Daily ETF Watch: Factor, Meet Hedging

May 07, 2015

Today Invesco PowerShares rolled out a fund that combines two major trends in the ETF space. The PowerShares Europe Currency Hedged Low Volatility Portfolio (FXEU) provides exposure to the low-volatility factor while hedging away the risk associated with the euro. Factor-based and currency-hedged funds have dominated ETF launches of 2015 year-to-date.

 

FXEU covers the 80 stocks in the S&P Eurozone BMI Index with the lowest volatility levels, while applying a hedge to eliminate currency risk using foreign currency forward contracts. The fund’s underlying index weights its components by volatility, with the least volatile stocks receiving the heaviest weightings.

 

Similarly, the nearly $20 billion WisdomTree Europe Hedged Equity ETF (HEDJ | B-54) could also be said to combine a factor-based approach with currency hedging. The fund selects only dividend-paying eurozone stocks, though it also has a screen for export-oriented companies. HEDJ’s index also weights its components by their dividends.

 

FXEU comes with an expense ratio of just 0.25 percent, less than half of the 0.58 percent charged by HEDJ.

 

Montage Closer To Launch Of Pipeline Fund

A Kansas money management firm looks like it’s close to rolling out an exchange-traded fund focused on oil and gas pipeline companies, adding to a relatively undeveloped part of the ETF universe. Mission Woods, Kansas-based firm Montage Managers Trust said in a regulatory filing that the Tortoise North American Pipeline Fund (TPYP) will cover a variety of security types, all of which represent companies involved in the gathering, processing, transportation and distribution of oil and gas products.

 

According to the prospectus, the portfolio can include common stocks, master limited partnerships (MLPs), as well as pipeline companies structured as limited liability companies and equity securities issued by MLP affiliates.

 

The fund limits the weight of MLPs in the portfolio to 20 percent, providing a 5 percent buffer against the legal 25 percent limit for an RIC-structured fund. In other words, the proposed ETF is registered under the Investment Company Act of 1940, and will be taxed like an equities fund and not a full-fledged MLP-only fund.

 

That makes the proposed Montage ETF most comparable to funds such as the Global X MLP & Energy Infrastructure ETF (MLPX) and the Alerian Energy Infrastructure ETF (ENFR). Both existing funds invest in a mix of common stocks and MLPs or related securities and have that 25 percent limit on MLP holdings. MLPX has more than $192 million in assets under management, while ENFR manages just $21 million.

 

TPYP’s expense ratio is listed as 0.70 percent, or $70 per $10,000 invested.

 

Individual securities in the proposed fund must have market capitalizations of at least $200 million to be included in the index, and constituent weights are capped at 7.5 percent of the index.

 

Montage has two other ETFs in registration, the Palmer Square CLO Debt Fund and the Palmer Square CLO Senior Debt Fund. The two funds will take on the collateralized loan obligation space, with the senior loan fund targeting debt securities rated AAA or AA. The other CLO fund will target securities rated A, BBB or BB.

 

Pioneer Investments Joins ETMF Wave
According to a recent press release, Pioneer Investments has joined the list of firms looking to launch exchange-traded managed funds, or “ETMFs,” via a patent owned by Eaton Vance.

 

The NextShares ETMF structure is similar to a standard ETF, but allows issuers to keep their trades out of the public eye by basing the price off the next daily net asset value plus a premium or discount. The structure appeals to active manager shops that are intrigued by the popularity of ETFs but uneasy about the transparency that comes with the product.

 

Pioneer has $242 billion in assets under management, with $71 billion of that managed in the U.S., the press release said. The firm joins the likes of Hartford Funds and Gabelli in licensing the structure from Eaton Vance’s Navigate subsidiary. 

 

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