ETF Launch Activity Sputters in May

May 31, 2012 by  
Filed under Commentary, ETF IPOs (New ETFs)

New ETF and ETN introductions in May totaled only eight, the slowest pace in 19 months.  Three of the new offerings are categorized as fixed income funds, two have allocations to multiple asset classes, one follows a hedge fund replication index, and two provide leveraged exposure to stock dividend indexes.  Additionally, two of the new offerings are actively managed ETFs.

1) PIMCO Global Advantage Inflation-Linked Bond Strategy Fund (ILB), launched 5/1/2012, is an actively managed exchange traded fund comprised of primarily high-quality inflation-linked bonds that span developed and emerging markets.  Managed by Mihir Worah, it has 62 holdings, an effective duration of 6.73 years, and expenses capped at 0.60%.  The top five country allocations are U.S. 21.8%, Mexico 15.9%, Brazil 11.4%, France 8.4%, and Canada 7.6% (ILB overview).

Opinion/analysis:  No yield data is given but is expected to be less than 2%.  ILB will compete with iShares Global Inflation-Linked Bond Fund (GTIP) that launched a year ago.  GTIP has about $15 million in assets, 53 holdings, a yield of 1.9%, and a lower 0.50% expense ratio.

2) Arrow Dow Jones Global Yield ETF (GYLD) was launched 5/8/2012 by ArrowShares, a new sponsor of ETFs.  The fund allocates its assets across five equal-weighted yield-oriented global baskets (equity, sovereign debt, corporate debt, real estate, and alternatives).  Each basket consists of 30 holdings totaling 150 positions.  The underlying index rebalances quarterly and has a current yield of 7.4%.

GYLD has an expense ratio of 0.75% and will make distributions monthly.  Its top five country allocations are the U.S. 40.0%, Australia 7.3%, Singapore 4.0%, Hungary 3.3%, and Portugal 3.3%.  Largest currency exposures include U.S. Dollar 56.0%, Euro 16.7%, Australian Dollar 7.3%, and Singapore Dollar 4.0%.  Sector representation includes Financials 28.0%, Governments 20.7%, Communications 16.0%, and Energy 12.7% (GYLD overview).

Opinion/analysis:  GYLD is expected to have an initial yield of about 6.7%.  A large portion of the “alternative” basket consists of MLPs.  The MLP allocation should never exceed 25%, which should allow the fund to maintain its Regulated Investment Company (“RIC”) status and not be subject to income tax liabilities like MLP ETFs structured as C-corporations.

3) Market Vectors Emerging Markets High Yield Bond ETF (HYEM) launched 5/9/2012 and tracks the BofA Merrill Lynch High Yield US Emerging Markets Liquid Corporate Plus Index.  The underlying index is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging markets issuers that are rated below investment grade and issued in major domestic or eurobond markets.  The fund has 63 holdings, a yield to worst of 9.7%, an average modified duration of 4.7 years, and expenses capped at 0.40% (HYEM overview).

Opinion/analysis:  HYEM marketing literature incorrectly claims it is the “first emerging market corporate high yield bond ETF.”  iShares Emerging Markets High Yield Bond (EMHY) predates it and holds that honor.  However, the new Market Vector’s offering appears to have some better characteristics including higher yield, lower duration, and lower expenses.

4) ETRACS Monthly Pay 2xLeveraged Dow Jones Select Dividend Index ETN (DVYL) was launched on 5/23/2012.  It is an exchange-traded note linked to the monthly compounded 2x leveraged performance of the Dow Jones U.S. Select Dividend Index reduced by the annual tracking rate of 0.35%.  The current 2x index yield is 7.9% (DVYL overview).

Opinion/analysis:  DVYL is essentially a 2x leveraged version of iShares Dow Jones Select Dividend (DVY), the second largest dividend ETF, in an ETN wrapper with monthly leverage reset.  Dividend funds are very popular with investors even though DVY plunged more than 62% in the recent bear market and reduced its dividend payout by more than 31% in 2009.  With DVYL, these risks will be magnified.

5) ETRACS Monthly Pay 2xLeveraged S&P Dividend ETN (SDYL) launched 5/23/2012.  It is an exchange-traded note linked to the monthly compounded 2x leveraged performance of the S&P High Yield Dividend Aristocrats Index reduced by the annual tracking rate of 0.30%.  The current 2x index yield is about 7.0% (SDYL overview).

Opinion/analysis:  SDYL is essentially a 2x leveraged version of SPDR S&P Dividends (SDY), the third largest dividend ETF, in an ETN wrapper with monthly leverage reset.  SDY plunged more than 54% in the recent bear market and reduced its dividend payout by nearly 22% in 2009.  SDYL will magnify these risks.

6) ProShares USD Covered Bond (COBO) launched 5/23/2012 tracking the BNP Paribas Diversified USD Covered Bond Index.  The index tracks U.S. dollar-denominated “covered bonds” that are generally rated AAA.  Covered bonds are debt instruments issued by a financial institution that are secured by a segregated pool of financial assets (the “cover pool”), typically mortgages or public-sector loans.

Currently, the index has 36 constituents, a yield of about 1.5%, and a modified adjusted duration of 3.3 years.  The fund has an expense ratio of 0.35% (COBO overview).

Opinion/analysis:  COBO is the first covered bond ETF.  Current holdings were issued exclusively by non-U.S. institutions from Canada 59.0%, Norway 11.6%, Switzerland 9.0%, France 6.3%, Australia 6.0%, Sweden 4.9%, and England 3.2%.

7) AdvisorShares Global Echo ETF (GIVE), launched 5/24/2012, is a broadly diversified actively managed ETF with a focus on Sustainable and Impact investment opportunities (GIVE overview).  GIVE seeks to achieve long-term capital appreciation with an emphasis on absolute (positive) returns and low sensitivity to a blend of traditional financial market indices such as the S&P 500 Index, Barclays Aggregate Bond Index, and MSCI EAFE Index, over a full market cycle, by allocating to different investment strategies and asset classes through four sub-advisors (“portfolio managers”).

The four managers are Baldwin Brothers, Community Capital Management, First Affirmative Financial, and Reynders, McVeigh Capital Management.  Each has a 25% initial allocation with First Affirmative being responsible for making ongoing allocations.  Current fund allocations are domestic equities 33%, cash 27%, foreign equities 19%, short exposure 15%, and fixed income 5%.  The net expense ratio of 1.70% includes a 0.40% donation to Philippe Cousteau Jr.’s Global Echo Foundation.

Opinion/analysis:  The prospectus only provides performance expectations for one of the four managers.  GIVE has already generated investor interest with nearly $25 million in assets upon launch.  The true test will come when investors have the opportunity to assess the fund’s long-term performance.

8) AlphaClone Alternative Alpha ETF (ALFA) launched on 5/31/2012 seeking to track the AlphaClone Hedge Fund Long/Short Index.  It claims to be the first ETF to replicate disclosed equity positions held by established hedge fund managers.  It tries to capture alpha from these managers’ long positions while protecting against protracted market downturns through a dynamic hedge mechanism, which adjusts exposure between 100% long and 50/50 long/short depending on long-term trends of the S&P 500.  ALFA is the second product to come to market using Exchange Traded Concept’s ETF-In-A-Box solution.  It will be managed by Index Management Solutions with a 0.95% expense ratio that makes no provision for short-sale related expenses (ALFA overview).

Opinion/analysis:  Granted it is new, but there are discrepancies and a general lack of information about the fund.  The literature says ALFA will “replicate disclosed equity positions” but then later says it “employs a representative sampling strategy”.  The index’s scoring methodology goes back to 2000, but AlphaClone (the index provider) has only been in existence since 2008 and didn’t offer managed accounts prior to 2010.  They provide backtested data on six other indexes, but no information is available on the new underlying index for this fund.

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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