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New ETFs This Week

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.

ICI Fund Flow Update

Recently the Investment Company Institute (www.ici.org) released May statistics on fund flows for mutual funds and exchange traded funds. Here’s what we gleaned from the May and prior months’ numbers:

Assets held in mutual funds and ETFs have risen dramatically since the end of February, owing to a combination of appreciation in market value and net capital inflows (net share creations).

In May both ETFs and mutual funds extended their asset growth at rates similar to March and April. For the three month period, ETF assets grew by 29% vs. 22% for non-money market mutual funds.

Interestingly, roughly 20% of ETF asset growth during the period was due to net capital inflows into ETFs, whereas only about 7% was due to net new share creations in mutual funds.

Also worth noting, 95% of March/April/May net mutual fund share creations were in the form of bond funds. 46% of ETF share creations were of the bond variety.

Assets, Share Creations	Mutual Funds					ETFs
(billions of dollars)
				Month			Month
			Non-	on			on
		Money	Money	Month			Month
	All	Market	Market	Chg		All	Chg
Feb	9,038	3,890	5,148			450
Mar	9,249	3,816	5,433	5.5%		482	7.2%
Apr	9,700	3,792	5,909	8.8%		530	9.9%
May	10,074	3,767	6,307	6.7%		582	9.9%
Change, 2/28 – 5/31	1,036	(123)	1,159			132
	11.5%	-3.2%	22.5%			29.4%

Investing in China with ETFs

From 2003 through 2008, China’s annual GDP growth rate ranged from 9.1% to 12.1%, hitting $4.3 trillion in 2008. By 2020, the size of the Chinese economy is expected to be the second largest in the world behind the US.

China’s economy has created a significant middle class and, as a result, a consumer economy is emerging.  In addition, the manufacturing and service industries in China are undergoing significant development, transformation and growth.

Prior to 2004, the only way to gain exposure to China through ETFs was via a broad emerging markets fund.  iShares then brought the first China-specific ETF to market with its FTSE/Xinjua China 25 Index Fund ETF. The ETF now holds nearly $6 billion in assets and leads a pack of six relatively broad ETFs covering China. In addition, there is a single ETF covering small-capitalization Chinese companies, another covering real estate and two covering China’s currency.

While the selection of vehicles for investing in China has expanded significantly over the past five years, look for continued innovation as the ETF industry develops, as the Chinese economy grows, and as investment access in China improves.

Below is a list of ETFs commonly used to access the Chinese market today:

Exposure		Sponsor		Fund			Ticker
China only		ishares		FTSE/Xinhua China 25			FXI
China only		SSgA		SPDRS S&P China			GXC
China only		PowerShares		Golden Dragon USX China			PGJ
China only		Claymore		China Small Cap Index ETF			HAO
BRIC		Claymore		BRIC ETF			EEB
BRIC		ishares		MSCI BRIC			BIK
Chindia		ishares		FTSE Chindia			FCHI
Chindia		First Trust		ISE Chindia			FNI
Real Estate		Claymore		China Real Estate			TAO
Currency		WisdomTree		Yuan Fund			CNY

Replace Your Tech Stock Fund

When most people think of ETFs, they usually think of broadly diversified index ETFs.  That’s what we generally use at The ETF Store.  Most investors will do well by using those ETFs to build a well diversified portfolio that includes investments in a wide range of asset classes.

I recognize that isn’t good enough for a lot of people.  They want to buy that hot tech stock they see on Cramer every night.  Or they think Apple’s new product is so hot they need to get in before everyone else in the world figures out what Steve Jobs is going to come out with.  If it’s not a hot stock, it’s the hottest tech stock fund highlighted in Money Magazine.

ETFs can now offer an elegant solution to the tech stock jockey who has to have his Google, Apple and Microsoft.  The iShares Dow Jones U.S. Technology Sector Index Fund (ticker IYW) is an ETF from iShares that is focused on the U.S. Tech sector.  It has a heavy dose of the biggest tech stocks (Microsoft was over 11% of fund assets at 3/31/09, Apple 7%, and Google 6%) with all the benefits of mutual fund-type diversification.    What makes it even better is you get the added benefit of transparency, low costs and possible tax savings offered by ETFs.

So if you need to watch Cramer or read Money Magazine, enjoy.  If you have to have tech stocks in your portfolio, though, look to ETFs.

Pimco’s Arrival: What it Really Means

Pimco’s first index-based ETF, the Pimco 1-3 Year Treasury Index Fund (TUZ), started trading last week. The ETF is based on the Merrill Lynch 1-3 Year U.S. Treasury Index.

Ever since Pimco made known last summer its intention to enter the ETF space many in the media have proclaimed Pimco’s entry a watershed event.

So, is Pimco’s entrance that big of a deal? In some respects, yes, in others, no.

What about the product innovation front? Not really – at least not with their first ETFs to market. Pimco is headed into well-covered areas overall. The only truly enhanced coverage among the seven new funds is in the short maturity TIPS and long maturity TIPS offerings – providing improved yield-curve granularity in the TIPS arena.

Here are the first seven Pimco ETFs and corresponding competing ETFs already in operation: 

Pimco 1-3 Year Treasury Index Fund (TUZ)

Been there, done that …

iShares Barclays 1-3 Year Treasury ETF (SHY)

Pimco 3-7 Year Treasury Index Fund

Been there, done that …

iShares Barclays 3-7 Year Treasury ETF (IEI)

Pimco 7-15 Year Treasury Index Fund

Close enough … Been there, done that …

iShares Barclays 7-10 Year Treasury ETF (IEF)

iShares Barclays 10-20 Year Treasury ETF (TLH)

SSgA SPDR Barclays Capital Intermediate Term Treasury ETF (ITI)

Pimco 15+ Year Treasury Index Fund

Close enough … Been there, done that …

iShares Barclays 10-20 Year Treasury ETF (TLH)

iShares Barclays 20+ Year Treasury ETF (TLT)

SSgA SPDR Barclays Capital Long Term Treasury ETF (TLO) 

Pimco Broad TIPS Index Fund

Been there, done that …

iShares Barclays TIPS Bond Fund (TIP)

SSgA SPDR Barclays Capital TIPS ETF (IPE) 

Pimco Short Maturity TIPS Index Fund

Alas, an improvement – greater yield curve granularity for TIPS

Pimco Long Maturity TIPS Index Fund

An extension of the preceding

Here’s where the first Pimco ETF is likely to matter:

Symbolically & level of public awareness

The first index ETF offering by a true behemoth of the active mutual fund space – i.e., the star/sizzle factor. Similar to the excitement and anticipation generated by a gifted, top athlete in one field declaring that he or she will pursue a second sport at the professional level. Bo Jackson’s gig worked and was impressive – for a while, at least, and Deion Sanders fared reasonably well. Michael Jordan’s effort in a differently-configured arena, however, was never productive. Will real impacts demonstrated in the first sport be similar in the second? Always an exciting question.

Getting Michael Jordan or Bo Jackson engaged in a second professional sport certainly didn’t hurt the level of public attention on the games in which they participated. Likewise, Pimco’s presence in ETFland will raise the profile of ETFs among rank-and-file traditional mutual fund investors. This alone may prove to be as important to the industry’s growth as any product innovation that Pimco might bring to the table.

 Fees

At 0.09% – at least for the first two years – fees on Pimco’s first index ETF would be 0.06% lower than the primary competing ETF, SHY. The industry may see a continuation of pricing pressure that an aggressive Vanguard brought to the table on a handful of largely duplicative ETFs if Pimco is to take only well-traveled, well-covered roads as it is with its first ETFs.

Here’s where at least the first Pimco ETF is not likely to matter:

Expansion of the ETF menu for investors

Adding yet another short-term treasury ETF does zippo to meaningfully expand security coverage for the industry and its investors.

Competition for Pimco’s traditional, actively managed mutual funds

Not surprisingly, the first ETF – and those slated to follow – are about as far removed as can be in fixed-income land from the patches covered by Pimco’s actively-managed mutual funds.

Whether Pimco will ultimately play a significant role in the shaping of innovation the ETF landscape will, in part, turn on the question of whether Pimco will limit itself to only creating ETFs that present no competitive threat to its suite of traditional, actively-managed mutual funds. If in ETFs it covers only those areas where it currently doesn’t tread on the active mutual fund side then Pimco will be wading outside of areas for which it’s recognized within the bond arena and, potentially, issuing a string of rather duplicative offerings relative to the industry’s existing lineup. Let’s hope that this isn’t how the story plays out. Still, though, intense fee competition and significantly enhanced public awareness of ETFs are rather bankable outcomes of their arrival.