AROUND THE WORLD OF ETFS

January 04, 2007

SPDRs Spread Their Web

SSgA has filed for the right to launch 16 new international ETFs, in one of the most important ETF filings in recent history. The new funds will give SSgA a complete lineup of global and regional ETFs, and will position the company to capitalize on the growing interest in international investing. The filings will put significant pressure on BGI, which has had, until this year, a near monopoly on international ETFs.

The funds are shown in the shaded box below.

Some of the funds—like the Europe, World, Japan and Asia Pacific funds—simply fill obvious holes in SSgA's ETF lineup. Others, like the Middle East & Africa ETF, capture sections of the market that investors did not previously have a way to access. The global real estate and infrastructure products are perfectly pitched to capture recent trends in the marketplace, and are likely to meet with a strong reception from investors.

It is interesting—and commendable—that SSgA went with a regional approach, rather than a country-specific strategy. BGI owns the single-country ETF space, and SSgA clearly thinks it can move into the regional space.

Previously, SSgA offered just three international ETFs, including two Europe funds and one GlobalTitans ETF.

Japan Rising, And SSgA With It

The first of the new SSgA international funds debuted in November, as SSgA launched the streetTRACKS Russell/Nomura PRIME Japan ETF (AMEX: JPP) and streetTRACKS Russell/Nomura Small Cap Japan ETF (AMEX: JSC) on the American Stock Exchange(AMEX).

The underlying indexes are jointly managed by Russell and Nomura, and use the same general methodology and rules as Russell's U.S. indexes.

The "PRIME" index tracks the 1,000 largest companies in the Japanese market, covering the vast majority of that market. At the last rebalancing, the index included stocks with market caps as low as $183 million.

The SmallCap index overlaps with the PRIME index, tracking the smallest 15 percent of companies in Japan. At the last rebalance, that worked out to a market-cap cutoff of approximately $1 billion. Both indexes are adjusted for float, and both ETFs charge 56 basis points in expenses.

The ETFs will go head-to-head with competing Japan funds from BGI and WisdomTree.

PowerCubes

PowerShares entered into an agreement with the Nasdaq to assume sponsorship of the hugely popular Nasdaq-100 Index Tracking Stock (NDAQ: QQQQ), as well as the Nasdaq-100 European Tracker (NDAQ: EQQQ) and Nasdaq's 4 BLDRS funds (tickers: ADRE, ADRD, ADRU, ADRA).

The deal brings the six funds and a combined $19.5 billion in assets under the PowerShares banner, more than tripling the company's total assets under management, from approximately $7.5 billion to nearly $27 billion.

Shareholders in the funds should notice no differences beyond the rebranding; the expense ratios, tickers and indexes will all remain the same. The Nasdaq will continue to administer and own the underlying indexes, and The Bank of New York will remain as trustee.

As part of the deal, PowerShares will gain control of more than $20 million in annual advertising dollars. In fact, one question raised following the deal was whether PowerShares planned to alter the fund structure to gain more discretionary control over the marketing budget. The QQQs and BLDRs are both unit investment trusts (UITs), and under the UIT structure, the "marketing dollars" must be spent directly on advertising. However, if the funds were converted to an open-ended structure, PowerShares could gain more flexibility in how that money is used.

Rydex Rolling

Rydex Investments launched nine equal-weight sector ETFs onto the AMEX, as the company looked to build on the success of its stunningly popular S&P 500 Equal-Weight ETF (AMEX: RSP).

The new funds divide the S&P 500 along sector lines, weighting each stock within each sector equally. One major selling point for the funds is that they will not be dominated by a handful of mega-cap stocks, a major problem for certain sector ETFs. For instance, Exxon-Mobil (23.7 percent) and Chevron (17.1 percent) represent nearly 41 percent of the popular iShares Dow Jones U.S. Energy Sector Index Fund (NYSE: IYE). In the new Rydex fund, those numbers are reduced into the single digits.

The funds and tickers are:
• Consumer Discretionary (AMEX: RCD)
• Consumer Staples (AMEX: RHS)
• Energy (AMEX: RYE)
• Financial Services (AMEX: RYF)
• Healthcare (AMEX: RGI)
• Industrial (AMEX:RGI)
• Basic Materials (AMEX: RYT)
• Technology (AMEX: RTM)
• Utilities (AMEX: RYU)

Steel Yourself

Van Eck Global expanded its fledgling ETF empire by launching two highly specialized ETFs onto the AMEX. The new Market Vectors— Environmental Services ETF (AMEX: EVX) and Market Vectors—Steel ETF (AMEX: SLX) joined Van Eck's flagship Market Vectors-Gold Miners ETF (AMEX: GDX).

The new funds may not have the immediate luster of the gold product, which attracted a healthy $250 million-plus since its debut in May. But steel is a critical industrial metal, and the "environmental services industry" (read: trash removal and recycling) has delivered strong performance over the years.

The Environmental Services fund uses an unusual weighting methodology designed to boost the influence of small-cap stocks, a potentially important feature in an industry where consolidation is an important and ongoing process. The Steel fund uses a traditional market-cap-weighting methodology.

Both funds charge 55 basis points in expenses.

PowerShares Takes On … PowerShares?

PowerShares rolled out eight sector ETFs based on the alpha-seeking "Intellidex" indexes developed by the AMEX. The underlying indexes use a combination of "growth-at-a-reasonable-price" and momentum-based strategies in an attempt to beat the market. The new funds are:

• PowerShares Dynamic Basic Materials Sector (AMEX: PYZ)
• PowerShares Dynamic Consumer Discretionary Sector (AMEX: PEZ)
• PowerShares Dynamic Consumer Staples Sector (AMEX: PSL)
• PowerShares Dynamic Energy Sector (AMEX: PXI)
• PowerShares Dynamic Financial Sector (AMEX: PFI)
• PowerShares Dynamic Industrials Sector (AMEX: PRN)
• PowerShares Dynamic Healthcare Sector (AMEX: PTH)
• PowerShares Dynamic Technology Sector (AMEX: PTF)

The funds will compete head-to-head with an existing slate of alpha-seeking sector ETFs from PowerShares. Those funds, launched in September, are tied to the FTSE RAFI fundamentally weighted indexes. It will be interesting to see how the company markets both sets of funds to investors. Generally speaking, the FTSE RAFI funds tilt toward a value approach, while the Intellidex funds tilt toward growth and small caps.

In addition to the new sector funds, PowerShares launched Banking (AMEX: PJB) and Healthcare Services (AMEX: PTJ) industry funds, as well as a MagniQuant market-timing fund (AMEX: PIQ), which uses macroeconomic data to make allocations across different sectors.

All of the funds are listed on the AMEX and charge 60 basis points in expenses.

PowerShares Three

PowerShares launched three new one-off ETFs onto the AMEX during the third quarter. The new funds include two environmental ETFs, the PowerShares Cleantech Portfolio (AMEX: PZD) and PowerShares Progressive Energy Portfolio (AMEX: PUW) and a third fund called the PowerShares Listed Private Equity Portfolio (AMEX: PSP).

The new Progressive Energy fund invests in technologies that improve the environmental performance of old energy sources like coal, oil and nuclear power, while the Cleantech fund broadens out its environmental focus to include companies working on ways to improve industrial efficiency and cut pollution.

The controversial Private Equity fund, meanwhile, represents the first attempt to open up the private equity space to retail investors. In theory, the fund tracks a modified equal-dollar-weighted index of 34 companies involved in the private equity business. In practice, many of the components have only tangential relations to traditional private equity firms. The index developers almost admit as much, but argue that you should not sacrifice the good on the altar of perfection; at least the fund comes close.

All three funds charge 70 basis points.

Better Than Ever

Index investors spurned by Amy Domini's decision to transition the $1.2 billion-plus Domini 400 Index Fund to an actively managed strategy are having the last laugh. Not only has Green Century Investments lowered the fee on its Domini 400 Index Fund to match the old fund's 95 basis point expense ratio, but now BGI has launched a new ETF that charges just 50 basis points. The new fund trades on the AMEX under the ticker symbol "DSI."

The decision to list on the AMEX is curious, as it comes less than a year after BGI decided to transition all of its ETFs away from the AMEX to the NYSE.

Wisdom Forest

WisdomTree Investments petitioned the SEC for the right to launch 31 new ETFs. Twenty-five of the funds rely on some variant of WisdomTree's classic dividend-weighted methodology, including five domestic sector funds and 20 international ETFs (including the first-ever ETF focused on stocks listed in India.)

In a somewhat shocking twist, the filing also includes six funds that weight stocks based on earnings. WisdomTree previously trumpeted dividends as the most transparent, least corruptible "fundamental" investing metric, and has long argued that high yields are correlated with above-market returns. It is not clear yet how the earnings-focused ETFs fit into that picture.

The earnings funds are all domestic (U.S.) funds. They include broad market, large-cap, mid-cap and small-cap funds that are weighted by earnings, as well as two funds that focus on stocks with low price-to-earnings ratios.

Rydex Takes On ProShares

Rydex Investments has filed for 96—count 'em, 96—leveraged, inverse and inverse-leveraged ETFs. The filing includes full slates of S&P and Russell style indexes, a full complement of S&P Sector SPDR funds and funds linked to the popular Nasdaq-100 Index.

The filing is a direct challenge to ProShares, which currently offers the only leveraged and inverse ETFs on the market, including ETFs tied to some of the same indexes covered by the Rydex filing.

Like ProShares, Rydex plans to offer three ETFs for each index track:

• Dynamic: 200 percent long exposure
• Inverse: 100 percent short exposure
• Dynamic Inverse: 200 percent short exposure

There is no word yet on expense ratios for the funds. ProShares currently charges 95 basis points for its leveraged and inverse ETFs.

The Claymore Four

Claymore Advisors took a step toward expanding its unusual collection of ETFs by filing with the SEC for four more interesting funds.

The Claymore/Clear Spin-Off ETF will hold the stocks of companies that have been spun off from larger corporations. The idea is that these stocks will be able to better focus on their core markets, and in turn outperform the broader market. To boost performance further, Claymore will layer a black-box quantitative screen on top of the universe of spin-offs, with a goal of selecting the 40 spin-offs with the greatest risk/reward profile.

The new Claymore LGA Green ETF, meanwhile, will combine SRI with enhanced indexing. The fund is designed to track something called the "Light Green Eco*Index," which screens companies for strong public environmental performance records, and then uses a quantitative performance strategy to select companies with the best risk/reward profile.

Taking another tack, the new Claymore/Ocean Tomo Patent ETF will track an index of 300 companies with high levels of intellectual property. The developers of the underlying index believe that these firms are well-positioned to outperform in the modern era, where information and intellectual property play an increasingly central role in economic performance.

Finally, the Claymore/Sabrient Defender ETF will track a deep value index designed to hold steady if the broader equity markets take a tumble.

The funds will charge between 50-60 basis points in annual expenses.

Commodity Sectors Catch On

PowerShares filed with the SEC for the right to launch seven new "sector" commodity ETFs. The new ETFs are based on "optimum yield" indexes from Deutsche Bank (DB), which include the spot return, "roll yield" and collateral interest income on each commodity investment, and use a flexible roll strategy in an attempt to maximize returns.

The funds will list on the AMEX and cover the Agriculture (AMEX: DBA), Base Metals (AMEX: DBB), Energy (AMEX: DBE), Gold (AMEX: DGL), Oil (AMEX: DBO), Precious Metals (AMEX: DBP) and Silver (AMEX: DBS) markets.

Similar sector funds from ETF Securities are already trading in Europe.

The Oil, Gold and Silver funds will charge 0.50 percent in expenses per year, while the remaining four funds will charge 0.75 percent each. The funds will also incur brokerage fees ranging from three to 16 basis points per year.

No-Fee Trading

Bank of America (BoA) announced plans to eliminate brokerage trading fees for customers who hold $25,000 or more in BoA deposit accounts. Accounts will be allowed 30 free trades a month. The move could have significant implications for the ETF industry if it catches on at other brokerages, as it removes one of the largest impediments to using ETFs-commission costs.

The catch … and there's always a catch … is that investors must store $25,000 in one of BoA's banking, checking or deposit accounts, which offer subpar interest rates compared to best-of-breed alternatives. Those lower interest rates can easily offset the commissions savings.

BoA isn't the first company to offer free trades: Wells Fargo offers 50 free trades per year to accounts with $250,000 or more in assets, and start-ups like Zecco offer free trades with no strings attached.

ETCs List In Germany

ETF Securities listed its family of 31 exchange-traded commodities (ETC) on the Deutsche Börse's Xetra platform. The funds, which include 21 individual commodity ETCs and 10 sector/broad-based funds, are the first ETCs to be priced in euros.

Interestingly, the first trades on the Deutsche Börse were not in popular commodities like gold and oil, but rather in oft-forgotten agricultural markets. Corn, for instance, saw the highest euro trading volume on day one, with nearly 20,000 euros worth of contracts trading hands.

Gold In Turkey

Turkey became the sixth country to host a gold bullion ETF, as Finans Portfoy launched its new Istanbul Gold ETF (GOLDIST) on the Istanbul Stock Exchange. In a move designed to attract foreign investors, the fund tracks the international spot price of gold in U.S. dollars. It charges 47 basis points in expenses.

Russia ETF In Germany

The Deutsche Börse launched the world's first (and so far only) ETF tied directly to the Russian market. The Lyxor ETF tracks the Dow Jones Rus Index Titans 10, which holds the 10 most liquid stocks on the Moscow Stock Exchange. Its two largest sectors are energy (51.6 percent) and basic industries (19 percent).

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