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ETF News

China ETFs Seeming More Like The Year Of The Bear

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MarketMuse update courtesy of ETFTrends’ Todd Shriber looking at China related ETFs. 

In the Chinese zodiac, 2015 is the year of the goat, but a popular exchange traded fund tracking China’s onshore equities is getting bearish treatment.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEArca: ASHR), the largest U.S-listed A-shares ETF, had 6.3% of its shares outstanding sold short as of Feb. 23, reports Belinda Cao forBloomberg.

ASHR surged 51.3% last year, making it one of 2014’s best-performing non-leveraged ETFs. That performance was better than quadruple the showing by the iShares China Large-Cap ETF (NYSEArca: FXI), the largest U.S.-listed China ETF. However, the 2014 A-shares rally has those stocks looking richly valued relative to their Hong Kong-listed counterparts, encouraging traders to up bearish bets on ASHR.

“The number of shares borrowed and sold short to profit from a decline in Deutsche Bank’s A-share ETF was 1.8 million on Feb. 23. That’s close to the record of 2.4 million, or 8.2 percent of total shares outstanding, reached Feb. 13,” Bloomberg reports, citing Markit data.

However, another catalyst could be encouraging the increased bearish bets on ASHR. On Jan. 21, Deutsche Asset & Wealth Management (DAWM) was forced to limit creations of new shares in ASHR because increased demand for the ETF was forcing the fund o bump up against their respective Renminbi Qualified Foreign Institutional Investor (RQFII), which allows the funds to purchase A-shares equities. 

Creation limits often lead to ETFs, particularly those with exposure to markets that are closed during the U.S. trading day, trading at premiums to net asset value. Professional traders then look to profit from the gap between the ETF’s market price and lower NAV by shorting the ETF. Since the start of 2015, ASHR has traded at a premium to its NAV in 26 days, according to DAWM data.

Although the most recently announced creation limit for ASHR has not yet been lifted, it should be noted the ETF was affected by the same scenario twice in 2014 and DAWM was quick to get ASHR’s RQFII limit increased.

With ASHR’s 2014 surge, some money managers now prefer H-shares to A-shares, but that means they are also missing out on a notable rally in A-shares small-caps.

The Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap Fund (NYSEArca: ASHS), which was subject to a second creation limit last November, is up 12.1% this year. ASHS tracks the CSI 500 Index of Shanghai- and Shenzhen-listed small-caps.

The Market Vectors ChinaAMC SME-ChiNext ETF (NYSEArca: CNXT), the younger of the two A-shares small-cap ETFs, has surged 23.7% year-to-date, making it 2015’s top-performing non-leveraged ETF. CNXT, which is heavily allocated to mid-caps, tracks the SME-ChiNext 100 (SZ399611), which provides exposure to the 100 most liquid mid- and small-cap stocks that trade on the Small and Medium Enterprise (SME) Board and the ChiNext Board of the Shenzhen Stock Exchange (SZSE).

 

ETF News

J.P. Morgan War On Hacking Boosts ETF $ HACK

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MarketMuse update courtesy of Yahoo Finance from ETF Trends. 

Earlier in the week, MarketMuse profiled cyber security ETFs recent boost and today, Brokerdealer.com profiled how J.P. Morgan’s war on cyber security is costing bankers’ jobs, so it only seemed fitting that MarketMuse combine to two subjects for today’s MarketMuse post. Since the threat of cyber security doesn’t seem to be going away anytime soon, J.P. Morgan is spending more money on cyber security protection and less money investors’ salaries resulting in the lowest banker hiring rate in recent years and growing cyber security ETFs.   

In what has become an almost daily affair in recent weeks, the PureFunds ISE Cyber Security ETF (HACK) is hitting record highs again Thursday and doing so on strong volume.

HACK, the first exchange traded fund dedicated to the cyber security industry, is up 1% today on volume that is already 36% above the daily average. As has been the case with HACK over its brief trading history (the ETF debuted in November), the catalysts for Thursday upside are easy to identify.

Namely, a Bloomberg article detailing J.P. Morgan Chase’s (JPM) commitment to bolstering its cyber security through increased spending and hiring of former military members. The bank was victimized by a cyber security breach in June 2014.

Given HACK’s penchant for responding favorably to such news items (see the controversy surrounding “The Interview” and the ETF’s reaction to the recent Anthem Blue Cross hack), it is not a stretch to say that if HACK was around in June, it would have soared in the days following news of the J.P. Morgan hack. [Anthem Hack Lifts Cyber Security ETF]

HACK did not exist in June 2014, but J.P. Morgan is having a favorable impact on the ETF. In October 2014, J.P. Morgan Chase (JPM) CEO Jamie Dimon said the banking giant will likely double its cyber security spending to $500 million within the next five years.

Important to HACK, Dimon is making good on that promise. J.P. Morgan’s security operation has 1,000 staffers, double the size of the comparable unit at Google (GOOG), according to Bloomberg. Add to that, J.P. Morgan is far from the only major financial services that is expected to increase cyber security spending in the coming years.

Citigroup’s (NYSE: C) cyber security budget jumped to $300 million at the end of last year while Wells Fargo (WFC) spends roughly $250 million a year on cybersecurity and has increased staffing in the area by 50%, according to the Wall Street Journal.

Increased cyber security spending by financial services firms is seen as a boon for companies such as FireEye (FEYE), Palo Alto Networks (PANW) and Japan’s Trend Micro. All three are members of HACK’s portfolio with FIreEye and Palo Alto Networks combining for 9.7% of the ETF’s weight.

Earlier this week, HACK surged after Russia’s Kaspersky Lab, a major cyber security firm, said a group of hackers have stolen as much as $1 billion from over 100 banks in 30 countries since late 2013.

Investors are buying into the thesis that increased cyber security spending bodes well for HACK’s longer-term potential. The ETF that the fund is now home to $231 million in assets under management, confirming HACK’s place on the list of most successful ETFs to debut in 2014. Impressively, HACK’s ascent to $231 million in AUM means the ETF has more than doubled in size over the past six weeks after topping $100 million in assets in early January. The ETF debuted in November.

For the original article, click here.

ETF News

Should You Have An All-ETF Portfolio? Betterment CEO Has An Answer

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MarketMuse update is courtesy of CNBC. CEO and Founder of Betterment , Jon Stein, offered his commentary on this issue to CNBC. Betterment is an automated investing service that provides optimized investment returns for individual, IRA, Roth IRA & rollover 401(k) accounts.

There’s a natural progression in the way the public responds to innovation. Something that first seems like a mere novelty becomes an interesting new niche, then a great idea and then, “How did we ever get along without this?”

In financial services, exchange-traded funds are somewhere around the third or fourth stage, between new niche and great idea. ETFs attracted more net investment last year ($239 billion) than did mutual funds ($225 billion), according to data from Morningstar. Five years earlier the net inflow into mutual funds was more than triple the net amount invested in ETFs.

In the last five years, the public’s affinity for ETFs raised assets under ETF management by 152 percent, to $2 trillion, up from $793 billion. Mutual fund assets only rose 53 percent during the same period.

Faster and cheaper information system infrastructure has helped the growth of ETFs. In my view, ETF portfolios will be the inevitable default for investors in the years to come because they are lower cost, more transparent and offer greater liquidity and tax advantages than mutual funds. Already, the increasing number of assets invested with automated investing services, which use all-ETF portfolios, underscores this shift.

Lower cost

By passively and systematically tracking an index, ETFs are far cheaper to run than most actively managed mutual funds that employ portfolio managers and analysts to select securities. That research costs money, and so does the frequent trading that’s common in such funds—they call it “active management” for a reason—not to mention the buying and selling of fund shares themselves, transactions that always involve the fund provider.

More transparent

ETFs also feature greater transparency. Their underlying portfolios change more rarely because the indexes that they’re based on generally maintain stable lists of components. The high turnover of many mutual funds and the fact that their holdings are reported only four times a year can make it difficult for shareholders to know exactly what they’re holding.

It’s not just the specific securities that can keep mutual fund investors in the dark. The broad nature of the fund itself can become obscured by what’s called “style drift.” Say growth is outperforming value; the managers of value funds, consciously or not, may start tilting toward more growth-oriented stocks.

Depending on what else they own, shareholders may become overweight in growth stocks and not even know it. By contrast, a value-stock ETF will hold value stocks no matter what.

ETFs are more transparent in another sense. The very low expenses and commoditized nature of ETFs make commissions and “kickbacks” to brokers or retirement-plan sponsors impractical. So if an ETF is recommended by an advisor or made available by a broker or retirement-plan sponsor, it’s likely to be an unbiased recommendation.

For the complete article from CNBC, click here

ETF News

Take A Drag Or Sip Out Of These Industries: Smoke and Alcohol ETFs Are Hot

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MarketMuse update is courtesy of Bloomberg’s Justin Fox. It is very difficult to invest stocks for long term, humans’ interests are always changing and that affects the stock market. Bloomberg’s Justin Fox suggests that people should invest in human behaviors such as the tobacco and alcohol industries, such as the tobacco sector big name, Philip Morris International Inc., PM or popular alcohol ETF,  Constellation Brands Inc., STZ. He explains that unless these products are banned, humans will always have an interest.

It would be really cool to know which industries are going to thrive and grow and create jobs in the future. It’s also really hard to figure that out ahead of time. If you’re just interested in which industries will deliver the best stock-market returns, though, history seems to point to an easy shortcut — invest in companies that sell addictive stuff.

I learned this dubious lesson by reading, in quick succession, two big new reports: the Brookings Institution’s analysis of the 50 “Advanced Industries” that are supposed to drive job and income growth in the U.S., and Credit Suisse’s annual “Global Investment Returns Yearbook.” The Brookings report tries to look into the future by measuring investment in technological progress by industry — and although most of the 50 advanced industries it identifies are what you would expect, there are some surprises. In the 2015 Credit Suisse yearbook, meanwhile, Elroy Dimson, Paul Marsh and Mike Staunton of London Business School examine 115 years of stock-market returns by industry, and while they document a lot of technological upheaval, the two biggest winners for investors turn out to be decidedly low tech.

An advanced industry, by Brookings’ accounting, is one “in which R&D spending per worker reaches the top 20 percent of all industries and the share of workers with significant STEM knowledge exceeds the national average.” (STEM = science, technology, engineering and math. And R&D = research and development. But you probably knew that.) There’s lots of research showing that technological change drives economic growth, and R&D spending and STEM knowledge are supposed to be proxies for future technological change.

I don’t know of any obviously better proxies, but the results show the difficulty of any such accounting. The list of the very biggest R&D spenders isn’t particularly surprising:-1x-1

Dig deeper into the advanced industries list, though, and you soon come across industries that don’t seem all that advanced: railroad rolling stock, foundries, petroleum and coal products, metal-ore mining. Are these secret hotbeds of technological change that should command more attention? Probably not. One old-school industry, motor-vehicle manufacturing, does spend a ton on R&D ($48,461 per worker), but those others made the list mainly because there just aren’t that many industries in the U.S. that invest in R&D at all. To get to 50, you have to include a bunch of industries with per-worker spending of less than $5,000 a year. (No. 50, in case you’re wondering, is wireless-telecommunication carriers — which spent just $455 per worker in 2009.)

This isn’t necessarily a problem for the U.S. economy. One thing you’ll notice if you spend any time with the North American Industry Classification System is that it’s backward-looking. Older parts of the economy are divided into lots and lots of industries; newer ones aren’t. So you get railroad rolling-stock manufacturing, which employed 25,200 people in 2013 and generated $3.6 billion in output, counted as an industry on the same level as computer-systems design, which employed 1.7 million people and generated $246 billion.

Yet it’s these newer industries that generate the growth — at least, they have over the past 115 years. In 1900, according to the Credit Suisse yearbook, railroads accounted for 63 percent of stock-market value in the U.S. Now they’re less than 1 percent, and 62 percent of U.S. stock-market value is in industries that were small or nonexistent in 1900. The largest industries by market cap now are technology, oil and gas, banking and health care.

We’re all supposed to believe that past performance is no guarantee of future results. But given human nature, it seems reasonable to expect tobacco and alcohol to continue to do well — unless tobacco is completely banned, of course. Picking the next hot industry is a much harder task, yet it is a much more important one.

For the entire article, click here.

 

 

 

ETF News

Threat Of Hackers Grows And So Does Cyber Security ETFs

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MarketMuse update courtesy of Todd Shriber of ETF Trends, profiles the increase in cyber security ETFs as the threats of being hacked become more and more relevant.

The PureFunds ISE Cyber Security ETF (NYSEArca: HACK) continues to cement its status as a legitimate event-driven exchange traded fund.

HACK is higher by 0.7% Tuesday on volume that is already more than quadruple the daily average after Russia’s Kaspersky Lab, a major cyber security firm, said a group of hackers have stolen as much as $1 billion from over 100 banks in 30 countries since late 2013.

Various media outlets are reporting those hackers are more interested in financial gain than pilfering personal information from the banks’ customers. That point is unlikely to assuage the banks or their customers, but it is enough to have HACK trading at record highs for the second consecutive session.

HACK’s Tuesday momentum is carrying over from last Friday when the ETF soared to a record high on volume of nearly 1.4 million shares as President Obama hosted the first-ever cyber security summit, which featured luminaries from throughout the tech industry, including Apple (NasdaqGS: AAPL) CEO Tim Cook.

Importantly, most of the action in HACK last Friday was of the bullish variety. So intense was buying activity in the ETF that the fund is now home to $231 million in assets under management, confirming HACK’s place on the list of most successful ETFs to debut in 2014. Impressively, HACK’s ascent to $231 million in AUM means the ETF has more than doubled in size over the past six weeks after topping $100 million in assets in early January. The ETF debuted in November.

News of the $1 billion bank hack, while positive for HACK in the near-term, also serves as reminder of the long-term opportunity with the ETF because the financial services industry is expected to be one of the largest spenders on cyber security enhancements in the coming years.

In October 2014, J.P. Morgan Chase (NYSE: JPM) CEO Jamie Dimon said the banking giant will likely double its cyber security spending to $500 million within the next five years.

HACK benchmarks to the ISE Cyber Security Index, “which tracks the performance of companies actively engaged in providing services for cyber security and for which cyber security business activities are a key driver of their business model. These cyber security services are designed to protect computer hardware, software, networks and data from unauthorized access, vulnerabilities, attacks and other security breaches,” according to PureFunds.

 

ETF News

PIIGS Bring Home the Bacon For The Eurozone

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MarketMuse update is courtesy of Tom Lydon from ETF Trends. 

Continuing with what has turned out to be exhausting coverage of European ETFs, the Portuguese, Irish, Italian, Spanish and Greek stocks (the PIIGS) ETFs are showing a bright immediate future for the Eurozone. 

Though still controversial, due in part to looming speculation that Greece could potentially depart the Eurozone, exchange traded funds tracking Portuguese, Irish, Italian, Spanish and Greek stocks (the PIIGS) have the look of value propositions.

Even with Greece’s change in government, one that threatens the country’s ability to pay its debts, meet funding needs and could hasten the country’s Eurozone departure, the Global X FTSE Greece 20 ETF (NYSEArca:GREK) has mustered a small year-to-date gain.

Earlier this month, Standard & Poor’s pared its rating on Greece’s sovereign debt to B- from B. The ratings agency is keeping the long- and short-term ratings on Greece on CreditWatch with negative implications. Greece’s B- rating is just one notch above CCC, a rating that implies vulnerability to nonpayment “and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation,” according to S&P, scenarios that Greece is unlikely to meet in the near-term.

The iShares MSCI Italy Capped ETF (NYSEArca: EWI) and the iShares MSCI Ireland Capped ETF (NYSEArca: EIRL), often seen as the steadiest hand of the five PIIGS ETFs, have been far more alluring than GREK this year. EWI and EIRL are up an average of 6.5% with average volatility of about27%. GREK is up about 2% with 93% volatility.

Investors looking for exposure to multiple PIIGS through the convenience of one ETF that emphasizes value investing can turn to the actively managed Cambria Global Value ETF (NYSEArca: GVAL).

Cambria’s Mebane Faber “Faber employs a statistic called the Cyclically Adjusted Price-Earnings (CAPE) ratio to evaluate countries. First developed by Nobel Prize winner Robert Shiller, the CAPE has proven effective at predicting the future performance of U.S. stocks. The lower the ratio is, the higher the expected return. Faber has applied the CAPE to other countries in his own research. Examining a period from 1980 through 2013, he found that those countries’ markets with a CAPE below seven subsequently produced a 14.4% 10-year annualized return while those with the highest CAPE above 45 produced only 1.2%,” reports Lewis Braham for Barron’s.

GVAL targets the cheapest, most liquid picks in countries where political or economic crisis have depressed valuations. GVAL’s eligible country universe includes Greece, Russia, Hungary, Ireland, Spain, Czech Republic, Italy and Portugal.

At the end of 2014, the five PIIGS member nations combined for 46% of GVAL’s weight,according to Cambria data.

Portugal’s CAPE is 7.7, Italy’s 9.6, Ireland and Spain about 11. The U.S.’s, by contrast, is 27, according to Barron’s.

Helped by its PIIGS exposure and what was an 8% weight to suddenly resurgent Russian stocks at the end of last year, GVAL is up 6.4% over the past month, giving the ETF an advantage of 60 basis points over the iShares MSCI ACWI ex U.S. ETF (NasdaqGM: ACWX).

For the original article from ETF Trends, click here

ETF News

German ETFs Offer Good Opportunities in Rebounding European Market

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MarketMuse update is courtesy of ETF Trends’ Todd Shriber.

Earlier this week and over the past few months, MarketMuse has been covering the rocky European market, thanks to Greece, and its recent rebound, with ETF $GVAL. Now investors have even more to be excited about with the recent success of German ETFs. 

The U.S. is not the only developed market where stocks are eying record highs. Germany’s benchmark DAX accomplished that feat Friday, climbing above 11,000 for the first time.

Exchange traded fund investors are responding, pumping massive of amounts of capital into Germany ETFs. The Recon Capital DAX Germany ETF (NasdaqGM:DAX), the only U.S.-listed DAX-tracking ETF, is up nearly 8% in the past month.

With its heavy tilt toward large, multi-national companies, the DAX index is benefiting from a depreciating euro currency. A weaker euro would help support export growth and potentially generate greater revenue from overseas operations for the multi-nationals.

A weak euro and sturdy data out of the Eurozone’s largest economy is prompting investors to put new capital to work with Germany ETFs. Through Thursday, only three ETFs have seen greater inflows than the $494.1 million added to the iShares MSCI Germany ETF (NYSEArca: EWG), the largest Germany ETF.

One of those three is the WisdomTree Europe Hedged Equity Fund (NYSEArca:HEDJ), which allocates 26% of its weight to German stocks. No ETF has seen larger 2015 inflows than HEDJ’s $4.1 billion in new assets and the gap between HEDJ and the second-place inflows ETF, the SPDR Gold Shares (NYSEArca: GLD), is sizable at over $1.6 billion.

Thanks to the faltering euro, investors are also flocking to currency hedged Germany ETFs. After taking in $450 million on Thursday, the iShares Currency Hedged MSCI Germany ETF (NYSEArca: HEWG) has added over $491 million this week. The ETF, which uses EWG with a EUR/USD hedge, had $287.4 million in assets heading into Thursday.

On a percentage basis, the Deutsche X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR) and the WisdomTree Germany Hedged Equity Fund (NasdaqGM: DXGE) have also seen significant asset growth. DXGE has more than doubled in size this year while DBGR has tripled in size since the start of 2014.

Underscoring the advantage of the euro hedge with German equities, DBGR and DXGE have both produced double-digit returns over the past month while EWG is up “just” 7.5%. Importantly, economic data supports the case for more upside for Germany ETFs,

“German gross domestic product expanded 0.7 percent in the fourth quarter, soaring past an estimate for 0.3 percent. Private consumption rose markedly in the fourth quarter, and investment developed positively, driven by a significant increase in construction output,” reports Inyoung Hwang for Bloomberg.

 

ETF News

Take A Bite Out of This Apple: Tech ETF Surges Off Of Apple’s Success

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MarketMuse update is courtesy of ETF Trends’ Tom Lydon. 

Shares of Apple (NasdaqGS: AAPL) are up a modest by the stock’s standards 0.6% today, pushing the iPhone maker’s market capitalization to a lofty $732 billion and some change.

As has been well-documented, Apple’s ascent to becoming the first company with a market value of $700 billion and its targeting of the unheard of $1 trillion stratosphere is benefiting plenty of exchange traded funds. One of those ETFs is the Fidelity MSCI Information Technology Index ETF (NYSEArca: FTEC).

FTEC is one of the newer kids on the sector ETF block, having debuted in October 2013 as part of Fidelity’s 10-ETF sector suite. That group has since grown by one with the recent addition of theFidelity MSCI Real Estate Index ETF (NYSEArca: FREL).

Fidelity has navigated the ultra-competitive sector ETF landscape with success. In June 2014, Fidelity’s original 10 sector ETFs had a combined $1 billion in assets under management, a number that has since more than doubled to $2.2 billion.

FTEC has been a primary driver of Fidelity’s sector ETF growth. At the end of January, the ETF had $352.6 million in assets under management, good for the second-best total among Fidelity sector ETFs behind the Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC).

In an environment where Apple has more than restored its juggernaut status, FTEC earns its place in the Apple ETF conversation with a weight of 17.1% to the iPad maker. That is more than double FTEC’s weight to Microsoft (NasdaqGS: MSFT), its second-largest holding.

FTEC’s Apple weight of 17.1% also exceeds the weight to that stock found in one of the fund’s primary rivals, the Vanguard Information Technology ETF (NYSEArca: VGT).Unlike rival ETF issuers, Vanguard does not update its funds’ holdings on a daily basis, opting to do so once a month. VGT’s latest holdings update, from Dec. 31, 2014, showsan Apple weight of 15.3%. With the stock’s 14.5% gain this year, VGT’s Apple exposure is now likely well over 16%.

FTEC and VGT compete for the affections of cost-conscious investors as both charge just 0.12% per year, making the pair the least expensive tech sector ETFs on the market. Each has returned 2.1% year-to-date.

Like its rivals, FTEC is a cap-weighted ETF, meaning as Apple’s market value rises, the stock’s presence in FTEC grows. Since the start of December, FTEC’s Apple weight has increased by 140 basis points.

“FTEC offers more exposure to semiconductors and data processing & outsourced services companies and no exposure to integrated telecom services stocks,” according to S&P Capital IQ, which rates the ETF overweight.

ETF News

Catch Europe’s Rebound With $GVAL ETF

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MarketMuse update profiling Europe’s market rebounding is courtesy of ETF Trends’ Tom Lydon. 

With Greece seemingly in the headlines every day, and rarely with good news, it is easy for investors to perceive European equities as damaged and vulnerable to more declines.

On the brighter side of the ledger, history is littered with examples that highlight the profitability of contrarian investing and buying when others are fearful. Enter the Cambria Global Value ETF (NYSEArca: GVAL).

GVAL debuted in March to 2014 and to say the ETF was the victim of inauspicious timing is to understate matters. While an ideal way to gain access to some attractively valued developed European markets, GVAL also features ample emerging markets exposure. Neither emerging nor non-U.S. developed markets were the places to be soon after GVAL debuted.

“GVAL has gotten off to a humble start. But if you’re a believer in value investing as a discipline, then GVAL deserves a serious look. In a market in which the U.S. has outpaced its foreign competitors for years, I consider GVAL to be an excellent, diversified rebound play on Europe and emerging markets,” according to Charles Sizemore.

GVAL’s current emerging markets exposure among its top 10 country weights does not lack for controversy. Brazilian stocks, embroiled in a graft controversy surrounding Petrobras (NYSE: PBR), made up 12% of GVAL’s weight at the end of the fourth quarter. Russia and Greece, rarely deliverers of good news, combined for another 14% of GVAL at the end of 2014, according to Cambria data.

“But herein lies the beauty of GVAL. Few investors would have thick enough skin to take a large position in any of these countries individually. But even investors with nerves of steel would have trouble building a viable portfolio of stocks from most of these markets due to the lack of available U.S.-traded ADRs to buy.   Very few investors have access to the small and mid-cap foreign stocks that dominate GVAL’s portfolio,” notes Sizemore.

The actively managed GVAL targets the cheapest, most liquid picks in countries where political or economic crisis have depressed valuations. GVAL’s eligible country universe includes Greece, Russia, Hungary, Ireland, Spain, Czech Republic, Italy and Portugal. At the end of 2014, 56% of the ETF’s country weight was allocated to Eurozone nations.

Investors can also access a sliver of GVAL via the Cambria Global Asset Allocation ETF (NYSEArca: GAA). Known as the ETF without an annual fee, GAA debuted in December and holds other ETFs. At the time of launched, GAA held a 4% weight to GVAL.

ETF News

Greece ETF Crumbles to Ruins

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MarketMuse update is courtesy of Business Insider’s Sam Ro

MarketMuse has previously reported on the volatility the Greece elections created early this year now even more problems have ensued for the country. Following the the European Central Bank’s announcement that it lifted its waiver on minimum credit rating requirements for marketable instruments issued or guaranteed by Greece, Greece’s ETF crashed leaving just ruins left.

The Greek stock market closed hours ago, but the exchange-traded fund that tracks Greek stocks, GREK, crashed during the final minutes of trading in the US markets.

The euro is also getting walloped, falling 1.3% against the US dollar.

This comes following bad news from the European Central Bank (ECB) to Greece’s debt-laden banks.

Shortly after 3:30 p.m. ET, the ECB announced that it lifted its waiver on minimum credit rating requirements for marketable instruments issued or guaranteed by Greece.

To put it another way, Greek banks can no longer exchange their junk-rated sovereign bonds for cash.

“The waiver allowed these instruments to be used in Eurosystem monetary policy operations despite the fact that they did not fulfill minimum credit rating requirements,” the ECB said in a press release. “The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the programme review and is in line with existing Eurosystem rules.”

“In other words, the ECB doesn’t see Greece complying with existing bailout rules,” Bloomberg’s Lorcan Roche Kelly explained.

However, it’s not all bad. The ECB has another way for Greek banks to exchange their securities for liquidity. The cost of borrowing will however be higher.

“Liquidity needs of Eurosystem counterparties, for counterparties that do not have sufficient alternative collateral, can be satisfied by the relevant national central bank, by means of emergency liquidity assistance (ELA) within the existing Eurosystem rules,” the ECB said.

“The move from the ECB today is a copy of the suspension of Greek debt that occurred in February 2012,” Kelly noted.

“For Greek banks, this move by the ECB will not directly be a disaster as they have reduced their exposure to the Greek sovereign since 2012 and so are less reliant on that debt as collateral,” Kelly argued.

Still, it appears to be more bad than good. And judging by the reaction in the currency and equity markets, investors and traders were hoping for better.

For the original article, click here.
ETF News

Mutual Funds Issuer Hoping to Enter the ETF Ring

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MarketMuse update courtesy of ETF Trends’ Tom Lydon

American Funds, one of the largest mutual funds issuer, are waiting for the SEC to approve an application for the issuer to enter the ETF industry. 

Capital Group Cos., the parent company of American Funds, submitted an application for ETFs to the SEC a year ago. A notice from the SEC indicates approval of American Funds’ ETF foray appears likely though there is still time for opponents to request an SEC hearing, though such a hearing is unlikely, reports Trevor Hunnicutt for InvestmentNews.

California-based American Funds has $1.2 trillion in assets under management, or more than half the current AUM tally for the U.S. ETF industry. However, ETFs are the fastest-growing corner of the asset management industry, underscoring the desire of mutual fund companies to become involved with products that institutional investors and advisors are increasingly adopting.

While it took nearly two decades for the ETF industry to reach $2 trillion in assets, it will not need nearly as long to get to $5 trillion, according to a new report by PwC. The PwC repots says the global ETF industry will reach $5 trillion in combined AUM by 2020.

News of American Funds potentially entering the ETF business represents a reversal from the company’s previous stance on ETFs. The company has been a strident supporter of active management at a time when data indicate many active managers consistently fail to beat their benchmarks.

In September 2013, Capital Group published a study that “argued that its stock-picking mutual funds outperformed their benchmark indexes in the majority of almost 30,000 periods examined over the past 80 years. That included 57 percent of one-year stretches, 67 percent of 5-year periods and 83 percent of 20-year ranges. The Capital Group study examined 17 of the company’s mutual funds that invest in equities or both equities and bonds. It measured their performance over every one-, three-, five-, 10-, 20- and 30-year period, on a rolling monthly basis, from Dec. 31, 1933, through Dec. 31, 2012.”

Still, “only about 13% of actively managed, large-company stock funds posted returns above that of the S&P 500 for 2014,” the Wall Street Journal reports.

Although the SEC notice did not specify whether American Funds will issue active or passive ETFs, the firm’s reputation for active management implies the company would favor actively managed ETFs, a still small, but fast-growing segment of the ETF business. Some industry observers also see actively managed ETFs being a key driver of ETF industry growth in the coming years. For the week ending Jan. 16, U.S.-listed actively managed ETFs had a combined $17.24 billion in AUM with nearly half that total allocated to PIMCO and First Trust ETFs, according to AdvisorShares data.

While that is just a fraction of the overall U.S. ETF industry, increased demand for active ETFs and the potential for a more favorable regulatory environment could make actively managed ETFs a $500 billion asset class by 2020, according to a report by publishedSEI Investments last year.

 

ETF News

Russia’s ETF Tries to Get Back On The Horse

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MarketMuse update courtesy of ETF Trends’ Todd Shriber.

MarketMuse has been profiling the recent market turmoil found all across Europe but mainly Greece and Russia. After a difficult past six months, Russia’s ETF has recently been back on the rise. 

Entering Tuesday, the Market Vectors Russia ETF (NYSEArca: RSX) sported a six-month loss of 35.2%, making it difficult to be bullish on Russian equities.

However, what is now a three-day rally for oil futures is compelling some traders to revisit RSX and the adventurous are even mulling positions in the Direxion Daily Russia Bull 3x Shares (NYSE: RUSL), the triple-leveraged equivalent to RSX. RSX is the oldest, largest and most heavily traded Russia listed in the U.S.

Over the past five days, the United States Brent Oil Fund (NYSEArca: BNO) is up more than 14%, which is important because Russia, the largest non-OPEC producer in the world, prices its oil in Brent terms, the global benchmark. RSX and RUSL have responded with arguably tepid five-day gains of 1.6% and 4.3%, respectively.

Still, traders with temerity might want to give RUSL a look because there are signs of capitulation among RSX bears.

“The RSX, country ETF for Russia, seen below on the daily timeframe, shows a consolidation pattern which has morphed into a sideway channel. Bears have thus far failed to crack it lower, perhaps blinded by love for a crash in crude and failing to recognize the temporary bottoming signs in place for energy and energy stocks. Thus, RUSL is on my radar as a levered long play, especially if RSX holds over $15.30 today,” according to Chessnwine of Market Chess.

Russia ETF

Lunch with Russia ETFs, in particular RUSL, is far from free. RSX has a three-year standard deviation of 27.2%. Said another way, RSX has been 1,200 basis points more volatile than the MSCI Emerging Markets Index over the past three years.

Additionally, oil prices will likely determine the near-term fate of RSX and RUSL. After all, no non-OPEC is as heavily dependent on oil as a driver of government revenue as Russia is. Nearly half of Russia’s government receipts come by way of oil exports.

Of course, there is the valuation argument, a familiar refrain of Russia bulls in recent years. Indeed, Russian stocks are down right cheap. At a forward P/E of four, the MSCI Russia Index trades at less than half valuation of the MSCI Emerging Markets Index and about a quarter of the valuation of the S&P 500.

There is another interesting point in favor of RUSL: Investors’ tendency to be wrong with leveraged ETFs. RUSL has seen outflows of over $21 million over the past month,according to Direxion data.

There is validity in going against the crowd with leveraged ETFs. Consider this: From about Aug. 20, 2014 to Sept. 23, the Direxion Daily Gold Miners Bear 3X Shares (NYSEArca: DUST) lost $185.3 million in assets but surged 55% over that period.

ETF News, Global Macro Strategy

Guggenheim Investments Eyes Currency Hedged ETFs

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MarketMuse update is courtesy of Reuters. 

Guggenheim Investments, the seventh-largest ETF issuer in the United States, is considering trying on currency hedged ETFs for size.

Guggenheim Investments is considering launching one or more currency hedged exchange-traded funds, one of the hottest and most sought-after financial products the last few months.

“I will confirm that we’re interested in this space,” Bill Belden, Guggenheim’s managing director of product development in Chicago told Reuters on Friday. “We’re very familiar with the currency space and we’re always interested in providing new products whether they’re hedged or not.”

A currency-hedged ETF removes the foreign currency return of a given fund by buying a forward contract in the currency, and rolling it typically on a monthly basis.

Currency-hedged ETF assets grew 48 percent in 2014 to roughly $20.8 billion, and have grown 1,519 percent over the past two years, according to Deutsche Bank AG, a major player in the space.

In contrast, unhedged European equity ETFs have seen six straight months of outflows since June 2014, with an aggregate $8.9 billion in outflows, Deutsche Bank data shows. On the other hand, hedged European equity ETFs have seen consistent inflows over the same period, taking in $4.5 billion.

A strong dollar is prompting U.S. investors to buy hedged ETFs. Typically, currency-hedged ETFs protects the underlying international equity exposure against a falling foreign currency such as the euro or yen.

BlackRock Inc, WisdomTree Investments Inc and Deutsche Bank are the three major players in the currency-hedged ETF space. WisdomTree, which was the first to this ETF sector, is the largest of the three, with about 80 percent of the roughly $20 billion allocated to currency-hedged ETFs.

WisdomTree in January alone attracted $1.6 billion in inflows, according to Luciano Siracusano, WisdomTree’s chief investment strategist.

But Guggenheim’s Belden said there’s room for more players in the industry. Guggenheim has about $28.8 billion in ETF assets and roughly $220 billion overall.

“The hedged ETF you have seen basically captures an exposure to an international market that hedges against a local currency’s falling value,” said Belden.

“But we know that local currencies don’t fall perpetually. It has been a pretty consistent trend in the past but we don’t know what’s going to happen to those strategies, if any particular currency goes the other way.”

Guggenheim has a suite of nine currency ETFs, totaling about $1.1 billion. Of the nine ETFs, two have shown positive returns. CurrencyShares Japanese Yen Trust is up 1.5 percent so far this month, and the CurrencyShares Swiss Franc Trust is up 8 percent.

ETF News

A Little Known ETF, Recon Capital, Comes Out Big in Its First Year

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MarketMuse update courtesy of ETF Trends, Tom Lydon. Tom Lydon highlights Recon Capital ETF that follows a covered call strategy successful first year. 

A little unknown exchange traded fund that follows a covered call strategy has generated robust dividend yields over its first year.

The Recon Capital NASDAQ-100 Covered Call ETF (NasdaqGM: QYLD), which began trading on December 12, 2013, has provided a distribution yield of 10.4% in 2014, according to a press release.

QYLD provides a covered-call strategy that targets Nasdaq-100 securities. Additionally, for those who rely on regular income payments, the ETF provides monthly distributions.

The covered-call options strategy allows an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset. Traders would typically employ a covered-call strategy when they have a neutral view of the markets over the short-term and just bank on income generation from the option premium.

In a flat market condition, the trader would use the buy-write strategy to generate a premium on the option. If shares fall, the option expires worthless and one still keeps the premiums on the options. However, the strategy can cap the upside of a potential rally – the trader keeps the premium generated but any gains beyond the strike price will not be realized.

During last year’s rally, QYLD underperformed the broader market, rising 3.6% over the past year. Nevertheless, the ETF somewhat made up the difference through its robust income generation on option premiums.

The monthly options premiums also provided a buffer from market volatility and helped hedge traditional investment allocations. The covered-call ETF strategy may act as a decent alternative investment strategy to a traditional equity and fixed-income portfolio, especially in the environment ahead.

“Unlike many fixed income investments, QYLD faces no headwinds from rising interest rates, nor is it susceptible to duration risk,” Kevin R. Kelly, Managing Partner of Recon Capital, said in the press release. “Rather, QYLD seeks to provide investors with a low volatility, non-leveraged, tax-efficient product that pays out a monthly income, instead of making distributions by quarter or on an annual basis. We are proud to round out 2014 – and the first year of QYLD trading — with a 10.4 percent yield for our investors, particularly as the 30 Year Treasury sits below 2.75 percent.”

 

ETF News

Virtus Investment Partners Take on The ETF Market

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MarketMuse update is courtesy of MarketWatch.

Virtus Investment Partners (NASDAQ: VRTS), multi-manager asset management business,  announced that they have reached an agreement with ETF Issuer Solutions (ETFis) , a comprehensive platform for listing, operating, and distributing exchange traded funds. Virtus Investment Partners will acquire the majority interest from the deal.  The transaction will provide Virtus with manufacturing capabilities for both active and passive ETFs, adding to its broad product line-up.

ETFis, founded in 2012, recently introduced the industry’s first actively managed ETF investing exclusively in master limited partnerships, the InfraCap MLP ETF AMZA, +0.14% 1. It currently manages two other ETFs and has seven additional ETFs in registration with the Securities and Exchange Commission. All of the company’s ETFs are managed by external subadvisers.

“There is growing interest among financial advisors and investors to use exchange-traded funds in their retail and institutional portfolios because of the tax efficiency and liquidity benefits that ETFs offer,” said George R. Aylward, president and chief executive officer of Virtus. “The ETFis business model is similar to the Virtus approach of offering investors access to strategies of boutique managers. This partnership with ETFis will expand our product capabilities and allow us to offer compelling investment strategies in an actively managed ETF format.”

ETFis will become a Virtus affiliate and continue to operate as a multi-manager ETF platform, providing investors access to differentiated investment capabilities from select subadvisers. The company is led by its co-founders, Matthew B. Brown, who manages operations and technology capabilities, and William J. Smalley, head of product strategy and management.

“We developed ETF Issuer Solutions to provide a technology-driven, ETF-specific platform that offers significant cost and operational efficiencies. The partnership with Virtus gives us the resources and support to execute on our long-term vision of building a leading multi-manager ETF platform,” said Smalley. “We are excited to have the opportunity to combine our offerings with Virtus’ extensive distribution capabilities to create a compelling alternative for asset managers that want to make their actively managed strategies available in an exchange-traded fund structure.”

The Newfleet Multi-Sector Unconstrained Bond ETF2 will be the first new offering managed by a Virtus affiliate added to the ETFis platform. The fund will leverage the Newfleet Asset Management team’s broad experience in multi-sector fixed-income investing in a strategy that will have the flexibility to capitalize on opportunities across all sectors of the bond markets, including evolving, specialized, and out-of-favor sectors, as it seeks to deliver relatively high income and an attractive total return. A registration statement for the fund has been filed with the SEC.

The transaction is expected to close in March. Terms were not disclosed. Paul, Weiss, Rifkind, Wharton & Garrison LLP acted as legal advisor to Virtus. Haynes & Boone LLP acted as legal advisor to ETFis.

Forward-Looking Information

This press release contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions and projections about our company, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in our most recent Annual Report on Form 10-K or in any of our filings with the Securities and Exchange Commission (“SEC”), which are available on our website at www.virtus.com under “Investor Relations.” All of our forward-looking statements are as of the date of this release only. The company can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.

For the entire article from MarketWatch, click here.

 

ETF News, People Profiles

ETMFs vs ETFs

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As the exchange-traded fund marketplace continues to evolve, the recent introduction of “exchange-traded managed funds”, aka ETMFs, has opened Pandora’s Box for those who have embraced “traditional” ETFs because of their transparency, real-time pricing (vs “end of day price setting”) and the relative ease of diagnosing liquidity by interrogating bid-offer markets in the respective underlying components.  The ETMF construct is intentionally-designed to mask the underlying components because (i) the underlyings are subject to change subject to the active manager’s strategy and (ii) mitigate the risk of market participants ‘gaming’ the cash ETMF via arbitraging the underlying components.

The excerpt below is courtesy of the 2nd of a series of interviews conducted by PA-based ValueShares and insight provided by Mike Castino, Senior Vice President.

Background:

Mike Castino, Senior Vice President

Mike Castino serves as business development officer for the Exchange Traded Funds division. Mr. Castino joined U.S. Bancorp Fund Services in 2013 with more than 20 years of business development, relationship management, marketing, managerial experience, and futures/equity trading experience. Prior to joining U.S. Bancorp Fund Services, Mr. Castino worked for Zacks Investment Management as managing director of the Index Services Division. He also held the position of vice president of Institutional Sales for Claymore ETFs (now Guggenheim Funds) and was senior floor trader at the Chicago Mercantile Exchange for a major Wall Street trading firm. He is also serves as chairman and trustee of ETF Series Solutions, our ETF trust. Mr. Castino received his Bachelor of Arts degree in business management from Illinois State University and is Series 7 and 66 licensed.

Interview:

The SEC recently approved Eaton Vance’s application to create exchange traded managed funds, or ETMFs. What is your opinion of ETMFs? Will the mutual fund companies now rush to launch ETMFs, and pay licensing fees to Eaton Vance, or will we see mostly just Eaton Vance products?

Mike: ETMFs are a welcome step forward in the in the evolution of non-transparent ETFs. Mutual fund families concerned about the non-daily disclosure of portfolio holdings can benefit from this structure as well as the added ability to mitigate capital gains. Given these benefits, Eaton Vance believes their clients may benefit from this structure, and mutual fund families sharing this sentiment may also be candidates for licensing this intellectual property.

While widely viewed by the larger investment community as a hybrid of existing structures, a mutual fund and an ETF, the SEC defines ETMFs as a separate and new structure. This becomes critical to definitively understanding which regulatory agencies or SROs, such as FINRA, may be establishing guidelines for this new structure, and what these guidelines may entail. At this time it is unknown whether it will it be similar to existing policies and procedures, or if regulatory changes will be occurring in the future.

Are ETMFs good for the investor? Specifically, can you help us understand ETMF liquidity? ETMFs will be “non-transparent” in the sense that they will only disclose their holdings monthly, or quarterly with a lag, as with mutual funds. Yet, if Authorized Participants (market makers) don’t know what an underlying ETMF basket looks like, how will they be able to maintain tight NAV spreads via the arbitrage process, as they do today with traditional ETFs? Any insights?

Mike: The ability to buy/sell shares of the ETF during the day at traditional bid/ask pricing does not exist in in the ETMF structure. ETMFs will be priced at the ETMF end of day NAV, plus or minus a determined spread.

To illustrate, let’s assume you purchased an ETF and an ETMF with the same underlying portfolio holdings at 10 a.m. on the same day. At the time of the purchase, the ETF was bought for $25 and the ETMF was bought for the NAV of $25 plus $.01. After the purchase, the market rallies before the end of the day. You paid $25 for the ETF which settles later that day at $25.50. The ETMF NAV will also have gained that day, but since your ETMF purchase price is based on end-of-day NAV, your actual purchase price is $25.51 ($25 starting NAV plus $.50 gained in the rally plus $.01). Effectively, you did not participate in the rally even if you purchased the ETMF at the same time as the ETF. Likewise, if you sell out an ETMF in the morning in anticipation of a sell off, you still get the end-of-day NAV plus or minus pricing.

This in no way indicates a flaw in the ETMF structure or that they are bad for investors. Many buy and hold investors will like the fact that they get end of day pricing and may not be subject to an intraday premium or discount relative to the current NAV. This holds true for many long-term mutual fund investors who will now potentially benefit from the tax mitigation features of ETMFs. It may be only tactical investors who are looking to buy at the start of the rally and capture that price movement, who would not find it beneficial to purchase an ETMF.

Liquidity and effectively pricing the shares may be a concern for some market makers. The specifics of what will be known about the portfolio when disclosed in the create/redeem process and what may have to be “reverse engineered” during the trading day if the ETMF is making changes to its portfolio during the trading day may widen spreads and affect the depth of book. Regardless, a portfolio of highly correlated, liquid securities may help market makers more confidently price the fund. While this is my opinion, investors should consult a market maker for their professional opinion.

What do you think are the most important considerations in selecting key service providers (e.g., custody, fund administration, fund accounting, statutory distribution) for an ETF?

Mike: Selection of an experienced service provider is an operational necessity. The greatest operational and cost efficiencies can often be achieved by using a service provider who offers full service options inclusive of administration, accounting, custody, index receipt agent and distributor services. This service offering should be built on state-of-the-art technology for create/redeem order entry among the seamlessly integrated internal systems that provide necessary access and reporting capabilities for the client and capital markets participants.

Beyond these services, the ability to provide an existing multiple series trust in which you can launch your ETF(s) using your own relief or “rented” relief is very helpful to new clients.

Many ETF providers have struggled with the question of distribution. It can be hard to identify who is buying ETFs on the secondary market, and this creates challenges for salesmen, who can’t attribute a secondary market trade to specific actions they took to make a sale. How do you think the industry will ultimately solve this problem?

Mike: Many wirehouses may be able to provide this information to you for a fee. There are data vendors out there who offer limited, but useful, data in this area of ETF ownership information as well.

Many ETF sponsors pay their ETF wholesale teams based first on a share of “pooled commissions” from AUM gathering. Additional incentives/commissions may be paid based on success stories wholesalers can provide their managers. For example, if they have a particular wirehouse advisor or RIA team that invests heavily in an ETF or ETFs, they may be inclined to contact the manager regarding that wholesaler and the valuable assistance they provide.

Due to the exchange listed nature of ETF shares, and the fact that they are not “transactional” like a mutual fund or unit investment trust, there may never be a final solution. But the current system of sharing a portion and building a case for additional incentives based on hard work should never go out of style. ETFs require servicing after the sale and the best wholesalers are product experts who can answer questions about the ETF methodology and other vital ETF subjects such as creation/redemption, liquidity, and best execution.

ETF News

ETF Industry Growing At Rapid Rate; Assets Will Hit $5 Trillion By 2020

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MarketMuse update courtesy of ETF Trends’ Tom Lydon. 

The U.S. exchange traded products industry hit a major milestone last year, eclipsing $2 trillion in assets under management, but industry observers do not see that growth slowing. Rather, it is expected that ETFs will continue their exponential growth rate in the years ahead.

While it took nearly two decades for the ETF industry to reach $2 trillion in assets, it will not need nearly as long to get to $5 trillion, according to a new report by PwC. The PwC repots says the global ETF industry will reach $5 trillion in combined AUM by 2020.

“New types of indexing (also referred to as “smart beta”) represent a hotbed of product development activity with 46 percent of firms surveyed identifying this as the most important area of innovation. PwC expects this to continue for the near-term. Active ETFs (34 percent) and alternatives (29 percent) are also expected to be sources of significant ETF growth between now and 2020,” according to the “ETF 2020” report.

The rise of strategic beta ETFs has also played a significant role in boosting U.S. ETF assets. As of late August, assets under managements across smart beta ETFs totaled $350 billion, a 30% year-over-year increase. Much of that growth has been driven by institutional investors, including large money managers, endowments and pensions. The growth of these non-traditional ETFs has been exponential as smart beta ETFs accounted for just 19% of total industry assets at the end of 2013. [U.S. ETFs top $2 Trillion in AUM]

Some industry observers also see actively managed ETFs being a key driver of ETF industry growth in the coming years. For the week ending Jan. 16, U.S.-listed actively managed ETFs had a combined $17.24 billion in AUM with nearly half that total allocated to PIMCO and First Trust ETFs, according to AdvisorShares data.

While that is just a fraction of the overall U.S. ETF industry, increased demand for active ETFs and the potential for a more favorable regulatory environment could make actively managed ETFs a $500 billion asset class by 2020, according to a report by publishedSEI Investments last year. [Big Growth Seen for Active ETFs]

“In the U.S., institutional investors, including registered investment advisors, wealth management platforms, other asset managers, endowments and foundations are each expected to continue to expand their investments in ETFs between now and 2020,” said PwC.

Those comments jibe with data released last year by several major ETF issuers that show institutional investors are increasingly turning to ETFs.

Institutional investors continue to be key drivers of ETF asset growth, a theme that is expected to continue in 2015. In its 2014 U.S. Institutional ETF Usage Report, BlackRock (NYSE: BLK) notes the “results show that institutional use of ETFs is expected to rise across the board. This trend holds true for both existing institutional ETF investors and those who do not currently hold ETFs.” [Institutions Boost ETF Usage]

Fixed income and global ETFs are expected to be favorites of institutional investors this year. That prediction has proven accurate to this point in 2015 as three international ETFs and one bond fund rank among the top 10 asset-gathering ETFs on a year-to-date basis.

ETF News, Tech Talk

Change is Coming: What to Expect With Bitcoin ETF

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MarketMuse update courtesy of Inside Bitcoins’ Kyle Torpey. 

Much of the bitcoin community is excited at the prospect of a bitcoin ETF due to the assumption that it could bring many new speculators into the market. After all, if everyone with access to assets traded on the NASDAQ can just as easily trade bitcoin in the same account as their other investments, it’s possible that more traditional investors may take a shot at the digital currency.

While there’s been plenty of attention on the possible Winklevoss bitcoin ETF, there hasn’t been much discussion on the effect the ETF could have on current bitcoin exchanges. Once traders have access to a regulated bitcoin ETF on the NASDAQ, why would they spend time trading on one of the frequently-hacked bitcoin exchanges?


Trading fees and unique trading options

I reached out to BTC China Senior Business Development Manager Greg Wolfson to get his reaction to the possibility of a bitcoin ETF becoming a reality in the near future. When asked what a traditional bitcoin exchange can offer that won’t be found with a bitcoin ETF, Wolfson was quick to point to zero-fee trading. The trend of offering free trading has become a popular way for new bitcoin exchanges to make a name for themselves, and this is something that simply cannot be offered by a bitcoin ETF.

When trading an ETF, you’re always going to have to pay brokerage fees and the expense ratio, which is used to pay the costs of operating the ETF. For example, GLD — on which the Winkless ETF is based — has a 0.40% expense ratio. You can bet that a bitcoin exchange will not charge you money simply for holding onto your bitcoins throughout the year — although leaving your bitcoins on an exchange for long periods of time is also not recommended.

“On the other hand, the the ETF will be regulated by the SEC and therefore, open to many types of institutional investors that are otherwise prohibited from investing in bitcoin.”

Wolfson went on to explain certain trading options that are unique to bitcoin exchanges in his full response on the matter:

“An ETF may best fulfill the needs of individuals who want to simply hold bitcoin, but exchanges still offer a diversity of trading options that set them apart. Zero-fee trading, derivatives, cross-trading with altcoins, and direct access to BTC, to name a few. On the other hand, the the ETF will be regulated by the SEC and therefore, open to many types of institutional investors that are otherwise prohibited from investing in bitcoin.”

Access to actual bitcoins

Direct access to bitcoins was another feature of bitcoin exchanges mentioned by Greg Wolfson. While you’re purchasing actual bitcoins on a traditional bitcoin exchange, such as BTC China, you’re only purchasing shares of assets owned by someone else when you buy an ETF. You cannot trade your ETF shares for actual bitcoins. If you’re looking for ownership over physical bitcoins rather than exposure to the bitcoin price, then a traditional bitcoin exchange — or even an OTC trade — will be a better option.

What about insurance?

Although Wolfson did not mention insurance in his comments regarding the bitcoin ETF, it’s possible that this could be another opportunity for bitcoin exchanges. As mentioned in a previous article, there is no insurance to be found for shareholders of the Winklevoss Bitcoin Trust (COIN).

As we’ve seen in the past — and as recently as a few weeks ago with the Bitstamp hack — thefts are a rather common occurrence in the bitcoin world. An exchange that decides to offer insurance for all deposits — outside of user error — could offer peace of mind to the paranoid trader who doesn’t want to worry about a possible MtGox fiasco. The only bitcoin companies that seem to be bragging about their insurance coverage publicly are Coinbase, Xapo, and Circle; none of which are useful for even moderately high frequency trading.

For the original article from Inside Bitcoins, click here