Around The World of ETFs

December 26, 2008



PIMCO Files First ETF Prospectus

The world’s largest bond fund manager has taken the next step in entering the $593.5 billion ETFs market.

Pacific Investment Management Co. filed a prospectus for its first ETF in November. The move follows a submission to the SEC on July 29 for exemptive relief to offer ETFs.

Although it originally said it was planning to launch a fund based on the Lehman Brothers U.S. Aggregate Bond Index, the Newport Beach, Calif.-based asset manager has submitted a prospectus for a proposed PIMCO 1-3 Year U.S. Treasury Index Fund.

Given recent events, it’s not surprising that PIMCO has decided to stick to the most liquid part of the bond market for its first ETF.

According to the PIMCO 1-3 Year U.S. Treasury Index Fund’s prospectus, it will trade on the NYSE Arca exchange and follow a Merrill Lynch benchmark. The latter is a market-capitalization-sized index that PIMCO will replicate using a representative sampling technique.

PowerShares Cuts Fund Prices

PowerShares recently slashed expense ratios on 11 domestic ETFs that track some of the FTSE RAFI fundamental indexes. The expense ratios were lowered from 0.60 percent to 0.39 percent as of Nov. 1.

The affected funds track nine U.S. sectors as well as the FTSE RAFI family’s “Large” and “Small-Mid” U.S. indexes. Only one of those ETFs has assets greater than $100 million—generally the breakeven point for ETFs in terms of assets. That’s the PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF).

BGI Adds Target Date, Bond ETFs To Lineup

Barclays Global Investors became the latest ETF provider to launch a family of life cycle ETFs, including seven target date funds and four target-risk funds. The funds use an ETF-of-ETFs structure, and charge all-in fees (including the underlying ETF expense ratios) of between 0.29 percent and 0.31 percent.

BGI says it will target the IRA market and retirement plans of smaller employers with the new target date funds. Assets in target date funds reached $184 billion at the end of 2007, according to Financial Research Corp. data, an annual growth rate of 70 percent. In 2000, there were 23 target date funds, and now there are more than 300, according to Lipper.

The first family of target date ETFs were the TDX Independence ETFs, launched through a partnership with XShares and TD Ameritrade. Those funds charge 0.65 percent, a fee that may be unsustainable with the launch of the new BGI funds.

BGI also added two additional fixed-income portfolios to its lineup, the iShares S&P Short Term National Municipal Bond Fund (NYSEArca: SUB) and the iShares Barclays Agency Bond Fund (NYSEArca: AGZ). Notably, one of the bond ETFs (AGZ) represents the first under the new Barclays index brand. It tracks an index of so-called “agency bonds,” which are bonds offered by private companies chartered by the U.S. government, such as Ginnie Mae, Freddie Mac and Fannie Mae. It charges 0.20 percent in expenses.

SUB will charge 0.25 percent in expenses.

NETS Offer New Twist On World Fund

Northern Trust launched its 17th ETF, the NETS FTSE CNBC Global 300 Index Fund (NYSEArca: MYG), this fall. MYG tracks developed and emerging markets stocks by market-capitalization size. It is one of two global equity ETFs the new ETF family plans to debut.

So far, only two truly all-world ETFs are on the market. The iShares MSCI ACWI (NasdaqGM: ACWI) launched in March, and was followed by the Vanguard Total World Stock Index ETF (NYSEArca: VT) in late June.

The new NETS global ETF, while not as diversified as ACWI or VT (which track indexes with 2,000-plus different names), does take at least 45 of its top stocks from subindexes that are all-cap in nature. Besides the more-diversified rivals, MYG faces other existing and more-concentrated global ETFs such as the iShares S&P Global 100 (NYSEArca: IOO) and the SPDR Dow Jones Global Titans (NYSEArca: DGT). Those, however, focus only on developed markets.

Russian Ruble Trading Arrives In ETF Market

Investors finally have access to currency-based ETFs for all four of the BRIC nations (Brazil, Russia, India and China), following Rydex Investments’ November launch of the CurrencyShares Russian Ruble Trust (NYSEArca: XRU), the first Russian currency play in the exchange-traded format. WisdomTree offers the only Brazilian currency fund, while both WisdomTree and Van Eck offer plays on the Chinese and Indian currencies.

Rydex invented the currency category in ETFs, but XRU is the first true emerging market currency fund in Rydex’s popular CurrencyShares family.

XRU charges 0.40 percent.

First Trust, PowerShares Introduce Infrastructure ETFs

Two ETF providers launched infrastructure ETFs within a 24-hour period in mid-October. First Trust Advisors rolled out the First Trust ISE Global Engineering and Construction Index Fund (NYSEArca: FLM), which takes a global focus, followed quickly the next day by PowerShares’ introduction of the PowerShares Emerging Markets Infrastructure Portfolio (NYSEArca: PXR).

FLM uses the International Securities Exchange’s Global Engineering and Construction Index as its benchmark; the fund is unique among infrastructure ETFs for its exclusion of utilities. PXR tracks the S-Network Emerging Infrastructure Builders Index, which has a methodology that breaks down the infrastructure world into two main camps: builders and providers.

PXR’s index is focused on emerging markets, and includes companies domiciled in emerging markets countries as well as companies with extensive operations in emerging markets.

FLM charges a 0.70 percent expense ratio, while PXR charges 0.75 percent.

HealthShares Liquidates All Funds

XShares has liquidated all 19 of its HealthShares ETFs, and was scheduled to dissolve the HealthShares fund management company on Dec. 31. Market conditions, the inability of the ETFs to attract significant market interest since inception, and lack of prospects for future growth and economic viability played into the decision by the funds’ board and investment advisor, XShares Advisors.

The liquidation actually came in two phases. XShares first tried to reinvigorate the HealthShares lineup by shutting down 15 of the funds and remaking the remaining four into broader portfolios. But those changes failed to reignite interest, and the company shut down all of the funds. The last day of trading was scheduled for Dec. 23.

This is the second major liquidation for XShares. The company earlier closed its lineup of real estate funds, which were marketed as AdelanteShares. In a statement, however, XShares said it remains committed to bringing out new ETFs in 2009 related to the environment and infrastructure.

Ziegler Shutters ETF

The $3.6 million NYSE Arca Tech 100 ETF (NYSE: NXT) was set to stop trading on Dec. 15, with distributions to shareholders scheduled for Dec. 26. Together with the HealthShares liquidation, this should push the total number of ETFs liquidated in 2008 to 46.

NXT was launched in March 2007 as an alternative to the popular PowerShares NASDAQ-100 ETF (NasdaqGM: QQQQ). Many consider QQQQ a proxy for the Technology sector, but in reality, it holds a mix of Tech and non-Tech stocks. NXT, in contrast, holds 100 pure Technology stocks and offered a unique pure-play on the Technology sector. Apparently not unique enough, however.

NXT was the only ETF offered by Ziegler Capital. The company will now turn its attention back to its mainline business, where it manages approximately $3.1 billion in fixed-income and equity assets, including $700 million in mutual fund investments, through its fund family, North Track Funds.

WisdomTree Reports Net Loss In Q3

A slumping stock market and a drop in assets under management led ETF provider WisdomTree Investments Inc. to report third-quarter net losses of $5.6 million, or 6 cents per share. That represented a 3 percent drop from the same period a year ago.

Last quarter, the firm had a 17 percent net loss. WisdomTree is the only pure-play publicly traded ETF sponsor.

Market depreciation, the dollar rally, and asset outflows took a toll on the company, as did its tilt to international-themed investments. Sequentially, the third quarter showed a stark contrast from past quarters in terms of money flows. In the second quarter of 2008, WisdomTree had inflow of $746 million; in the third quarter, there was $13 million in outflows from the funds.

As a result, WisdomTree’s total assets declining to $4.1 billion. That compared with $4.7 billion at the end of the second quarter.

Revenues were $6.2 million in Q3, which was up from $5.2 million a year ago. Sequentially, revenues were flat.

FocusShares Refocuses

FocusShares has shut down all four of its ETFs, after almost a year of existence and almost no market traction. In announcing the closings, FocusShares said it would undertake a strategic reevaluation of its approach to the ETF business. The company currently has several ETFs in its pipeline and in various stages of registration with the SEC.

The four ETFs, launched in December 2007, had amassed a total of $17 million in assets at the end of September, and had net outflows year-to-date of $5 million, according to National Stock Exchange data. The four funds, which all traded on NYSE Arca, were liquidated on Oct. 20. They included the FocusShares ISE Homebuilders Index Fund (SAW), FocusShares ISE SINdex Fund (PUF), FocusShares ISE-CCM Homeland Security Index Fund (MYP) and FocusShares ISE-Revere Wal-Mart Supplier Index Fund (WSI).

Inverse ETFs Hurt By Short-Sale Ban

The SEC’s ban on short-selling in Financial stocks, a move made to stem the manipulative trading in beaten-up financial names, wreaked havoc on inverse Financial ETFs from ProShares and Rydex in the U.S., and Deutsche Bank in Europe. All three ETF groups had to suspend trading temporarily after the ban went into effect, and even after allowing trading to resume, the companies could not allow new creations due to the inability to gain further short exposure to the market.

The SEC lifted the ban on Oct. 8 as a result of the bailout package passing in Washington, and the funds resumed creations. The funds affected were the ProShares Short Financials (NYSEArca: SEF) and ProShares UltraShort Financials (NYSEArca: SKF); the Rydex Inverse 2X S&P Select Sector Financial ETF (NYSEArca: RFN); and the European-listed x-trackers DJ STOXX 600 Banks Short ETF (LSE: XS7S).

The U.S. ETFs traded generally well throughout the period of the short-sale ban. Although there were days of poor tracking performance, the funds typically tracked close to their indexes and (surprisingly) did not develop major premiums above their net asset values. Redemptions were allowed on all three funds throughout the short-selling ban.

Carbon Products Launch In Europe

ETF Securities Limited has listed the world’s first carbon ETC on the London Stock Exchange (LSE). Meanwhile, NYSE Euronext and EasyETF have launched the first pan-European low-carbon index, and an ETF pegged to the benchmark, respectively.

ETF Securities’ ETFS Carbon (LSE: CARB) is the first portfolio in the growing range of ETCs to offer investors direct exposure to the carbon emissions allowance futures market. CARB tracks the ICE ECX EUA Futures Contract, which is currently the most-liquid exchange-traded contract within the EU Emissions Trading Scheme. On the LSE, ETFS Carbon will trade both in euros (CARB) and British pence (CARP).

Meanwhile, the NYSE Euronext Low Carbon 100 Europe Index is designed to measure the performance of the 100 largest blue-chip European companies with the lowest carbon (CO2) emissions in their respective sectors or subsectors. A fund tracking the index, the EasyETF Low Carbon 100 Europe, launched on the Euronext Paris exchange in October.

Carbon emissions allowance trading markets have developed as part of the international response to concerns over the environmental effects of increasing global greenhouse gas (GHG) emissions. The European carbon market is currently the largest and most-liquid trading market, with approximately 80 percent of global turnover in CO2 allowances and credits in 2007. Total EU trading activities were valued at approximately EUR 30 billion in the first half of 2008, equivalent to 750 million tonnes of CO2, an increase of 80 percent over the same period in 2007.

AIG Posts $1 Billion-Plus Collateral For ETCs

In October, American International Group reached an agreement with ETF Securities and the LSE to post some $1.5 billion in collateral to cover contracts in ETF Securities’ lineup of ETC funds. The funds hold swap contracts with AIG as their core asset, and got caught up in the near-bankruptcy of AIG in September. Had AIG gone bankrupt—rather than being rescued by the U.S. Federal Reserve—the funds would have been essentially wiped out. The collateralization is intended to backstop the swaps and reassure investors that their money is safe.

With the new agreement, ETF Securities announced that the collateral will be valued each business day by Bank of New York Mellon, utilizing generally recognized pricing information vendors, subject to an agreed dispute mechanism. AIG is required to transfer additional collateral if the value of the collateral in the account falls below the value of all commodity securities in issue.

BNY Mellon also serves as collateral manager for the deal. It will hold collateral paid by AIG in a separate account, over which a unit of ETF Securities “may take control by delivering to BNY a notice of exclusive control,” the company said in a statement.

Trading in more than 100 AIG-linked ETCs was halted in September as rumors swirled about AIG’s possible bankruptcy. The company did manage to honor all of its obligations with regard to commodity securities throughout the turmoil, however, including processing all creations and redemptions in the usual manner and paying all redemptions on time. In September, the U.S. government had to step in with an $85 billion bailout package to rescue the once-mighty insurance conglomerate.


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