rapid growth in the fixed income ETF market has provided more liquidity and a cost-efficient alternative to undertaking credit risk,” said Timothy Coyne, Global Head of the ETF Capital Markets Group at State Street Global Advisors. “The Bloomberg Fixed Income ETF Basket Tool provides market participants an efficient and systematic way to access the primary market of ETFs.” Continue reading →

slider, Tech Talk

The Man Who Is Transforming Equities Market Structure: Dark Pool Killer Targets Maker-Taker

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For those who might have missed it, Jeffrey Sprecher (pictured above), the CEO of Intercontinental Exchange, which owns the NYSE, is determined to put the genie back in the bottle by turning back the market structure changes that have taken place over the past 10 years, including the surge of “dark pools” hosted by leading investment banks which internalized all institutional order flow and the dominant use of complex “maker-taker” fee models that exchanges have provided as a means of capturing order flow to their venues.

genie-bottle-blue-smokeAs reported by the WSJ  2 days ago, Sprecher has been negotiating with all of the major banks that operate dark pools and offering a %90 reduction on NYSE exchange fees if those banks will send the order flow back to the NYSE. According to the latest news, those banks are apparently on-board with the notion proposed by Sprecher, yet KCG, the group formed by Getco and the former Knight Capital, a major “market-maker” is opposed.

Here’s an excerpt from the story by WSJ’s Bradley Hope and Scott Patterson:

“..Under the proposal, the NYSE would drop the fee for trading stocks at its exchanges to five cents per 100 shares from 30 cents per 100 shares, the people say. Banks, in turn, would accept a rule known as “trade at” that would give more precedence to the stock exchanges for most orders. A trade-at rule would mandate that stock trades take place on exchanges unless private venues offered a better price. Advocates of the rule say it would force a significant chunk of the stock trades that occur away from exchanges back onto them.

Credit Suisse AG, which operates the largest dark pool in the world, has endorsed the proposal, according to a person familiar with the matter.

Goldman Sachs Group Inc., Morgan Stanley, Deutsche Bank AG, J.P. Morgan Chase & Co., and UBS AG—which are among firms expected to be affected by the proposal—declined to comment.

“We’re actively involved in discussions with ICE and we are optimistic about the proposal yielding positive results,” said Jamie Selway, a managing director at Investment Technology Group Inc., a brokerage that operates a dark pool.

Last month, Nasdaq announced it was drafting a pilot program that would test the effect of lowering trading fees on a group of stocks. The pilot is scheduled to begin in February.

The NYSE proposal would require approval by the Securities and Exchange Commission and is likely to face opposition. Among the critics is KCG Holdings Inc., a brokerage firm that operates dark pools and a business that matches up retail stock trades.

“Mandating trading on exchanges is an elephant-gun approach motivated by commercial interests of a handful of market participants,” KCG said in a statement Wednesday.

The ICE proposal has been in the works for more than a year, according to people familiar with the situation.

Mr. Sprecher and Thomas Farley , the ICE executive appointed as president of NYSE Group, began discussing a variety of changes to their markets, including a reduction in fees, with Wall Street firms about nine months ago, according to a person close to the discussions. The goal was to try to get long-term investors such as mutual funds, as well as banks and high-frequency traders, to unite behind a broad restructuring of the market that included lower fees, the person said. Credit Suisse became more deeply involved in the discussions several months ago, the person said.”

 

The full WSJ story is here

 

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Best ETFs for 2015 

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After yesterday’s post regarding 2014’s Best and Worst ETFs, NASDAQ has release a list of the 5 best ETFs to buy for 2015. Below are excerpts from the article. 

With the clock about to roll past 2014 and into the New Year, it’s time for investors to be looking ahead with regards to their portfolios. That can be a daunting task, however, as it’s difficult to predict exactly what will happen over the progression of a year.

ETFs are intraday tradable baskets of stocks or other assets that make playing various global trends — both short and long-term — easy. And as some trends are already beginning to emerge, we can use them to tweak our portfolios accordingly to maximize profits.

The iShares MSCI USA Minimum Volatility ETF

With regards to the United States, all signs point to sunny with a slight chance of recession.

For the most part, things are going pretty good. Job growth seems to be picking up, while lower gas prices have consumers dancing in the streets. The unfortunate thing is that falling oil prices have the potential to cripple one of the main drivers of the recent U.S. growth.

Add in the fact that the Fed’s loose monetary policy has pushed investors into riskier assets in order to find returns/yield and you have a recipe for increased volatility.

Which is why the iShares MSCI USA Minimum Volatility ETF (USMV) maybe a good bet.

USMV uses screens to kick out high-volatility stocks and capture the upside of the market. That also limits the downside as well as the “bounciness” associated with market movements. Currently, the $34 billion ETF holds 159 different stocks, including Becton, Dickinson and Co. (BDX) and Wal-Mart Stores, Inc. (WMT).

USMV’s underlying index has done a good job of fighting volatility and downside risk. Back in 2008, the broader MSCI USA index was down 37% while USMV was only down 26%.

While the chance of recession is small, it is building. At just 0.15% in expenses, USMV is a cheap way to fight that potential and is a one of the best ETFs to buy for 2015.

Vanguard FTSE Europe ETF

Despite the headwinds, both the Dow Jones Industrial Average and the S&P 500 are sitting at all-time highs. That doesn’t make them screaming buys at the current moment. But European equities just might be.

Currently, European stocks can be had for a 40% discount to their American counterparts. That in of itself is tantalizing. However, the real boost may come from various QE programs being enacted on the continent. That should boost asset prices in the near term.

The Vanguard FTSE Europe ETF (VGK) tracks the FTSE Developed Europe Index and includes both large and mid-cap stocks in Europe. Top country weights include the U.K., Switzerland and France.

All in all, VGK holds 528 different stocks. That makes VGK a prime play on Europe’s cheapness and potential growth in 2015.

Add in Vanguard’s commitment to running cheap funds — VGK only charges 0.12% in expenses — as well as the ETF’s 3.81% dividend yield and you have a great ETF pick for 2015.

For the rest of the list from NASDAQ, click here.

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Crude Oil: An Objective View From Rareview: Let’s Not Be Franc

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Below excerpt is courtesy of today’s Rareview Macro a.m. edition of global macro strategy commentary “Sight Beyond Sight”…

Crude Oil

The professional community is honing in on to two crude oil observations overnight – one “temporary” and one “transitory”.

  • Ali Al-Naimi, Saudi Arabia’s oil minister, said the global economic slowdown has contributed to a temporary “problem” in the market. (Source: Saudi Press Agency report)
  • The Federal Reserve said it views the decline in the energy price as “transitory” which was forcefully reiterated many times during Chairwoman Janet Yellen’s press conference.
Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

Here is a dirty framework to work with before you all get excited about this. Please note, this analysis is completely neutral as we have no axe to grind when it comes to Crude Oil and have not speculated in anything related to the black stuff for months. So the view is objective.

WTI is up 3-days in a row or 3.5%. Yesterday, it was up $3 but closed flat. At one point today it was up $2.26 and it is now only up $1.22.

Brent is up 2-days in a row 4.58%. Yesterday, it was up ~$3 but closed largely flat. At one point today it was ~$3 and is up only $1.62.

Simply put there are two kinds of bets professionals make when a historical event materializes, such as that we have just witnessed in crude oil. Continue reading →

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Goldman Sees Gold in ETF Market-

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Extract below courtesy of Forbes.com

In what comes as the latest move by Goldman Sachs to grab a larger share of the rapidly-growing exchange-traded fund industry, the investment banking giant is looking to launch as many as 11 new ETFs in the near future. Goldman filed a request with the SEC last Friday (December 12) to list six ETFs that will rely on smart-beta investment strategies under the new ActiveBeta brand name, and another five ETFs that are hedge fund-themed. While the bank intends to list these ETFs on the NYSE Arca exchange, it has not revealed tickers or expense ratios for any of them.

Goldman has been looking for ways to grow its asset management business since the economic downturn of 2008, as it faces increasing pressure from regulators as well as investors to increase the share of less volatile revenue streams in its trading-focused business model. The increasing popularity of ETFs over recent years made the industry a top priority for Goldman, with the bank first revealing its intent in September by seeking the SEC’s approval for a series of active ETFs (see Goldman Details Plans To Foray Into Active ETF Market). Goldman was also involved in talks to acquire the New York-based ETF provider IndexIQ in October. Notably, Goldman’s decision to launch these 11 new ETFs comes shortly after IndexIQ’s acquisition by New York Life Insurance.

 

For the entire article, please click here