Everything that No One Can Talk About

September 06, 2005

The wide world of exchange-traded funds (ETFs) continues to expand; a look at what’s simmering at the SEC.

When you follow an industry closely, it's easy to lose perspective.  We examine every bit of news that comes out each day, and it's hard to see the broader trends at work. It's like looking at a Seurat painting under a microscope; you're too close to see.

That's how I feel about the exchange-traded funds (ETF) industry.  As I watch asset counts tick up each month and follow the news trickling out of San Francisco and Chicago and New York, the pace of change in the industry seems almost slow.  When are we finally going to have an active ETF?  And where's that cursed crude oil fund?

At times like this, it pays to step back a bit and look at where the industry is, and where it's going.  When you consider that just two years ago we had no dividend ETFs, no micro-caps, no gold products and no PowerShares, you begin to get a better picture.  And if you spend a few hours combing the recent filings at the Securities and Exchange Commission (SEC) and talking to industry insiders, you're reminded that we may still be in the early stages of the ETF revolution. 

With that in mind, here's a look at some of the most exciting products that are currently in registration with the SEC. Many of these have been covered previously on IndexUniverse.com, but some have gone unnoticed, both here and on other Web sites.

The new funds fall into five categories: Commodities/Currencies, Enhanced Index, Leveraged, Sector/Style and Specialty.


For all the talk of the commodities boom, it's still extremely difficult for most investors to gain direct exposure to the commodities sector.  You can't just rush out and buy a few barrels of oil and stick them under the mattress.  ETFs are the obvious answer, and the success of the two gold ETFs launched last year in the United States shows that investors are hungry for more commodity-based products. Thankfully, ETF providers are looking to deliver.  Here's what's on the burner:

Broad-Based Commodities ETFs

Two broad-based commodities index ETFs are currently in registration with the SEC, and it will be interesting to see which makes it to market first. 

The first fund filed with the SEC (May 27, 2005) comes from Deutsche Bank. They're back!  In 1996 just one week after the Morgan Stanley-sponsored WEBS (now iShares) came to market, the firm Morgan Grenfell (now Deutsche Bank) introduced nine single-country ETFs called Country Baskets, which were listed on the New York Stock Exchange. Limited trading volumes and a change in management at Deutsche Bank did not bode well for these now forgotten ETFs. Deutsche Bank is actually now well-positioned to launch the fund, as it already runs a similar fund in Europe. Similar - I said - but not the same. 

This gets a bit confusing.  The European ETF is modeled on the Goldman Sachs Commodity Index (GSCI). The U.S. fund, however, will track a different index: Deustche Bank's own "Liquid Commodity Index," a production-weighted index of six commodities: sweet light crude, heating oil, aluminum, gold, wheat and corn.  The fund will carry a hefty expense ratio of up to 1.45 percent, but will offset that with an expected interest income of 2.5 percent per year.

The reason Deutsche Bank is using its own index, apparently, is that U.S. ETF-leader Barclays Global Investors (BGI) locked up the U.S. licensing agreement for the GSCI.  BGI filed for the right to launch an ETF tracking the GSCI on July 22.  The iShares fund will carry an expense ratio of 0.75 percent. 

The GSCI, for the record, is heavily-dominated by oil exposure, although it does offer a smattering of exposure to other products as well. 

It's hard to gauge the horse race here.   Deutsche Bank can draw on its experience in Europe to bolster its bid, while BGI boasts a great history of working with the SEC and an uncanny ability to beat the competition to market.  One factor that may help BGI is that there are futures and options tied to the GSCI, which will allow arbitrageurs to do their work with relative ease, ensuring that the share price of the fund sticks close to its net asset value.  Then again, you can be sure that Deutsche Bank's listing partner - the American Stock Exchange (AMEX) - will be eager to beat iShares to the punch; iShares pulled its ETF listings from Amex last month in favor of the New York Stock Exchange and Archipelago, and there may be some bad blood.

Texas Tea

It's a little bit easier to gauge the horse race for first-mover advantage among the two crude oil ETFs currently in registration at the SEC. 

On the face of it, the Macro Securities Trust should have the edge.  After all, it was filed first - on May 10, one week ahead of the competing fund - so it should have a slight lead at the SEC.

But the fund, backed by Robert Shiller (author of Irrational Exuberance), bears little resemblance to anything else on the market today, and that could severely complicate matters.  Here's the rub: "Shares" of the ETF wouldn't really be backed by anything - they would be sold in pairs, with each side of the pairs trade agreeing to pay the other if the price of the targeted underlying product moved.  In the case of the oil fund, the pairs trade wouldould be based on the price of Brent Sweet Crude Oil as published in the Wall Street Journal. The funds wouldn't really own anything.  Given that Shiller's filing strays so far from established financial products, it could be a while before the SEC agrees to approve his product. 

That being the case, the pendulum swings clearly in favor of Ameristock, a tiny mutual fund company based out of Alameda, California.  An Ameristock offshoot filed for the right to list an ETF tied to the price of oil on May 16.  The Ameristock fund takes the more traditional approach of using oil futures to gain exposure to the price of oil.

But there are challenges to the Ameristock filing, too.  For one, they're inexperienced, with no history in the ETF industry.  Moreover, the SEC has yet to approve any ETF relying on futures contracts, although many are in registration. 

Given all that, the door might still be open for one of the established players to swoop in and leapfrog to the front.


One place where the most established player in the industry is focusing is on precious metals.  BGI was second-to-market with a gold ETF, and it suffered the fate of almost all second-movers in the ETF industry - a slow launch and a fractional share of total assets. 

With silver, Barclays Global Investors (BGI) is making sure that it won't get beat; the company filed for the right to list a silver ETF earlier this year.  Although the are some lingering questions - such as concerns about the sheer physical quantity of silver available in the world - this fund should have relatively smooth sailing through the SEC, as it follows on the popular gold products closely.


The only thing cooking on the currency front is the EuroShares filing by Rydex.  That fund, filed back in June, would provide simple exposure to the value of the euro.  The fund's construction is simple: The fund holds euros in a bank account. Period.  End of story.

Demand for the product could be quite high, as it would offer investors an easy way to hedge against the value of both the dollar and the euro.  The fund also looks to be shareholder friendly - it will pay a dividend (via interest on the euro deposits) that will swamp the expense ratio, and net-net, deliver better returns than most euro bank accounts.

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