All posts by MarketsMuse Staff Reporter

ETF News

Actively Managed ETFs Are Less Volatile, Lipper Finds

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Courtesy of  Barron’s Brendan Conway:

By Brendan Conway

Actively managed exchange-traded funds attempt to pick winners much like, say, Bill Miller does in mutual funds. The number of such funds has taken off, and while they’ve tended to underperform versus passive index-tracking ETFs, they’ve also been less volatile.

Those are some of the findings of a new Lipper report by Sasha Franger, the company’s fiduciary research analyst. The group has returned an annualized 2.78% over the last four years, versus 3.20% for “pure” index peers, Franger found. The trend turned in the last year, however: Actively managed ETFs’ performance pulled ahead slightly.

Market gyrations appear to be blunted in actively managed ETFs. This makes intuitive sense: An active manager should be able to pull your assets out of plunging equities or bonds when the environment calls for it. Passive funds can’t.

Median active ETF annual performance ranged from 1.31% to 10.83% for the last four years, while median performance for pure index ETFs has experienced huge swings and has ranged from -40.09% to 55.59%, coinciding with the economic downturn and recovery.

Click here for the full article

ETF News

NYSE Backs Payments for ETF Market Makers; Incentives To Street For Providing Liquidity

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Reporting courtesy of James Armstrong/Traders Mag.

Following a similar proposal by Nasdaq OMX, NYSE Euronext has unveiled a plan to allow market makers to get paid for providing liquidity for exchange-traded funds. If approved, the plan could reduce the number of funds listed without lead market makers.

On April 27, NYSE formally asked the Securities and Exchange Commission to authorize a pilot program that would add incentives for firms that become LMMs. Under the proposal, issuers would be allowed to pay an additional $10,000 to $40,000 per year to attract market makers.

Bryan Johanson, managing director for global index and exchange-traded products at NYSE Euronext, said firms have been increasingly reluctant about becoming LMMs, and the exchange wanted to offer an additional incentive to attract market makers to that role.

Under the NYSE plan, issuers could pay an optional quarterly incentive fee to the exchange, which would then use that money to distribute credits to LMMs that meet minimum performance standards.Johanson said the exchange discussed the matter with market makers and found that around $10,000 to $40,000 was the level at which they started to consider taking on new exchange-traded products.

“We didn’t want this to be overly burdensome for the issuers,” Johanson said. “We tried to balance their interests with the market makers so we could come up with a figure that was appropriate and fair.”

A Financial Industry Regulatory Authority rule prohibits payments for market making, but NYSE argues this rule applies to securities of individual companies, not to exchange-traded products. Continue reading →

ETF News, Strike Price

UofMass Study: Option Collar Strategies Deliver Better Performance With Less Risk

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As reported by Pension&Investments Magazine, a newly-published research report from the University of Massachussetts has found options-based collar strategies would have outperformed the market in most asset classes, while providing drastically reduced risk leading up to the 2008 financial crisis, AND as well, throughout the subsequent recovery.

“The contagion across asset classes during the financial crisis suggests that protective options-based investment strategies, such as collars, when implemented on a wide range of asset classes, could provide portfolios with greater downside risk protection than standard multi-asset diversification programs,” according to a summary release of the report issued by the Options Industry Council, which helped sponsor the research by Edward Szado and Thomas Schneewies. Mr. Szado is a research analyst and Mr. Schneewies a professor of finance, Isenberg School of Management, University of Massachusetts.

The research covers the 55 months from June 2007 to Dec. 31, 2011, and expands on a 2010 paper that studied the effects of a collar strategy against the PowerShares QQQ ETF from 1999 to 2010.

The authors evaluated the impact of collar strategies against ETFs across a wide range of asset classes such as equities, commodity, fixed income, currency and real estate, based on a set of rules where a six-month put option is purchased and consecutive one-month calls are written. While Australian dollar and Japanese yen currency ETFs, two bond ETFs and Nasdaq and gold ETFs outperformed the collars, the strategy outperformed other ETFs across asset classes while providing significant risk protection. Continue reading →

ETF News, People Profiles

Narrowing Spreads for Illiquid ETFs

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Excerpts Courtesy of James Armstrong/Traders Magazine

For some illiquid exchange-traded funds, the price isn’t always right. Spreads can be unreasonably wide, luring the less informed to take the bait and accept a price that is far from reasonable. Fortunately, those spreads are slowly narrowing due to competition.

With illiquid funds, the screen does not always match what an ETF is really worth. If a fund rarely trades, both the bid and the offer will be posted by professional trading shops and will be skewed to a premium or a discount. That means spreads can be more than a dollar wide at times.

Even if liquidity is present, it’s not showing up in the posted prices. Recent data from Index Universe shows more than 10 percent of ETFs still have spreads of 100 basis points or more. The vast majority of those funds have an average daily volume of fewer than 5,000 shares.

Many in the industry are trying to help investors who want access to these lightly traded ETFs but don’t want to get soaked every time they buy or sell. Gradually, they are starting to get some of those spreads down to more reasonable levels, though certain funds still have a way to go.

High-Touch + High-Tech Approach

The agency shop WallachBeth Capital has built a niche for itself with ETFs that trade in lesser quantities. Though liquid ETFs can be plugged into algos without much of a problem, less liquid ones cannot, so WallachBeth combines high tech with a high-touch approach to its trading. The firm uses a highly-sophisticated trading technology platform to support its ETF desk of 12 traders to find liquidity that doesn’t show up on the screen.

Andrew McOrmond, managing director at WallachBeth, said if a broker only calls one or two people, and counterparties know there isn’t much competition for that order, they won’t get the best price. But when a firm calls 22 people, he said, and their counterparties are aware of this, firms on the other side tend to give their best price rather than dangle an outlier number in hopes of catching a big spread.  Continue reading →

ETF News

Finra Fines Wells Fargo, Three Others Over ETF Sales

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Citigroup Inc. (C), Morgan Stanley, UBS AG (UBSN) and Wells Fargo & Co. (WFC) agreed to pay a combined $9.1 million to settle regulatory claims they failed to adequately supervise the sale of leveraged and inverse exchange-traded funds in 2008 and 2009.

The firms also didn’t have a reasonable basis for recommending the securities to their clients, the Financial Industry Regulatory Authority said today in a statement. They will pay fines of about $7.3 million and reimburse $1.8 million to customers.

“The added complexity of leveraged and inverse exchange- traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers,” Brad Bennett, Finra’s chief of enforcement, said in the statement.

Finra warned brokers in June 2009 that leveraged and inverse ETFs were difficult to understand and not a good fit for long-term investors. ETFs typically track indexes and trade throughout the day on an exchange like stocks. Leveraged versions use swaps or derivatives to amplify daily index returns, while the inverse funds are designed to move in the opposite direction of their benchmark.

Because gains or losses in the funds are compounded daily, returns of more than one day can differ from expected returns gauged by the underlying index.

Firm Assessments

Wells Fargo, based in San Francisco, was assessed the highest fine at $2.1 million and must pay $641,489 in restitution. Citigroup, based in New York, received a $2 million fine and must pay $146,431 in restitution; New York-based Morgan Stanley will pay a $1.75 million fine and $604,584 in restitution; and Zurich-based UBS will pay a $1.5 million fine and $431,488 in restitution.

In settling the claims, the firms neither admitted nor denied the charges, said Washington-based Finra, the brokerage industry’s self-funded regulator.

For more on this “believe-it-or-not, this sh*t still happens story”, please go to Bloomberg LP; the first reader comment is a doozy!

ETF News, People Profiles

BNY Mellon Awarded Best ETF Service Provider In The Americas for Sixth Year in Row

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Here’s a morale booster for BNY Mellon staff:

NEW YORK, May 1, 2012 /PRNewswire via COMTEX/ — BNY Mellon, the global leader in investment management and investment services, has been named as the 2011 “Best Service Provider – The Americas” at the eighth annual Global ETF Awards, which is sponsored by exchangetradedfunds.com. This is the sixth consecutive year that BNY Mellon has been honored as the top service provider to ETFs (exchanged-traded funds).

“Our industry-leading technology platform coupled with the unmatched expertise of our global service group have enabled us to quickly adapt to the wide array of innovative ETFs entering the marketplace,” said Joseph F. Keenan, managing director for BNY Mellon Asset Servicing and head of its global ETF services business. “Our unwavering commitment to providing the highest quality customer service and our passion for partnering with sponsors to help drive the evolution of the ETF industry are both key reasons for consistently winning this award.”

ETF News, People Profiles, Strike Price

UK’s Abydos Hedge Fund Using Options to Prepare for Iran Strike

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(Reuters) – Abydos Capital, a new hedge fund run by a former partner at one of London’s most high-profile oil investors, is worried about a potential military strike against Iran and plans to use options to protect his portfolio.

Jean-Louis Le Mee, Chief Investment Officer of Abydos, told Reuters he thinks there is a 25 to 50 percent chance of an Israeli strike against Iran’s nuclear capabilities, an act that would likely send stock markets tumbling and drive up oil prices, hitting hedge funds that hadn’t protected their portfolios.

Le Mee, one of the first hedge fund managers to discuss such a strategy, said he was planning to use options to profit from a spike in oil prices and a fall in equities via the S&P 500 index .SPX if Iran was attacked over its nuclear programme.

“There’s a high chance that something will happen either this summer in June/July or after the U.S. elections,” said Le Mee, whose former firm BlueGold made headlines in 2008 by calling the peak of the market. “If talks break down, then the Israelis could do something very quickly.

A typical hedging policy could see a fund buy call options, the right to buy at a certain price, on an asset it expects to rise, and buy put options, the right to sell at a predetermined price, on assets it expects to fall. Continue reading →

ETF News

State Street Begins Asset-Allocation ETFs in Active Push

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State Street Corp. (STT), the second- largest manager of exchange-traded funds, opened three products that can spread money across a range of asset classes in a push into actively managed ETFs.

The funds will use tactical asset-allocation strategies and invest in ETFs including those run by State Street, James Ross, senior managing director of State Street Global Advisors, the Boston-based company’s money-management unit, said today at a conference in New York. The mix of underlying investments will include stocks, bonds, commodities and other asset classes.

“I can see active ETFs being a larger part of the ETF landscape,” Ross said. “We obviously plan to participate in that growing market.”

State Street, which introduced the industry’s oldest ETF in 1993, manages about $307 billion in the products, entirely in passive strategies. The firm’s active ETFs come about two months after Bill Gross became the most prominent fund manager to push into the industry. Gross’s Pimco Total Return Exchange-Traded Fund, which has beaten the bond market with a 3.3 percent return since it started on March 1, has gathered $540 million in assets.

Continue reading →

Strike Price

Sponsors Scout Buying Options within SMAs

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A little-used and relatively obscure investing strategy – buying options within a separately managed account – has made a bit of a stir in recent months, with a spike in product development talks between asset managers and platform sponsors, mostly for the strategy’s potential to address advisor and client concerns about market volatility.

The technique of using options in SMAs has been around for a while, primarily as a specialty aimed at generating returns through option-writing expertise, or to help clients with large concentrated positions hedge their portfolios. The new strain of product inquiries, however, is looking at how options might help advisors address a major concern of the last few years: lessening the shock and distress clients feel when the markets shimmy and shake in all directions.

“We’re seeing more demand in the last year or so, maybe even in a shorter timeframe,” says Patty Loepker, director of externally managed SMA and institutional products at Wells Fargo Advisors, who is chairing the Money Management Institute’s conference this week in Chicago. “More advisors are calling and asking for strategies, and we’re seeing more demand for managers that offer it.” Continue reading →

ETF News

Goldman ETF Strikes Gold in India

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  Trading in Goldman Sachs Group Inc.’s gold ETF in India surged almost 11 fold, leading an advance in gold securities, as investors bought gold to mark the auspicious Hindu festival of Akshaya Tritiya.

Volumes in GS Gold BeEs, India’s biggest exchange-traded fund backed by gold, was 937,816 units on the National Stock Exchange of India Ltd. at 4:54 p.m. in Mumbai, up from 85,376 units yesterday and more than the 101,914 average daily volumes in the last six months through yesterday, according to data compiled by Bloomberg.

Gold demand in India, the world’s biggest importer, may climb as much as 25% to 15 metric tons on Akshaya this year, according to Rajesh Exports Ltd., the country’s biggest gold-jewelry exporter.

Assets held by local gold funds reached a record 98.9 billion rupees ($1.87 billion) at the end of March, according to the Association of Mutual Funds in India. GS Gold BeEs had assets worth 29.6 billion rupees (some $563 million (USD)) as of March 31, data from the association showed.

Trading in UTI-Gold Exchange Traded Fund climbed more than fivefold, while volumes in Reliance Gold ETF, the second-biggest fund, was up more than sixfold, data shows.

ETF News, People Profiles

Does Size Really Matter? (with ETF Returns)

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According to Benzinga.com’s ETF Professor, its not necessarily the size of the ETF, but the motion when it comes to investor returns.

From Benzinga’s April 23 edition:

“..There are plenty of instances in life when bigger is better. When it comes to exchange-traded products, bigger isn’t always associated with better [4]. At least when it comes to what should be investors’ primary consideration: Returns.

It has been documented that ETFs and ETNs with low average daily volume [5] and an assets under management number that may not be viewed as impressive by the so-called experts can outperform. In fact, all investing in an ETF with a bigger AUM total does is lead investors to a bigger fund, not larger returns [6].

Fortunately, a move away AUM and average daily volume as the primary determinants of an ETF’s worth is already under way.

“Some of the traders we talk to are using AUM and ADV a lot less now,” said Chris Hempstead, head of institutional sales and trading at WallachBeth Capital. “Some hedge funds using ETFs to hedge might use the larger ETFs because they just need short-term exposure, but buy-side traders are using AUM and ADV less and less.”

The statistics back up the assertion that bigger isn’t always better with ETFs. In an interview with Benzinga, Hempstead noted that in the case of the nine Select Sector SPDRs, all have been outperformed by a comparable fund of smaller stature on a year-to-date basis. Continue reading →

ETF News, People Profiles

Better Take a Peak at China’s PEK..Premium Merchandise

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Courtesy of the ETF Professor at Benzinga.com

Following the March 22 debacle concerning the VelocityShares Daily 2x VIX Short-Term ETN (NYSE: TVIX  that saw the now infamous ETN tumble 30% in that one trading day, traders and investors predictably wondered what exchange-traded product could be next to fall victim to a similar scenario.

That scenario being an ETF or ETN trading at an elevated premium to its net asset or indicative value. One fund that has been noticed trading at elevated premium’s to its NAV is the Market Vectors China ETF (NYSE: PEK [6]) and this has been the case since the ETF debuted in October 2010.

What some investors may not understand is the reason why the Market Vectors China ETF has previously traded at premiums to its NAV that have been as high as 12%, sometimes a tad more. PEK is the only U.S.-listed ETF that offers investors exposure to China’s A shares market, but since foreign investors are limited in owning Chinese A shares directly, PEK uses swaps and derivatives instruments to accomplish its objectives.

Noteworthy is the fact that PEK’s premium has started to shrink, coinciding with news announced earlier this month that the China Securities Regulatory Commission boosted the quotas for qualified foreign institutional investors to $80 billion from $30 billion.

Chris Hempstead, head of ETF trading for New York-based execution firm WallachBeth Capital, talked about the implications increased access to China’s A shares for foreign investors may have on PEK in an exclusive interview with Benzinga on Friday.

Chris Hempstead, WallachBeth Capital

“PEK trading an elevated premium to its NAV in the past was not a function of it not being able to create and redeem shares as was the case with TVIX,” Hempstead said. “There are completely separate reasons why PEK’s NAV has been elevated compared to TVIX and some of the other products.”

Hempstead explained that it is the process by which PEK accesses China’s A shares market that has led to the high premium to its NAV in the past. Continue reading →

ETF News

China approves new yuan ETFs in Hong Kong

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(Reuters) – Chinese regulators have started licensing domestic funds to create new yuan-denominated exchange-traded funds (ETFs) for sale in Hong Kong, hoping to attract fresh investors to use yuan they have accumulated offshore to invest in mainland markets.

Within two weeks of announcing a 50 billion yuan ($7.9 billion) increase in the quotas for the Renminbi Qualified Institutional Investor (RQFII) program, China’s market regulator has already issued licenses for the Hong Kong subsidiaries of some domestic fund management companies to create new funds, according to sources and media reports.

A source at one fund said the CSRC had given approval to create an index-linked ETF but said that permission from the Hong Kong Securities and Futures Commission (SFC) was still pending. The source said the CSRC had not yet specified how much of the new quota the fund would receive.

The 21st Century Business Herald, a prominent financial newspaper, quoted an anonymous fund manager as naming four companies as having received approval to launch index-tracking ETFs: Harvest Fund, China AMC, E Fund Management and CSOP Asset Management.

The report said the funds would track the CSI100 index .CSI100, the CSI300 index .CSI300, the FTSE Xinhua China A50 index .FTXIN9, and the MSCI China A Index .dMICNA0000P but did not specify which fund would track which index.

ETF News

iShares to Introduce EM Corporate Bond ETF Thursday

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Courtesy of Benzinga.com’s  “ETF Professor”–and distributed by Dow Jones MarketWatch..

By far the most prolific issuer of new ETFs in 2012, BlackRock’s BLK +1.83% iShares unit, the world’s largest ETF sponsor, will introduce another new bond ETF on Thursday when the iShares Emerging Markets Corporate Bond Fund (bats:CEMB) debuts.

The iShares Emerging markets Corporate Bond Fund will be the latest iShares offering to list on the BATS Exchange.

CEMB will track the Morningstar Emerging Markets Corporate Bond Index and feature dollar-denominate issues. Eligible individual securities must have a minimum outstanding face value of $500 million or more, and eligible issuers must have aggregate outstanding debt of $1 billion or more to be included in the index and a remaining maturity of 13 months or more at the time of rebalancing and a minimum of 36 months to maturity or greater at time of issuance, according to ETF Daily News.

While there are no ratings restrictions for the issues to be included in the index, the bonds must have at least one rating from Fitch, Moody’s or Standard & Poor’s. Continue reading →

ETF News

Don’t Cry For Me, Argentina…Argh! Re: ARGT

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It remains to be seen whether Argentina’s nationalisation of YPF ends up in a military face-off with Spain (wouldn’t that be the black swan that nobody even thought of?!), but this coverage is courtesy of Zacks Research:

“…In order to play the Argentinean economy in basket form, investors have the FTSE Argentina 20 ETF ( ARGT ) from Global X. The fund hasn’t exactly caught on with investors, as the ETF has less than $5 million in assets and sees pretty wide bid ask spreads.

On the nationalization news, the Argentina ETF sank by 3.6%, pushing the ETF pretty close to its 52 week low. While many Argentinean stocks weren’t too heavily impacted by the news, it should be noted that YPF does make up the fourth biggest allocation in the South American ETF and this company plunged by 11% during market hours although it was up about 2.4% after hours.

Beyond this, it is also troubling that the two biggest sectors in ARGT are energy and basic materials. Given that Argentina has proven to be a proponent of nationalization in the energy space and that basic materials could suffer the same ‘national public interest’ fate, it doesn’t look good for the fund going forward.

In fact, these two sectors combine to make up nearly 45% of the total assets including four of the top ten holdings. Additionally, one has to wonder how much other energy companies will want to invest in Argentina after this debacle, possibly signaling a shift in policy by many oil firms that have operations in the nation.

“Going forward, you are going to see a severe retrenchment of external investors in looking at Argentina,” said Enrique Alvarez , head of Latin American research at IDEAglobal, in a Marketwatchinterview. When nationalism and expropriation “come back into the government lexicon, those are terms that have no fit whatsoever in the current, broader scheme of financial markets and of investments around the globe.”

Thanks to this report and the general uncertainty in this South American market, many investors may want to shy away from an Argentina stock purchase. If anything, ARGT could be an intriguing long term short candidate, or part of a pairs trade with other South America ETFs.

Continue reading →

ETF News

Diamonds Are A Girl’s Best Friend.. Inside an ETF??

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As reported by ETF Trends (among others), diamonds could follow precious metals such as gold to be “commoditized” by the introduction of exchange traded funds based on this obscure market if regulators approve the products.

An ETF could be diamonds’ best friend or their worst enemy, based on your perspective.

Last month,  ETF provider IndexIQ  filed with the Securities and Exchange Commission to launch a physically backed diamond fund.

However, there are many challenges involved with launching diamond ETFs. Unlike gold, the gems are not uniform. There are many different types of diamonds, based on size, quality and other factors. And, unlike most commodities, there is no futures market for diamonds. Up-to-date diamond pricing is very inefficient, and those seeking to receive a more accurate market price on diamonds will have to subscribe to reputable sources.

A diamond ETF would most likely be backed by physical holdings, similar to the most prominent precious metals ETFs. DeBeers, the world’s largest diamond supplier, has received requests to back an ETF vehicle, but nothing has come of it.

Some advisors are already advising caution on a diamond ETF, even though it’s not clear whether such products will gain regulatory clearance. “Stay away until you know exactly how it works, and can be sure it’s acting like you think it will,” said Ron Rowland at Capital Cities Asset Management. It’s going to be a difficult market to create.”

ETF News

AAPL Un-Buckling-Case Study ETF Correlation

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According to TradersMag, during Q1 2012,  ETF volume as a percentage of total volume reported by major exchange fell to 16 percent from 19 percent (for all of 2011) because correlations between individual stocks and ETFs has declined. Once again, it appears to be a stock-picker’s market.

The same column in TM referenced a Credit Suisse reoprt that found that average correlation across the S&P 500 went as low as 13 percent in February. (It has since bounced back to around 40 percent.) In 2011, by contrast, correlation surpassed 80 percent in the fall and ended the year at 77 percent for December.

According to Credit Suisse analyst Ana Avramovic, ““If correlation is high, then macro fears tend to dominate, and ETFs are a great way to implement macro ideas since they give you exposure to an entire sector or theme with a single product. Naturally, as correlations come down, it makes sense that ETF activity would also come down.”

Industry sources suggest that while volumes in plain vanilla ETFs–those comprised of single-name stocks- may be declining, there has been an increased use of leveraged ETFs, and ETFs tied to commodities.  One trader says, “We have so many more sector products that are out there, and so many different ETFs that are coming out that drill down to minutiae so you can get very specialized exposure. “People are going to use that instead of going in to buy a single stock.”

Now,  let’s turn the page back a few weeks to the post that identified the ETFs with largest AAPL weightings. Now let’s look at the overall market averages vs. those ETFs and vs. AAPL.  No surprises, right?

ETF News, Strike Price

From Russia With Love: RSX Iron Condor

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Courtesy of WCI top gun Matt Buckley..For those loving Russia, here’s a market neutral thesis that capitalizes on volatility.

“RSX Implied Volatility is overpriced relative to its forecast volatility of 5.24% over the trade period. We are looking for possible price movement but for it to stay within its $27.00 to $33.00 price range until the exit of this trade.”

Tactic: Opening 25 RSX May 2012 Iron Condors (strikes [24/27/33/36]) for a $0.45 credit

Tactical Employment of Iron Condor:

  • Buying to Open 25 RSX May 2012 $36.00 Calls
  • Selling to Open 25 RSX May 2012 $33.00 Calls
  • Selling to Open 25 RSX May 2012 $27.00 Puts
  • Buying to Open 25 RSX May 2012 $24.00 Puts
  • Net Credit: $45.00 per Iron Condor for a total of $1125.00
  • Max Gain: $1125.00
  • Max Risk: -$255.00 per Iron Condor for a total risk of -$6375.00