Daily ETF Watch: Fidelity Launch, 5 Others

Fidelity Investments today rolled out a real estate sector fund that joins its new family of sector-focused index funds. The Fidelity rollout is one of four launches today and two on Monday. The concentration of launch action is the latest sign that ETFs are a hotbed in the financial services industry. 

Apart from the launch of the Fidelity MSCI Real Estate Index ETF (FREL) today, State Street Global Advisors today brought to market a riff on the S&P 500 that isolates  buybacks, and ProShares rolled out two funds focused on dividend-growers in the U.S. midcap and small-cap equity space.

Additionally, on Monday, RevenueShares launched a strategy targeting growth stocks around the world, and UBS rolled out a double-exposure ETN targeting small-cap dividend-paying companies.

The six launches so far this week are emblematic of how vital the 22-year-old ETF industry is. A total of 19 funds have come to market so far this year, after 202 new strategies were launched in 2014, according to data compiled by ETF.com. Most of this week’s launches are in the “smart beta” category, a pattern that prevailed last year, suggesting enhanced indexing in ETFs is still building momentum.

All these launches are a lot for investors to chew on in a 48-hour period, and, at the risk of paying short shrift to some of them, the Fidelity real estate fund looks to be the one with some of the more interesting talking points. So, we’ll start with Fidelity and move on to the others in today’s column.

Fidelity Fund Talking Points

The new Fidelity fund, FREL, comes with the same 12-basis-point ($12 for each $10,000 invested) annual expense ratio as Fidelity’s other 10 sector funds and, crucially, breaks out real estate as a separate industry sector.

Previously, in the GICS industry sector rubric, REITs have been tucked into the financials sector. Whether this finer breakdown constitutes a material alternative to say, real estate exposure via a fund like the Vanguard REIT ETF (VNQ | A-84) is a subject worthy of serious consideration.

Additionally, the Fidelity sector funds, including FREL, use MSCI’s investable market indexes. These so-called IMI indexes include smaller-cap names than do the sector ETFs from SSgA or Vanguard, giving investors in the Fidelity suite access to the size effect isolated in the research of Eugene Fama and Kenneth French.

ProShares Launches

ProShares, meanwhile, has doubled the size of its dividend-growers family of ETFs with the launches of the ProShares S&P MidCap 400 Dividend  Aristocrats ETF (REGL) and the ProShares Russell 2000 Dividend Growers ETF (SMDV). 

Both new funds come with an annual expense ratio of 40 basis points.

The Dividend Aristocrats franchise at ProShares is based on the concept that investors need core holdings of income-generating stocks, and the fact that the various funds are drilling down into well-known indexes long regarded as core holdings reflects this.

The two existing funds in the lineup are the $609 million ProShares S&P 500 Dividend Aristocrats ETF (NOBL | B-61) and the ProShares MSCI EAFE Dividend Growers ETF (EFAD). NOBL has a 35 bp annual expense ratio, while EFAD costs 50 bps a year.

SPDRs Buyback Fund 

One of the launches today was the SPDR S&P 500 Buyback ETF (SPYB). The fund, which mines the world’s best-known equity index for constituents that are engaging in buybacks, comes with an annual expense ratio of 35 bps.

The buyback universe has garnered attention in recent years, as investors look for returns in an era of sluggish growth. Companies that buy back stock, in theory, end up lifting their stock prices, as the buybacks take shares outstanding out of circulation, allocating bottom-line income to fewer shares.

The downside is that by buying back shares instead of spending capital on business development plans, companies may be sacrificing longer-term growth prospect for nearer-term share-price appreciation.

RevenueShares Launch

On Monday, RevenueShares rolled out the RevenueShares Global Growth Fund (RGRO), which targets the five biggest countries in the developed world and the five biggest countries in the emerging markets using gross domestic product.

The fund then weights companies within each of those selected countries based on revenues, giving the portfolio a tilt—so the theory behind each of the RevenueShares products goes—to those companies producing true top-line growth.

The new fund comes with an annual expense ratio of 70 bps.

UBS ETN

Finally, UBS on Monday brought to market the “$100,000,000 ETRACS Monthly Pay 2xLeveraged US Small Cap High Dividend ETN due February 6, 2045 (SMHD).”  That is truly its real name—the lengthiness being a peculiarity of ETNs, which are registered under the Securities Exchange Act of 1933 and not, like most ETFs, under the Investment Company Act of 1940.

Among other things, this means that as far as the Securities and Exchange Commission goes, ETNs are regulated by the SEC’s Division of Corporate Finance and not, like ETFs, by the SEC’s Division of Investment Management. After all, ETNs are debt obligations and don’t hold actual assets like ETFs.

In any case, UBS’ SMHD marks a continuation of the Swiss bank’s broad strategic pursuit of the income-focused spaces of the investment universe.

More specifically, SMHD is going after a pocket of the dividend-generating world that has essentially been ignored by fund sponsors; namely, small-cap companies.

SMHD’s index of dividend-paying small-cap companies is currently shooting off a hard-to-believe yield of around 9 percent. Add to that the double-exposure element embedded in the ETN’s strategy, and the security’s yield approaches 18 percent.

Of course, there’s no free lunch in the world of investments. In other words, the strategy costs around 190 basis points a year after adding the 85 basis-point tracking fee and the 105 basis point fee charged to finance the leveraging mechanism that is at the center of the ETN’s strategy. 

Eason Vance Snags GAMCO

GAMCO Investors said this week it would be filing an exemptive relief request with the Securities and Exchange Commission that would allow the firm to launch nontransparent actively managed exchange-traded managed funds (ETMFs). The firm already has a product lineup that includes the Gabelli mutual funds and closed-end funds.

GAMCO has licensed the NextShares structure for ETMFs from Eaton Vance’s Navigate Fund Solutions for its own usage. According to GAMCO’s press release, the funds are “designed to protect the confidentiality of portfolio trading information.”

Eaton Vance purchased the patents for ETMFs from ETF industry figure Gary Gastineau, who developed a methodology for actively managed ETFs that are traded and priced based on net asset value rather than relying on intraday portfolio transparency.

GAMCO is following in the footsteps of American Beacon, which already filed its own 40-APP for nontransparent ETFs in January using Eaton Vance’s NextShares structure.

American Funds Gets SEC Approval

Separately, Capital Group’s American Funds arm has received tentative approval from the SEC to launch transparent actively managed ETFs. Unless a hearing is requested by a third party before the end of February, the approval will become effective and allow the firm to market transparent active ETFs that are similar to strategies already available to investors.

American Funds has also requested exemptive relief for nontransparent ETFs. The nontransparent petition uses a trading system developed by Precidian Investments, and should not be confused with Easton Vance’s ETMFs.

The Precidian approach allows for intraday pricing of ETFs, much like what already exists for index and transparent active ETFs. The Eaton Vance ETMF meanwhile is basically a hybrid structure that combines characteristics of ETFs and of active open-end mutual funds.

Both are nontransparent, but ETMFs—like mutual funds—get priced at the end of the day, while the Precidian systems allows for true intraday trade.

That makes them decidedly different and, perhaps most significantly, ETMFs have been approved by regulators, while Precidian’s bona fide nontransparent active ETFs, as of yet, have not.