Around the World of ETFs.

May 01, 2006

Direct Invest

The Nasdaq launched a direct investment program in March for the QQQQs, in a major attempt to remove the barriers to regular investments in ETFs. The new program allows investors who purchase the QQQQs on a regular basis (say, every month) to do so directly from the QQQQ Trust, without a brokerage commission.

MyStockFund Securities, a discount broker based in Virginia, will administer the plan. The group usually charges $3.99 for buy orders, but will waive the fee for QQQDirect in the hope of attracting new customers. Customers will have to pay $12.99 to sell the fund, but presumably, dollar-cost averaging investors are the buy-and-hold type. Nasdaq plans to expand the program to other Nasdaq-linked ETFs soon.

More QQQQs

With asset growth in the QQQQ franchise flat-lined, Nasdaq entered into an agreement with First Trust Advisors to launch two new ETFs based on variants of the popular Nasdaq-100 Index. The Nasdaq-100 Equal-Weighted Fund (ticker: QQEW) will track an equal-weighted version of the index, while the NASDAQ-100 Technology Fund (ticker: NDXT) will track an equal-weighted index of technology-related companies within the Nasdaq-100. The funds should help reinvigorate the QQQQ franchise, as they will provide more focused exposure to the companies that QQQQ buyers want in the first place: nimble, innovate technology names.

The launches also should help Nasdaq compete with the forthcoming (and price-weighted) ArcaEX Tech 100 ETF.

Pure Style, Baby!

Rydex Investments launched a new suite of style-based ETFs based on S&P's "Pure Style" index series. The "Pure Style" ETFs offer concentrated style exposure to the six major style and capitalization segments (short/mid/large cap X growth/value) by: 1) excluding companies that exhibit neither strong growth nor strong value tendencies; and 2) applying a "style weighting" methodology that assigns the highest weight to companies with the most pronounced style tendencies. Most style indexes and funds simply divide the market in half, with half of the capitalization assigned to growth and half to value, and weight by market capitalization.

Itsy-Bitsy SPDRs

State Street Global Advisors (SSgA) launched three new Select Sector SPDRs ETFs, taking its powerful SPDR franchise and focusing it down onto the industry level. The new ETFs focus on the Biotech (XBI), Homebuilder (XBH) and Semiconductor (XSD) industries. The underlying indexes are equal-weighted and rebalanced quarterly.

"With professional investors seeking to inject higher return potential into their portfolios, these new SPDRs are uniquely designed so that investors gain the most direct exposure to their respective industries," says Greg Ehret, co-head of SSgA's Advisor Strategies unit.

The Select Sector SPDRs dominate the sector market in the ETF industry, with more than $14 billion in assets.

Morningstar To Rate ETFs

In a sign of the growing importance of ETFs, Morningstar began using its popular "star rating" system to rank ETFs the same way it ranks traditional mutual funds. The Morningstar system assigns funds a rank of one to five stars based on their "risk-adjusted performance" within their peer group. 

To account for trading commissions, Morningstar will assign a 0.2 percent front-end load and a 0.2 percent back-end load to all ETFs. That's the equivalent of what an investor would pay for a $10,000 round-trip with $20 commissions.

ETFs do fairly well in the rankings, with 60 percent earning either three or four stars. Only two funds had the performance and long-term track record to merit "overall" five-star ratings: the iShares S&P Financial Sector Fund and the Global Materials Select Sector SPDR. The dogs in the ETF cellar include the iShares MSCI Mexico and iShares MSCI Malaysia funds, both of which earned just one star.

S&P and Lipper have provided rankings for ETFs for some time.

Has Gold Gone Reflexive?

The word on the Street is that the gold ETFs have gone "reflexive." In other words, investors are piling so much money into the ETFs, which buy and store gold in a vault, that it is creating a shortage of physical gold on the market. That drives up the price of gold, which attracts more investors to the ETF, which … well, you get the idea.

Can the rising price of gold be laid at the foot of the ETFs? Let's look at the numbers: Globally, the suite of gold bullion ETFs holds 429 tonnes of gold-making them the 12th largest repository of gold bullion, just ahead of the central bank of Taiwan (426 tonnes) and just behind the central bank of Spain (472 tonnes). That's incredible for a product that only launched in the past few years. After all, Spain has been around for a long time.

But remember that the United States holds 8,133 tonnes of gold, or 19 times the net holdings of the ETFs. According to the WGC, total aboveground stocks total 155,000 tonnes, making the gold ETFs' share of aboveground stocks just 0.3 percent.

Then again, the real issue is available supply, and in 2004, the world's central banks entered into an agreement to limit global gold sales to 500 tonnes per year. (Don't worry-it's not collusion when governments do it.)  Adding a couple hundred tons of annual demand could have a short-term impact.

Silver Sparkles On ETF Hopes

Silver broke out to a 19-year high as the SEC took the first step towards approving the Silver Trust ETF from Barclays Global Investors (BGI). The SEC hosted a 21-day window for public comment on the fund, which drew hundreds of impassioned responses from both sides of the issue. Critics say that the silver ETF would drive up the price of silver by upsetting the delicate supply/demand balance for the metal, to the detriment of the American economy. Others say: That's life.

IPO ETF ASAP

First Trust Advisors filed for the right to launch a new ETF based on the IPOX Schuster IPOX-100 Index, which tracks the "aftermarket" performance of the top 100 initial public offerings (IPOs) in the U.S. The IPOX-100 selects the 100 largest and best-performing IPOs and holds them from their seventh day of trading through their 1,000th day on the market. The index rebalances on a quarterly basis. Currently, the largest holding is Google.

"Academically, there's a lot of evidence to suggest that IPOs trade differently and are really a separate asset class from other companies," says Josef Schuster, founder and CEO of IPOX-Schuster, the creator of the index. "Also, because the index is constantly updated, it provides exposure to the growth and innovative aspects of the economy."

The index has posted three-year annual returns of 27 percent, more than doubling the 12 percent return of the S&P 500.

In related news, IPOX launched three new European indexes: The IPOX Europe Composite, IPOX Europe 100 and IPOX Europe-30. There is no word yet on investable products for those benchmarks.

Gaming The Cockroach Effect

According to Zacks Investment Research, a company that beats analyst earnings estimates this quarter is 2.5 times more likely to beat estimates next quarter. They call it the cockroach effect-if you see one earnings surprise, you're going to see a thousand.

What's more, says Zacks, companies that beat estimates tend to outperform the market. Put those two features together and you have an easy way to beat the market: Invest in companies that are beating analyst expectations.

That's the idea behind the latest PowerShares ETF, the PowerShares Zacks Small Cap Portfolio, which launched on February 16. The fund holds 250 equally weighted small-cap companies that meet Zacks' earnings surprise screen. The index will be re-balanced on a quarterly basis.

According to Zacks, this index would have delivered five-year annualized returns of 15.81 percent through December 2005, compared to just 6.75 percent for the Russell 2000 Index.

Non-Energy Commodity ETF Offered

In early February, Frankfurt-based Deutsche Börse listed the world's first non-Energy commodity ETF. The EasyETF holds 18 commodities in four non-Energy sectors-Agriculture, Livestock, Industrial Metals and Precious Metals-and tracks the Goldman Sachs Non-Energy Index, a sub-index of the broader Goldman Sachs Commodities Index.

Limestone Launches ETF Hedge Fund

In March, Limestone Capital became one of the first companies to launch a hedge fund using only ETFs. The Raleigh, N.C.-based money manager currently offers two products, a long-only fund that invests pension money and a long-short limited partnership, open (so far) to friends and family. Rob Hounshell, Limestone's president, has currently limited his investment universe to 21 iShares funds, but expects to broaden it over time. He uses ETFs because of "their liquidity, low volatility and diversity."

Now That's Amore

iShares Europe made a big push into Italy in March, with the cross-border listing of 15 additional iShares ETFs. The listings boost the number of iShares on the market in Italy to 25, making it the leading provider in the Italian market.

TD Kills Its ETFs

Canadian bank TD Asset Management shuttered its four ETFs-S&P/TSX Composite (TSX: TTF), S&P/TSX Capped Composite (TSX: TCF); Select Canadian Growth (TSX: TAG); Select Canadian Value (TSX: TAV)-in mid-March. The decision to close the ETFs was based on lackluster volumes and asset gathering.

FTSE Licenses Dividend ETFs

FTSE licensed BGI to create ETFs on its recently launched UK Dividend+ and EPRA/NAREIT Europe ex-UK Dividend+ indexes. Both indexes were created in response to the ever-growing demand for higher-yielding asset classes. The UK Dividend+ contains the 50 highest-yielding constituents in the FTSE 100 and FTSE 250 indexes. The EPRA/NAREIT Europe ex-UK Dividend+ contains high-yielding real estate stocks in the EPRA/NAREIT Global Real Estate Index.

Zero Cap Gains For Most ETFs…

Most ETF investors dodged the taxman again in 2005. BGI's iShares, for instance, posted zero year-end capital gains distributions for all 102 domestic and international equity and domestic fixed-income ETFs; it is the fourth year in a row with zero capital gains for the iShares. PowerShares also posted no capital gains distributions for its entire family of ETFs, as did Rydex Funds, among others.

... Except In Canada

iUnits, BGI's version of ETFs trading in Canada, did distribute capital gains last year. With the Toronto Stock Exchange Composite Index up about 18 percent at year's end, iUnits S&P/TSX 60 (XIU), which was up nearly 26 percent CAD for 2005, had a nominal 0.6 percent distribution. The capped version of the fund, iUnits S&P/TSX Cap 60 (XIC), was up 27 percent CAD and had a 7.1 percent distribution. iUnits MSCI International Equity RSP (XIN), which was up 12.2 percent, had a 10.7 percent distribution, while the iUnits S&P/TSE MidCap (XMD), which was up 23.5 percent, had a 6.1 percent distribution. The iUnits S&P/TSE Energy (XEG) had a 4.6 percent distribution. According to BGI Canada, the large distributions were a one-time event, due to switching benchmarks or to other stock movements within the funds.

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