The Inside Scoop

February 09, 2006

The 'scoop looks at the latest developments in the ETF world, including the commodities ETF, forthcoming launches and Bobo the Dart Throwing Monkey's exciting new ETF portfolio.

 

When we took a look recently at our referral history for IndexUniverse.com, we found that the number one referring search term of all time was "commodities ETF," followed shortly after by "Gold ETF."  Given what the gold and commodities markets have done in recent years, and the difficulty in accessing these asset classes until now, the curiosity is not surprising.

First things first, let me provide you with some of the best links for additional information, including articles that we've run on this site, which in turn include links to the informational Web sites of each product, and links to their prospectuses and other information.  Just following these links, you should be able to get all the reading on you could ever want on the:

Commodities ETF
Gold ETF

Currency ETF.

The early success of these products has clearly underscored the demand for them.  Assets in the streetTRACKS Gold Fund (GLD) recently hit $5 billion, while assets in the iShares gold offering, IAU, are now up over $500 million; both an iShares silver and iShares commodities ETFare on the way. The Deutsche Bank commodities ETF (DBC) has been off to a reasonable start - over $100 million in assets - but like the Euro Currency Shares ETF (FXE), it hasn't gotten the big publicity and flood of assets of the gold product, or say DVY, the dividend ETF. Nonetheless, it has still blown most ETF launches out of the water.

While the launch of the Commodities ETF has generated enthusiasm simply because it provides more reasonably priced and easy access to commodities, there's also strong interest in the product within the ETF industry because of the wider significance of the launch.  It really is Katie-bar-the-door (I love saying that) in terms of what can be done in the ETF structure. Basically, anything that you can trade a future or option on (say…weather patterns or the probability of a terrorist strike in Iowa) could now theoretically be turned in to an ETF and traded on the secondary market. 

Less outlandishly, this means we are looking at some of the following new product opportunities: leveraged or inverse ETFs (poor ProFunds now is in year six with the SEC), oil and silver ETFs, local housing market ETFs, ETFs trading on macroeconomic indicators like GDP, inflation or unemployment rates, leveraged currency ETFs, ETFs for volatility, buy-write and any other amalgam of futures, bonds and equities that you could think of.  Some of these may strike you as being in the realms of an academic exercise, but so was indexing 40 years ago. 

It just seems to me that for those of us who follow the industry closely, these are very interesting times on a number of different levels.  I am a real wonk on these issues - so I welcome any feedback or questions you might have.  Send us your scoops, your queries and your ruminations - better yet, post them on our discussion boards: www.indexuniverse.com/discuss

A Word On Terms:

Terms have been a significant area of contention in the industry.  The two recent terms that stand out as being in dispute are "enhanced indexing" and "ETF."  I'll leave Steven Schoenfeld to the enhanced indexing definitions.  (See this article.)

Steven's also working on a comprehensive new article looking at all the recent developments in the space (looking at all the alternative weighting schemes in particular), which is scheduled for publication in the March/April issue of the Journal of Indexes.

For my purposes today, I'll keep to the debate on the term "Exchange Traded Fund" or "ETF." For the record, there are a number of people who disagree with my definition.  Nuveen, for example, uses the term to cover exchange-traded closed-end funds, which are, afterall, funds that trade on an exchange; and Debbie Fuhr from Morgan Stanley would say that you need the fund to track a dynamic index portfolio.

To my mind, what makes an ETF an ETF is the creation and redemption mechanism.  This ensures that the shares that trade on the secondary market like regular stocks closely track the Net Asset Value of the underlying portfolio.  That's it.  In the U.S., these are in trust or open-end structure.  But anything that has a structure where an Authorized Participant can daily create or redeem, in kind, shares of the fund in exchange for a bundle of the underlying portfolio…is an ETF.  There, now that we've solved that…

ETFR

We're just now working on doing some very fun things with the ETFR publication.  Due to the strong demand of readers, we are implementing expert model ETF portfolios, which will compete head to head with my own "Bobo The Dart Throwing Monkey" portfolio of ETFs.  There are a LOT of people now trading ETF portfolios based on momentum, contrarian, sector rotation, etc. strategies.  We've selected some of the most reputable of these, and think this will make a very interesting feature.  It will launch with the March issue of ETFR…on sale now at newsstands across the country.  Well, on sale now at www.indexuniverse.com/subscriptions, anyway.

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