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3 ETFs Impacted By Financial Legislation

After weeks of deliberation, the U.S. Congress passed the final version of legislation for the first major overhaul of the nation’s financial system since the Great Depression, imposing more restrictions on Wall Street and banks and impacting several stocks and exchange traded funds (ETFs) which track the sector.

This final version will give the government new powers to break up companies that threaten the economy, create a new agency to protect consumers in their financial transactions and shine a light into shadow financial markets that escaped the oversight of regulators.  More specifically, the law will restrict banks from prop trading by limiting the amount an institution can invest in a hedge fund or private-equity fund to a maximum 3% of the bank’s capital. Companies most likely to be influenced by this regulation include big players like JP Morgan Chase (JPM), Goldman Sachs (GS), Bank of America (BAC), Wells Fargo (WFC) and Morgan Stanley (MS).

Another facet of a tighter leash on large financial companies comes from the comprehensive regulation in the over-the-counter (OTC) markets.  With the new law, routine derivatives will have to be traded on exchanges or other electronic systems and routed through clearinghouses, which increases transaction costs.  Additionally, banks who participate in derivatives trading are going to be required to turn their derivatives trading operations into affiliates.

A third artery of the new law includes an increase in the deposit-insurance fee paid by banks to the Federal Deposit Insurance Corporation (FDIC), eating away at cash that can be used to generate revenue.  In addition to this increase, the new law requires banks that package loans to keep 5% of the credit risk on their balance sheet and allow regulators to exempt certain “low-risk” mortgages from this requirement.

Lastly, the new law revamps the credit-rating industry which allows investors to sue credit-rating firms for “knowing or reckless” failure and gives the Securities and Exchange Commission (SEC) the power to deregister a firm that gives too many bad ratings over time.

In a nutshell, the new law is expected to expand consumer protection and clamp down on lending practices and may be beneficial to the average consumer, however, it is likely to have a negative impact on revenue generation and the overall bottom line of the large financial institutions.

Some ETFs that are likely to be influenced by the new law include:
• Financial Select Sector SPDR (XLF), which boasts JP Morgan Chase , Bank of America and Wells Fargo as its top holdings.
• iShares Dow Jones US Financial Services (IYG), which includes Goldman Sachs and Citigroup in its top holdings.
• Vanguard Financials ETF (VFH), which gives ample exposure to the aforementioned firms as well as includes The Travelers Companies (TRV) and Aflac (AFL), which are expected to be impacted by the newly constructed Federal Insurance Office to monitor the insurance industry and give it two cents on ways to modernize insurance regulation.

The Benefits of ETFs

With the plethora of investment tools at one’s hands and the concept of indexing flooding newswires, exchange traded funds (ETFs) and their counterparts are extremely attractive and for good reason.

An alert investment advisor has probably heard of ETFs, but may not really know what they offer. In a nutshell, ETFs offer the ability to be traded intraday on an exchange, unlike traditional mutual funds which can only be bought and sold at the end of a trading day. ETFs give investors the ability to access hard to reach markets, like commodities, currencies and emerging markets, while being able to be sold short or utilized as a hedging tool. They are open-ended structures, which provides liquidity.

Additionally, the vast majority of ETFs are passively managed and track an index as opposed to being actively managed, which generally drives up costs. When it comes to taxes, ETFs are typically much friendlier than mutual funds due to their in-kind redemption and creation process, which prevents the triggering of capital gains.  They also rarely change their holdings, meaning they rarely have distributions.

Lastly, ETFs offer a characteristic that should be of utmost importance, transparency. One knows exactly what and how many shares of stocks, bonds, futures contracts or swaps an ETF holds on a daily basis. As for mutual funds, they are only required to disclose holdings on a quarterly basis.

Granted, ETFs carry expense ratios, but they still tend to be lower than the front-end or back-end loads, 12b-1 fees, management fees and other expenses associated with mutual funds. An investor knows exactly how much an ETF will cost without any hidden fees. To add icing to the cake, most ETFs actually move in tandem with their indexes, whereas the majority of actively managed mutual funds fail to match the performance of their respective benchmarks.

ETFs are a growing market and are here to stay. At the end of the May 2010, ETFs and ETNs (exchange traded notes) boasted nearly $798 billion in assets with 995 different listed products.

Claymore Brings Back Shipping ETF

As global economies start to show signs of life and growth, ETF provider, Claymore Securities recently announced the re-launch of the Claymore Shipping ETF (SEA), giving investors an opportunity to play a potential increase in global trade and a growing maritime shipping industry. If you have a shipping company, check out https://www.conexwest.com/.

SEA seeks to replicate the performance of the Delta Global Shipping Index which includes companies that derive at least 80% of their revenues from operating or leasing ships or from the transportation of goods. Another prerequisite of the companies that are included in the Delta Global Shipping Index is that they have at least $250 million in market capitalization and a 30-day average daily trading volume of at least $2 million.

As for SEA, the ETF will carry an expense ratio of 0.65% and allocates nearly 68.9% of its sector weightings to industrials and the remaining 31.1% to energy.

Additionally, it boasts Seaspan Corp (SSW), Teekay Shipping Corp (TK), General Maritime Corp (GMR) and Teekay Tankers (TNK) as its top holdings. Lastly, SEA allocates its assets with the following geographical weightings: Greece (18.55%), United States (12.31%), Bermuda (10.29%), Japan (10.24%), Hong Kong (10.01%) and China (8.43%).

During the global recession, many ships were sidelined in an effort to reduce idle capacity, however, things are slowly starting to change. This change can be illustrated by the recent performance of the Baltic Dry Shipping Index, which measures shipping costs for commodities, and generally increases as the number of shipments increases. The Index is up nearly 28% over the past four months.

In a nutshell, as long as economies around the world continue to grow and the demand for transporting goods increases, the global maritime shipping industry will likely reap the benefits.

The ETF Store names Telford Chief Investment Officer

The ETF Store, Inc. announced today that Thomas Telford has joined the firm as its chief investment officer, effective immediately.

Tom was previously a portfolio manager with American Century Investments for twelve years.  He served as manager and co-manager on a number of equity mutual funds during his time there, including the New Opportunities and Technology Funds.  Most recently Tom was the lead manager of the firm’s flagship Ultra Fund, for which he managed approximately $10 billion in assets.

Joe Massman, Founder of The ETF Store, commented on the hiring, “Tom is an outstanding and seasoned asset manager.”  Massman continued, “Tom joining the firm is a validation of our strategy and reflects the changes occurring within the investment advisory business.  Exchange traded funds have been called the next generation mutual fund and they have benefited investors tremendously.  Now, with Tom’s experience having directly managed tens of billions of dollars, we can fully leverage the power of ETFs for our clients.”

Telford added, “I’m excited to join an innovative investment advisory firm like The ETF Store.  Exchange traded funds have changed the way investors invest, and with The ETF Store I’ll have the opportunity to bring sophisticated investment strategies to retail investors.”

Separately, Telford and The ETF Store announced the formation of Impetus Capital Management, an asset management firm that will provide ETF asset management solutions to institutional, high net-worth and third party investment advisors.

The ETF Store to Present at KCEE Event

The Kansas Council on Economic Education is sponsoring a two-day conference titled “Investing Tools for the Classroom” on Wednesday, June 2^nd and Thursday, June 3^rd.  Kansas Teachers in grades 4-12 are encouraged to attend this virtual conference being held at five of the Kansas Regents Universities:  ESU, FHSU, KSU, PSU & WSU.  Free resources and training will be provided for integrating “Investor Education” into the classroom.  The conference is designed to give teachers a strong comfort level with investing topics and will be especially helpful to current Stock Market Game Advisors, personal finance, economics, business, math and FACS teachers.

As part of this event, The ETF Store’s V.P. of Finance, Nathan Geraci, will be presenting a session titled “Introduction to Exchange Traded Funds” which will provide an overview on what exchange traded funds (ETFs) are, their history, the advantages they can have compared to mutual funds, and the benefits of using ETFs in investment portfolios.

For teachers interested in attending this event, you can register online here.  There is no cost for teachers to attend this conference and continental breakfast and lunch will be provided both days.