ETF Prime Archive

Index IQ’s Newest International ETFs

As international markets continue to draw attention from investors, analysts and advisors, exchange traded fund (ETF) provider, Index IQ, recently launched two new ETFs, one tracking small-cap companies in Canada and another tracking small-cap companies in Australia.

Canada has drawn much attention due to its surplus in energy resources.  In fact, according to the U.S. Energy Information Administration, Canada has considerable natural resources and is one of the world’s largest producers and exporters of energy.  Additionally, over the past 30 years, Canada’s total energy production has increased by nearly 87 percent while its total consumption has only grown by 44 percent, leaving a sizeable surplus.

To put it into perspective, Canada has the second-largest proven crude reserves globally, it’s the second-largest exporter of natural gas globally and the fourth-largest exporter of crude oil globally.  It has nearly 180 billion barrels of crude oil, second only to Saudi Arabia.  As the global economy recovers from the financial windstorm and grows, energy will be in demand and Canada will likely be attractive.  For this reason, Index IQ launched the IQ Canada Small Cap ETF (CNDA).

CNDA offers exposure to small-cap Canadian stocks through its 100 different holdings which are comprised of energy companies (18.8%), financials (6.5%) and industrials (5.7%).  The ETF carries an expense ratio of 0.69% and seeks to replicate the performance of the IQ Canada Small Cap Index.

Australia continues to remain attractive for some of the same reasons as Canada does,  mainly its resource and commodity supply.  The continent is home to diversified natural resources giant and mining company, BHP Billiton (BHP) and metals mining giant Rio Tinto (RTP).  As a result, Australia is the world’s fourth largest producer of gold, a commodity that continues to keep its luster.  Australia is also the fourth largest producer of coal, the largest component in electricity generation, something that will likely witness increased demand as emerging markets continue to prosper.  To further bolster Australia’s appeal, the nation has heavy ties with China as it is one of the world’s largest exporters to the nation.

The IQ Australia Small Cap ETF (KROO), which carries an expense ratio of 0.69%, enables investors to reap the benefits of the Australian small-cap market.  The ETF is primarily focused on the materials sector which constitutes 26.9% of its assets, followed by consumer discretionary at 24.6% and industrials at 10.7%.

Hidden Costs of Mutual Funds

A recent Wall Street Journal article highlighted a well kept secret of mutual funds:  investors may be paying more for their mutual funds than they realize.  Most investors are familiar with the “expense ratio” charged by funds.  These fees typically cover the cost of the portfolio manager and other expenses involved with operating the fund.  According to Morningstar, the average expense ratio of U.S. stock mutual funds is 1.31% of total assets.  For comparison, the average expense ratio on similar ETFs is 0.29%.  However, what many investors don’t realize is that this expense ratio doesn’t include charges related to buying and selling securities for the fund – charges that are typically hard for investors to quantify due to either poor or non-existent disclosure by funds.

So what exactly are these additional charges and how much can they cost investors?  The article highlights four main components of these charges:  brokerage commissions, bid-ask spreads, market impact costs, and opportunity costs.  Brokerage commissions are simply the charges a fund incurs to buy and sell securities.  The bid-ask spread is essentially the difference between the highest price that a buyer is willing to pay for a security and the lowest price for which a seller is willing to sell that security.  This spread can impact returns since a fund continually buys securities at the higher price and sells at the lower price.  Market impact costs result from funds causing a change in the price of a security before their trade has been completed due to the size of the trade and the liquidity, or lack thereof, of the security.  Opportunity costs arise when fund managers can’t purchase or sell a security at a desired price because of this market impact.  A study conducted last year puts these total costs at an average of 1.44% of total assets.  This is in addition to the 1.31% average expense ratio.

While ETFs also have exposure to these transaction costs as securities are bought and sold to track a targeted index, these passively managed products typically have a fraction of the turnover of actively managed funds.  With a number of mutual funds averaging more than 100% turnover, these hidden costs can soar and erode investor returns.  And when investors factor in research indicating that the majority of active mutual fund managers underperform their benchmark index, they’ll have to ask themselves if they’re getting what they pay for.

The ETF Store to Present at Money Smart Day at the Fed

The 3rd annual ‘Money Smart Week of Greater Kansas City’ campaign kicks off on Saturday, April 24^th and runs through Friday, April 30^th.  The campaign is a coordinated effort by local financial institutions, non-profit organizations, schools, libraries, and government agencies to advance financial education through public awareness and sponsorship of a week-long series of over 150 programs, workshops and activities.  The goal of the campaign is to increase the public’s knowledge of personal finance.  For a complete listing of events during the week, visit the campaign website here.

As part of this initiative, The ETF Store will be participating in Money Smart Day at the Fed on Thursday, April 29th, at the Federal Reserve Bank of Kansas City.  This one day event allows people to attend a variety of free sessions related to personal finance topics.  On the 29^th, The ETF Store’s V.P. of Finance, Nathan Geraci, will be conducting a session from 10am – 11am on saving and investing, including an overview of investments, how to analyze them, and how to choose an investment advisor.

To attend Money Smart Day, you can register online.  Free parking and light refreshments will be available for attendees.

Playing Egypt With ETFs

As investors continue to turn to international markets for diversification, a hedge against the dollar and amplified rates of return, ETF provider, Van Eck Global has taken it a step further by offering the first ever exchange traded fund which gives country specific exposure to Egypt.

The Market Vectors Egypt Index ETF (EGPT) gives investors exposure to small, mid and large cap Egyptian stocks.  It holds 28 different stocks of publicly traded companies that are both domiciled and primarily listed on an exchange in Egypt or that generate at least 50% of revenues in Egypt.  As for sector breakdown, 42.5% of its assets are allocated to financials, 18% to telecommunications, 15% to industrials and 14.8% to the materials sector.  EGPT carries an expense ratio of 0.94% and has roughly $2 million in assets under management.

Egypt is attractive because it is the third largest economy in Africa and is expected to witness growth greater than most developed nations in 2010.  Historically, Egypt has seen nice growth trends, boasting average annual GDP growth of 4.9% since 2000 and 6.3% for the last three years.  Additionally, the nation is attractive due to its supply of natural resources – more specifically, crude oil, natural gas and iron ore. 

Some other ways to gain exposure to Egypt include the Market Vectors Africa Index ETF (AFK), which allocates nearly 20% of its assets to Egypt and the SPDR S&P Emerging Middle East & Africa (GAF), which allocates slightly over 5% of its assets to the country.

Metals ETFs Expand Their Family

As emerging economies continue to grow and developed economies mend the wounds from a global financial crisis, the demand for metals has surged.  In fact, some metals are in such high demand that ETF provider First Trust has responded by launching the first equity-based platinum and copper exchange traded funds.

Demand for copper and platinum is especially high due to their industrial and manufacturing uses, their ability to enable investors to gain exposure to foreign markets and their ability to enable investors to hedge positions against the U.S. dollar.

Copper is heavily used in construction with its capability as an excellent conductor of electricity and because it corrodes slowly.  Additionally, copper is an important ingredient in many alloy metals and is typically included in finishings that involve brass, German silver and sterling silver.

As for platinum, it’s commonly used in automotive catalytic converters, which control emissions.  Additionally, platinum is used in the medical research industry and is often a sought after metal in fine jewelry. 

The outlook for both metals remains bright and can be played directly through these new ETFs which include:

• First Trust ISE Global Copper (CU) which tracks companies directly involved in various aspects of copper mining, refining or exploration.  CU carries an expense ratio of 0.70% and enables investors to gain access to Canada, the United Kingdom and Peru.
• First Trust ISE Global Platinum (PLTM) which holds companies who are linked to the platinum and palladium industries.  PLTM carries an expense ratio of 0.70% and provides exposure to South Africa, Canada and the United Kingdom.

In addition to these new ETFs, one can play these metals through the following exchange traded notes (ETNs):

• iPath DJ UBS Copper (JJC), which carries an expense ratio of 0.75%.
• iPath DJ UBS Platinum (PGM), which carries an expense ratio of 0.75%.
• UBS E-TRACS Long Platinum (PTM), which carries an expense ratio of 0.65%.

Keep in mind that ETNs are a little different than traditional ETFs, in that they are debt instruments and carry the risk that the issuer could potentially default.