Around The World Of ETFs

March 24, 2008

Claymore Says Timberrr!

Claymore is offering investors access to a market segment that they may not have been able to access before. The Claymore/Clear Global Timber ETF (AMEX: CUT) is the first U.S.-listed timber fund. Previously, timber was largely restricted to institutional investors because of the high costs associated with acquiring timber land.

There were no timber-based index funds. CUT tracks the Clear Global Timber Index, which includes companies that own or manage forested land and harvest the timber from it for the commercial use and sale of wood-based products such as lumber, pulp and paper products. As of September 30, 2007, the index had 27 components from 11 countries. CUT has an expense ratio of 0.65 percent. Timber is considered a desirable investment because of its low correlation with the broader market.

ETN Tracks Closed-End Funds

Since their inception, ETNs have been acknowledged as a useful vehicle for gaining exposure to some of the more exotic areas of the market. Goldman Sachs is upholding ETNs' News 54 March/April 2008 reputation with the recent launch of the Claymore CEF Index-Linked GS Connect ETN (NYSE Arca: GCE). GCE tracks Claymore Securities' index of 75 closed-end funds, which is calculated by Dow Jones indexes. The component funds are selected and weighted based on liquidity, distributions and market valuation. GCE charges 0.95 percent.

First Trust Launches Global Select Dividend ETF

In late December, First Trust Advisors launched the First Trust Dow Jones Global Select Dividend Index Fund (FGD) on the American Stock Exchange (Amex). FGD carries an expense ratio of 0.60 percent. The underlying index includes 100 stocks from more than 11 developed markets, with the components selected and weighted based on dividend yield. Barclays Global Investors (BGI) offers two ETFs based on the Dow Jones Select Dividend indexes that together offer somewhat similar exposure using the same methodology.

The iShares Dow Jones Select Dividend Index Fund (NYSE: DVY) holds only domestic stocks, while the iShares Dow Jones EPAC Select Dividend Index Fund (NYSE: IDV) holds stocks from Europe and the Asia-Pacific region. The funds have expense ratios of 0.40 percent and 0.50 percent, respectively.

PowerShares Ends Year With ETF Launch

PowerShares closed December with the addition of two more funds based on the Dorsey, Wright & Associates Technical Leaders indexes, as well as an international real estate ETF tracking a FTSE RAFI index. The PowerShares DWA Developed Markets Technical Leaders Portfolio (NYSE Arca: PIZ) and PowerShares DWA Emerging Markets Technical Leaders Portfolio (NYSE Arca: PIE) take the DWA Technical Leaders strategy international.

The strategy uses a proprietary methodology to select stocks with the best relative strength characteristics. PIZ and PIE charge 0.80 percent and 0.90 percent, respectively. The third fund was the Power- Shares FTSE RAFI International Real Estate Portfolio (NYSE Arca: PRY), which carries an expense ratio of 0.75 percent.

BGI Adds Emerging Market Debt

In December, BGI added the iShares JPMorgan USD Emerging Markets Bond Index Fund (NYSE Arca: EMB) to its lineup. The new fund tracks the JPMorgan EMBI Global Core Index covering sovereign and quasi-sovereign emerging market debt issued in U.S. dollars. Previously, PowerShares was the only firm offering an ETF for that particular asset class with its PowerShares Emerging Markets Sovereign Debt Portfolio (AMEX: PCY). The most notable difference between the two is price: The iShares fund charges 60 basis points versus the PowerShares fund's 50-basis-point expense ratio.

Claymore Launches China Real Estate

The Claymore/AlphaShares China Real Estate ETF launched in December on the NYSE Arca platform under the symbol ''TAO.'' The fund is the first to combine two very hot areas of investment under one umbrella— China and international real estate. As China develops further, real estate is expected to be at a premium, as businesses struggle to gain footholds around industrial centers. The Alpha- Shares China Real Estate Index tracks publicly traded companies and REITs that engage primarily in the development, management or ownership of real estate properties in mainland China, Hong Kong and Macau. TAO has an expense ratio of 0.65 percent.

Rydex Chases ProShares

Rydex Investments expanded its lineup of ETFs with the introduction of a family of leveraged and inverse products on the Amex. Its products will go head-to-head with the leveraged and inverse ETFs from ProShares, which have been on the market for more than a year and have established a dominant position in the space. The new Rydex funds track three indexes: the S&P 500, S&P MidCap 400 and Russell 2000.

Each index is tied to two funds—one targeting 200 percent of the returns of the index and another targeting 200 percent of the inverse (or -200 percent) of the index's returns. They include the Rydex 2x S&P 500 ETF (AMEX: RSU), Rydex Inverse 2x S&P 500 ETF (AMEX: RSW), Rydex 2x S&P Mid- Cap 400 ETF (AMEX: RMM), Rydex Inverse 2x S&P MidCap 400 ETF (AMEX: RMS), Rydex 2x Russell 2000 ETF (AMEX: RRY) and Rydex Inverse 2x Russell 2000 ETF (AMEX: RRZ). ProShares already offers funds with essentially the same strategy tracking the same indexes. The Rydex funds hope to attract assets by way of the expense ratio: ProShares charges 0.95 percent for its ETFs, while the Rydex funds charge just 0.70 percent.

PowerShares Adds Fixed-Income

PowerShares recently launched two more fixed-income ETFs. The PowerShares VRDO Tax- Free Weekly Portfolio (AMEX: PVI) is the first of its kind. It tracks the Thomson Municipal Market Data VRDO Index, which covers variable rate demand obligations (VRDOs). VRDOs are floating-rate municipal bonds that can be ''put back'' to an investment dealer at certain times. They're thought of as very-high-quality bonds, with little default risk.

However, they generally require a minimum investment of $100,000. PVI will open them up to all investors, with an expense ratio of just 0.25 percent. The PowerShares High-Yield Corporate Bond Portfolio (PHB) tracks the Wachovia High Yield Bond Index, which includes U.S. bonds rated below investment grade by Moody's, Fitch or S&P. PHB has an expense ratio of 0.50 percent.

First BuyWrite ETF Opens

In December 2007, PowerShares launched the first of three planned ETFs based on the Chicago Board Options Exchange's BuyWrite in- dexes for the S&P 500, the NASDAQ- 100 and the Dow Jones Industrial Average. The PowerShares S&P 500 Buy- Write Portfolio (NYSE Arca: PBP) is based on the CBOE S&P 500 Buy- Write Index, which tracks the performance of a covered call strategy as applied to the S&P 500 Index.

The strategy tends to outperform in down markets, but sacrifices some upside performance when the market is rising. Buy-write strategies are often used to reduce volatility in a portfolio. PBP charges 0.75 percent in expenses.

Taiwan To Become ETF Hot Spot?

A recent Financial Times article reports that Taiwan is looking to greatly expand its ETF lineup in the first half of 2008. The Taiwan Stock Exchange is currently in talks with the Tokyo Stock Exchange about cross-listing both exchanges' ETFs, and it has signed an agreement with the Abu Dhabi Securities Market (ADSM) that encompasses plans for the two exchanges to jointly develop and list ETFs as well.

Société Générale has detailed 10 different possible ETFs to list on the Taiwan Stock Exchange, and two more Taiwanese firm—Fubon and KGI Securities—are looking to list ETFs on their home exchange. ETFs could provide the Taiwan Stock Exchange with a way to profit from domestic investors' increasing interest in foreign investment opportunities.

A Different Kind Of Focus

A new ETF company debuted in December, as FocusShares LLC listed four new ETFs on the NYSE Arca platform. The new funds are all tied to narrow 20- or 30-stock indexes from the options-focused International Securities Exchange (ISE).

They include the FocusShares ISE Homebuilders Index Fund (NYSE Arca: SAW), which holds companies focused on residential home construction; FocusShares ISE SINdex Fund (NYSE Arca: PUF), which buys companies involved in casinos, liquor and cigarettes; FocusShares ISE-CCM Homeland Security Index Fund (NYSE Arca: MYP), which holds companies that have contracted work with the Department of Homeland Security; and FocusShares ISE-REVERE Wal-Mart Supplier Index Fund (NYSE Arca: WSI), which holds companies that derive a large portion of their revenues from sales to Wal-Mart.

The homebuilders fund charges 0.35 percent in expenses, while the other funds charge 0.60 percent.

Vanguard Offers ''Mega'' Funds

In December, Vanguard launched three index funds covering the ''mega-cap'' segment of the U.S. stock market; the funds are available as ETF and institutional shares, but not regular Investor shares. The three funds track the MSCI U.S. Large-Cap 300 Index and its growth and value subindexes.

The ETF shares—the Vanguard Mega Cap 300 (MGC), Vanguard Mega Cap 300 Value (MGV) and Vanguard Mega Cap 300 Growth (MGK) funds—all listed on the NYSE Arca. While the institutional shares charge an expense ratio of just 0.08 percent, the ETF shares charge 0.13 percent.

Taking Another Approach To Oil

Victoria Bay Asset Management rolled out its third ETF on the Amex in early December, launching the United States 12 Month Oil Fund (AMEX: USL). The fund is designed to track more closely to the spot price of oil than competing oil futures ETFs, including Victoria Bay's own News 56 March/April 2008 U.S. Oil Fund (AMEX: USO).

Like USO, USL relies on the futures market to gain exposure to oil, but instead of buying the near-month contract and then rolling it over into the next-month each month, USL spreads its investments out across the next 12 months' worth of contracts, buying an equal amount of each contract. Victoria Bay says this approach will make USL less vulnerable to the forces of contango and backwardation. USL charges 0.66 percent.

SSgA Launches ''JNK'' Bond ETF

State Street Global Advisors (SSgA) launched its own high-yield bond ETF on December 4, becoming the third company to issue a high-yield bond ETF in the past 12 months. The SPDR Lehman High Yield Bond ETF trades on the Amex as ''JNK.''

The new fund goes head-to-head with two competitors, the PowerShares High Yield Corporate Bond Portfolio (AMEX: PHB) and the iShares iBOXX $ High Yield Corporate Bond Fund (AMEX: HYG). JNK's underlying index, however, has the best track record of the three, and JNK itself is cheaper with an expense ratio of 0.40 percent compared with 0.50 percent for the competing funds.

Van Eck Enters Muni Arena

Van Eck Global finally launched its long-awaited municipal bond ETFs. In December, Van Eck launched its first muni bond ETF, the Market Vectors-Lehman Brothers AMT-Free Intermediate Municipal Index ETF (AMEX: ITM), which targets muni bonds with a nominal maturity of six-17 years.

The fund charges 0.20 percent. In January, the firm rolled out the Market Vectors-Lehman Brothers AMT-Free Long Municipal Index ETF (AMEX: MLN), which covers muni bonds with maturities of 17 or more years. It charges 0.24 percent. Van Eck plans to launch at least four more muni bond ETFs, which could give it the most comprehensive family of such ETFs among all the providers.

Vanguard's EDV Not For Average Investor

The newly launched Vanguard Extended Duration Treasury ETF (AMEX: EDV) tracks the Lehman Brothers Treasury STRIPS 20-30 Year Equal Par Bond Index.

EDV charges an expense ratio of 0.14 percent and is a share class of the Vanguard Extended Duration Treasury Index Fund, which launched at the same time. The index mutual fund is only available to institutional investors; the fund and ETF are intended as tools for the pension fund industry and are not considered appropriate for retail investors.

ProShares Expands Into 130/30

In a major new development for the ETF industry, ProShares has filed papers with the SEC for a new ''130/30'' ETF. The new fund will use a proprietary, quantitative analytical system to rank all of the large-cap stocks in the U.S. market. It will then take a 130 percent long position in the high-ranked stocks and a 30 percent short position in the low-ranked stocks. The goal is to capture additional alpha and generate excess returns while retaining a net 100 percent exposure to the market.

BGI Goes International

As 2007 wound down, BGI's iShares family launched 11 international ETFs on two different exchanges. The iShares FTSE Developed Small Cap ex-North America Index Fund (NDAQ: IFSM), which debuted on the NASDAQ, marks BGI's first foray into the small-cap international arena; it charges an expense ratio of 0.50 percent.

The launch also included four NASDAQ-listed ETFs based on FTSE EPRA/NAREIT real estate indexes, offering region-based exposure to the real estate markets: iShares FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index Fund (NDAQ: IFGL), iShares FTSE EPRA/NAREIT Asia Index Fund (NDAQ: IFAS), iShares FTSE EPRA/NAREIT Europe Index Fund (NDAQ: IFEU) and iShares FTSE EPRA/NAREIT North America Index Fund (NDAQ: IFNA).

The funds each charge 0.48 percent. Meanwhile, BGI launched six international funds the NYSE Arca exchange, including the iShares S&P Asia 50 Index Fund (NYSE Arca: AIA), which has an expense ratio of 0.50 percent; the iShares MSCI BRIC Index Fund (NYSE Arca: BKF), which charges 0.74 percent; and the iShares MSCI Chile Index Fund (NYSE Arca: ECH), which charges 0.75 percent.

Also included in the launch was the iShares MSCI EAFE Small-Cap Index Fund (NYSE Arca: SCZ), charging 0.40 percent in expenses; the iShares S&P Global Infrastructure Index Fund (NYSE Arca: IGF), which tracks an index of 73 companies involved in infrastructure products and services worldwide and charges 0.48 percent in expenses; and the iShares MSCI Kokusai Index Fund (NYSE Arca: TOK), which covers the world's developed markets ex-Japan and charges 0.25 percent in expenses.

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