AROUND THE WORLD OF ETFS

November 01, 2006

Go-Go GSCI

BGI launched its long-awaited commodities ETF onto the New York Stock Exchange (NYSE). The new iShares GSCI Commodity- Indexed Trust trades under the ticker symbol "GSG," and tracks the performance of the GSCI Excess Return Index.

The fund will compete head-tohead with the aforementioned Power Shares DB Commodity ETF, aka DBC. The two funds are very different: DBC tracks a focused index of just six commodities, but offers fairly balanced exposure to the commodities market; in contrast, GSG tracks 24 different commodities but is heavily concentrated in energy (Figure 4).

Both funds include the roll yield, spot return and collateral interest income in their returns. The funds both charge the same core management expense ratio, at 75 basis points.

One unusual quirk with GSG is that it achieves its commodities exposure through CERFS, long-term options traded on the Chicago M e rcantile Exchange (CME), with expirations dating out to five years. These long-term options could mean less day-to-day management hassle (and expense) for BGI, but some investors worry that they will not have sufficient liquidity to support strong trading in the ETF.

First,Trust Russell

In a major challenge to PowerShares, First Trust Advisors has teamed up with Russell to launch a new family of ETFs that use quantitative strategies in an attempt to outperform the market. So far, First Trust has filed just nine sector-based AlphaDex funds with the SEC, but Dan Waldron, vice president of ETFs at First Trust, says the company plans to expand its Russell-linked portfolio over the full market, including both domestic and international funds.

Waldron says that alpha-seeking ETFs are the "next wave" in the ETF market. "We think advisors want to deliver excess returns and generate superior performance for their clients. We think the next generation of ETFs will be those that generate alpha."

Route 66

In the largest single ETF filing ever, ProShares petitioned the SEC for the right to launch 66-yes, 66-leveraged, short and shortleveraged ETFs. The funds track 22 popular style and industry indexes, including the Russell 2000 and the S&P SmallCap 600, as well as a full slate of S&P style indexes and 14 Dow Jones industry benchmarks. The new ETFs will join 12 existing Pro Shares ETFs, which launched onto the Amex this summer.

As with the existing funds, there will be three ProShares tied to each index: an "Ultra" fund offering 2X long leveraged exposure, a "Short" fund offering short exposure and an "Ultrashort" fund offering 2X shortleveraged exposure.

"Active Index"ETF Wave Continues

C l a y m o re Securities launched five new ETFs onto the Amex, in its first foray into the U.S. ETF market. The company already has a number of ETFs trading in Canada.

The most popular of the new funds is likely to be the Claymore/BNY BRIC ETF (AMEX: EEB), a passive, market-cap-weighted index tracking The Bank of New York's BRIC Select ADR Index. The fund is the first U.S. ETF to focus on the hot markets of Brazil, Russia, India and China.

The other funds are the:

  • Claymore/Zacks Yield Hog ETF (AMEX: CVY), focused on preferred stocks and other securities with high yields.
  • Claymore/Zacks Sector Rotation ETF (AMEX: XRO), which makes quarterly sector allocation bets based on trends in fundamental macroeconomic data.
  • Claymore/Sabrient Insider ETF (AMEX: NFO), which invests in stocks showing insider buying and analyst upgrades.
  • Claymore/Sabrient Stealth (STH), which selects 150 "offthe- radar" small-cap stocks with robust growth.

Claymore also filed for two new quantitatively driven international ETFs tracking "Developed International" and "Developed World" indexes from Robeco, the active fund management arm of Rabobank. The indexes try to outperform the market by selecting the most attractive stocks within each country, while keeping country weights at market- cap- weighted levels. To ensure liquidity, the funds only choose from stocks with market caps above $1 billion.

Competition In Canada

Claymore Advisors also expanded its fledging Canadian ETF empire with the launch of three new ETFs, and filings for three more. The new launches join the existing Claymore Fundamental Index ETF (TSX: CRQ), which debuted earlier in the summer, and are the:

  • BRIC (TSX: CBQ), which tracks The Bank of New York BRIC (Brazil, Russia, India and China) ADR Index.
  • CDN Dividend and Income Achievers (TSX: CDZ), which focuses on Canadian companies that pay high and growing dividends.
  • U.S. Fundamental Index (TSX: CLU), which tracks a currencyhedged version of Rob Arnott's fundamentally weighted FTSE RAFI US 1000 Index.

The additional filings include a global "fundamental" index, a Japanese "fundamental" index and a fund tied to Canadian oil sands companies.

Game On

WisdomTree Investments, fresh from launching its first 20 ETFs, filed with the SEC for the right to launch ten international sectors funds. The new funds will be the first purely international (ex-U.S.) sector-based ETFs.

The move makes it clear that WisdomTree intends to fulfill its promise to offer a complete, dividend-screened alternative to traditional ETFs, across both sector and country lines. WisdomTre e hopes investors will either wholly or substantially replace their cap-weighted holdings with WisdomTree's dividend- screened alternatives. The new funds feature expense ratios of 58 basis points.

Global Conquest

BGI finally rounded out it "global sector" ETF portfolio, with five new global sector iShares joining five existing funds that have been on the market, in some cases, since 2001. The new funds are the:

  • iShares S&P Global Consumer Discretionary Sector Index Fund (NYSE: RXI)
  • iShares S&P Global Consumer Staples Sector Index Fu n d (NYSE: KXI)
  • iShares S&P Global Industrials Sector Index Fund (NYSE: EXI)
  • i S h a res S&P Global Utilities Sector Index Fund (NYSE: JXI)
  • iShares S&P Global Materials Sector Index Fund (NYSE: MXI)

The largest existing iShares global sector fund is the $700 million Global Energy fund (NYSE: IXC).

PowerShares Spreads The Love

PowerShares listed ten new FTSE RAFI "fundamentally weighted" ETFs on the Nasdaq Stock Exchange (NASDAQ), in the first phase of what the company says will be a continuing expansion of its FTSE RAFI portfolio. The new funds join the largecap FTSE RAFI US 1000 ETF (NYSE: PRF), which listed earlier this year, and feature a "smid-cap" ETF and nine sector funds. Bruce Bond, president of Power Shares, says he expects to list many more FTSE RAFI funds in the future, include international funds.

These are the first PowerShares ETFs to list at the NASDAQ, and represent a major win for the exchange's fledgling ETF business. Bond says that the company wants to have a relationship with all the major exchanges. More cynical observers would note that the NASDAQ is currently in negotiations to buy the London Stock Exchange (LSE), and that the LSE owns half of FTSE.

A Collection Of PowerShares

PowerShares filed with the SEC for the right to launch an unusual group of seven new ETFs. The new funds are:

  • Financial Preferred Portfolio
  • Listed Private Equity Portfolio
  • REIT Preferred Portfolio
  • DWA Technical Leaders Portfolio
  • Value Line 400 Portfolio
  • Value Line Industry Rotation Portfolio
  • Wilderhill Progressive Energy Portfolio

The funds carry a 70 basis point expense ratio, among the highest in the ETF industry. Despite the high fees, the funds could attract sophisticated investors as, in many cases, they tap into previously untouched segments of the market.

For instance, the Financial Preferred Portfolio tracks the performance of the Wachovia Hybrid and Preferred Securities Financial Index, a market-cap-weighted index of the preferred stocks of leading financial companies. Preferred securities operate somewhere in the gray area between stocks and bonds:

They pay a fixed dividend and, in the event of liquidation, have a seniority rank that is higher than stocks and lower than bonds. Generally speaking, they forfeit much of the upside of stocks in exchange for lower volatility.

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