All posts by MarketsMuse Staff Reporter

ETF News

Errors Abound When It Comes to ETF Tracking Errors

Leave a comment

Courtesy of Dave Nadig

Here’s how I know the ETF Revolution has long since passed, and what we’re living in now is the new ETF normal: The questions from advisors are getting a lot smarter.

I used to get emails about how creation and redemption worked. Now I get questions about tracking error.

Unfortunately, most people think about tracking error all wrong.

Here’s a perfect example. Take two funds that have been in the headlines a lot these past few weeks, the Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM).

Now imagine you’re a Sophisticated Investor. You know a few things: You know expense ratio matters. You know spreads matter. You know tracking error matters.

So you pop up your Bloomberg, and here’s what you see:

 

 

Even on trading, Vanguard wins on expenses. But Holy Meatballs Batman, what are those guys down in Pennsylvania doing!? A tracking error of 4.433 percent?

And at this point, many advisors will make a critical mistake, assuming that the Vanguard fund is horribly mismanaged. It’s not an unreasonable assumption, if in fact this was an accurate tracking error number. But it’s not.

Remember, academic tracking error is the annualized standard deviation of daily return differences. If the index is up 1 percent today, and VWO is up 0.95 percent, well, that’s -.05 percent to add to the series. Take that whole series, plug it into your stats package, get the standard deviation, annualize it, and there you go.

There are a few reasons this is all a terrible idea. First of all, imagine that VWO was actually missing its mark by 0.05 percent, day in and day out. Well, the standard deviation of those daily differences will be zero. It’s enormously consistent. Continue reading →

ETF News

ETFs that “Tilt” for Institutional Investors

Leave a comment

  Courtesy of Rosalyn Retkwa

Most ETFs are still designed to track an index passively at a low cost. But the market can support only so many ETFs that simply copy an index, and with actively managed ETFs still problematic, there is a growing category in between: ETFs that use “factor-based strategies” to reweight indexes in favor of factors other than market capitalization. Such ETFs are still in the passively managed camp because once they establish their rules for reweighting, they have to follow those rules, but they’re not plain-vanilla passive, either.

“A lot of the new index funds deviate away from market cap and try to implement strategies that add performance over the market cap performance,” says Samuel Lee, the editor of Chicago-based Morningstar’s newsletter, ETFInvestor. “The most common type of non-market-weighted strategy is the value strategy, where stocks are cheap by some sort of fundamental accounting measure — price-to-earnings, price-to-book or price-to-cash-flow,” he says. But there are a number of factors that can be used in reweighting indexes, for instance, “company size is well accepted as a factor,” he says.

The newest factor-based ETFs to hit the market are the “tilt index” funds from FlexShares, sponsored by Northern Trust of Chicago. In its product literature, FlexShares describes its tilt funds as “applying a nuanced ‘tilt’ methodology” that weights its portfolios more towards small-cap and value stocks. The funds still include large-cap and growth stocks, but “seek to counterbalance the inherent bias toward large-growth companies embedded in market-weighted strategies,” the firm says. Continue reading →

ETF News, People Profiles

Axing the Taxes Using ETFs

Leave a comment

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, Tech Talk

Tradeweb to Launch European ETF “Trading Hub” with “RFP” model

Leave a comment

Courtesy of IndexUniverse.eu Rebecca Hampson

The electronic trading platform for exchange-traded funds launched at the end of last month by electronic market place provider, Tradeweb, has been backed by ETF issuer, Source who says that it will create a central hub of liquidity in Europe, which the market currently lacks.

Michael-John Lytle, managing director at ETF issuer Source, told IndexUniverse.eu: “In Europe, US$3bn of ETF trades take place on-exchange daily.  This is much less than in the US where, on average, US$50bn is traded. This move has the potential to expose the other two thirds of European market flows which trade over-the-counter (OTC). Transparency can in turn encourage further liquidity and this is vital to a thriving and growing ETF market. Hence, it is a very exciting development.”

He said: “Liquidity in the European ETF market is very fragmented and this platform has the potential to capture a meaningful portion of OTC liquidity in Europe.”

Tradweb’s platform will allows buy-side firms access to 5,000 European-listed ETFs’ prices on request. Because of the transparent nature of the platform it is hoped that it will boost trading and encourage more market participants to join.

Lytle said: “The platform will facilitate large trades that would be challenging to execute on-exchange.  These OTC transactions are currently executed over the phone.  This platform will allow an investor to simultaneously collect prices from up to five market makers.  If it is successful, this will be a big step forward for the European ETF market.”

“Tradeweb already has 11 ETF market makers on board and a couple of dozen clients. It also has a tried and tested technology platform used widely in fixed income. Concentrating flows in one venue has the potential to centralise and expose a meaningful amount of OTC activity.”

“Any e-trading platform that requires multiple mouse clicks in effort to first source block liquidity, wait for responses for bids and offers, and then execute a transaction needs to be populated at the outset with credible and actionable liquidity, otherwise I’m still much better off relying on the new hybrid “high-touch/high-tech liquidity aggregators” who leverage technology and navigate the OTC market-maker ecosystem.”   Continue reading →

ETF News

Europe Dividend ETFs Offer Big Yields

Leave a comment

Courtesy of  Daniela Pylypczak

Amidst the seemingly never-ending eurozone drama, there have been some surprising bright spots in the space: Europe Dividend ETFs. These products have managed to maintain their footing, while at the same time provide investors with relatively handsome dividend yields.

Currently, there are only two funds whose sole objective is to target dividend-paying companies from Europe. And while these two ETFs focus on the same geographical region, their methodologies, portfolio composition and resulting dividend yields are noticeably different.

STOXX European Select Dividend Index Fund (FDD)

This offering from First Trust offers investors exposure to 30 of the highest-dividend yielding stocks from roughly 18 different European countries. Considering that FDD’s underlying index is dividend-weighted, it is perhaps not surprising to find nearly 45% of the fund’s total assets allocated to the its top 10 securities, making the 30-stock portfolio rather top-heavy along and relatively shallow. Although FDD’s portfolio composition might deter some investors, its ability to deliver juicy yields to its investors may prompt some to give this fund a closer look. Currently, FDD’s annual dividend yield is 4.98%, the highest among the Europe-specific dividend ETFs

Europe SmallCap Dividend Fund (DFE)

WisdomTree’s DFE allows investors to make more of a “pure play” on the European economy, while at the same time maintaining relatively high dividend yields. DFE invests in small cap European stocks, an asset class that is often overlooked by most Euro-focused ETFs. Continue reading →

ETF News

Vanguard’s CIO Gus Sauter: Agency Execution is our Preference

Leave a comment

  Courtesy of  Gregory Bresiger.. Excerpts from Part 3 of a series of interviews with Vanguard Chief Investment Officer Gus Sauter

How does Vanguard Funds,’ famous for Fred Mertz like trading economy, go about finding the lowest possible costs? The process is detailed in Part Three of Traders Magazine’s Q&A with Vanguard chief investment officer Gus Sauter.

Traders Magazine: Why have you and your company launched this campaign to change what you perceive as an overpriced market structure?
Gus Sauter: I think transaction costs are surprisingly high.

Traders Magazine: You said in an interview that “a large part of indexing is actually being a trader.”  Does mean that, as with most traders, you’re using algos and using agency traders like ITG or Instinet. How does it work out for Vanguard?
Gus Sauter: We do most of our trading through agency brokerage. We will use brokers’ algos as well if we think that is appropriate for trading. We monitor the transaction costs on a broker by broker basis.

Traders Magazine: Even index fund managers need the same trading skills as though who are actively managing funds?
Gus Sauter: Yes, it really is important that our portfolio managers understand how to trade, how to execute, how to find the right strategies and venues. Should it be an algo or something they are using a dark pool.

Traders Magazine: Higher than most investors think?
Gus Sauter: Yes, a lot of people don’t realize how much money you could spend on transactions if you’re not careful. In other words, we trade hundreds of billions of dollars a year. If you lose , just a half a percent, you’re losing a billion dollars.

Traders Magazine: The implication of what you’re saying is the industry, especially in good times, is incredibly sloppy. Is it because it is other people’s money?
Gus Sauter: Yea, hard for me to tell you. Historically, people have never had respect for the magnitude of transaction costs. They really felt they provided so much alpha in their actively managed funds that they really didn’t have to worry about transaction costs.

Traders Magazine: Not over the past decade…
Gus Sauter: Yes, in a lower return environment people really recognize how much costs are.  And they are devoting more time to how they trade.

 

Full article: http://www.tradersmagazine.com/news/vanguard-sauter-brokers-capital-110393-1.html?zkPrintable=true

 

ETF News

IndexIQ Launches QMN: Latest in Innovative Family of Absolute Return Hedge Fund ETFs

Leave a comment

IndexIQ, a leading developer of liquid index-based alternative investment solutions, is launching the newest addition to its Exchange-Traded Fund family, the IQ Hedge Market Neutral Tracker ETF (QMN), on October 4, 2012, it was announced today. QMN is designed to offer investors liquid, transparent Market Neutral hedge fund exposure.

QMN will seek to track, before fees and expenses, the performance characteristics of the IQ Hedge Market Neutral Index (IQHGMN), part of IndexIQ’s proprietary IQ Hedge family of benchmark hedge fund replication indexes. The IQ Market Neutral Index (IQHGMN) has live performance dating from September 2008.

“Market Neutral is one of the largest hedge fund investment styles, both in terms of the number of funds and in the amount of assets being put to work,” said Adam Patti, IndexIQ CEO. “After incubating the index underlying QMN for four years, we felt it was an excellent time to roll out this strategy, particularly given the volatility and uncertainty inherent in today’s market environment. As we add QMN to our fund family, IndexIQ now has ETFs for investors who want to gain liquid, transparent, low cost exposure to Market Neutral (Ticker: QMN), Global Macro (Ticker: MCRO), and Hedge Funds of Funds (Ticker: QAI). We’re very pleased to be the pioneer in yet another area of the alternative investment landscape.”

Fully story here

ETF News

Vanguard Drops MSCI..

Leave a comment

Widely reported..and excuse our delayed tape i.e. dissemination.

Excerpt courtesy of IndexUniverse

Vanguard, the world’s biggest mutual fund company, has decided to segue away from some MSCI indexes over the next several months in favor of benchmarks created by FTSE. The move was motivated in part by lower index licensing costs and will involve its $67 billion Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO).

Vanguard’s switch affects six international equity funds that had total assets of $170 billion as of Aug. 31, FTSE said today in a press release, noting the transaction was the largest ever international index-provider switch. The switch leaves iShares, the world’s biggest ETF firm, as the ETF firm with the deepest ties to MSCI.

The six funds will change to benchmarks in the FTSE Global Equity Index Series, replacing MSCI, and VWO and the index mutual fund of which it is part will be based on the FTSE Emerging Index, FTSE said. One huge difference is the absence of South Korea from the FTSE index, while the MSCI index weights the country at around 15 percent.

In its own press release, Vanguard said that in addition to the six international benchmarks moving to FTSE indexes, it also plans to switch indexes on 16 U.S. stock and balanced index funds to benchmarks developed by the University of Chicago’s Center for Research in Security Prices (CRSP)—a leading provider of research-quality, historical market data and returns. The existing indexes on these U.S.-focused funds are also provided by MSCI.

Full story: Click Here for IU update

ETF News

ETFs That Mature Like Bonds : Guggenheim Gets It

Leave a comment

  Courtesy of WSJ Reporter Daisy Maxey

While growth hasn’t been explosive, one family of defined-maturity ETFs, offered by Guggenheim Investments, a unit of Guggenheim Partners LLC, has grown to $1.6 billion since the first funds were launched about two years ago. And a defined-maturity municipal-bond fund group at BlackRock Inc.’s iShares unit has attracted about $220 million.

These ETFs seek to combine the diversification of a bond fund with the fixed term of an individual bond. A fund with the year 2015 in its name, for instance, will hold bonds that mature in that year—and it will liquidate by the end of that year.

But while the interest payment and face value of an individual bond are spelled out up front, the funds’ monthly distributions and payouts at maturity may fluctuate some. “It’s a little different structure” for investors to learn about, says Timothy Strauts, an ETF analyst at researcher Morningstar Inc.

The ETFs were designed partly to be building blocks in a “laddered” bond portfolio, where investors buy bonds with staggered maturity dates and hold them to maturity. Traditionally, laddering was done with individual bonds, but getting sufficient diversification can require an investment of $500,000 or more.

Investment advisers are the biggest buyers of the funds, but many wanted to see how the funds worked at maturity before buying, says William Belden, head of product development at Guggenheim. Guggenheim BulletShares 2011 Corporate Bond liquidated successfully at the end of last year, the first in the series to mature, and more advisers are now showing interest, Mr. Belden says.

See the WSJ for the full article.

Continue reading →

ETF News

The “ETF bid” and Feedback Loops: Corporate Bond ETFs

Leave a comment

Courtesy of Brendan Conway

They’re calling it the “ETF bid” — the idea that corporate bond prices get juiced when passively managed funds have to buy them. It’s known to happen in thinly traded stocks in some instances. So it shouldn’t come as a surprise that thinly traded, idiosyncratic markets like high-yield bonds are seeing a similar effect. It’s the cautionary part of an otherwise pretty encouraging story: ETFs’ power to crack open hard-to-reach asset classes for more investors.

This week’s print Barron’s ETF Focus on the subject concludes that investors should be especially wary of selling passively managed bond funds when markets turn bearish — that’s often the best time to buy. And investors who buy these ETFs when markets feel rosy pay a premium for the service. Obviously, it’s best to avoid paying extra if possible.

Yes, it’s the same old advice, to be a contrarian investor. But ETFs are only growing in importance in the bond markets. The more heavily they are traded, the more investors have to pay attention to their pricing dynamics — and that’s true even for those who don’t use ETFs. If you haven’t read our Barron’s print column, one of the key findings comes from Goldman Sachs’ (GS) Charles P. Himmelberg and Lotfi Karoui. The duo estimate that a monthly rebalanced portfolio of bonds tracked by the iBoxx $ Liquid Investment Grade Index, the benchmark driving the $24.5 billion iBoxx $ Investment Grade Corporate Bond Fund (LQD), has beaten comparable non-indexed bonds by roughly 4.7%, or about 1% a year, since the beginning of 2009.

Great, right? Well, not always. Index bonds also appear to sink harder during bad times, as they did late last year.

In this vein, we wanted to point out a meticulous look at how this works in practice, from TF Market Advisors’ Peter Tchir. Continue reading →

ETF News, People Profiles

WSJ Weekend: Managing ETF Costs-Focus on Fees & Order Execution

Leave a comment

Courtesy of Jason Zweig / WSJ Columnist

On Sept. 21, Charles Schwab, SCHW -0.74%the discount broker, cranked up its publicity machine to announce it is cutting expenses on its 15 exchange-traded funds, or ETFs, by an average of 50%, to as low as 0.04%. Invest $10,000 and you can pay as little as $4 a year.

Could expenses go to zero? “Well, with our pricing adjustment, they do round to zero,” quips Marie Chandoha, president of Charles Schwab Investment Management. Schwab isn’t alone: 16 ETFs charge less than 0.1% in annual expenses, according to XTF.com, an ETF-rating website. Investing is within spitting distance of becoming free—and that is unambiguously worth celebrating.

Nevertheless, investors need to bear in mind that annual expenses are the most visible—but far from the only—cost of an ETF. Even as annual expenses race toward zero, you can still get clipped on other costs if you aren’t careful.

Let’s take a moment to put what is happening into historical perspective. In 1976, Vanguard Group introduced First Index Investment Trust (now the Vanguard 500 Index Fund ), which sought to replicate the return of the Standard & Poor’s 500-stock average. The fund’s expenses the first year, says Vanguard’s founder, John C. Bogle, ran at 0.43%.

Today, the cost of a $10,000 account in the same portfolio—now available both as the Vanguard 500 Index mutual fund and the Vanguard S&P 500 VOO -0.45%ETF—is as low as 0.05%. That is less than one-eighth what the same portfolio cost a generation ago and roughly 98% less than what a conventional mutual fund cost in the 1970s.

“There’s still lots of room for improvement” on fees, says Vanguard’s chief investment officer, Gus Sauter. “There’s a tremendous amount of [downward] pricing pressure in the marketplace now.”

Continue reading →

ETF News

Gambling ETF (BJK) Jumped On NFL Ref News-Benzinga

Leave a comment

Courtesy of Benzinga.com ETF Professor

It might just be a coincidence, but one ETF benefited this week from the maelstrom over the NFL’s replacement referees and subsequent return to work by the league’s regular officials. That fund is the Market Vectors Gaming ETF (BJK: 34.01, -0.10, -0.29%).

To say the replacement officials affected football wagers is an understatement. An estimated $300 million changed hands worldwide Monday following a controversial call at the end of the Green Bay Packers/Seattle Seahawks game that saw the latter emerge the winner, according to The Associated Press.

That call worked in favor of sports books because the vast majority of bettors who had action on the game were on Green Bay, the favorite. The problem is too much controversy and incompetence at the hands of the replacement refs is not good for sports books.

And that is not good for big casino operators that run sports books such as Las Vegas Sands (LVS: 46.37, -0.40, -0.86%), Wynn Resorts (WYNN: 115.44, +0.01, +0.01%) and MGM International (MGM: 10.75, -0.13, -1.19%). That trio combines for over 19 percent of BJK’s weight.

So it probably was not surprising to see BJK rise on Tuesday, the first trading day after the Monday Night Football flap. Perhaps BJK rose on speculation the Monday Night Football debacle would force NFL Commissioner Roger Goodell’s hand to get the regular officials back to work as soon as possible.

Read more: http://www.foxbusiness.com/news/2012/09/28/gambling-etf-jumped-on-nfl-ref-news/#ixzz27s3IgfXD
ETF News

Why Actively Managed Mutual Funds Are Investing in ETFs

Leave a comment

   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, Global Macro Strategy, People Profiles

Not So Bad After All For Europe ETFs

Leave a comment

Courtesy of the ETF Professor at Benzinga.com

MarketsMuse extends our warm wishes to all of those celebrating the Jewish New Year and extending  you  “L’Shanah Tovah”

Today’s piece from ETF Professor couldn’t be better timed considering the upcoming (Oct 11)  European Investing & Trading Summit at London’s May Fair Hotel with a special ‘carve-out’ focused on ETF trading and liquidity across the Euro landscape.

Summit Coordinator MarketsMedia advises us at press time that the ETF trading session, hosted by WallachBeth Capital MD Andy McOrmond, is oversubscribed, but additional tix are being made available.

In theory, 2012 should have been a much darker year for ETFs tracking eurozone nations. Headlines have included speculation about Greece’s imminent departure from the eurozone, the need for a massive bailout of Spanish banks and Italy not being far behind in the bailout buffet line.

Then there are these facts. Italy is mired in a recession. Spain’s unemployment rate is over 20 percent and Greece could make the ominous switch to emerging market from developed market status.

Those are just a few of the issues Europe ETFs have had to deal with in 2012. Apparently, markets are not all that logical because while many global investors have anointed U.S. equities the toast of the developed world because the SPDR S&P 500 SPY -0.42% is up 16 percent year-to-date, some eurozone ETFs are doing quite well, too.

iShares MSCI France Index Fund EWQ -1.57%

France departed the AAA credit rating club earlier this year, but the CAC 40 Index has posted a gain of 11.2 percent year-to-date. The iShares MSCI France Index Fund has been even better with a gain of nearly 13 percent. A large part of the reason for EWQ’s good fortune is that many of its components derive the bulk of their revenue from outside the eurozone.

For example, Total TOT -1.56% and Sanofi SNY -1.40% account for about 22 percent of EWQ’s weight and neither is eurozone dependent. EWQ needs to move above $22.65 to confirm another breakout.

iShares MSCI Belgium Investable Market Index Fund EWK -0.94%

Belgium is another surprise eurozone winner this year, particularly because the country endured some ratings downgrades in late 2011. In fact, 2011 was so rough on EWK it was outperformed by the iShares MSCI Spain Index Fund EWP -2.96% and the iShares S&P Europe 350 Index Fund IEV -1.28% . Continue reading →

ETF News, Strike Price

Institutional investors see big tail-risk event ahead

Leave a comment

Courtesy of Christine Williamson

About three-quarters of executives from a mixed universe of institutional investors think a significant tail-risk event is likely to very likely within the next 12 months, according to a new survey from State Street Global Advisors.

Survey respondents — money managers, family offices, consultants and private banks — expect the five most likely causes of a tail-risk event in the next year would be a global economic recession (36%); a recession in Europe (35%); the breakup of the eurozone (33%); Greece dropping the euro (29%); and a recession in the U.S. (21%). (Percentages total more than 100% because respondents could select multiple causes.)

About 80% said they believe that tail-risk management should be an integral part of portfolio management, and 73% said they are better prepared to weather a severe market downturn since making strategic asset allocation changes after the 2008 market crash.

Fully 80% of the universe said they are somewhat confident to very confident that they have some form of downside protection in place that will protect their portfolio from the ravages of a severe downturn in the market, said Michael Arone, managing director and global head of portfolio strategy at SSgA, in an interview.

When it comes to the strategies that provide the most effective hedge against tail risk, 61% of SSgA’s survey group named diversification over traditional asset classes; 55% cited risk-budgeting techniques; 53%, managed volatility equity allocations; 50%, direct hedges; 43%, other alternative investments; 39%, managed futures allocation; 38%, single-strategy hedge funds; and 37% named hedge funds of funds.

Prior to the 2008 tail-risk event, 89% of institutional investors — a category in which SSgA included pension funds, money managers and private banks — diversified across asset classes, a practice that dropped to 67% in mid-2012. Risk budgeting was employed by 71% of institutional survey respondents pre-crash vs. 63% post-crash in mid-2012; managed volatility equity strategies, 50% pre-crash, 55% mid-2012; managed futures allocation, 44% pre-crash, 39% mid-2012; direct hedging, 36% pre-crash, 44% mid-2012; hedge funds of funds, 41% pre-crash, 28% mid-2012; single strategy hedge funds, 34% pre-crash, 39% mid-2012; and other alternative investments, 57% pre-crash, 58% mid-2012.

SSgA commissioned the survey, which interviewed 310 investment professionals in June and July.

The firm’s full report, “Managing Investments in Volatile Markets,” will be available on Sept. 27.

Original Story Link: http://www.pionline.com/article/20120924/reg/120929951

This copy is for your personal, non-commercial use only. Reproductions and distribution of this news stor

Strike Price

Options Industry Looks for New Sources of Order Flow-RIAs Need Education

Leave a comment

  Courtesy of Peter Chapman

With options volume down this year, industry professionals are looking beyond traditional players such as retail investors and hedge funds for growth.

“We are strongly focused on the institutional space,” Alan Grigoletto, director of education at the Options Industry Council, said at this year’s joint Futures Industry Association and OIC options conference in New York. “In the coming years, we see much more participation from wealth advisers and pension funds, and even endowments.”

Most of the industry’s volume comes from two sources: retail traders and hedge funds. Retail investors were the driving force that got the industry on its feet in the 1970s. The hedge funds have jumped in over the past 10 years.

But with volume down 13 percent through August of this year, tapping new sources of flow has taken on new urgency. During the first eight months of this year, volume dropped to an average 16 million contracts per day from 18.5 million last year.

“The appetite is just not there,” Nasdaq OMX managing director Chuck Mack said at the FIA-OIC confab. “We need that appetite. We need the hungry investors to come back in.”

For those looking to corral new players, there’s good news and bad news. The good news is that registered investment advisers are “flocking to the options market,” Jeff Chiappetta, a TD Ameritrade executive responsible for institutional trading, including advisers, told conference-goers.

The bad news is that pension funds and mutual funds are not flocking to options, according to industry sources. Mutual funds are starting to set up hedged versions of some of their stock funds using options, but the trend is nascent. Pension plans are also tiptoeing into options, but the pace is glacial.

“The trustees on the boards of these [pension] plans come from all walks of life,” Gregg Johnson, a consultant to public pension plans with Gray & Company, told conference attendees. “They range from policemen and firemen up to sophisticated investors. But when they hear the word ‘options’ or ‘derivatives,’ they become frightened. They don’t understand. They always think they add more risk to a portfolio, rather than reduce it.” Continue reading →

ETF News

ETFs Overtaking Swaps for Junk-Bond Speculation:

Leave a comment

By Mary Childs – Sep 17, 2012

Exchange-traded funds are poised to overtake credit derivatives by year-end as a way to speculate on junk bonds.

The value of corporate securities held by the five-largest junk ETFs almost doubled in the past year to a record $31.4 billion, while the net amount of protection bought or sold on the debt using the two current credit-default swaps indexes declined 3 percent to $35 billion, data compiled by Bloomberg show. The ETFs are growing at an average 5.2 percent monthly pace this year, which would put assets at more than $36.5 billion by Dec. 31.

Trading in credit swaps has slowed as the market faces regulation for the first time under the Dodd-Frank Act, potentially making them harder and costlier to buy and sell. The growth of junk-bond ETFs, which are listed on exchanges and brokered like stocks, has accelerated since their inception in 2007 as investors seek a faster and cheaper way to trade debt.

“Product innovation is often the answer to regulatory change and I don’t think it’s any coincidence that we’ve seen this explosion of interest in fixed-income ETFs just at the point at which CDS as a product and asset class comes under pressure,” Will Rhode, director of fixed-income at research firm Tabb Group LLC, said in a telephone interview.

Gaining Influence

Junk-bond ETFs, which have attracted 25 percent of high- yield fund inflows since 2010 as measured by EPFR Global, are gaining influence in a market where both securities and their derivatives are generally traded off exchanges.

Even investors seeking to hedge against losses on the securities have started using ETFs, with the number of shares borrowed to bet against one run by State Street Corp. surging almost three-fold from the end of 2011.

Credit swaps, created in the 1990s as a means for lenders to protect against losses on corporate debt, gained popularity in the past decade as a way to wager on gains without actually owning bonds or loans.

With the Federal Reserve saying last week it will probably hold its interest-rate target near zero through at least mid- 2015 and conduct a third round of bond purchases to stimulate the economy, investors are gravitating toward the funds to boost returns as demand for default protection diminishes. Continue reading →

ETF News

Virtu Financial Buys Dutch Market-Maker in Push to Provide European ETF Liquidity

Leave a comment

Courtesy of WSJ with reporting by Jenny Strasburg

Virtu Financial LLC said it bought a Dutch market-making business, bolstering the U.S. trading firm’s presence in a European exchange-traded-funds market that has emerged as a profitable battleground for high-speed traders.

Virtu, one of the most-active traders of stocks, commodities and other securities in the U.S. and Europe, acquired the market-making division from Amsterdam-based Nyenburgh Holding BV, the companies said. They declined to disclose the value of the transaction.

Market makers stand ready to buy and sell securities at quoted prices, helping ensure that trades are executed smoothly. Market makers take a sliver of profit from each transaction, and the flow of data can help them profit in their own trades.

With the Nyenburgh deal, New York-based Virtu gains relationships with ETF issuers as well as buyers and sellers of the instruments, which include pensions and hedge funds, said Chris Concannon, a Virtu partner and chief compliance officer of its broker-dealer operation. Virtu has traded European ETFs since 2009.

Virtu expects growth in the ETF market will help fuel trading in the assets that underlie them, from gold and palladium to agricultural-commodity futures. The firm, through its Dublin-based office, became a registered market maker on the London Stock Exchange in August, and is registering on major European exchanges, said Douglas Cifu, Virtu’s president and chief operating officer.

The deal comes amid mounting competition and regulation in the European market for ETFs, or investment funds that track the performance of indexes and other baskets of individual securities. Unlike in the U.S., the majority of ETF trading in Europe occurs in over-the-counter transactions. But new rules are pushing more ETF trading onto exchanges, providing opportunities for  trading firms like Virtu to grab a bigger share of the market.

Noted James Ryan of London-based ETF broker WallachBeth International, “Virtu’s expanded role as a liquidity provider in European-based ETFs will necessarily enhance the playing field as the ETF market in Europe continues to evolve and otherwise catch up to the US market in terms of both institutional investor transparency and overall liquidity.” Continue reading →