February 6, 2012
Declaration of ETFolution

“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.

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January 12, 2012
Turning TRXT: The End of the Beginning? The Beginning of the End?

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.  

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Filed under: ETFs 
January 11, 2012
Tax Issues and ETFs

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.

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Filed under: ETFS taxes 
January 10, 2012
ETFidelity

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.

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December 13, 2011
ETF Tools for ETF Tools

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.

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Filed under: ETFs