Friday, November 14th, 2014

ETF Deathwatch for November 2014: 20% of the Industry

By Ron Rowland
8:45 am CST

Eighteen zombie ETPs joined ETF Deathwatch this month while six exited due to improved health and nine more were removed because they ceased operations.  The net increase of three pushes the overall count to 331, consisting of 226 ETFs and 105 ETNs.

There were 1,652 products listed for trading at the end of October, and the 331 now on Deathwatch is the equivalent of 20%.  The 114 new products brought to market in the past six months are excluded in order to give them time to attract attention.  Another 442 products are not part of the current list because they have already closed and are no longer listed.  Of the 2,094 new products launched in the past 21 years, 21% (442) have closed, so the 20% currently on Deathwatch is not out of line with historical closure rates.

About two years ago, a representative from BlackRock (BLK) was not pleased that I had iShares ETFs on ETF Deathwatch, claiming that they had never closed an ETF.  I reminded him that iShares practically invented ETF closures, shutting down three ETFs in 2002.  That was before BlackRock bought iShares from Barclays was the response.  Since that conversation, BlackRock has shuttered 32 additional iShares ETFs, including 18 in October.  Being the largest issuer of ETFs does not make you immune from product closures, and 16 additional iShares ETFs are still on ETF Deathwatch.

The average age of products on the list held steady at 46.2 months, and 94 are now more than five years in age.  The average asset size is $6.5 million, same as a month ago, and 55 have asset levels of less than $2 million.  Eight products went the entire month of October without any trades, and 163 (nearly 10%) had zero volume on the last day of the month.

Here is the Complete List of 331 Products on ETF Deathwatch for November 2014 compiled using the objective ETF Deathwatch Criteria.


The 18 ETPs added to ETF Deathwatch for November:

  1. AdvisorShares Madrona International (FWDI)
  2. AdvisorShares Meidell Tactical Advantage (MATH)
  3. AdvisorShares Pring Turner Business Cycle (DBIZ)
  4. Deutsche X-trackers Harvest MSCI All China (CN)
  5. Direxion Daily Gold Bear 3x Shares (BARS)
  6. Direxion Daily Gold Bull 3x Shares (BAR)
  7. EGShares Blue Chip ETF (BCHP)
  8. iPath Pure Beta Broad Commodity ETN (BCM)
  9. iShares Commodity Optimized Trust (CMDT)
  10. iShares MSCI All Country Asia x-Japan Small Cap (AXJS)
  11. iShares MSCI Colombia Capped (ICOL)
  12. iShares Yield Optimized Bond ETF (BYLD)
  13. Market Vectors Indonesia Small-Cap (IDXJ)
  14. ProShares UltraShort Consumer Goods (SZK)
  15. WisdomTree Global ex-U.S. Utility (DBU)
  16. WisdomTree Japan Hedged Capital Goods (DXJC)
  17. WisdomTree Japan Hedged Health Care (DXJH)
  18. WisdomTree Japan Hedged Tech, Media and Telecom (DXJT)

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

  1. Deutsche X-trackers Muni Infrastructure Revenue Bond (RVNU)
  2. ETRACS Monthly Pay 2x DJ International Real Estate ETN (RWXL)
  3. First Trust Hong Kong AlphaDEX (FHK)
  4. First Trust Taiwan AlphaDEX (FTW)
  5. Forensic Accounting ETF (FLAG)
  6. WisdomTree Barclays US Aggregate Bond Negative Duration (AGND)

The 9 ETPs removed from ETF Deathwatch due to delisting:

  1. iShares MSCI Far East Financials (FEFN)
  2. iShares MSCI Emerging Markets Financials (EMFN)
  3. iShares MSCI Emerging Markets Materials (EMMT)
  4. iShares Retail Real Estate Capped (RTL)
  5. iShares Industrial/Office Real Estate Capped (FNIO)
  6. iShares Global Nuclear Energy (NUCL)
  7. iShares Target Date 2045 (TZW)
  8. Global X Canada Preferred (CNPF)
  9. Global X Pure Gold Miners (GGGG)

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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Tuesday, November 11th, 2014

Eaton Vance ETMFs – A Giant Step Backward

By Ron Rowland
12:19 pm CST

Last month, the SEC correctly shot down the nontransparent ETF application from BlackRock (BLK) and Precidian as not being in the interest of the public.  This week, many ETF pundits are trumpeting the SEC’s recent approval of Eaton Vance’s new ETMF (Exchange Traded Managed Fund) structure.  However, for retail investors, ETMFs have little to nothing in common with “real” ETFs, and one has to look hard to identify even possible improvements to traditional mutual funds.

In a summary of the SEC’s action prepared by Ropes & Gray LLP, the SEC’s exemptive relief will “permit the operation of a new type of exchange-traded fund, called an exchange-traded managed fund (“ETMF”), the shares of which would trade on an exchange at prices that are based on the net asset value (“NAV”) next determined at the end of each day.”

If you believe that sounds more like the description of a mutual fund than an ETF, you are correct.  ETFs have many features that differentiate them from traditional mutual funds, and most (if not all) of these differences are perceived as advantages.  By removing nearly all of these differences, the new ETMF structure places it squarely in the mutual fund camp.  Additionally, it even removes one of the best features of mutual funds, namely that all buyers and sellers receive the identical NAV-based price on any given day.

The new ETMFs and traditional mutual funds both:

1) trade at the end of the day (whereas ETFs trade throughout the day)

2) must be bought or sold prior to knowing what the price is (whereas ETFs maintain bid/ask quotes throughout the day and can use limit orders)

3) can be bought and sold through a brokerage account (one feature making them similar to ETFs)

4) are non-transparent in their holdings (whereas ETFs typically update holdings daily)

Shares of ETMFs will trade with new types of orders, NAV plus premium for buys and NAV minus fee for sales.  Intraday values will be published every 15 minutes, instead of every 15 seconds for ETFs.  However, these intraday values have no bearing on the price you pay.  You could place an order for an ETMF at NAV plus $0.05 at noon, when the intraday value is $45.00.  If the end-of-day NAV is 45.90, then your order will be filled at $45.95 (plus any brokerage commission).  When buying or selling traditional mutual funds, shares are traded at NAV without any premiums or discounts.

The SEC also placed some restrictions on ETMFs.  ETMF advertising:

1)   cannot call them an open-end investment company

2)   cannot call them a mutual fund

3)   cannot call them ETFs

4)   must include a statement to the effect that shares are not individually redeemable (when talking about creation/redemption of shares)

It is clear that ETMFs have no direct advantages over ETFs for investors.  For fund managers, the advantage is keeping their trading activity and holdings secret.  ETMFs do offer some advantages over traditional mutual funds for retail investors.  Potentially lower expense ratios, potential tax-efficiency, and the publication of intraday values are a few that come to mind.

Bottom line:  ETMFs are not ETFs (part of the SEC ruling).  ETMFs are a giant step backward compared to ETFs, although they are potentially an incremental improvement to traditional mutual funds.

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, November 7th, 2014

ETF Stats for October 2014 – Trading Activity Surges 71%

By Ron Rowland
10:43 am CST

ETF trading activity, as measured by dollar volume, exploded in October to more than $2.3 trillion.  This is a 71% increase over September and the highest level in more than three years.  Assets under management increased 3.4% from the prior month to end at $1.91 trillion, establishing a new month-end record.  Although this is just 0.1% above the previous high set two months ago, it only takes a penny to set a new record.

The quantity of listed products increased by two, finishing at 1,652 (1,441 ETFs and 211 ETNs), for the largest month-end count ever.  Not to be left out, the quantity of actively managed ETFs also soared to a new high of 118 with nine new additions for the month.

Launch activity was strong with 22 products coming to market.  All but one of the new offerings were ETFs, as ETN release activity continues to lag.

Closures were high for the month, and 20 ETFs are no longer with us.  Eighteen of the closing funds wore the iShares brand.  Many of these newly closed funds had significant asset levels, granting them a hall pass when it comes to compiling the monthly ETF Deathwatch list.  Four of the ETFs had assets north of $50 million each, levels many ETFs can only dream about, and implies iShares has redefined ETF survivability.

The number of funds with more than $10 billion in assets increased from 41 to 43 and hold 56% of all ETP assets.  Products above $1 billion grew from 235 to 241 and account for about 89% of assets.  The cumulative assets of the 824 smallest products account for just 1% of industry assets, and it takes the 1,378 smallest products (83%) to equal the assets of SPDR S&P 500 (SPY).  SPY is the largest ETF by far, and it single-handedly accounts for 9.6% of all ETP assets.

October had 23 trading days, which helped boost trading activity to more than $2.3 trillion.  However, that is only about 10% more days than the 21 in September, so something else is responsible for the 71% surge.  Looking at the daily volume data, it is easy to see the bulk of trading activity occurred mid-month.  As you may recall, the market was selling off sharply, and the Ebola scare created some panic selling.  Therefore, we can attribute the trading spike to fear.

The number of products averaging more than $1 billion a day in trading climbed from seven to thirteen, and they accounted for more than 62% of all ETP dollars traded.  Products averaging more than $100 million per day jumped from 75 to 102 and accounted for nearly 91% of trading activity.  Turnover was heavy, and the monthly turnover ratio (total dollar volume / assets under management) jumped to 1.22 from 0.74 in September.

October 2014 Month EndETFsETNsTotal
Currently Listed U.S.1,4412111,652
Listed as of 12/31/20131,3322041,536
New Introductions for Month21122
Delistings/Closures for Month20020
Net Change for Month+1+1+2
New Introductions 6 Months10410114
New Introductions YTD16612178
Delistings/Closures YTD57562
Net Change YTD+109+7+116
Actively-Managed Listings118 (+9) n/a118 (+9)
Assets Under Mgmt ($ billion)$1,880$28.0$1,908
% Change in Assets for Month+3.5%+0.5%+3.4%
Qty AUM > $10 Billion43043
Qty AUM > $1 Billion2365241
Qty AUM > $100 Million73639775
% with AUM > $100 Million51.1%18.5%46.9%
Monthly $ Volume ($ billion)$2,242$95.8$2,338
% Change in Monthly $ Volume+69.1%+146.9%+71.3%
Avg Daily $ Volume > $1 Billion12113
Avg Daily $ Volume > $100 Million993102
Avg Daily $ Volume > $10 Million30910319
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 October (sorted by launch date):

  1. Arrow DWA Tactical ETF (DWAT), launched 10/1/14, is an actively managed fund-of-funds ETF that will invest in global market strategies based on their relative strength.  Exposure may be across U.S. equities, international equities, fixed income, commodities, and currencies.  In down markets, the fund can invest up to 30% in inverse U.S. securities.  The fund’s expense ratio will be capped at 1.40% until 12/1/15 (DWAT overview).
  2. Compass EMP Developed 500 Enhanced Volatility Weighted Index ETF (CIZ), launched 10/1/14, will invest in 500 non-U.S. companies in developed countries that have displayed net positive earnings for four quarters.  Constituents are then weighted by standard deviation.  The fund’s current dividend yield is about 2.2% when fully invested.  The ETF has the ability to hedge by taking part of the portfolio to cash.  If the index has a 10% decline, the fund will liquidate 75% of its holdings.  The fund will be reinvested in full if it recoups the loss or in 25% increments each time it loses an additional 10%.  The expense ratio will be capped at 0.78% through 10/31/15 (CIZ overview).
  3. ETRACS Monthly Pay 2xLeveraged US High Dividend Low Volatility ETN (HDLV), launched 10/1/14, is an exchange traded note designed to provide significant monthly income, which was calculated at an annual rate of 9.2% as of 9/24/14.  The underlying index selects companies based on comparatively high forecasted dividend yields and relatively lower volatility.  The payout will be linked to 2 times cash distributions and paid monthly.  The fund sports a 0.85% expense ratio (HDLV overview).
  4. Falah Russell-IdealRatings U.S. Large Cap ETF (FIA), launched 10/2/14, is designed to be a portfolio of well-known American companies that have passed screenings for their ethical and financial dealings based on Islamic beliefs.  There are currently 440 holdings, with the majority coming from the Technology and Health Care sectors.  Investors will pay 0.70% annually to own this fund (FIA overview).
  5. InfraCap MLP ETF (AMZA), launched 10/2/14, is an actively managed ETF structured as a C-corporation that will invest in companies in the business of gathering, processing, transporting, and storing energy products.  This is the first fund that attempts to follow my How to Build an MLP ETF That Does Not Lag Its Index.  In this case, the leverage at just 1.3x is too low to accomplish the goal, although being actively managed, it doesn’t have an index to track.  Even so, it is good to see someone is listening, and the fund will be a 1940 Act fund.  The fund’s expense ratio is 0.95% (AMZA overview).
  6. ProShares Managed Futures Strategy (FUTS), launched 10/2/14, seeks to profit in both rising and falling markets by establishing long and short positions in futures contracts.  The product will hold 24 contracts in asset classes such as commodities, currencies, and fixed income.  It will issue a K-1 instead of a 1099 for tax reporting.  The expense ratio is 0.75% (FUTS overview).
  7. Renaissance International IPO ETF (IPOS), launched 10/7/14, seeks to give investors exposure to newly listed international companies soon after their launch on non-U.S. exchanges.  Companies are added to the fund on the fifth day of trading if they are considered ‘sizable’, while the rest are added on quarterly reviews.  Companies are removed after two years.  The fund sports a 0.80% expense ratio (IPOS overview).
  8. Fidelity Corporate Bond ETF (FCOR), launched 10/9/14, is an actively managed ETF seeking to provide current income by purchasing investment-grade corporate bonds and other corporate debt securities.  As of 11/3, the effective duration is 6.9 years, but the website does not currently list any yield information.  The ETF has an expense ratio of 0.45% (FCOR overview).
  9. Fidelity Limited Term Bond ETF (FLTB), launched 10/9/14, is an actively managed ETF seeking to generate current income by purchasing investment-grade debt securities of all types.  As of 11/3, the effective duration is 2.9 years, but the website does not currently list any yield information.  Investors will pay 0.45% to own this fund (FLTB overview).
  10. Fidelity Total Bond ETF (FBND), launched 10/9/14, is an actively managed ETF seeking to provide current income by purchasing debt securities of all types.  As of 11/3, the effective duration is 5.2 years, but the website does not currently list any yield information.  The fund sports a 0.45% expense ratio (FBND overview).
  11. ProShares Morningstar Alternatives Solution ETF (ALTS), launched 10/9/14, will provide diversified exposure to alternative asset classes through a fund-of-funds approach.  The underlying ETFs utilize non-traditional strategies such as long/short, market neutral, managed futures, hedge fund replication, and others.  The fund’s expense ratio will be capped at 0.95% until 9/30/16 (ALTS overview).
  12. iShares Commodities Select Strategy ETF (COMT), launched 10/16/14, is an actively managed fund that provides exposure to a broad range of commodities through futures and commodity producer stocks.  Energy futures represent over half of the fund.  COMT will utilize a strategy pioneered by First Trust Global Tactical Commodity Strategy Fund (FTGC) of using an offshore wholly owned subsidiary to manage the futures trading and avoid the need to issue a K-1 tax form.  Investors will pay 0.48% annually to own this fund (COMT overview).
  13. iShares MSCI Emerging Markets Horizon ETF (EMHZ), launched 10/16/14, will hold large- and mid-cap companies located in the 25% smallest (by market cap) emerging market countries.  Securities from the BRIC (Brazil, China, India, and Russia) countries are excluded.  The fund has an expense ratio of 0.50% (EMHZ overview).
  14. Vident Core U.S. Bond Strategy ETF (VBND), launched 10/16/14, is attempting to add value to a basic bond fund by trying to improve credit and duration risks through enhanced diversification and risk management.  It will attempt to diversify interest rate risks across all core U.S. bond sectors, over- or under-weight various bond sectors based on macroeconomics, and screen corporate bonds for relatively stronger leadership, governance, and creditworthiness factors.  The website states yield information will not be available until 1/2/15.  The fund sports a 0.45% expense ratio (VBND overview).
  15. First Trust Eurozone AlphaDEX ETF (FEUZ), launched 10/22/14, will select stocks from the NASDAQ Eurozone Index universe using a rules-based methodology that scores stocks on three growth factors and three value factors.  Growth factors are 3, 6, and 12-month price appreciation, sales to price, and one-year sales growth.  The value factors are book value to price, cash flow to price, and return on assets.  These factors make up a stock’s selection score, and the top 150 are included.  The fund’s expense ratio is 0.80% (FEUZ overview).
  16. ValueShares U.S. Quantitative Value ETF (QVAL), launched 10/22/14, is an actively managed ETF that will generally invest in 50 mid- to large-cap U.S. stocks that it views as cheap, yet high quality.  Its quantitative screens include forensic accounting to analyze financial statements for signs of financial distress, valuation for low enterprise values relative to operating earnings, and quality for long-term business fundamentals and current financial strength.  Investors will pay 0.79% annually to own this fund (QVAL overview).
  17. Global X JPMorgan Efficiente Index ETF (EFFE), launched 10/23/14, is a fund-of-funds that will vary its holdings among 5 asset classes and 13 sub-classes, while targeting annual volatility less than 10%.  Current holdings include iShares 20+ Years Treasury (TLT), Vanguard REIT (VNQ), Vanguard Emerging Markets (VWO), Vanguard S&P 500 (VOO), and iShares Core Small-Cap 600 (IJR).  The fund has an expense ratio of 0.86% (EFFE overview).
  18. Global X JPMorgan US Sector Rotator Index ETF (SCTO), launched 10/23/14, is a fund-of-funds that will utilize a momentum-based sector rotation strategy in rising markets and can move fully or partially to short-term fixed income in falling or volatile markets.  Current holdings are Dow Jones REIT SPDR (RWR), Consumer Staples SPDR (XLP), Utilities SPDR (XLU), Health Care SPDR (XLV), and Industrial SPDR (XLI).  The fund sports a 0.86% expense ratio (SCTO overview).
  19. Recon Capital DAX Germany ETF (DAX), launched 10/23/14, will invest in the 30 largest and most liquid companies listed on the German equities market, known as the DAX Index.  This is not the first ETF to track this index.  That honor goes to NETS DAX Index ETF (R.I.P. 2/9/09) which also used the ticker symbol DAX.  The fund’s expense ratio is 0.45% (DAX overview).
  20. ALPS STOXX Europe 600 ETF (STXX), launched 10/31/14, will hold 600 of the largest developed market equities of the STOXX Europe Total Market Index.  The United Kingdom accounts for about 29% of the fund and other country allocations include France 15%, Switzerland 14%, and Germany 13%.  Investors will pay 0.25% annually to own this ETF (STXX overview).
  21. ARK Genomic Revolution Multi-Sector ETF (ARKG), launched 10/31/14, is an actively managed ETF that will be concentrated in the health care sector.  Securities selected are expected to benefit from extending and enhancing the quality of life by incorporating advancements in genomics.  This may be accomplished by offering new products and services relying on genomic sequencing, analysis, synthesis, or instrumentation.  The fund’s expense ratio is capped at 0.95% until 9/30/15 (ARKG overview).
  22. ARK Innovation ETNETS DAX Index ETF (ARKK), launched 10/31/14, is an actively managed fund that will hold companies expected to benefit from development of new products or services related to scientific advancements and disruptive technologies.  Unlike ARK’s other funds, it will not concentrate in a single industry but can be spread among health care, industrials, and technology.  The fund’s expense ratio will be capped at 0.95% until 9/30/15 (ARKK overview).

Product closures/delistings in October:

  1. iShares MSCI Far East Financials ETF (FEFN) [iShares Raises the Bar on ETF Survivability]
  2. iShares MSCI Emerging Markets Financials ETF (EMFN)
  3. iShares MSCI Emerging Markets Materials ETF (EMMT)
  4. iShares Retail Real Estate Capped ETF (RTL)
  5. iShares Industrial/Office Real Estate Capped ETF (FNIO)
  6. iShares Global Nuclear Energy ETF (NUCL)
  7. iShares NYSE 100 ETF (NY)
  8. iShares NYSE Composite ETF (NYC)
  9. iShares Target Date 2010 ETF (TZD)
  10. iShares Target Date 2015 ETF (TZE)
  11. iShares Target Date 2020 ETF (TZG)
  12. iShares Target Date 2025 ETF (TZI)
  13. iShares Target Date 2030 ETF (TZL)
  14. iShares Target Date 2035 ETF (TZO)
  15. iShares Target Date 2040 ETF (TZV)
  16. iShares Target Date 2045 ETF (TZW)
  17. iShares Target Date 2050 ETF (TZY)
  18. iShares Target Date Retirement Income ETF (TGR)
  19. Global X Canada Preferred (CNPF) [press release]
  20. Global X Pure Gold Miners (GGGG)

Product changes in October:

  1. ProShares added the word “Dividend” to the name of the ProShares Dividend Aristocrats ETF (NOBL) effective October 1.
  2. PIMCO added the word “Active” to all of its actively managed ETFs effective October 31.

Announced Product Changes for Coming Months:

  1. ProShares will perform a reverse split on 10 ETFs effective November 6.
  2. First Trust Enhanced Short Maturity ETF (FTSM) will perform a 1-for-2 reverse split effective November 10, and it reduced the capped expense ratio from 0.35% to 0.25% effective October 29.

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, October 24th, 2014

SEC Gets One Right Putting Kibosh On Nontransparent ETFs

By Ron Rowland
12:27 pm CST

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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