ETFolution

Why It's Never Good to Look Back...

Tue, 29 May 2012 00:26:57 -0400

After reading Henry Blodget’s piece on how he was figuratively at the center of the Facebook IPO scandal, I looked back upon a story I wrote following the Wall Street research settlement. My conclusion:

Where will the evidence come from when water cooler chatter actually returns to the water cooler?

Of course, my editor and I picked a sensational headline - Will E-Mail Kill Wall Street? - to drive home the rhetoric. But the Facebook whisper number controversy proves that we haven’t learned much in 10 years.

And even a Google-style modified Dutch auction wouldn’t have solved this problem.

The More Things Change...

Mon, 14 May 2012 23:16:15 -0400

Working in and around interactive publishing for more than a decade, I’ve watched every content provider face decisions around abandoning/considering/maintaining/resuming charging for content. Most recently, The New York Times put up its porous paywall, even as other publishers search for premium content and services to upsell.

Technology-driven change has forced models to change across industries for decades. But when you take a closer look, you’ll find that technology has just altered how traditional systems of sales, distribution and monetization have adapted.

In my recent post at Forbes, I drill down in the latest machinations in the mutual fund/ETF market. One of the crowning glories of ETFs was that they did not have to pay for distribution or sales. Exchange-trading took care of distribution and market makers were compensated on spreads.

Recent proposals, however, are offering to increase the incentives to market makers to trade smaller ETFs. Currently, exchanges pay “lead” market makers a greater rebate for posting liquidity to certain markets. Now, the exchanges want to bring in fund issuers to make greater/optional payments to lead market makers, hoping that an initial push will help get small, young ETFs off the floor.

In the ETF market, only time will tell whether a product is good or not, and a little extra boost could definitely help. But it’s also worth looking at what has been most successful, simple, easy to use products that practically sell themselves.

And that’s the point. The ETF market has functioned (more or less) effectively for almost 20 years in the U.S.

Products that worked and adpated stuck around. Those that didn’t bid goodnight.

So, I’m not surprised that the mutual fund/ETF market would be willing to try its old distribution tricks on a new platform. It’s the nature of the beast.

My article and interview with Deborah Fuhr of ETFGI LLP, one of...

Mon, 07 May 2012 11:28:47 -0400

My article and interview with Deborah Fuhr of ETFGI LLP, one of the world’s leading experts in exchange-traded funds, notes and anything else ET you can imagine.

"You are the Alpha"

Tue, 06 Mar 2012 00:27:25 -0500

While hardly biblical, Vanguard Chief Investment Officer Gus Sauter passed this wisdom on to a conference hall full of financial advisers at InsideETFs in January.

As I was also in attendance, my latest stories in the “Investing in Funds” issue of The Wall Street Journal encapsulate Sauter’s notion.

For the first story, I asked several financial advisers and strategists to create a multi-asset portfolio that they would offer income-seeking investors. Three advisers offered up portfolios using mostly bond ETFs and one firm rang in with a more multi-asset approach, picking off payment streams from closed-end funds, preferred stocks and even master limited partnerships. As to why the other advisers didn’t use those assets, they claimed that valuations had already passed such items through their screens. The article also offers some insight into how money managers take different approaches to the same problem - providing income for investors, while also taking pains to protect the downside.

There is no one right answer.

In the second story, I wanted readers to understand some of the nuances of large ETF trades that don’t come out everyday. While ETFs trade like stocks, they are not. Because they are actually traded units of an investment company, shares can be created or redeemed by market makers known as authorized participants.

These authorized participants, as well as institutional brokers, help facilitate large orders by working with investors and fund distributors to manage flow between secondary markets (the exchanges) and off-market creation/redemption of new shares. I talked to one adviser who was shifting clients into a new ETF in the portfolio and worked with both the broker and the issuer to get the trade done effectively.

For large, liquid ETFs, such concerns are rare, unless you are a whale. For small, thinly-traded or new products, diligent trading is key. For more, Emerging Global Advisors offers a PDF worth a glance on sourcing liquidity.

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Also, be sure to check out my blog at Forbes.

Declaration of ETFolution

Mon, 06 Feb 2012 23:32:42 -0500

“Growth for ETFs will be circumscribed by cutting and splicing the market as finely as possible,” says Morningstar’s Traulsen. “Firms will have to put out new funds and compete on price.”

The quote above is from an article I wrote in 2003 entitled “ETFs Turning Ten.” Nearly a decade (and billions in assets) later, most of the observations in that story still ring true.

I’ve recently started writing again at Forbes.com and am spending even more time analyzing the ETF market, both as an investor and as an interested observer. I’ve even renamed this blog and my blog at Forbes.

ETFolution is a forum to discuss how exchange-traded products are tranforming asset management and financial advisory. While I see the benefits, savings and transparency in the structures, I am not entirely convinced, as my friend Josh Brown ponders, that ETFs will crush traditional mutual funds in ten years. In fact, many critics of ETFs may yet have their day. And, as Tom Lauricella points out at MarketBeat, some already are.

While I don’t expect (or plan) to write everyday, I will be sure to note and analyze critical issues in the ETF market and how they affect the interested parties, including investors.

If there are any issues you believe to be undercovered, let me know.

Turning TRXT: The End of the Beginning? The Beginning of the End?

Thu, 12 Jan 2012 01:47:47 -0500

The March 1 listing of the PIMCO Total Return Exchange Traded Fund will be a pivotal event for the mutual fund industry.

As the exchange-traded version of the $244 billion Total Return Fund starts trading, the industry will get see one of its flagship actively-managed funds price throughout the day. Yet the new ETF’s ability to build assets over time will be the true test of the structure and the future of active funds.

As I noted on The Wall Street Journal’s MarketBeat last year, the acceptance of the exchange-traded model by the largest mutual fund is a signal that the regulated asset management business has fundamentally changed.

At its core, an exchange-traded product should remove any trading and accounting externalities and isolate manager cost and margin. TRXT, the ticker for Total Return Exchange-Traded, comes out at 0.55 basis points, higher than the 0.46 basis point fee charged by the institutional class, but well lower than many of the other share classes of Total Return, including load and annuity classes.

While TRXT will be similar to the core fund, it won’t feature derivatives nor can it be nearly as diversified.

Still, the rest of the actively-managed fund world will be watching to see how fast TRXT gains traction. PIMCO’s Enhanced Short Maturity Strategy Fund (MINT) at $1.8 billion AUM is the category leader in active ETFs (as well as longer-duration money fund alternatives.) Actively-managed equity ETFs haven’t had nearly the success, despite the best efforts of AdvisorShares to advance the model.

But the move by PIMCO to open up the Total Return strategy to ETF investors could mark both the end of the beginning for ETFs and the beginning of the end for traditional funds.

Tax Issues and ETFs

Wed, 11 Jan 2012 16:49:41 -0500

My latest (last?) story at WSJ is a primer on the tax issues affecting ETFs. For the most part, they are straight forward. Equity ETFs are as efficient (or slightly more so) than equity-indexed mutual funds.

Bond ETFs, especially with cash create/redeem during a year of rising bond prices, had some capital gains to distribute.

IndexUniverse put out two compendia on ETFs and taxes late last year. Truly yeoman’s work and incredibly helpful. Check out the complete guide to ETF Taxation as well as their summary of 2011 distributions.

Also, with the help of some folks at WisdomTree and Teucrium, I learned a little more about the nuances of futures-based commodity ETP taxation.

One of the WisdomTree funds I looked at —WisdomTree Brazil Real Fund— paid out a large distribution. According to the company, the fund has an August fiscal year end, at which point it had distributions to pay out (and paid those out in December.) Those distributions amounted to 29% of the NAV by December.

Another hitch for futures funds, realized gains (or losses) are marked to market for the individual investor at the close of the tax year at 60% long-term, 40% short-term and then used to increase/decrease the basis.

There’s no actual distribution from the fund, just a distribution of the tax liability.

ETFidelity

Tue, 10 Jan 2012 21:47:47 -0500

In early December, Fidelity Investments went “state of the art” in updating its exchange-traded fund application, according to one of my sources.

While I detailted in my story at The Wall Street Journal that filing is very preliminary (as was pointed out in Index Universe in early December and Barron’s more recently), there is no reason to think that Fidelity can’t take market share in ETFs almost immediately. Schwab’s growth to $5 billion in ETF AUM in less than 2 years is the proof Fidelity needed.

Granted that the simplicity of ETFs is that they are exchange-traded, meaning that anyone with exchange access can trade the products, Fidelity has access to a giant community of individual investors and advisors that many start-up ETF providers do not. While other brokers - including Schwab, Scottrade and TD Ameritrade and now E-Trade - have teased their own ETFs with low-cost or zero commission trades, Fidelity knows from its current relationship pitching 30 iShares ETFs at $0 how well that works.

At Charles Schwab, they will gladly take long term assets under management (even at 0.06 bps) against the friction of a $9.95 trade.

Fidelity closed November with $93 billion in indexed assets under management, less than 10% of its total mutual fund assets. The company also has the solid Fidelity Select mutual fund franchise that could mimic (with a twist) the Select Sector SPDRs from SSgA.

Many have asked me what this may mean for Fidelity, the ETF market or even their Fidelity-administered 401(k) plan. At this point, it’s too early to tell, but there’s no doubt that interested parties should take notice.

ETF Tools for ETF Tools

Tue, 13 Dec 2011 12:43:14 -0500

My latest story at SmartMoney.com, How to Sift Through All Those ETFs, sheds light on some new and interesting tools for ETF investors, or any investor. While I didn’t approach portfolio theory and risk profiles, these tools can constitute a good second step for adding ETFs to your investments.

The ETF market has grown significantly this year, some might even say to its own detriment, but shouting about ETFs with few assets is noise on top of new and innovative products trying to gain traction.

ETFs Running out of Levers

Wed, 16 Nov 2011 14:52:03 -0500

My latest stories on exchange-traded funds are both about the competition brewing among ETF firms to gather assets.

The first highlights strategy-based or factor ETFs being launched by several firms to mimic stock-picking methodologies. Many of these are new and untested. The second recaps a recent fee tussle between StateStreet and PowerShares over a collection of financial indexes.

The current phase of ETFs - dubbed 3rd gen by some - may also lead to significant consolidation as many funds and fund companies have been on the market long enough to know if their approach is working.

To Which Wall St. Responds

Sun, 02 Oct 2011 00:48:24 -0400

I already gave you index funds, penny increments and ARMs. What more do you want, proxy access? Sorry about that.

Understanding My ETF Coverage

Mon, 26 Sep 2011 22:53:17 -0400

Following on my coverage of ETFs for The Wall Street Journal’s monthly “Investing in Funds,” I’ve been writing every few weeks at SmartMoney.com as well.

You can find my recent work stories at my author page.

Unlike the pieces I write for WSJ, the stories at SmartMoney are designed to be timely and actionable. The stories in WSJ are necessarily deeper and more about the mechanics of exchange-traded funds.

The work I’ve done over the past 1.5 years has helped inform my understanding of the situation on the UBS Delta One desk. The first thing I thought when the allegations of fraud broke was that the trade settlement and structure of European ETFs might be involved.

I was also not surprised to see ETFs at the center. Frauds are often hidden right in front of our eyes, masked by either liquidity, lax oversight or both. And, as we have seen before, they can be uncovered quickly by counter-trend or six-sigma deviations.

How a loss that large and seemingly over many positions was uncovered at $2.3 billion is the most baffling. To lose that much, you must have even more at risk.

Let’s hope that woke up every delta one desk around the world.

felixsalmon: Angela Merkel demonstrates the size of the Greece...

Thu, 15 Sep 2011 16:08:43 -0400

felixsalmon:

Angela Merkel demonstrates the size of the Greece crisis

Where's My Money (Fund)?

Tue, 30 Aug 2011 10:32:48 -0400

Watching weekly money market fund flows at ICI, the mutual fund industry group, can be confusing. Too many variables go in to flows to actually divine something meaningful. But the past few weeks (and years) have started to bear out divergent issues.

Investors continue to dump prime and tax-exempt funds, on all levels, and move in to government funds. The why is all over the map: most funds are saddled with high expenses, a consequence of rapidly moving money. Historically low yields hit these ultrashort, highly regulated funds the most. Operational costs for the funds are being widely supported by the investment managers, to the point that BNY Mellon now has enough gumption to charge fees on non-money fund corporate cash.

To wit, ETFs have been floated as alternatives to money market funds. Get rid of mandating $1 per share NAV and externalize the accounting and you remove a lot of the costs. (In the June Investing in Funds report, WSJ looked at the money fund debate.

So far, only three ETFs have come up as viable money-fund alternatives. One - PIMCO’s MINT appeals to the yield-chasers. Two others contain ultra short term Treasurys, for the ultimate cash bear. The industry is starting to take notice. Federated Investors is looking to launch a MINT-like fund and could just be starting the next wave of ETFs.

ETFs Complex and Less So for Volatile Days

Fri, 05 Aug 2011 23:42:00 -0400

Watching the stock market’s spectacular drop this week, I took a look at FactorShares spread ETFs as well as a collection of long-term bond ETFs.

The first, a post on WSJ’s MarketBeat, jumps into the world of quadruple leverage. Factor Advisors launched a collection of commodity pools that offered a leveraged long position in one thing (you pick) and a leveraged short position in other. Few of the funds have garnered any more assets than they launched with, but the 2x Gold Bull/2x S&P 500 Bear highlighted by many who follow ETFs soared in the last month.

Also on a roll, and more palatable to investors not willing to buy products with embedded margin, were the long-term bond ETFs I discussed on SmartMoney. These ETFs push the envelope on duration and maturity, by design, and flutter in the wind from the breath of bond vigilantes or fly in the face of economic weakness.

I looked at these ETFs last February, when the market was moving against them during weak treasury auctions.

ETFs On the Loan Again

Fri, 08 Jul 2011 12:17:14 -0400

ETFs On the Loan Again:

In my recent piece on securities lending in and around ETFs, I rolled through a lot of data on both how ETFs are lending out their portfolio securities, as well as how they themselves are being lent.

Check out this Marketbeat post and the original story.

To find out how your ETF or mutual fund is participating in securities lending, just take a look at the fund’s income statement in its annual report.

On Tickers and Marketing

Tue, 14 Jun 2011 19:12:25 -0400

On Tickers and Marketing:

A quick post at WSJ on single-stock tickers and crazy ETF words!

What did Dominique Strauss-Kahn use to get out of Rikers?

Tue, 17 May 2011 10:14:00 -0400

Bailout Greece.

Feel free to boo, hiss or add your own in the comments.

The Retirement Planner from SmartMoney

Tue, 10 May 2011 12:37:29 -0400

The Retirement Planner from SmartMoney:

We spent several months trying to improve upon a tool that is commonplace at most financial services and financial media sites. I think we have succeeded.

The key lesson for anyone testing this out is to learn from the tool and not try to use the tool to tell the future. Our tool does a fantastic job of detailing the degree to which minor saving or spending decisions in your life come out in the end.

Please take it for a ride and use send feedback.

Lots of it.

Are ETFs Good or Bad for Brokers?

Mon, 02 May 2011 17:13:55 -0400

My story in today’s WSJ tries to get at a difficult point. Do brokers, and specifically discount brokers, owe it to themselves to protect their customer from themselves?

The proliferation of new ETF products - not just leveraged and inverse leveraged funds - have begun to make the world of ETFs look like open-end funds, closed-end funds and hedge funds all in one.

Several sources appropriately pointed out that ETFs are tradable, optionable and shortable, like stocks, and deserve to be regulated thusly. Others pointed out that you are outsourcing complex fund management to experts, but have to make no admission of actually understanding/reading the investment prospectus.

Some bloggers continue to wave the flag that these products should not get the greenlight because the initial marketing was out of sync. This seem to have been corrected by regulatory “hints” and updated marketing language and audience. Volume has similarly reduced since the summer of 2009.

But I believe that this story plays out more in the hands of brokers, who have to decide if it matters for their business to increase disclosure/information on fund construction. And for that, it may only take an act of codifying a standardized statement of information for ETFs to begin with.