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More Advisors Moving to ETFs

Nate Geraci July 24, 2009

It appears that other advisors are starting to catch on to what The ETF Store has known for awhile – ETFs offer investors greater transparency and cheaper options than many mutual funds. According to an article published in the Wall Street Journal today, a survey conducted by Cogent Research found that advisors expect to reduce their clients’ holdings in mutual funds over the next few years while increasing their use of ETFs. Greater transparency and lower costs were cited as the primary drivers.

Cogent’s survey shows a continuation of a trend that has seen advisors reduce mutual fund holdings in client accounts from 35% in 2007, down to 30% currently, and an estimated 27% in 2011. Compare this to advisors’ use of ETFs which has grown from 5% in 2007, to 8% currently, and an estimated 14% by 2011. This is clear evidence that advisors are recognizing the benefits of including ETFs in client portfolios and reducing mutual fund holdings to take advantage of ETFs. As Christy White, a principal director at Cogent, points out, the survey results highlight an “industrywide problem” for mutual fund companies – one that’s not going to go away.

State Street and The Wharton School of Business

Nate Geraci July 20, 2009

According to a survey of 840 investment professionals, 67 percent identified ETFs as the most innovative investment vehicle of the last two decades

Quick Snapshot: June ETF/ETN Data

Nate Geraci July 16, 2009

National Stock Exchange, Inc. recently released Exchange-Traded Fund (ETF) and Exchange-Traded Note (ETN) data for June. Some highlights:

Total ETF/ETN assets at the end of June were approximately $603.5 billion.
The total number of ETF/ETN products increased to 837 from 804 a year ago.
Net cash inflows to ETFs/ETNs in June totaled approximately $12.4 billion.
Year-to-date net cash inflows were approximately $41.9 billion, an increase of nearly 102% over the same time period in 2008.
ETF/ETN notional trading volume totaled approximately $1.5 trillion in June, 32% of all U.S. equity trading volume.

As the data shows, ETFs and ETNs continue to log impressive gains in investor assets. With their low cost structure, flexibility, transparency, tax efficiency, and wide asset class coverage, it’s clear that ETFs and ETNs are quickly becoming the preferred investment vehicle for all types of investors.

Are You Invested Too Much In The US Market?

Nate Geraci July 6, 2009

Most individual investors have the overwhelming majority of their equity investments in the US stock market. Investment professionals have historically encouraged this allocation under the slogan of ‘efficient frontier’, that a domestic overweight portfolio will reduce their risk and improve their returns over time.

The problem with that approach is that it ignores both recent and future economic trends. In fact, the case can be made that you are in fact reducing your potential returns and increasing your risk with a domestic heavy portfolio.

The chart below shows the market capitalizations of the US and non-US stock markets over the past ten years. As you can see, the value of the US stock market as a percentage of total world stock market valuation has been steadily decreasing. Had you been overweight international markets past ten years you would have been better off.

Some of that trend has no doubt been due to a decline in the value of our currency, but the majority of the change is do to the shifting sources of economic growth in the world.

A fair question might be, “that was the past ten years; how do you know the same trends will continue in the future?” I can’t answer that question with certainty, but with our economy in a mini-great depression, our budget deficits and debt growing by the trillions, and emerging markets continuing their torrid economic growth, it seems apparent to me a turnaround in that trend is unlikely anytime soon.

Protect yourself and be smart. Take another look at your allocation to international markets, and especially emerging ones.

New ETFs This Week

Nate Geraci July 3, 2009

This past week saw a highly diverse group of new ETFs launch, a continuation of the rapid development in the space as investors demand access to previously unattainable asset classes, countries, niche markets, or investment strategies. Investors have taken notice of the powerful ability of ETFs to gain exposure to new areas and ETF providers are responding in an attempt to quell investors’ insatiable appetite. This week’s offerings display innovation in the industry:

June 30^th: MacroShares’ Housing ETFs, the first ETFs tracking US housing, began trading on the NYSE Arca. As discussed in a previous blog, the bullish MacroShares Major Metro Housing Up (UMM) ETF seeks to deliver three times the cumulative percentage change in the S&P/Case-Shiller Composite-10 Home Price Index while the bearish MacroShares Major Metro Housing Down (DMM) attempts to deliver three times the inverse cumulative percentage change in the index.
July 1^st: Javelin launched the Dow Jones Islamic Market International Index Fund (JVS) which seeks to mimic the performance of the Dow Jones Islamic Market Titans 100 Index. This index is comprised of 100 companies from outside the US that abide by Islamic law and finance rules which include avoiding companies involved with alcohol, gaming, pork products, highly leveraged companies, etc.
July 2^nd: ProShares launched the first ETF providing short and leveraged exposure to the Russell 3000 Index, which tracks the 3,000 largest companies in the U.S. The ProShares Ultra Russell 3000 ETF (UWC) aims to return 200% of the daily performance of the Russell 3000 Index. The ProShares UltraShort Russell 3000 ETF (TWQ) attempts to return 200% of the inverse daily performance of the Russell 3000 Index.

In addition, on July 2^nd, iShares reached an agreement with Peru’s pension funds allowing for the creation of the first Peruvian ETF in the US, the iShares MSCI All Peru Capped Index Fund. The Peruvian pension funds will essentially exchange shares of local companies in exchange for shares of the ETF. Because of the lack of liquidity in the Peruvian market, this arrangement allows Barclays to access shares of companies that would otherwise be extremely difficult to acquire. Peru’s Lima General Index is up 86% so far this year.