Daily ETF Watch: DBC Creations Halted

Invesco PowerShares announced yesterday it was temporarily suspending creations on 11 ETFs it has marketed and distributed with Deutsche Bank, the largest of which is the PowerShares DB Commodity Index Tracking Fund (DBC | C-61), with $3.6 billion in assets under management. Six PowerShares DB ETNs are also being shut down in a related move. Elsewhere in the ETF space, Lattice Strategy launched its first trio of ETFs, while iShares rolled out its actively managed "Balanced Risk" bond fund.

The suspensions of the ETF creations are linked with the transition of managing ownership of the securities from Deutsche Bank to Invesco. Up until now, in the case of the ETFs, Deutsche Bank had managed the funds, while PowerShares had marketed them. Back in the last quarter of 2014, it was announced the funds would be managed, distributed and marketed by Invesco PowerShares by sometime in the first quarter of 2015.

In the press release regarding the ETF creation halts, Invesco PowerShares said it was working quickly “with the Securities and Exchange Commission to have declared effective a post-effective amendment to the funds’ registration statements, as well as approval by the National Futures Association” with an eye to getting the suspension lifted as soon as possible.

PowerShares noted that the funds’ spreads could widen in the meantime due to the suspension; however, although no new creation baskets can be offered, existing ones can still be redeemed by authorized participants.

When PowerShares and Deutsche Bank first began marketing these ETFs, Deutsche Bank had no real presence in the U.S. ETF market. In the last few years, however, it has rolled out a very successful lineup of its own funds, the Deutsche X-trackers.

The 11 affected ETFs include:

ETNs Also Suspended

The NYSE also indicated yesterday that trading on six of the PowerShares DB ETNs was being suspended. They are in the process of being liquidated. None had managed to accumulate significant assets.

The affected ETNs include:

Lattice Launches

Lattice Strategy, the San Francisco-based firm behind a growing number of factor-focused and risk-calibrated indexes, today launched its first three ETFs, including one focused on U.S. stocks and another two on non-U.S. stocks in the emerging markets and developed markets, respectively.

The three new funds, their tickers and annual expense ratios are as follows:

·         Lattice US Equity Strategy ETF (ROUS), 35 basis points, or $35 for each $10,000 invested

·         Lattice Emerging Markets Strategy ETF (ROAM), 65 basis points

·         Lattice Developed Markets (ex-US) Strategy ETF (RODM), 50 basis points

The indexes it produces often isolate a number of investment factors, including valuation, momentum and quality, according to the latest prospectus detailing the three new funds. Overall, the indexing strategies are designed, each in their own way, to control risk in the pursuit of investment returns.

Lattice, while a newcomer as an ETF issuer, has been at the center of the “smart beta” trend that has taken the exchange-traded-fund industry by storm in the past few years. As an example, the firm is behind the indexes used by Vident Financial, the relatively new ETF issuer that has brought three funds to market in the past two years. The funds have so-called ethical indexes that screen for higher-quality firms and debt issuers from entities that have solid business practices.

iShares Launches Active Broad Bond ETF

BlackRock’s iShares unit today launched an actively managed bond ETF that seeks to achieve an even balance between credit and interest-rate risk using quantitative analysis. That will prove to be a challenge in the current low-rate environment driven by easy-money policies around the developed world.

The investment argument for the iShares U.S. Fixed Income Balanced Risk ETF (INC) is based on the premise that the cap-weighted Barclays U.S. Aggregate Bond Index is burdened with an inappropriate amount of interest-rate risk.

Assessing the Barclays Agg, iShares reckons the benchmark can be characterized as roughly 90 percent interest-rate risk and 10 percent credit risk. But with INC, iShares will target a risk distribution that is 50 percent credit risk and 50 percent interest-rate risk.

According to iShares, the interest-rate risk associated with the Barclays Agg is primarily rooted in its allocation to Treasurys, which is currently more than one-third of its total market capitalization. INC can take a short position in Treasurys via futures and swaps.

However, there is one key difference from the Aggregate Bond Index in terms of coverage, as INC can invest “without limitation” in high-yield bonds, while the Aggregate is strictly investment-grade.

Actually, its biggest existing competitor is likely another iShares fund, the iShares Core Total USD Bond Market (IUSB | C), which tracks the Barclays U.S. Universal Index, a sort of extended version of the Barclays Agg that includes high-yield debt. The passively managed fund has managed to accumulate some $356 million in assets under management since its launch in June 2014.

INC was seeded with $75 million prior to launch, which, right out of the gate, puts it ahead of its two other competitors, the fund-of-funds iShares Yield Optimized Bond ETF (BYLD | D-48) and the actively managed Columbia Core Bond ETF (GMTB | D-78), which have AUMs of $10 million and $5 million, respectively.

The new fund is slated to launch on the BATS exchange. It comes with a net expense ratio after fee waivers of 0.25 percent, or $25 for each $10,000 invested, according to the fund’s latest prospectus. That’s 10 basis points more than IUSB, and three basis points less than BYLD. GMTB charges 0.58 percent.