Around the World of ETFs

January 01, 2006

14 New iShares For The U.K.

iShares UK  launched a major expansion of its  ETF franchise in November. The firm announced a three-week rollout of 14 new ETFs, covering everything from and emerging markets to dividends real estate and inflation-protected bonds. The new funds will double the number of iShares ETFs on the market in the U.K.

"This launch reflects our strategy to offer a more complete product set to our investors, who have been asking for these types of funds," says Chris Sutton, president of iShares UK. "Launching 14 iShares simultaneously will leave no one in any doubt about our positioning and capabilities as a global leader in the ETF market."

The new products are:

•   iShares MSCI World
•   iShares MSCI AC Far East ex-Japan
•   iShares MSCI Taiwan
•   iShares MSCI Brazil
•   iShares MSCI Korea
•   iShares MSCI Emerging Markets
•   iShares MSCI Eastern Europe
•   iShares AEX (Holland)
•   iShares DJ Euro STOXX Growth
•   iShares DJ Euro STOXX Value
•   iShares DJ Euro STOXX Select Dividend
•   iShares FTSE/EPRA European Property Index Fund
•   iShares FTSE UK Dividend Plus
• iShares EURO Inflation Linked Bond

BGI plans to extend the new funds across Europe over time.

Power Shares Keeps Expanding, Crosses $2 Billion Mark

PowerShares Capital Management shows no signs of slowing its fevered pace of product launches. The enhanced indexing pioneer launched eight sector-based funds on October 26, bringing the total count of PowerShares ETFs to 30. That's up from two-yes, two-a year ago.

The new funds will join the eight existing PowerShares sector funds launched in June. The new funds are:

•  PowerShares Lux Nanotech Portfolio
•  PowerShares Aerospace and Defense Portfolio
•  PowerShares Dynamic Building & Construction Portfolio
•  PowerShares  Dynamic Energy Exploration & Production Portfolio
•  PowerShares Dynamic Utilities Portfolio
•  PowerShares  Dynamic Retail Portfolio
•  PowerShares Dynamic Oil & Gas Services Portfolio
•  PowerShares Dynamic Isurance Portfolio

PowerShares CEO Bruce Bond says that, with the launch of the new funds, PowerShares will have "the most diverse ETF industrying in the United States."

iShares may disagree with that- it offers 25 different industry funts-but the iShares offerings do have a good deal of overlap, with multiple ETFs covering the same y sectors (five Financial funds, etc.).

But t horse race is beside the point. The point is that PowerShares is  dramatically expanding its lineup, and  fashioning itself as a real alternative to the iShares  and streetTRACKS  families  of straight index ETFs. For every traditional index ETF, it seems, PowerShares wants to offer an enhanced alternative. And the company is gaining critical mass: PowerShares currently has more than $2 billion in assets under management.

SSgA Makes Branding Move

State Street Global Advisors (SSgA ) inked a deal with the AMEX on November 1 that grants State Street sole control of the advertising budget for three of the world's largest ETFs. For an undisclosed fee, SSgA acquired the licensing rights for the SPDRs Trust (SPY), Midcap SPDRS Trust (MDY) and Dow Diamonds (DIA) ETFs, along with related trademarks. All three funds were jointly developed by SSgA and the AMEX, but under the previous agreement the job of marketing the funds fell solely to the Amex. The funds had been marketed by AMEX and PDR Services LLC, a wholly owned subsidiary of the exchange.

Now, SSgA controls the marketing budget .

We're talking serious money, too. According to the prospectuses, the SPDR spends three basis points of total assets on marketing each year; the Midcap SPDR spends 1.1 basis points; and the DIA spends a whopping 5.6 basis points. Based on recent figures, that works out to almost $21 million a year.

The licensing deal also grants SSgA rights to use the S&P 500 and Dow Jones Industrial Average trademarks, which can't be a bad thing.

SSgA says the licensing fee was "not material." But for a gigantic company like State Street, that's a relative term, and there was certainly some money involved. The question, then, is why would SSgA cough up good money to the Amex for the right to market these funds?

The answer must be brand positioning. SSgA was the original home of the ETF, creating the SPDR in 1993. And it remains the trustee for the fund, which is the largest ETF in the world.

But because there is currently very limited SSgA branding on the SPDR, it does not get as much credit for the fund as it may deserve. Many people associate SSgA with its streetTRACKS-branded family of ETFs, which are doing well but do not boast the kind of assets tied to the SPDRs. If controlling the advertising budget for the SPDRs and DIA somehow lets SSgA boost its overall ETF profile (or the profile of its streetTRACKS brand), that could be a huge boost for SS g A's ETF franchise.

That's all the more important because SSgA recently filed for the right to launch nine new ETFs (with plans for many more), marking the first major expansion of its ETF roster in seven years.

Silver ETF In Doubt

The Silver User's Association (SUA), an industrial lobbying group made up of companies that use silver in their operations, has launched an al-out lobbying campaign to block BGI from launching a silver bulion ETF.

Why? Because it would be too good of an investment.

According to the SUA, the market for physical silver is so tight that an ETF would tip the balance of availability, sending the price skyward . That would hurt its members, which use large quantities of silver in their daily operations.

The SEC has never turned down a filing because it re p resented too good of an investment. But it's certain to look at liquidity, and at the ability of the fund to purchase large quantities of silver as money roles in. Silver stores are tight, and speculators have long faced troubles and delays in getting silver delivered following the expiration of futures contracts. If those same delays and troubles apply to the ETF, or if they get worse with increased demand, that could be a problem.

Institutions Increase ETF Holdings

Institutional investors have dramatically upped their use of U.S.-based ETFs over the past five years. Worldwide, these investors have increased their use of ETFs by a whopping 252 percent from June 1999 through June 2005, and by 11 percent from June 2004 through June 2005, according to London-based Debbie Fuhr, chief ETF strategist at Morgan Stanley.

Not surprisingly, the U.S. ranks first in the number of institutions using ETFs. As of June 2005, the U.S. had 1,231 institutions buying ETFs. Canada came in second with 52 institutions, Spain came in third with 49, the U.K. came in fourth with 48 and Switzerland came in fifth with 41. SPDRs and QQQQs are the most widely held ETFs, followed by the iShares EAFE and iShares Japan funds.

MSCI's Foot print Grows ; Assets Top $50 Billion

The iShares MSCI EAFE Index Fund (EFA) has surpassed the Nasdaq-100 Trust (QQQQ) as the second-largest ETF in the world. As of September 29, BGI's EFA fund had assets of $19.7 billion, compared to $19.6 billion for the QQQQs. EFA's assets surged by 135 percent in 2004 alone, and were up an additional 40 percent through September 2005.

The S&P Depositary Receipts (SPY) remains the largest ETF in the world, with assets of $47 billion.

Hot on EFA's heels is its emerging markets cousin, the MSCI Emerging Markets  Index Fund  (EEM), which posted an astonishing 218 percent jump in assets in 2004. EEM was on a pace to match that growth in 2005, with assets up 150 percent through September. The fund currently has $8.8 billion in assets.

This strong growth helped push ETF assets tied to MSCI indexes over $50 billion for the first time in 0ctober. As of October, MSCI says there were $47 billion in ETF assets tied to its international indexes, with $8.5  billion tied to the domestic benchmarks.

31 Flavors Of Dividends

Three new PowerShares dividend funds hit the market on September 15. The funds joined PowerShares ' flagship High Yield Equity Dividend Achievers Portfolio (PEY), which launched in December 2004 and currently has more than $450 million in assets.

Of the three new funds, the most interesting may be the PowerShares Dividend Achievers Portfolio (PJM), which selects all the companies in the U.S. with a ten-year history of boosting their dividends. While existing dividend funds have huge concentrations in  high-yielding sectors like Utilities and Financials, PJM is much more diversified, with double-digit  weightings in Financials, Consumer Staples,  Healthcare and Industrials.  In theory, the product could be used by investors in lieu of broad-based index exposure. Using historical data, the fund has out paced the S&P 500 over the past ten years (12.39 percent vs. 9.96 percent) with lower volatility.

The other funds to launch were the High Growth Rate Dividend Achievers Portfolio (PHJ), which tracks the 100 companies with the highest dividend growth rate over the past ten years, and the International Dividend Achievers Portfolio (PID), which includes 48 American Depositary Receipts with a five-year history of boosting their dividends.

Vanguard Launches Dividend Fund

Not to be outdone, Vanguard joined the dividend party as well, announcing plans on September 23 to launch a new dividend-focused fund and related VIPERs ETF. The fund was expected to hit the market in December, although it was still under review at the SEC at press time.

According to Vanguard, the new fund's target benchmark is something called the Mergent Dividend Achievers Select Index, which Vanguard identifies as a "subset of the Mergent Dividend Achievers Index." Neither of those indexes appears on the Mergent Web site, but Vanguard spokesperson Michael Smith says that the fund will select stocks "essentially" from the pool of names included in Mergent's Bro a d Dividend Achievers Index, the bogie for the PowerShares' PEY fund. How Vanguard will differentiate itself fro m the popular PowerShares fund is as yet unclear. The Vanguard fund will be managed by Vanguard's Quantitative Equity Group, which suggests that they will use a quantitative strategy to select the most appealing stocks from the bro a d e r index. That puts PowerShares-the pioneer of the enhanced indexing movement-in the unusual position of running a straight index fund, while Vanguard -the pioneer of straight indexing-runs an enhanced fund.

Dividend ETFs Cross The Pond

European ETF leader Index change launched a new ETF based on the (U.S.) Dow Jones Select Dividend Index in Germany on October 7. It is the first U.S.-based dividend index in E u rope. The index is the same bogie that serves as the basis for the $7 billion iShares dividend fund in the U.S.

In other STOXX news, the company licensed its regular EURO STOXX index to BNP Paribas for a new ETF in France; it will be the first broad euro-zone index in that country.

Oil ETF Debuts In Mexico

ETF Securities, which developed and launched the first oil-based ETF (listed on the London Stock Exchange), listed its oil ETF on the Mexican Bolsa on September 29. The fund is the first non-U.S. foreign security to list on the Mexican exchange , and represents a major step in the development of Mexico's ETF industry.

"Mexico is only the second country in the world to have this type of instrument, and this is our first energy- related financial product," said a celebratory Guillermo Prieto Treviño , president of the Mexican Stock Exchange.

Nik Bienkowski, director of research at ETF Securities, says that the Mexican Bolsa was interested in the ETF in large part because of the role that oil plays in the Mexican economy. PEMEX, the state-owned oil company, contributes a huge portion of the nation's annual budget and is the largest employer in Mexico.

"The Mexican Bolsa was very keen to work with us (on the listing)," says Bienkowski. "The process of launching the fund was smooth and efficient . "

The Mexican ETF industry is small, but growing. In addition to the oil fund, the iShares gold fund (IAU) trades on the exchange, as does an iShares bond fund.

Third U.S. MicroCap ETF Debuts

The third ETF to track a micro c a p index began trading on the Amex at the end of September, with the debut of the First Trust Dow Jones Select MicroCap fund (FDM).

FDM joins the iShares Russell Microcap fund (IWC) and PowerShares's Zacks Microcap Portfolio fund (PZI). Two weeks after launch, IWC had $51.1 million dollars in assets while PZI had $87.5 million in assets. All three ETFs have expense ratios of 60 bps.

Vanguard Patents VIPERs

Vanguard has patented its unique ETF structure, whereby the VIPERS ETFs exist as separate share classes of existing mutual funds. The patent is jointly issued to Vanguard and Vanguard's chief investment officer, Gus Sauter.

Vanguard says that the patent will be used both to protect its invention and to license out as a source of revenue. The patent could become important if and when actively managed ETFs hit the market, as an ETF share class would offer an interesting way to manage capital gains through spinning off "in-kind" redemptions of appreciated securities.

DJ EuroStoxx ETF Trades In France

The first broad Euro zone ETF to trade in France began trading on Euronext in mid-October. The newly launched EasyETF (which tracks the DJ Euro Stoxx Index) is managed by BNP Paribas and AXA Investment managers. The DJ Euro Stoxx Index is the regional subindex of the DJ Stoxx 600 Index.

Four New Lyxor ETFs Available In Milan

The Borsa Italiana launched four new Lyxor ETFs in September: the EuroMTS Inflation Linked, MSCI EMU SmallCap, MSCI EMU Growth and MSCI EMU Value funds.

The EuroMTS Inflation Linked ETF replicates the performance of the inflation-linked government bonds (euro-area), the MSCI EMU SmallCap represents the small-cap segment of major European exchanges, and the MSCI EMU Growth and MSCI EMU Value funds are based on their respective style indexes.

Including these new ETFs, Borsa Italiana now offers 28 ETFs covering 13 asset classes.

Daiwa Shutters ETF

The Daiwa Transportation Equipment (1611JP) fund, which was launched in March 2002, was delisted from the Tokyo Stock Exchange on August 27. At the end of July, the fund was trading a mere 300 share s a day and had accumulated just $17 million in assets. It was doing well for its investors, though: from January through July 2005, the ETF was up 13.3 percent.

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