Wednesday, December 10th, 2014

Don’t Believe The Hype – New ETF Is Neither Free Nor First

By Ron Rowland
10:25 am CST

Perhaps you’ve seen the hype.  Dressed up as “news” stories and industry insights in otherwise reputable media outlets and blogs, the true facts behind this new ETF contradict the headlines.

A mash-up of the many headlines I observed this week might read “The First Free ETF Finally Arrives” or otherwise suggest this is the first ETF to ever have a 0% expense ratio.  Closer inspection reveals the new ETF will have an expense ratio of 0.29%.  That is not the definition of free.  Additionally, there are about 300 ETFs listed for trading in the U.S.with lower expense ratios.

Even if it were to have a 0% expense ratio, which it doesn’t, it wouldn’t be the first.  Want an example?  Check out the iShares Treasury Floating Rate ETF (TFLO).  Its website shows an expense ratio of 0.00%.  That is much closer to free than 0.29%.  Granted, TFLO’s zero expenses are due to a 0.15% waiver, but the math still works.

Old Mutual was the first firm to launch a free ETF for U.S. investors.  Its GlobalShares FTSE Emerging Markets Fund (GSR) came to market December 8, 2009 with a 0.00% expense ratio.  Five years ago probably makes this one first.

The Cambria Global Asset Allocation ETF (GAA) launches today (12/10/14).  It is a passively managed Fund-of-Funds with an expense ratio of 0.29%.  The expense ratio is based on a 0.00% management fee and acquired fund fees of 0.29%.  However, about 9% of GAA’s holdings will consist of other Cambria ETFs that have management fees of 0.59%, resulting in an indirect management fee of about 0.05%.

GAA may indeed be an innovative approach to ETF investing and could become a very successful product.  However, this is not an article about GAA.  It’s a warning to investors to read beyond the headlines before investing in any product.

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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Tuesday, December 9th, 2014

ETF Deathwatch for December 2014: A Zombie Milestone

By Ron Rowland
13:08 pm CST

The ETF Deathwatch membership roll contains four fewer products this month.  Ten new names joined the list, and fourteen came off.  Ten of the removals were due to improved health, while the other four ceased operations in November.  The overall count now stands at 327, consisting of 226 ETFs and 101 ETNs.

Zombie ETFs achieved a major milestone in November.  The iPath Short Enhanced MSCI Emerging Markets Index ETN (EMSA), long the poster child of ETF Deathwatch, has now gone more than two years without a single trade.  Barclays launched the EMSA ETN in November 2010 and was criticized for its inability to describe the product’s use of leverage.  EMSA then proceeded to join ETF Deathwatch in June 2011, the first month it became eligible.

Trading in EMSA was sporadic at best.  As the calendar rolled over to 2012, activity dwindled further.  It saw zero volume on about half the days in January, then it dried up completely for all of February and March.  Transactions took place on only one day in April, two days in May, and two days in June.  That was it until November 9, 2012 when EMSA recorded its last trade – 100 shares at $81.61.

Now, more than two years later, we are still awaiting its next trade.  The quote screen is very telling.  I’m currently looking at a bid price of $40.44 and an ask of $121.30, for a spread of $80.86.  According to the iPath website, EMSA has a current value of $77.91 and about $4.4 million in assets.  I fail to comprehend why a product like this is allowed to remain listed.  So, why is it still listed?  Possibly because the 3.30% expense ratio means that Barclays takes in about $145,000 per year on a dead product.

EMSA is possibly the most egregious example of a zombie ETP, but it is not alone.  There were 13 ETPs that went the entire month of November without a trade.  On the last day of the month, 265 products posted zero volume.  Nearly 16% of all listed ETPs did not trade that day.  The true danger of owning products on this list is not knowing if any buyers will show up when you want to sell your shares.

One of the oldest ETFs on Deathwatch escaped this month.  BLDRS Europe 100 ADR (ADRU) is more than 144 months (12 years) old and had enough increase in trading activity the past three months to finally come off.  However, the average age of products on the list still increased from 46.2 to 46.6 months, and 95 are now more than five years in age.  The average asset size is $6.6 million, up from $6.5 million a month ago, and 59 have asset levels of less than $2 million.

Here is the Complete List of 327 Products on ETF Deathwatch for December 2014 compiled using the objective ETF Deathwatch Criteria.

The 10 ETPs added to ETF Deathwatch for December:

  1. Claymore CEF Index GS Connect ETN (GCE)
  2. Deutsche X-trackers Solactive Investment Grade Subordinated Debt (SUBD)
  3. Direxion Daily 20+ Year Treasury Bear 1x (TYBS)
  4. First Trust Managed Municipal (FMB)
  5. IQ Canada Small Cap (CNDA)
  6. iShares iBonds Dec 2016 Corporate Term (IBDF)
  7. iShares iBonds Dec 2018 Corporate Term (IBDH)
  8. iShares MSCI Emerging Markets Value (EVAL)
  9. WisdomTree Commodity Currency Strategy (CCX)
  10. WisdomTree Europe Dividend Growth (EUDG)

The 10 ETPs removed from ETF Deathwatch due to improved health:

  1. BLDRS Europe 100 ADR (ADRU)
  2. EGShares India Consumer (INCO)
  4. iPath Pure Beta Cocoa ETN (CHOC)
  5. PowerShares DB 3x Long USD Index Futures ETN (UUPT)
  6. ProShares Ultra MSCI Brazil Capped (UBR)
  7. ProShares UltraShort MSCI EAFE (EFU)
  8. SPDR Russell 1000 Low Volatility (LGLV)
  9. VelocityShares 3x Long Crude ETN (UWTI)
  10. WisdomTree BofA ML High Yield Bond Negative Duration (HYND)

The 4 ETPs removed from ETF Deathwatch due to delisting:

  1. VelocityShares Emerging Asia DR ETF (ASDR)
  2. VelocityShares Emerging Markets DR ETF (EMDR)
  3. VelocityShares Russia DR ETF (RUDR)
  4. Barclays ETN+ S&P 500 3x Long B ETN (BXUB)

ETF Deathwatch Archives

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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Friday, December 5th, 2014

ETF Stats for November 2014 – Just Shy of $2 Trillion

By Ron Rowland
15:37 pm CST

ETF assets moved closer to crossing the $2 trillion threshold, but they haven’t accomplished the task yet.  Finishing the month at $1,979,993,748,006 means it will only take a 1% increase in December to end the year above this significant level.  Through a combination of inflows and market gains, industry assets grew 3.8% in November and 16.7% year-to-date.

A dozen new ETFs came to market in November, while sponsors delisted and liquidated five products.  The net increase of seven puts the month-end product count at 1,659 (1,450 ETFs and 209 ETNs).  There have been 190 product introductions so far in 2014 and 67 closures.  Four of this year’s launches have already closed and won’t show up on any year-end roster.

Actively managed ETFs have made great strides in 2014, at least in the quantity available.  Four new actively managed ETFs rolled out in November, bringing the count to 118.  The year began with only 71, putting the growth at 66%.

Asset managers are trying to expand the definition of ETFs to include nontransparent funds.  Fortunately for investors who have embraced the transparency inherent in today’s ETF offerings, the recent attempts at allowing nontransparent ETFs have failed.

In October, the SEC put the kibosh on a nontransparent ETF proposal that utilized a blind trust to keep portfolio holdings secret from investors.  However, the SEC stopped short of claiming that nontransparency was directly responsible for the denial.  Instead, it claimed the inability for market makers to maintain a trading price close to the fund’s NAV (due to the nontransparency) was the primary reason.

Then in November, most financial media outlets incorrectly proclaimed the SEC’s approval of Eaton Vance’s ETMF structure was a stamp of approval for nontransparent ETFs.  However, that is patently false as the SEC ruling specifically forbids these new-fangled products to be marketed as ETFs.  Instead, they are exchange traded managed funds, a new structure that is more mutual fund than anything else.  ETMFs do not trade during the day like ETFs, and like mutual funds, buyers will not know how much they paid per share until after the market closes.

The number of trading days fell from 23 in October to just 19 in November, a 17% drop.  Therefore, it is not surprising for the monthly dollar volume to decline.  However, given the abnormally large spike of trading activity in October, November’s tally came in 51% lower at $1.14 trillion.  Seven ETFs averaged more than $1 billion per day, and these seven captured 48.3% of the notional amount traded.

The number of funds with more than $10 billion in assets decreased from 43 to 42 and hold 56% of all ETP assets.  Products above $1 billion grew from 241 to 244 and account for about 89% of assets.  The cumulative assets of the 841 smallest products account for just 1% of industry assets, and it takes the 1,399 smallest products (84%) to equal the assets of SPDR S&P 500 (SPY).  The monthly turnover ratio (total dollar volume / assets under management) plunged from 1.22 in October to just 0.57 in November.

November 2014 Month EndETFsETNsTotal
Currently Listed U.S.1,4502091,659
Listed as of 12/31/20131,3322041,536
New Introductions for Month12012
Delistings/Closures for Month325
Net Change for Month+9-2+7
New Introductions 6 Months10110111
New Introductions YTD17812190
Delistings/Closures YTD60767
Net Change YTD+118+5+123
Actively-Managed Listings122 (+4) n/a122 (+4)
Assets Under Mgmt ($ billion)$1,953$27.4$1,980
% Change in Assets for Month+3.9%-2.2%+3.8%
Qty AUM > $10 Billion42042
Qty AUM > $1 Billion2395244
Qty AUM > $100 Million73937776
% with AUM > $100 Million51.0%17.7%46.8%
Monthly $ Volume ($ billion)$1,107$31.5$1,138
% Change in Monthly $ Volume-50.6%-67.1%-51.3%
Avg Daily $ Volume > $1 Billion707
Avg Daily $ Volume > $100 Million73376
Avg Daily $ Volume > $10 Million2789287
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 November (sorted by launch date):

  1. Cambria Global Momentum ETF (GMOM), launched 11/04/14, is an actively managed fund-of-funds investing in equities, fixed income, real estate, commodities, and currencies.  The fund uses measures of trailing momentum and trend to select 16 funds from a target universe of 50 ETFs it considers the most liquid, least expensive, and most representative.  The fund will maintain the ability to invest in cash and bonds during unfavorable markets.  GMOM has a 0.94% expense ratio (GMOM overview).
  2. First Trust Emerging Markets Local Bond ETF (FEMB), launched 11/05/14, is an actively managed fund that will hold at least 80% of its net assets in local currency-denominated bonds, notes, bills, certificates of deposit, time deposits, commercial paper, and loans from issuers in emerging market countries.  The fund will use foreign currencies and derivative instruments to hedge interest rate and currency risks.  No yield information is provided.  The fund sports a 0.85% expense ratio (FEMB overview).
  3. First Trust International IPO ETF (FPXI), launched 11/05/14, provides exposure to IPOs and spin-offs in both emerging and developed countries during their first 1,000 trading days.  The underlying index ranks potential constituents by market capitalization, and the 50 largest international companies are selected.  Hong Kong and China have the largest allocations at about 17% each.  Investors will pay 0.70% annually to own this fund (FPXI overview).
  4. First Trust Low Duration Mortgage Opportunities ETF (LMBS), launched 11/05/14, is an actively managed fund that will invest at least 80% of its net assets in investment grade, mortgage-related debt securities and other mortgage-related instruments tied to residential and commercial mortgages.  The fund targets an average effective duration of 3 years or less.  While the fund states its primary objective is to generate current income, no yield information was found.  The fund sports a 0.65% expense ratio (LMBS overview).
  5. JPMorgan Diversified Return International Equity ETF (JPIN), launched 11/07/14, will provide broad exposure to developed market equities outside of North America.  Securities selected for the index go through a ranking process evaluating value, size, momentum, and low volatility factors.  The fund will seek to allocate risk equally across 40 regional sectors.  The ETF will cap its expense ratio at 0.43% until 3/1/16 (JPIN overview).
  6. PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio (PDBC), launched 11/07/14, is an actively managed fund that is composed of futures contracts on 14 heavily traded commodities across the energy, precious metals, industrial metals, and agriculture sectors.  The ETF will utilize an offshore subsidiary, allowing it to issue 1099s instead of K-1s.  The fund’s expense ratio is capped at 0.59% until 2/29/16 (PDBC overview).
  7. Market Vectors ChinaAMC China Bond ETF (CBON), launched 11/11/14, is taking advantage of the relaxed restrictions on investments in China and will provide exposure to fixed-rate, RMB-denominated bonds that are issued in People’s Republic of China by Chinese credit, governmental, and quasi-governmental issuers.  Distribution frequency should be monthly, but no yield information is noted on the website.  The ETF’s expense ratio is capped at 0.50% until 9/1/16 (CBON overview).
  8. PureFunds ISE Cyber Security ETF (HACK), launched 11/12/14, invests in a portfolio of companies that provide hardware, software, and services designed to enhance cyber security.  Companies in the underlying index are identified as either infrastructure or service providers.  There are currently 30 holdings, with about 90% classified as infrastructure and 10% as service.  Investors will pay 0.75% annually to own this fund (HACK overview).
  9. Emerging Markets Internet and Ecommerce ETF (EMQQ), launched 11/13/14, focuses on internet and ecommerce companies in emerging markets.  The fund currently holds 42 stocks in eight countries, with the lion’s share of the allocation belonging to China at about 65%.  The index-based fund sports a 0.86% expense ratio (EMQQ overview).
  10. FlexShares Credit-Scored US Corporate Bond Index Fund (SKOR), launched 11/13/14, will invest in intermediate maturity corporate bonds, and the underlying index’s selection criteria includes a credit scoring methodology.  The proprietary credit-score seeks to identify companies that display strength in management efficiency, profitability, and solvency.  Distributions are expected monthly, and the current yield to investors is estimated at 2.3%.  The fund’s expense ratio will be capped at 0.22% until 11/3/15 (SKOR overview).
  11. Global X China Bond ETF (CHNB), launched 11/19/14, is another ETF taking advantage of the relaxation of investment restrictions in China and will provide exposure to RMB-denominated bonds that are issued or distributed within the mainland.  Bonds included in the underlying index will be issued by governments, agencies, or Central State-Owned Enterprises.  They will have a minimum maturity of one year and at least RMB 1 billion in outstanding principal.  Distributions are expected monthly, but no yield information is provided.  CHNB’s expense ratio will be capped at 0.50% until 11/19/15 (CHNB overview).
  12. SPDR MSCI ACWI Low Carbon Target ETF (LOWC), launched 11/26/14, seeks to provide after-fee results that correspond to the performance of the MSCI ACWI Low Carbon Target Index.  The index is designed to reflect a lower carbon exposure than that of the broad market by overweighting companies with low carbon emissions relative to sales and per dollar of market capitalization.  Investors will pay 0.30% annually to own this fund (LOWC overview).

Product closures/delistings in November:

  1. VelocityShares EmergingAsiaDR ETF (ASDR)
  2. VelocityShares EmergingMarkets DRETF (EMDR)
  3. VelocityShares Russia DRETF (RUDR)
  4. Barclays ETN+ S&P 500 3x Long B ETN (BXUB)
  5. Barclays ETN+ S&P 500 2x Long C ETN (BXUC)

Product changes in November:

  1. ProShares performed reverse splits on 10 ETFs effective November 6.
  2. First Trust Enhanced Short Maturity ETF (FTSM) had a 1-for-2 reverse split effective November 10.

Announced Product Changes for Coming Months:

  1. Russell plans to close its last remaining ETF, the actively managed Russell Equity ETF (ONEF), with its last day of trading on January 26, 2015.  Russell closed its other 25 ETFs more than two years ago (October 2012).

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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Friday, November 28th, 2014

Downplaying Black Friday

By Ron Rowland
8:40 am CST

This week marks the beginning of the sprint to the finish line of 2014.  Yesterday, our country held its annual thanks.  Ironically, the day after we give thanks for everything we have, we are encouraged to spend lavishly on gifts and things we do not have.  What was once a subtle shifting of gears between two holidays has evolved into a clutch popping, tire burning, head jerking start to the year-end spending blitz known as the holiday shopping season.

Black Friday derives its name from accounting lingo.  For many retailers, the day’s sales number is large enough to make them profitable (“put them in the black”) for the year.  To grab a larger share of this one-day spending spree, some retailers started opening earlier than others.  In an effort to one-up their competition, stores gradually moved their opening times earlier and earlier.  Some began welcoming shoppers at midnight, forcing anyone trying to open earlier to do so on Thanksgiving Day instead of Friday.  Some did so, and the media dubbed it Gray Thursday.  However, many consumers have declared enough is enough and are refusing to spend their dollars at these establishments.

The internet is also changing shopping habits, creating bargains in the days leading up to Thanksgiving as well as extending those sales into December.  Brick and mortar stores are fighting back as many have staged pre-Black Friday sales over the past week or more.  News reporting has moved to a constant 24-hour cycle, and it appears retailers would like to do the same.

By most accounts, this year’s holiday shopping season should be quite robust and record-setting.  Third quarter GDP was revised upward to 3.9% from the initial 3.5% estimate from a month ago.  The nation’s average price for a gallon of gasoline has dropped to just $2.81, and consumer sentiment is at a 7-year high.  The weather is always a factor, but anything less than a prolonged polar vortex should not derail the anticipated record spending.

Large and liquid ETFs with holdings affected by this year’s shopping environment include SPDR S&P Retail (XRT), Market Vectors Retail (RTH), SPDR Consumer Discretionary Select Sector (XLY), Vanguard Consumer Discretionary (VCR), iShares Transportation Average ETF (IYT), and SPDR S&P Transportation (XTN).

Although the media will still be fixated on measuring the crowds and dollars spent on Friday, we believe the Black Friday benchmark has become less significant.  It’s the whole fourth quarter that matters – not just one day.

Disclosure covering writer, editor, and publisher:  Long IYT and XLY.  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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