Friday, October 24th, 2014

SEC Gets One Right Putting Kibosh On Nontransparent ETFs

By Ron Rowland
12:27 pm CDT

Nontransparent ETFs would be detrimental to ETF investors.  Nontransparent ETFs fly in the face of the primary tenets of what constitutes an ETF.  Nontransparent ETFs are not in the public interest.

Earlier this week, the SEC struck down a request that would have allowed ETFs to keep their holdings hidden.  Many news sources are spinning this as a setback for the ETF industry, but in reality, it is a victory for ETF investors.

The ETF industry has flourished, and much of its success is the result of what ETFs have come to stand for in the eyes of the investing public.  ETFs are popular because they fully disclose their holdings (transparent) and have a share creation and redemption mechanism that helps force trading prices to closely track the fund’s net asset value (“NAV”).  These are the core features that define ETFs and differentiate them from other investment vehicles.

Before an ETF can be launched, it needs to get exemptive relief from the SEC.  In its ruling, the SEC said it, “believes that Applicants’ proposed ETFs do not meet the standard for exemptive relief under section 6c of the Investment Advisers Act of 1940”.  According to that section, exemption is allowed only if it “is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions” of the Investment Advisors Act.

The SEC elaborated by stating the proposed nontransparent structure “presents a significant risk that the market price of ETF shares may materially deviate from the NAV per share of the ETF, particularly in times of market stress when the need for verifiable pricing information becomes more acute.”

In my opinion, the SEC has been lax recently by allowing ETFs and ETNs without a functioning creation/redemption mechanism to continue trading without a ticker symbol change or other investor warning.  Additionally, the mutual fund industry has built a 70+ year history on being pass-through vehicles with regard to taxes, yet tax-paying C-corporations are now allowed to call themselves ETFs and mutual funds.

In short, the SEC has not been regulating the ETF industry in a manner that protects investors.  However, this recent ruling is a concrete step in the right direction.  The SEC has rightfully determined that nontransparent ETFs are not in the public interest.

I’m not against products that trade on a stock exchange and have secret portfolios.  However, I am against calling such a product an ETF.  Doing so would be a disservice to investors and the $1.8 trillion currently invested in transparent ETFs.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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Wednesday, October 15th, 2014

ETF Deathwatch for October 2014: Two 6-Year Old Products Join

By Ron Rowland
15:35 pm CDT

Thirteen names were added while fifteen came off the ETF Deathwatch this month.  The net reduction of two is not as good as it seems since nine that departed were the result of actual fund closures.  Just six escaped the honorable way by improving their health.  This month’s list contains 328 products, consisting of 223 ETFs and 105 ETNs.

Five of the new arrivals are relatively young, being slightly over six months of age.  This is the first time they are eligible for Deathwatch, which gives them plenty of time to attract investors in the future.  New arrivals included in this category are First Trust RBA Quality Income ETF (QINC), Global X Guru International Index ETF (GURI), Global X Guru Small Cap Index ETF (GURX), Horizons Korea KOSPI 200 ETF (HKOR), and KraneShares Bosera MSCI China A ETF (KBA).

However, some of the products joining the list have age working against them.  ETRACS CMCI Food Total Return ETN (FUD) and iPath Optimized Currency Carry ETN (ICI) are each more than six years old.  Another year on the market is not going to help them.  SPDR Nuveen S&P VRDO Municipal Bond (VRD) is also new to the list.  It is five years old and has just $6 million in assets.

The average age of products increased from 44.8 to 46.2 months, and 93 are now more than five years in age.  BLDRS Europe 100 ADR (ADRU) is the oldest product on ETF Deathwatch.  It is nearly 12 years old, and there were fewer than 110 ETFs listed for trading when it launched.  The average asset size is $6.5 million, down slightly from $6.6 million a month ago, and 61 products have asset levels of less than $2 million.  Four products went the entire month of September without any trades, and 163 (nearly 10%) had zero volume on the last day of the month.  These are true zombie ETFs.

Here is the Complete List of 328 Products on ETF Deathwatch for October 2014 compiled using the objective ETF Deathwatch Criteria.

The 13 ETPs added to ETF Deathwatch for October:

  1. ETRACS CMCI Food TR ETN (FUD)
  2. First Trust RBA Quality Income ETF (QINC)
  3. Global X Guru International Index ETF (GURI)
  4. Global X Guru Small Cap Index ETF (GURX)
  5. Horizons Korea KOSPI 200 ETF (HKOR)
  6. iPath Optimized Currency Carry ETN (ICI)
  7. iPath US Treasury 5-Year Yield Bear ETN (DFVS)
  8. IQ Hedge Market Neutral Tracker (QMN)
  9. KraneShares Bosera MSCI China A ETF (KBA)
  10. ProShares Short FTSE China 50 (YXI)
  11. RBS Rogers Enhanced Industrial Metals ETN (RGRI)
  12. SPDR Nuveen S&P VRDO Municipal Bond (VRD)
  13. WisdomTree Emerging Markets Consumer Growth (EMCG)

The 6 ETPs removed from ETF Deathwatch due to improved health:

  1. iPath Bloomberg Industrial Metals ETN (JJM)
  2. PowerShares DB 3x Italian T-Bond Futures ETN (ITLT)
  3. Recon Capital Nasdaq-100 Covered Call ETF (QYLD)
  4. WisdomTree Barclays US Aggregate Bond Zero Duration (AGZD)
  5. WisdomTree BofA ML High Yield Bond Zero Duration (HYZD)
  6. WisdomTree China Dividend Ex-Financials (CHXF)

The 9 ETPs removed from ETF Deathwatch due to delisting:

  1. Direxion Daily Brazil Bear 3x Shares (BRZS)
  2. Direxion Daily FTSE Europe Bear 3x Shares (EURZ)
  3. Direxion Daily Japan Bear 3x Shares (JPNS)
  4. Direxion Daily South Korea Bear 3x Shares (KORZ)
  5. PIMCO Germany Bond Index (BUND)
  6. EGShares China Infrastructure (CHXX)
  7. EGShares TCW EM Intermediate Term Investment Grade (IEMF)
  8. EGShares TCW EM Long Term Investment Grade Bond (LEMF)
  9. EGShares TCW EM Short Term Investment Grade Bond (SEMF)

ETF Deathwatch Archives

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentionedNo positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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Monday, October 13th, 2014

ETF Stats for September 2014 – Count at 1,650

By Ron Rowland
18:48 pm CDT

Eighteen ETFs and two ETNs came to market in September while thirteen ETFs closed their doors.  Both the closure and launch counts should have been one number higher, but BlackRock (BLK) chose to perform an extreme makeover on a seven-year old iShares ETF rather than closing it and launching a new one.  The net increase of seven listings puts the month-end counts at 1,440 ETFs and 210 ETNs for a total of 1,650 exchange traded products.

Four of the introductions were actively managed ETFs, consisting of a long/short fund from First Trust, a “risk aware” ETF from State Street, and two innovation-themed funds from new ETF player ARK Investment Management.  However, PIMCO closed an actively managed bond fund, putting the month-end tally of actively managed listings higher by three at 109.

As the largest supplier of ETFs, BlackRock isn’t typically thought of as a sponsor trying to take shortcuts with products, but that appears to be what it did recently.  At the end of June, the iShares Developed Small-Cap ex North America ETF (IFSM) had more than $56 million is assets, and the iShares MSCI Europe Small-Cap ETF (IEUS) did not exist.  On September 1, the roles reversed, and the iShares MSCI Europe Small-Cap ETF (IEUS) miraculously appeared with an irrelevant seven-year track record.  BlackRock went so far as to create a “Fact Sheet as of 6/30/14” even though the extreme makeover didn’t take effect until September 1, 2014.  Investors who purchased international small cap exposure no longer have it with IEUS and should look elsewhere.

Guggenheim extended both of its BulletShares target maturity series by two years each.  The firm now has high yield funds maturing every year through 2022 and investment grade corporate bonds going through 2024.  PowerShares introduced a self-laddering corporate bond fund, and FlexShares brought out a “disciplined duration” mortgage-backed securities ETF.  Equity fund introductions include single country quality mix ETFs from State Street, a deep value fund from new entrant TWM, and an ETF investing in companies having stock splits.

Asset levels declined 3.2% to $1.8 trillion for the month, keeping the $2 trillion mark elusive.  The number of funds with more than $10 billion in assets increased from 40 to 41, while products above $1 billion shrank from 243 to 235.  However, the majority of funds (53%) remain under the $100 million threshold.  The smallest 50% only account for 1% of industry assets, and it takes the cumulative assets of the smallest 1,373 products to equal the money in SPDR S&P 500 (SPY), the largest ETF.

Trading activity picked up 14.3% in September, partially recouping the slowdown of the summer months but remaining below average at just $1.2 trillion.  Seven products averaged more than $1 billion a day in trading, and these seven accounted for more than half (52.9%) of all ETP dollars traded.

September 2014 Month EndETFsETNsTotal
Currently Listed U.S.1,4402101,650
Listed as of 12/31/20131,3322041,536
New Introductions for Month18220
Delistings/Closures for Month13013
Net Change for Month+5+2+7
New Introductions 6 Months9310103
New Introductions YTD14511156
Delistings/Closures YTD37542
Net Change YTD+108+6+114
Actively-Managed Listings109 (+4-1) n/a109 (+4-1)
Assets Under Mgmt ($ billion)$1,817$27.9$1,845
% Change in Assets for Month-3.2%-1.4%-3.2%
Qty AUM > $10 Billion41041
Qty AUM > $1 Billion2305235
Qty AUM > $100 Million73337770
% with AUM > $100 Million50.9%17.6%46.7%
Monthly $ Volume ($ billion)$1,326$38.8$1,365
% Change in Monthly $ Volume+15.4%-13.8%+14.3%
Avg Daily $ Volume > $1 Billion617
Avg Daily $ Volume > $100 Million73275
Avg Daily $ Volume > $10 Million2629271
Data sources:  Daily prices and volume of individual ETPs from Norgate Premium Data.  Fund counts and all other information compiled by Invest With An Edge.

New products launched in September (sorted by launch date):

  1. FlexShares Disciplined Duration MBS Index Fund (MBSD), launched 9/4/14, provides exposure to mortgage-backed securities while seeking to limit effective duration variability.  Currently, its yield is 1.9%.  The fund has an expense ratio of 0.20% (MBSD overview).
  2. First Trust Long/Short Equity ETF (FTLS), launched 9/9/14, is an actively managed ETF seeking to generate long-term total returns by establishing long and short positions in equity securities.  Under normal market conditions, the overall portfolio will be 80-100% invested in long positions and 0%-50% invested in short positions.  Investors will pay 0.99% annually to own this fund (FTLS overview).
  3. PowerShares LadderRite 0-5 Year Corporate Bond Portfolio (LDRI), launched 9/10/14, will invest in short-term investment grade corporate bonds with maturities of five years or less.  Currently, investors can expect a 1.4% yield from this ETF.  The fund sports a 0.22% expense ratio (LDRI overview).
  4. SPDR SSgA Risk Aware ETF (RORO), launched 9/10/14, is an actively managed ETF that will use a dynamic strategy based on predicted investor risk preferences to invest in a selection of equities from the Russell 3000 Index.  This strategy rests on two basic principles: 1) changes in aggregate risk preferences can kick off a flight-to-quality or a rotation into securities that are perceived to be risky and 2) what the market perceive as “risky” will vary over time.  The ETF will use a quantitative process to predict the overall risk appetite of the market as well as the riskiness of each security in the selection universe.  When the method expects a risk-on or risk-off leaning in the market, the portfolio will shift into more or less risky securities accordingly.  The fund’s expense ratio is 0.50% (RORO overview).
  5. Barclays Return on Disability ETN (RODI), launched 9/11/14, is an exchange-traded note that will track an index comprised of companies viewed as having positive activities relating to those with disabilities in the areas of talent, customer, and productivity.  The three areas focus on elements “such as using best practices for attracting and hiring candidates with disabilities, focusing on ‘ease of use’ features in products and services, and implementing productivity-focused process improvements driven by people with disabilities.”  The ETN has an expense ratio of 0.45% (RODI overview).
  6. C-Tracks Miller/Howard Strategic Dividend Reinvestor ETN (DIVC), launched 9/16/14, is an exchange traded note whose index will select stocks via a quantitative methodology including items such as expected growth of dividend yield, market valuation relative to book value, and trailing 26-week stock price momentum.  The index will hold 30 equally-weighted securities.  The ETN will not pay dividends, but the underlying index assumes dividends are reinvested.  Investors will pay 0.70% annually to own this ETN (DIVC overview).
  7. Stock Split Index Fund (TOFR), launched 9/16/14, is based on a model portfolio in an investment newsletter and will invest in companies whose stocks have recently split.  The index will hold about 30 equally-weighted stocks.  In order to be added to the index, stocks must have announced a split of at least 2-for-1 in the preceding six months.  The fund’s expense ratio will be capped at 0.55% until 12/31/15 (TOFR overview).
  8. Guggenheim BulletShares 2021 High Yield Corporate Bond ETF (BSJL), launched 9/17/14, will hold U.S. dollar denominated, below investment grade corporate bonds maturing in the year 2021.  The fund’s expense ratio is 0.42% (BSJL overview).
  9. Guggenheim BulletShares 2022 High Yield Corporate Bond ETF (BSJM), launched 9/17/14, will invest in U.S. dollar denominated, below investment grade corporate bonds with effective maturities in 2022.  The fund has an expense ratio of 0.42% (BSJM overview).
  10. Guggenheim BulletShares 2023 Corporate Bond ETF (BSCN), launched 9/17/14, will hold U.S. dollar denominated, investment grade corporate bonds maturing in 2023.  Investors will pay 0.24% annually to own this fund (BSCN overview).
  11. Guggenheim BulletShares 2024 Corporate Bond ETF (BSCO), launched 9/17/14, will invest in U.S. dollar denominated, investment grade corporate bonds with effective maturities in 2024.  The fund sports a 0.24% expense ratio (BSCO overview).
  12. SPDR MSCI Mexico Quality Mix ETF (QMEX), launched 9/18/14, will invest in companies located in Mexico.  Stocks will fit in one of the following three categories:  value, low volatility, or quality factor selection.  Consumer Staples rules the sector allocations at 25%.  There is not great diversity with only about 30 holdings, and telecom company America Movil represents 17% of the ETF all on its own, which also appears to solely account for the 2nd largest sector allocation of telecom at 17%.  The fund has a 0.40% expense ratio (QMEX overview).
  13. SPDR MSCI South Korea Quality Mix ETF (QKOR), launched 9/18/14, will invest in companies domiciled in Korea.  Stocks will fit in one of the following three categories:  value, low volatility, or quality factor selection.  The information technology and consumer discretionary sectors account for more than half of the fund.  There are about 100 holdings, and Samsung is the largest at about 15%.  The fund has an expense ratio of 0.40% (QKOR overview).
  14. SPDR MSCI Taiwan Quality Mix ETF (QTWN), launched 9/18/14, will invest in companies located in Taiwan.  Stocks will fit in one of the following three categories:  value, low volatility, or quality factor selection.  Information technology represents the lion’s share of the ETF at a 59% allocation.  The fund holds about 100 securities.  Investors will pay 0.40% annually to own this fund (QTWN overview).
  15. Deep Value ETF (DVP), launched 9/23/14, will purchase the 20 undervalued dividend paying stocks in underlying TWM Deep Value Index, which consists of stocks from the S&P 500 Index with solid balance sheets, earnings, and strong free cash flow.  The companies selected are weighted based on a rules-based assessment of their valuations, and the stocks that are more attractively valued will have a higher weight.  The fund sports a 0.80% expense ratio (DVP overview).
  16. Source EURO STOXX 50 ETF (ESTX), launched 9/23/14, will invest in the 50 stocks in Europe’s leading blue chip index.  Twelve Eurozone countries are represented.  Source is an established player in the European exchange-traded product marketplace, but this is its entrance into the U.S. market.  It is majority owned by Warburg Pincus.  The fund’s expense ratio is 0.16% (ESTX overview).
  17. iShares Currency Hedged MSCI Emerging Markets ETF (HEEM), launched 9/25/14, uses a fund-of-funds approach to replicate the local performance of large- and mid-capitalization equities from emerging market countries by holding iShares MSCI Emerging Markets ETF (EEM) and hedging against currency fluctuations between the U.S. dollar and the component currencies.  The fund’s expense ratio will be capped at 0.70% through 12/31/15 (HEEM overview).
  18. Guggenheim Emerging Markets Real Estate ETF (EMRE), launched 9/29/14, will provide exposure to the investable universe of publicly-traded companies and real estate investment trusts (“REITs”) in emerging market countries.  The companies to be included must derive a majority of their revenues from real estate development, management, and/or ownership of property in emerging markets.  The fund has an expense ratio of 0.65% (EMRE overview).
  19. ARK Industrial Innovation ETF (ARKQ), launched 9/30/14, is an actively managed ETF that will be concentrated in the industrials and information technology sectors.  Securities selected are expected to benefit from developments and improvements in scientific research areas such as robotics, 3D printing, space exploration, and energy storage.  Investors will pay 0.95% annually to own this fund (ARKQ overview).
  20. ARK Web x.0 ETF (ARKW), launched 9/30/14, is actively managed and will focus on the information technology sector, including information providers and online shopping.  Securities selected are expected to benefit from the increased use of shared technology, infrastructure, and services such as cloud computing, data mining, digital education, and wearable technology.  The fund sports a 0.95% expense ratio (ARKW overview).

Product closures/delistings in September:

  1. Direxion Daily Brazil Bear 3x Shares (BRZS) [Direxion Closing 5 ETFs and Charging Shareholders]
  2. Direxion Daily FTSE Europe Bear 3x Shares (EURZ)
  3. Direxion Daily Japan Bear 3x Shares (JPNS)
  4. Direxion Daily South Korea Bear 3x Shares (KORZ)
  5. Direxion Daily Natural Gas Related Bear 3x Shares (GASX)
  6. PIMCO Australia Bond Index (AUD) [PIMCO Closing Four More ETFs]
  7. PIMCO Build America Bond (BABZ)
  8. PIMCO Canada Bond Index (CAD)
  9. PIMCO Germany Bond Index (BUND)
  10. EGShares China Infrastructure (CHXX)
  11. EGShares TCW EM Intermediate Term Investment Grade Bond (IEMF) [EGShares Closed Four More ETFs]
  12. EGShares TCW EM Long Term Investment Grade Bond (LEMF)
  13. EGShares TCW EM Short Term Investment Grade Bond (SEMF)

Product changes in September:

  1. BlackRock performed an extreme makeover on the iShares Developed Small-Cap ex North America ETF (IFSM) on September 1, converting it to iShares MSCI Europe Small-Cap ETF (IEUS) and making its seven-year track record completely meaningless.  Unfortunately, there is no mention of this extreme makeover on the new IEUS overview page, which might deceive investors relying on this information.
  2. Market Vectors Wide Moat ETF (MOAT) was renamed Market Vectors Morningstar Wide Moat ETF (MOAT) effective September 16.
  3. ProShares changed the underlying index and names of its China ETFs (YXI, XPP, and FXP) from FTSE/Xinhua China 25 to FTSE China 50 effective September 22.
  4. Barclays changed the underlying indexes and names on its iPath commodity ETNs from Dow Jones–UBS to Bloomberg effective July 19 (listing names changed effective September 23).

Announced Product Changes for Coming Months:

  1. ProShares is adding the word “Dividend” to the name of the ProShares Dividend Aristocrats ETF (NOBL) effective October 1.
  2. BlackRock is closing 18 iShares ETFs, including their target date funds, with the last day of trading on October 14.
  3. Global X is closing Global X Canada Preferred (CNPF) and Global X Pure Gold Miners (GGGG) with the last day of trading on October 16.

Previous monthly ETF statistics reports are available here.

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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Monday, October 13th, 2014

iShares Raises the Bar on ETF Survivability

By Ron Rowland
11:08 am CDT

Blackrock’s (BLK) huge iShares closure takes place this week.  The firm is shutting down 18 ETFs, including many that would be considered successful by most standards.  The last day of trading will be Tuesday, October 14, with final shareholder distributions expected to be completed by October 21.  To get your money sooner, and to avoid any liquidation surprises, we recommend selling shares prior to the impending delistings.

The affected funds, and their asset levels at the time of closure announcement:

  1. iShares MSCI Far East Financials ETF (FEFN), $4.5 million
  2. iShares MSCI Emerging Markets Financials ETF (EMFN), $6.6 million
  3. iShares MSCI Emerging Markets Materials ETF (EMMT), $7.6 million
  4. iShares Retail Real Estate Capped ETF (RTL), $11.8 million
  5. iShares Industrial/Office Real Estate Capped ETF (FNIO), $19.9 million
  6. iShares Global Nuclear Energy ETF (NUCL), $8.8 million
  7. iShares NYSE 100 ETF (NY), $69.6 million
  8. iShares NYSE Composite ETF (NYC), $73.3 million
  9. iShares Target Date 2010 ETF (TZD), $9.0 million
  10. iShares Target Date 2015 ETF (TZE), $30.8 million
  11. iShares Target Date 2020 ETF (TZG), $56.4 million
  12. iShares Target Date 2025 ETF (TZI), $43.7 million
  13. iShares Target Date 2030 ETF (TZL), $42.8 million
  14. iShares Target Date 2035 ETF (TZO), $34.9 million
  15. iShares Target Date 2040 ETF (TZV), $51.1 million
  16. iShares Target Date 2045 ETF (TZW), $8.7 million
  17. iShares Target Date 2050 ETF (TZY), $14.0 million
  18. iShares Target Date Retirement Income ETF (TGR), $13.5 million

Collectively, the 18 funds account for more than half a billion dollars in assets, an asset level many ETF sponsors would die for.  Seven of the named ETFs are on ETF Deathwatch, including the first six listed above, and their closures come as no surprise.

However, the other eleven establish a new threshold for what it takes to be a viable product.  Starting with iShares NYSE 100 ETF (NY) and iShares NYSE Composite ETF (NYC), these two have significant assets, with $69.6 million sitting in one fund and $73.3 million in the other.  There are 809 products on the market with fewer assets.  BlackRock’s size and scale of its ETF operations gives it a significant competitive advantage.  If it no longer believes that a $70 million iShares ETF is a viable product, then what does that say about the 49% of the industry with smaller funds?

Target date funds are a staple of the 401(k) industry, and the iShares Target Date lineup of 10 funds extends all the way to products targeted at people retiring in 2050.  However, these funds are also targeted for closure this week.  With more than $300 million in assets, and the 401(k) industry trying to included ETF offerings, it is hard to believe there is not a future here for iShares.

Given that BlackRock has redefined what it means to be viable, other sponsors are going to have to perform a critical review of their current offerings.  That also goes for the other 80 iShares ETFs with less than $70 million in assets and not included in this week’s closures.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

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