Americas ETP News
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Morgan Stanley Report-ETF Tracking Error: Continued Improvement in 2011
March 6, 2012--Tracking error declined across most market segments and
virtually all providers for US-listed ETFs in 2011 and averaged 52
bps. We define tracking error in this report as the difference in
total return between an ETF's net asset value (NAV) and its underlying index.
In our view, the most common sources of
tracking error include fees and expenses, portfolio optimization, fair
value pricing of net asset value (NAV), and index changes.
Additionally, compliance with IRS/SEC diversification requirements has historically led to extreme tracking error for select ETFs as they may be forced into material weighting and holding deviations from their stated benchmarks.
ETF tracking error exhibited continued improvement from 2009 highs. Over the past two years, average tracking error has fallen 73 bps, including a decline of 22 bps year-on-year. The range of tracking error has also declined substantially over the past two years from 1,709 bps in 2009 to 695 bps in 2011 (excluding one fund, which we explain later, the range would have fallen to 356 bps). Further, year-on-year, 74% of ETFs exhibited lower tracking error with an average decline of 39 bps. Last, the magnitude of tracking error has improved materially since 2009. In 2011, 37% of ETFs included in our study exhibited 25 bps or less of tracking error. Notably, this compares with 26% of funds in 2010 and just 23% of funds in 2009. Conversely, only 11% of ETFs exhibited tracking error greater than or equal to 100 bps in 2011, which compares favorably to the 22% in 2010 and 37% in 2009.
Despite the rise in the number and complexity of products, ETF providers have managed to lower tracking error. Process improvements, better optimization techniques, smarter indexing, scale, increased access to global capital markets, and a greater focus on tracking error by providers have contributed to the improved results, in our view. Importantly, the results of our 2009 tracking error study were skewed by rising markets and outperformance of smaller constituents within indices driving increased tracking error. In our view, this magnifies the improvement in tracking error over the past two years.
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Source: Morgan Stanley
CME Group, BM&FBOVESPA, and S&P Indices Announce Agreement for Cross-Listing of Global Benchmark Equity Index, Commodity and Energy Futures
IBOVESPA Futures to be Listed on CME Globex Trading Platform; S&P 500 Index, Light Sweet Crude Oil (WTI) and Mini-sized Soybean Futures on BVMF PUMA Trading System
March 6, 2012--CME Group, the world's leading and most diverse derivatives marketplace, and BM&FBOVESPA (BVMF), the largest equity and futures exchange in Latin America, today announced a cross-listing and cross-licensing agreement involving S&P 500 Index and Bovespa Index (IBOVESPA) futures.
BVMF will also license CME Group's Chicago Board of Trade (CBOT) Mini-sized Soybean and NYMEX Light Sweet Crude Oil (WTI) futures settlement prices. The agreement also provides the companies the opportunity to license additional products in the future.
Under the cross-listing arrangements, the IBOVESPA, the main indicator of the Brazilian stock market's average performance, will be listed on Chicago Mercantile Exchange (CME) and cleared through CME Clearing as U.S. dollar denominated Ibovespa futures. BVMF will launch U.S. dollar denominated S&P 500 Index futures to be settled in Brazilian real, the CBOT listed Mini-sized Soybean futures and the NYMEX listed Light Sweet Crude Oil (WTI) futures. The S&P 500 is being made available to BVMF via sublicense from CME Group and S&P Indices, one of the world's leading index providers, under CME Group's exclusive global license.
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Source: CME Group
White paper release: 2012 Study of Indexing in DC Plans
March 6, 2012--Summary
Despite the popularity of index funds and their accompanying perception of being low cost, small plans are paying quite a premium for this investment type. This study supports the use of index investments in defined contribution plans, but finds that nearly 88% of such plans in the United States are overpaying by using Mutual Funds instead of Exchange Traded Funds (ETFs).
Given the substantial number of plans which fall into this category (88% of plans have less than $200 million in assets), the increasing popularity of index investing and new fiduciary regulations that require companies to ensure the reasonableness of investment expenses; the practical decision to replace index mutual funds with ETFs will likely serve as the “breakout” point for ETFs in retirement plans.
This study will show that for plans with less than $200 million in assets, ETFs should be used for index investing rather than mutual funds.
view white paper-2012-Study of Indexing in DC plans
Source: Invest n Retire
Launches of ETPs hit record in US
March 6, 2012--A record number of exchange-traded products (ETPs) were launched in the US in January and February, as the battle among asset management companies for market share in the fast-growing sector intensifies.
A total of 71 different ETPs, which track the performance of a basket of underlying assets, were launched in the first two months of 2012, compared to 302 in the whole of 2011, according to ETF Global Insight, a data provider. That took the number of US ETPs to 1,432 at the end of February, up from around 700 five years ago.
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Source: FT.com
ETFs After Pimco Total Return
March 5, 2012--Like bills introduced in congressional subcommittees, exchange-traded fund filings can often be more position papers than action items. Witness the several hundred prospective ETFs and handful of issuers just sitting in registration.
But last week, amid the Pimco Total Return ETF hype, New York-based asset manager Van Eck Global took a noteworthy position, espoused by only one other ETF issuer.
In a filing under the Investment Company Act of 1940, Van Eck proposed launching ETF share classes of existing and future mutual funds. The filing also requests the ability to convert traditional mutual fund shares to exchange-traded shares.
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Source: Forbes
How Do Exchange Rate Regimes Affect Firms' Incentives to Hedge Currency Risk? Micro Evidence for Latin America-IMF Working paper
March 5, 2012--Summary: Using a unique dataset with information on the currency composition of firms' assets and liabilities in six Latin-American countries, I investigate how the choice of exchange rate regime affects firms' foreign currency borrowing decisions and the associated currency mismatches in their balance sheets.
I find that after countries switch from pegged to floating exchange rate regimes, firms reduce their levels of foreign currency exposures, in two ways. First, they reduce the share of debt contracted in foreign currency. Second, firms match more systematically their foreign currency liabilities with assets denominated in foreign currency and export revenues--effectively reducing their vulnerability to exchange rate shocks. More broadly, the study provides novel evidence on the impact of exchange rate regimes on the level of un-hedged foreign currency debt in the corporate sector and thus on aggregate financial stability.
SEC's Gallagher sounds alarm on Volcker rule
March 5, 2012--A securities regulator said policymakers may need to overhaul the Volcker rule proposal that curbs banks' proprietary trading, saying a hasty approach could cause market disruptions and harm U.S. competitiveness.
Dan Gallagher, a Republican commissioner at the U.S. Securities and Exchange Commission, said on Monday that a quick review of the thousands of comment letters revealed widespread fears about the rule's potential impact.
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Source: Reuters
Sommers Is 'Deeply Concerned' Over Lack of CFTC, SEC Coordination on Swaps
March 5, 2012--The inability of U.S. regulators to agree on guidelines for the international reach of the Dodd- Frank Act may disrupt the $708 trillion global swaps market, said Jill E. Sommers, a Republican member of the Commodity Futures Trading Commission.
“I’m deeply concerned that there has not been adequate coordination” with the U.S. Securities and Exchange Commission and non-U.S. regulators, she said today in a speech at an Institute of International Bankers conference in Washington. “Of even greater concern to me is that the commission appears to be considering a piecemeal approach,” she said of the CFTC.
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Source: Bloomberg
2012 ISDA U.S. Municipal Reference Entity Protocol
March 5, 2012--The 2012 ISDA U.S. Municipal Reference Entity Supplement to the 2003 ISDA Credit Derivatives Definitions (the "2012 Muni Supplement") brings the terms of U.S Municipal CDS ("Muni CDS") contracts in line with the terms applicable to standard corporate and sovereign CDS contracts.
The key changes to current Muni CDS terms are the use of auction settlement following a credit event and reliance on the ISDA Credit Derivatives Determinations Committee for the Americas (the "DC") to make binding determinations for issues such as whether a Credit Event has occurred; whether an auction will be held; and whether a particular obligation is deliverable.
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Source: ISDA
ETF Industry Association Releases February 2012 ETF Data Reports
March 5, 2012--Highlights from the February 2012 ETF Data report include:
Assets in US listed Exchange Traded Funds (ETF) and Exchange Traded Notes (ETN) totaled approximately $1.2 trillion at February 2012 month-end, an increase of almost 14% over February 2011 month-end, when assets totaled $1.06 trillion.
ETFs/ETNs net cash inflows reached approximately $13.9 billion for the month of February 2012, with year-to-date net cash inflows reaching $42.7 billion, a record for the first 2 months of a calendar year.
At February 2012 month-end, there were 1,440 U.S. listed products, an increase of 27% compared to 1135 U.S. listed products at the same time last year.
Visit www.etf-ia.com for more info.
Source: ETF Industry Association
