March 02, 2007

Simply SPDRs

State Street Global Advisors (SSgA) has dropped the streetTRACKS brand name from its family of ETFs, and will consolidate all of its funds under the catchier "SPDRs" moniker.

The rebranding was to begin January 8, and is to be completed in stages throughout the year.

This is the second major rebranding of an ETF fund family in the past year, following Vanguard's decision to give up the unfortunate "VIPERS" moniker and call its ETFs, simply, "Vanguard ETFs."

SSgA is in the midst of a significant effort to reinvigorate its ETF franchise, which recently crossed the $100 billion mark on total assets under management. The company says it will launch a major advertising campaign tied to the rebranding.

S&P Tweaks Portfolio

S&P modified its ETF-only model portfolio to reflect a protective stance for 2007, tacking on an additional 5 percent allocation to fixed income and lowering the U.S. equity exposure by 5 percent. The international exposure, while retaining the same 20 percent allocation as last year, looks radically different: Specific mandates to Japan and Asia were eliminated in favor of broad market exposures, including EAFE weighted at 15 percent and emerging markets weighted at 5 percent. The bond segment is not only larger this year, but is heavily weighted in favor of the Lehman Aggregate, clocking in at 20 percent, while short-term debt has been reduced to 5 percent. This weighting scheme, says S&P, serves as a hedge against a slowing economy.

S&P's portfolio is designed to be held for five years.

Few Gains

Rumors are that 2006 was the biggest year for capital gains in recent history. Analysts predict that investors could cough up over $20 billion in capital gain taxes. Early reports, however, suggest that ETF investors have, by and large, dodged the bullet.

BGI said that it would distribute zero capital gains to the vast majority of its equity and fixed-income ETFs. Only two real estate funds—the iShares Dow Jones U.S. Real Estate Fund (NYSE: IYR) and the iShares Cohen & Steers Realty Majors Index Fund (NYSE: ICF)—will make distributions, totaling $0.37/share in long-term gains for IYR and half a penny per share in long-term gains for ICF. The other 115 iShares funds will issue no gains whatsoever.

PowerShares, meanwhile, managed zero capital gains for its entire family of equity ETFs, while Rydex posted no gains for its popular Rydex S&P Equal Weight ETF (AMEX: RSP) and Rydex Top 50 Index (AMEX: XLG) ETFs, either. WisdomTree had gains in nine of its 30 ETFs, and State Street Global Advisors paid out gains on eight of 42 funds.

Vanguard International

Vanguard filed papers with the SEC for the right to launch a new international index fund. The new fund will track the FTSE All World ex-US Index, and will be the second Vanguard fund to cover the broad ex-U.S. marketplace, joining the Vanguard Total International Stock Index Fund (VGTSX). The FTSE product will be launched with three share classes: Investor shares, Institutional Shares and ETF Shares.

Why does Vanguard need two funds tracking the same space? Think Mounties: VGTSX, like almost all large international funds, includes broad exposure to both developed and emerging markets outside the U.S. But because it tracks an MSCI Index, it does not include Canada: MSCI's indexing system uses "North America" and not the "U.S." as a region, so Canada is lumped in with the USA.

In contrast, Canada makes up about 5 percent of the new FTSE Index: a large enough proportion to have a significant impact on performance. Adding Canada to the MSCI benchmarks would have added approximately 40 basis points per year in annual performance over the past five years.

In an interview with, Vanguard principal Paul Lohrey said that investors who don't already own the Total International fund should "seriously consider" the FTSE fund. One wonders how long it will be until MSCI switches its benchmarks to include Canada as well.

Interestingly, Vanguard is being very aggressive on its ETF pricing: The new ETF share class will charge 25 basis points, while the Investor shares will levy a 40 basis point fee. That will make the ETF the share class of choice for the vast majority of small investors.


Seeing The World

Vanguard isn't the only company looking toward Canada for better international exposure. In fact, SSgA beat Vanguard to the punch with the launch of its new SPDR MSCI ACWI ex-U.S. ETF (AMEX: CWI), which tracks the performance of substantially all investable markets outside the U.S. (including Canada).

The exciting new fund charges 35 basis points, higher than the Vanguard ETF but substantially lower than other comparable products.

Lucky Seven

Investors who want to fine-tune their commodities exposure got a new set of options in January, as PowerShares launched seven sector-based commodity ETFs onto the AMEX. The new ETFs were launched in partnership with Deutsche Bank, and follow in the footsteps of the broad-based PowerShares DB Commodity Index Fund (AMEX: DBC), the first (and still the largest) commodity index ETF in the U.S. The new funds are the:

PowerShares DB Energy Fund (AMEX: DBE)
PowerShares DB Oil Fund (AMEX: DBO)
PowerShares DB Precious Metals Fund (AMEX: DBP)
PowerShares DB Gold Fund (AMEX: DGL)
PowerShares DB Silver Fund (AMEX: DBS)
PowerShares DB Base Metals Fund (AMEX: DBB)
PowerShares DB Agriculture Fund (AMEX: DBA)

Like DBC, the funds track the performance of fully collateralized futures investments. They also rely on Deutsche Bank's "Optimum Yield" strategy, which attempts to improve the "roll yield" for the funds. Although Deutsche Bank claims incredible backtested results (it says the PowerShares DB Oil Fund outperformed the Goldman Sachs Crude Oil Total Return Index by more than 12 percent in the past year alone), the "Optimum Yield" strategy remains a bit untested.

The oil, gold and silver funds will charge 50 basis points; the other funds will charge 75 basis points. Those expenses will be covered by the collateral interest income, which will approach 5 percent per year based on current interest rates.

Out of the box, the Agriculture fund attracted the most assets, gathering over $40 million in its first few weeks on the market.

Defending Claymore

Claymore Advisors rolled out five new ETFs onto the AMEX on December 15. The Claymore/Clear Spin-Off ETF (AMEX: CSD) is a quantitatively screened portfolio of companies that have been spun off from other companies, while the Claymore/Ocean Tomo Patent ETF (AMEX: OTP) focuses on companies with strong pools of intellectual capital. The LGA Green ETF (AMEX: GRN) is a quantitatively screened portfolio of companies with strong environmental performance records, and the Claymore/Sabrient Defender ETF (AMEX: DEF) is a deep value fund meant to hold its value when markets fall. All the funds charge 69 basis points in annual expenses.

iPath India

The hottest new exchange-traded product to hit the market recently is not an ETF at all, but rather, an exchange-traded note (ETN) from Barclays Bank. The iPath India ETN (AMEX: INP), which is technically a debt security but trades like an ETF, launched on December 20 and gathered more than $200 million in assets in its first month on the market. The fund offers U.S. investors the first indexed access to the domestic market of India, and charges just 75 basis points for the privilege.

Five New PowerShares

PowerShares rolled out five new ETFs onto the AMEX on Friday, December 1. The most interesting of the new funds is the PowerShares Financial Preferred Portfolio (AMEX: PGF), which tracks the performance of "preferred stock" from major financial companies. Preferred stock is an unusual class of stock that operates somewhere in the gray zone between stocks and bonds, providing higher income and lower risk, but less upside than traditional equities. PGF is the first preferred stock ETF to hit the market.

The other funds are:

PowerShares Dynamic Large Cap (AMEX:PJF)
PowerShares Dynamic Mid Cap (AMEX:PFM)
PowerShares Dynamic Small Cap (AMEX:PJM)
PowerShares Value Line Industry Rotation (AMEX:PYN)

The expense ratios range from 60-70 basis points.


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.




Crazy Eights

The paucity of fixed-income ETFs in the U.S. has baffled industry observers for some time. Despite representing a market nearly as large as equities, there have been just six fixed-income ETFs available to investors until recently.

BGI, developer of the original six fixed-income funds, significantly expanded its bond ETF offerings with the launch of eight new funds onto the NYSE in January.

The new funds are shown in the blue box below. The funds complement the existing iShares funds, and fill out BGI's offerings in the Treasury, Corporate and Mixed-Security markets. It's nice to see the expense ratios on the funds stay low.

There are other fixed-income ETFs in development: Ameristock, creator of the U.S. Oil Fund (AMEX: USO), is working on five fixed-income Treasury bond funds tied to indexes from Ryan ALM.

Milken Cookies

In related news, BGI filed papers with the SEC to launch a new junk bond ETF. According to the filing, the fund is designed to track the International Index Co.'s iBoxx Liquid High Yield Index, which covers 50 of the "most liquid and tradable U.S. dollar-denominated, high-yield corporate bonds for sale in the United States."

Vanguard Says "En Garde"

In related news, Vanguard appears ready to challenge BGI's hegemony in the fixed-income ETF space. The indexing giant filed papers with the SEC for the right to offer ETF shares on four of its popular bond funds: the Vanguard Total Bond Market Index Fund, Vanguard Short-Term Bond Index Fund, Vanguard Intermediate-Term Bond Index Fund and Vanguard Long-Term Bond Index Fund.

The ETFs will charge expenses of just 11 basis points, far below the 15-20 basis point fees levied by BGI. The fees are also substantially lower than the 18-20 basis point fees Vanguard charges for the comparable Investor shares.

The Claymore Clipper

Claymore Advisors continues to lay plans for rapid expansion in the ETF market. Claymore, which already runs an array of unusual ETFs, has filed with the SEC for the right to launch 14 new ETFs that use 14 different approaches to try to "beat the market."

The funds track indexes from 10 different index providers, and run the gamut in terms of investing philosophy. They use a bewildering variety of fundamental factors, momentum analysis and general indexing mojo. The quirks of these methodologies, along with the "black box" nature of the underlying strategies, mean that any backtested results should be treated with caution.

The most interesting filings are created in partnership with Sabrient. The new Claymore/Sabrient CEF Balanced Opportunity and Claymore/Sabrient CEF Income Opportunity funds are ETFs-of-CEFs: They hold multiple closed-end funds in a single, open-ended ETF structure.


IndexIQ: Indexing Intangibles

In one of the more unusual ETF filings in recent months (and that's saying something), a group called IndexIQ has filed for 20 new ETFs tied to "intangible" indexes, grouping things like the "Most Innovative," "Most Powerful" and "Most Productive" companies. IndexIQ says these intangible attributes "too often are overlooked in equity analysis, but represent many of the strongest drivers of corporate growth and equity returns." The idea is similar to the "intellectual property" indexes developed by Ocean Tomo, one of which serves as the basis for an ETF from Claymore.

There is no word yet on expense ratios or on where the new ETFs will be listed.

Revenue Weighting

VTL Associates, a newcomer on the ETF stage, filed papers with the SEC for the right to launch three revenue-weighted ETFs:

TIGERS Revenue-Weighted Large Cap Index Fund
TIGERS Revenue-Weighted Mid Cap Index Fund
TIGERS Revenue-Weighted Small Cap Index Fund

The funds represent a new twist on the "fundamental indexing" theory advanced by Rob Arnott's Research Affiliates (RAFI). Unlike Arnott's famous RAFI indexes, however, which use a combination of four fundamental factors, VTL focuses on just one: revenues. The company believes that revenues are the fairest and least corruptible "fundamental" measure, and that using revenue-weighting leads to balanced indexes that don't unfairly bias against certain sectors. Not coincidentally, it also creates indexes with strong backtested performance.

The new TIGERS funds will use the same securities that are in the S&P 500, S&P MidCap 400 and S&P SmallCap 600 indexes. The large-cap fund will charge 50 basis points in annual expenses, while the mid-cap and small-cap funds will charge 55 basis points. Tickers are not available at this time. For more, see the article by Vincent Lowry in this issue of JoI.

Healthshares 20

Almost a year ago, a group called Ferghana-Wellspring filed papers with the SEC for the right to launch 12 disease-focused ETFs. The idea for the funds was to track the performance of companies involved in a certain area of medical research: say, "cancer," or "dermatology."

Many people dismissed the funds as too narrowly focused, and when no new news was heard about the products, most observers wrote them off.

Well, it looks like they were wrong. Ferghana-Wellspring has refined, expanded and rebranded its filing: the group recently filed papers with the SEC for the right to launch 20 "Healthshares" ETFs. The ETFs will take disease-specific, category-focused and regional approaches to slicing up the health care industry. The filing includes 17 disease- and technology-focused ETFs, as well as funds targeted at Asian Health, European Drugs, European Medical Products and a health care composite that combines the other 19 funds.

The funds will list on the NYSE, and expense ratios will range from 75 to 95 basis points.

ETF Lifecycle

A group called TDAX Funds filed papers to launch five "lifecycle" ETFs based on proprietary indexes from Zacks. The new funds are being billed as "Independence Shares," and are:

Zacks 2010 Lifecycle Index
Zacks 2020 Lifecycle Index
Zacks 2030 Lifecycle Index
Zacks 2040 Lifecycle Index
Zacks In-Target Lifecycle Index

Like all lifecycle funds, these funds offer balanced exposure to different asset classes—stocks, bonds, international stocks, REITs, etc. These particular indexes rely on a Zacks methodology that uses black-box quant strategies in an attempt to outperform the market.

The "In-Target" fund takes a general approach, creating a portfolio of securities designed to fit the needs of most investors.

There is no word yet on expense ratios or tickers.



State-specific investing: That's the idea behind the new ETF filing from XShares. The group submitted papers to the SEC to launch new ETFs covering equity investments in 22 individual states. It's not clear if XShares plan to extend its franchise to cover the other 28 states. The funds will trade on the NYSE. There is no word yet on tickers or expense ratios.

No Stamp Tax

In a move that could alter the landscape of the European ETF marketplace, the British government said it would scrap the so-called "stamp tax" on foreign ETFs. Previously, ETFs incorporated outside the U.K. that wanted to be listed and/or traded on the London Stock Exchange (LSE) had a 50 basis point annual excise tax slapped on shares. This (understandably) discouraged cross-listings, as it more than doubled the average expense ratio for the funds. As a result, the LSE has fallen behind in the market for ETF listings.

The new stamp tax exemption will only cover ETFs with underlying shares that are not listed in the U.K. ETFs based on U.K.-listed shares will continue to be covered by the stamp act tariff.

BGI In Bonds

BGI launched two new bond ETFs on the London Stock Exchange: The iShares GBP Index Linked Gilt ETF (ISIN: IE00B1FZSD53) tracks the performance of the Barclays UK Government Inflation-Linked Bond Index, a mixed-duration index with an average duration term of 12.3 years; the iShares FTSE UK All Stocks Gilt ETF (ISIN: IE00B1FZSB30) tracks the FTSE UK All Stocks Gilt Index, a more well-known index of U.K. government bonds stretching across all maturities. It charges 0.20 percent in annual fees, and at press time was yielding close to 4.52 percent.

ETF Securities Expands To Euronext

ETF Securities continued its commodities march across Europe, cross-listing 25 ETFs on Euronext. The funds, which already trade in London and Germany, include 15 individual commodity ETFs, nine commodity "sector" funds and one fund linked to the Dow Jones AIG Commodity Index (DJ-AIG). As of yet, ETF Securities has no plans to expand into the U.S.

iShares The Love

BGI is lowering fees on many of its international ETFs, according to a new prospectus filed at the SEC. BGI spokeswoman Christine Hudacko said that as asset counts rose on the funds, Barclays was able to pass down economy-of-scale savings to shareholders. The truth is that it has to pass down those savings. Barclays' management agreement for many of its ETFs calls for a direct relationship between fees and assets levels. Still, a fee reduction is a fee reduction, and Barclays should be congratulated for doing the right thing.

Curiously, the fee on the hugely popular iShares MSCI Emerging Markets Fund (NYSE: EEM) remains stuck at 75 basis points. That fund is not bound by any asset-linked fee reduction, so despite a huge surge in assets, its ER will stay the same.

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