March 02, 2007


Open And Closed

There has long been talk in the ETF world about closed-end funds (CEFs) converting to open-end (ETF) status. After all, it makes so much sense: CEFs often trade at a discount to net asset value (NAV), and converting to ETF status would instantly end that discount.

Now, someone has done it. First Trust Advisors, an Illinois-based firm that offers both CEFs and ETFs, has transitioned its $544 million Value Line Dividend Fund (AMEX: FVD) to ETF status.

The experiment has had mixed results. The discount did disappear, virtually overnight, as arbitrageurs had their way with the ETF. But investors have responded by pulling money out of the fund in large amounts. The fund lost over $170 million in assets in its first month as an ETF.

That's a bit strange, as the fund is now a better deal: The expense ratio has dropped from 0.93 percent to 0.70 percent. Still, it looks like investors felt trapped in the CEF, and were eager to exit the fund once it hit par.

Got A Yen For Yen?

Rydex Investments filed papers with the SEC for the right to launch a new yen-based currency ETF. The new CurrencyShares Japanese Yen ETF (NYSE: FXY) will complement Rydex's existing family of seven currency-based ETFs, which provide exposure to the euro, Australian dollar, British pound, Canadian dollar, Mexican peso, Swedish krona and Swiss franc. The funds hold the named foreign currency as their sole asset, and earn local interest rates on deposits.

The yen fund could prove popular: The yen is the second-most-popular currency in the massive foreign exchange market, and is a key component of the popular New York Board of Trade U.S. Dollar Index. Due to low interest rates in Japan, however, the new ETF will be a depreciating asset: It will have to sell yen to cover the 40 basis point annual expense ratio. As a result, over time, each share will represent a smaller and smaller number of yen.

Getting Real Around The World

SSgA has launched the first international real estate ETF in the United States. The new SPDR Dow Jones Wilshire International Real Estate ETF (AMEX: RWX) began trading on the AMEX on December 19.

The new fund is dominated by exposure to the U.K., Australia and Japan, which collectively represent nearly 60 percent of the fund (see chart).

The only downside to the product is its expense ratio which, at 60 basis points, is on the high side for an ETF. Still, compared with competing funds available today, it represents a very good deal: Almost all international real estate funds have expense ratios over 1 percent.

The fund has been a hit with investors, gathering over $150 million in its first month on the market.

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