Nine New ETPs for Week Ending 7/15/11

July 17, 2011 by  
Filed under Commentary, ETF IPOs (New ETFs), ETNs

The parade of new exchange traded product launches continues unabated.  Last week, nine new products came to market consisting of six ETFs and three ETNs.  One of the new ETFs was from Precidian, a new sponsor in the ETF arena, and another is actively managed.

A brief overview of the new products and my analysis/opinion of each follows this list containing names, ticker symbols, and launch dates:

  1. iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN (VZZB) 7/11/11
  2. iPath US Treasury 5-Year Bull ETN (DFVL) 7/12/11
  3. iPath US Treasury 5-Year Bear ETN (DFVS) 7/12/11
  4. IQ Emerging Markets Mid Cap ETF (EMER) 7/13/11
  5. Market Vectors CEF Municipal Income ETF (XMPT) 7/13/11
  6. MAXIS Nikkei 225 Index Fund (NKY) 7/13/11
  7. ProShares Hedge Replication ETF (HDG) 7/14/11
  8. Schwab US Aggregate Bond ETF (SCHZ) 7/14/11
  9. WisdomTree Global Real Return Fund (RRF) 7/14/11

 

iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN II (VZZB) provides an initial 200% exposure (without any leverage reset) to mid-term VIX futures.  VZZB is a replacement for VZZ, which triggered an early termination on July 1, 2011.

Opinion:  Given the possibility of early termination with “no-reset” leveraged products, I suspect traders formerly using VZZ may migrate to products with a longer shelf life versus switching to VZZB.

 

iPath US Treasury 5-Year Bull ETN (DFVL) and iPath US Treasury 5-Year Bear ETN (DFVS) will track the Barclays Capital 5 Year US Treasury Futures Targeted Exposure Index.  The index is designed to increase in response to a decrease in 5-year Treasury note yields and to decrease in response to an increase in 5-year Treasury note yields.  DFVL employs an index multiplier that provides a participation rate of $0.10 gain or loss per each 1.00 point increase or decrease, respectively, in the level of the index, while DFVS does the opposite.  The ETNs have annual investor fees of 0.75% (DFVL overview and DFVS overview). 

Opinion:  These products are 5-year versions of existing 2-year, 10-year, and long-term Treasury yield ETNs.  They are potentially useful for investors wanting to construct customized yield curve exposure. 

 

IQ Emerging Markets Mid Cap ETF (EMER) seeks to provide the performance (minus the 0.75% expense ratio) of a float-adjusted market cap-weighted index of the mid-capitalization segment of stocks from emerging markets.  Largest country allocations go to Taiwan 22.8%, South Korea 13.0%, South Africa 11.7%, China 10.8%, and Brazil 9.4%.  Sectors with weightings above 10% are Consumer Discretionary 18.7%, Financials 18.1%, Industrials 15.9%, and Materials 13.3%.  The underlying index has 348 stocks, with none exceeding a 1% weighting (EMER overview).

Opinion:  This is the first ETF to target emerging market mid-cap stocks, which tend to be more sensitive to internal country growth versus the export orientation of the large-cap firms.  I expect to be holding shares of EMER in the future. 

 

Market Vectors CEF Municipal Income ETF (XMPT) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the S-Network Municipal Bond Closed-End Fund Index, which is composed of shares of municipal closed-end funds listed in the United States.  The index assigns a greater weight to funds trading at a discount.  As a Fund- of- Funds (ETF of CEFs), XMPT will incur acquired fees of 1.03% but will cap its net expense ratio at 1.43%  (XMPT overview).

Opinion:  XMPT is the first ETF to offer municipal CEF exposure.  Based on figures of the underlying index, I estimate that XMPT will have a distribution yield of 5.2% with monthly distributions, a modified duration of 10.4 years, and leveraged exposure of 134%.  A similar product, the PowerShares CEF Income Composite Portfolio (PCEF), has a current distribution yield of 6.6% with an expense ratio of 1.62%.  However, it holds only taxable closed-end funds.  XMPT’s focus on municipal income funds will produce a higher tax-equivalent yield for most investors.

 

MAXIS Nikkei 225 Index Fund (NKY) (NKY overview) seeks to provide investments results that correspond generally to the price and yield performance, before fees and expenses (0.50% expense ratio), of publicly traded securities in the Japanese market, as measured by the price-weighted Nikkei 225 Index.  The largest sectors within the Nikkei 225 include Industrials 24.9%, Technology 18.8%, Consumer Discretionary 18.7%, and Health Care 9.2%.

The sponsor and advisor, Percidian Funds, is a new entrant to the US ETF market.  However, the management team at Percidian, formerly Next Investments, was involved in the development of SPDR Gold Shares (GLD) and the CurrencyShares product line.  The “MAXIS” in the fund’s name is a registered service mark of Mitsubishi UFJ Asset Management.

Opinion:  The closure of Northern Trust’s family of NETS ETFs created a void of products focusing on the well-known home-grown indexes of foreign countries, and Percidian brought in Northern Trust as the sub-advisor to NKY.  The iShares MSCI Japan (EWJ) currently owns the Japan ETF space and has a 15-year head start on gathering assets.  NKY has a long way to go to catch up.

 

ProShares Hedge Replication ETF (HDG) (HDG overview) is the 122nd ETF from ProShares and seeks investment results, before fees and expenses (expense ratio 0.95%), that track the performance of the Merrill Lynch Factor Model — Exchange Series.  The index tries to match the risk and return characteristics of the hedge fund asset class by targeting a high correlation to HFRI Fund Weighted Composite Index (HFRI), an equally weighted composite of over 2,000 hedge funds.  Neither HDG nor the underlying index invests in hedge funds.  Instead, the index for the ETF attempts to mimic the characteristics of the HFRI using a systematic model to establish weighted long or short (sometimes long or flat) positions in six underlying factors on a monthly basis.  The six factors are the 1) S&P 500 Total Return Index, 2) MSCI EAFE US Dollar Net Total Return Index, 3) MSCI Emerging Markets US Dollar Net Total Return Index, 4) Russell 2000 Total Return Index, 5) three-month U.S. Treasury bills, and 6) ProShares UltraShort Euro ETF.

Opinion:  Index IQ blazed the trail for hedge fund replication products in the ETF space in 2009 with the IQ Hedge Multi-Strategy Tracker ETF (QAI) and IQ Hedge Macro Tracker ETF (MCRO).  The goal of equity-like returns with bond-like volatility is the “allure” of hedge funds, but that goal has escaped QAI and MCRO the past two years.  They have underperformed both stocks and bonds while having higher volatility than iShares Barclays Aggregate Bond (AGG).  Even so, QAI has attracted nearly $135 million in assets, indicating investor demand and a potential payoff for the sponsor that eventually best delivers on the allure.

 

Schwab US Aggregate Bond ETF (SCHZ) (SCHZ overview) seeks investment results that track, as closely as possible, before fees and expenses, the total return of the Barclays Capital U.S. Aggregate Bond Index.  SCHZ becomes the fourteenth member of Schwab’s broad-based ETF lineup.

Opinion:  SCHZ tracks the same index as the two category heavy weights – iShares Barclays Aggregate Bond (AGG) with a 0.22% expense ratio and assets of nearly $12 billion, and Vanguard Total Bond ETF (BND) with a 0.11% expense ratio and assets of more than $10 billion.  Having the industry’s lowest aggregate bond fund expense ratio at only 0.10%, commission-free trading for clients of Schwab, and a well-known underlying index, should guarantee success for SCHZ.

 

WisdomTree Global Real Return Fund (RRF) (RRF overview) seeks total returns of capital appreciation plus income that exceed the rate of inflation over long-term investment horizons.  RRF is actively managed using a structured investment approach that considers country and currency exposure, sector allocation, investment exposure and risk.  The fund incorporates both domestic and global inflation-linked debt securities as well as disciplined commodity strategies, thereby offering investors the potential for short- and long-term inflation protection, enhanced risk-adjusted performance, income, and diversification for traditional portfolios.  RFF will make quarterly dividend payments but expects the payment amounts to fluctuate.  Initial allocations include 67% Inflation Linked Bonds (22% US, 22% Developed Markets, and 22% Emerging Markets) and 33% Commodities (20% CTI Index, 10% CSCB Index, and 3% gold).

Opinion:  RRF appears to take a reasonable approach to providing a diversified inflation beating fund.  Its primary competitor, IQ Real Return ETF (CPI), is structured too conservatively to attract investor interest.

 

Disclosure covering writer, editor, and publisher:  Long GLD.  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.

Comments

One Response to “Nine New ETPs for Week Ending 7/15/11”

  1. Ron Rowland on July 20th, 2011 8:14 am

    A reader pointed out that the yield for XMPT is likely to be closer to 6.3% versus the 5.3% stated above because the 1% in acquired fund fees is already accounted for in the 6.7% yield of the index. I agree, which makes XMPT an even more attractive offering.

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