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ETFs: Fixed Income: Defined Maturity Fixed Income ETFs - A "Maturing" Investment-Morgan Stanley
July 29, 2010--The introduction of fixed income ETFs with defined maturity dates is an important evolutionary development within the ETF
market. In an environment where many investors are concerned about rising rates, defined maturity
ETFs, which terminate and distribute their net asset
value at predetermined dates, offer a compelling alternative to traditional fixed income funds.
However, they also entail additional complexities.
Defined maturity ETFs seek to blend many of the favorable characteristics of traditional mutual funds
(diversification, professional management, daily liquidity, monthly income) with those of ETFs
(transparency, trading flexibility) and individual bonds
(specified maturity dates, known yield to maturities).
In January 2010, BlackRock’s iShares division introduced the first six defined maturity ETFs, which are focused on the municipal bond market. Each ETF holds a portfolio of bonds maturing between June 1 and August 31 of a referenced year and are designed to provide a yield to maturity consistent with a diversified portfolio of bonds maturing in that year. Bonds included in the ETFs’ reference indices are non-callable, investment grade, and AMT-free. Recently, Claymore Advisors issued seven definedmaturity investment grade corporate bond ETFs.
Defined maturity ETFs can be useful tools for implementing or plugging holes in existing bond ladders, matching maturities with anticipated major expenses, and can enable investors to target specific positions on the yield curve. While investors will have a fairly accurate gauge of the yield to maturity at the time of purchase, the major complexity of defined maturity ETFs is that distributions and final maturity values are likely to fluctuate in offsetting directions.
Introduction
Fixed income has been a primary driver of ETF asset growth over the past two years. By our estimates, fixed income ETFs have taken in roughly $85 billion in net new assets since the beginning of 2008, which is equivalent to roughly 26% of the total new assets raised in US-listed ETFs. During that time, 54 additional fixed income ETFs have been issued, bringing the current number to 100, and the fixed income share of the ETF market has increased from 5% to 16%. While many of the more recently issued fixed income ETFs have targeted new markets such as international corporate bonds, low duration, and convertible bonds, the defined maturity structure marks an important and significant evolution in the ETF industry.
U.S. Department of the Treasury Economic Statistics - Monthly Data Update
July 29, 2010--The U.S. Department of the Treasury Economic Statistics - Monthly Data has been updated.
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BNY Mellon Depositary Receipts 2010 Mid-Year Review is now available
July 29, 2010--Depositary Receipt Market Highlights
American and global depositary receipt (DR) trading volume increased 8.3% to 78.1 billion, a record high.
During the first six months of 2010, $1.84 trillion of DRs traded on U.S. and non-U.S. markets and exchanges, a record high and a 41.5% increase year-over-year.
The total value of U.S. investment in non-U.S. equities (both DRs and non-U.S. shares) increased 68% to about $4.2 trillion. At the same time, non-U.S. equities accounted for 19.8% of all equity investment in the U.S., an increase from 18.4% at the same time last year.
At the mid-year mark, companies from 19 countries had established 64 new sponsored DR programs, and 50 new unsponsored DR programs had been established for issuers from 15 countries. The number of available DR programs rose to 3,214 from 3,096 a year ago. Industry-wide, DR programs for issuers from 76 countries were available to investors.
The number of DR capital-raising transactions was significantly higher than the 13 at the mid-year mark last year. In the first half of 2010, issuers from nine countries completed 44 new primary and follow-on DR offerings, raising nearly $4.1 billion. India and China together accounted for 34 of the offerings and about half the total value raised.
During the first half of 2010, overall DR performance as evidenced by The BNY Mellon ADR Index was broadly lower. On June 30, 2010, the Composite ADR Index closed at 152.86, down 15.76% year-to-date, while still managing a 4.71% gain year-on-year.
RiverPark Advisors, LLC files with the SEC
July 29, 2010--RiverPark Advisors, LLC
has filed an amended application for exemptive relief with the SEC for actively managed ETFs.
view filing
Global X Funds, the New York-based provider of exchange traded funds, launched today the Global X Brazil Financials ETF (ticker: BRAF). This is the first ETF to offer targeted access to the rapidly growing Brazilian financial sector.
July 29, 2010-Global X Funds, the New York-based provider of exchange traded funds, launched today the Global X Brazil Financials ETF (ticker: BRAF). This is the first ETF to offer targeted access to the rapidly growing Brazilian financial sector.
The Global X Brazil Financials ETF tracks the Solactive Brazil Financials Index, which is designed to track the performance of the Brazilian financial sector. As of July 20, 2010, the largest index components were banks Itau Unibanco, Banco Bradesco and Banco do Brasil.
The financial sector in Brazil is large and benefits from a decade of restructuring. Brazilian loan portfolio values far exceed that of any other Latin American country, and are five-fold higher than second-ranking country Mexico, according to BNamericas data. Brazilian M&A deals reported by Dealogic in Q1 2010 were worth $37.8 billion and double the deal flow posted a year ago. Financial investment in Brazil is expected to grow by 22% annually through year 2020, according to Itau Unibanco.
"Brazil is establishing itself as the financial center of the region, thanks to strong macroeconomic trends over the past half decade of decreasing fiscal debt and unemployment, rising credit and industrial production," says Bruno del Ama, CEO of Global X Funds. "Such trends plus favorable projections give a solid platform for financial sector growth going forward. The Global X Brazil Financial ETF provides efficient access to these themes."
The Brazil Financials ETF (BRAF) is part of a family of Brazil ETFs, which includes the Global X Brazil Consumer ETF (BRAQ) and Brazil Mid Cap ETF (BRAZ) that were recently launched on July 8 and June 22, respectively. Other members of the fund family yet to launch include the Brazil Industrials, Materials, and Utilities ETFs.
Exchange Traded Funds See Strong Asset Inflows in First Half of 2010, According to State Street Global Advisors
July 29, 2010--Exchange traded fund (ETF) industry assets in the United States decreased 0.4 percent during the first half of 2010, as investors held $772 billion in 897 ETFs as of June 30, 2010, according to State Street Global Advisors (SSgA), the investment management business of State Street Corporation (NYSE: STT [FREE Stock Trend Analysis]). During the same period, equity markets, as measured by the widely followed S&P 500 Index fell, 8.9 percent.
“Despite the market’s performance during the first half of 2010, ETF net inflows are ahead of last year’s pace,” said Tom Anderson, director of strategy and research for the Intermediary Business Group at State Street Global Advisors. “This growth has been driven by financial professionals, individual investors and institutions, and underscores the way investors build and maintain portfolios in every market cycle using these innovative investment products.”
Three key trends helped shape the ETF industry during the first six months of 2010:
Continued Growth of Fixed Income ETF Assets
The growth of fixed income ETF assets, which increased 78 percent in 2009, remained a key trend during the first half of the year. Fixed-income ETF assets increased by $21.2 billion or 21 percent in the six months to June 30, 2010, as the number of bond ETFs available to investors reached 105. This growth illustrates the rapid evolution in the ETF industry in order to meet the needs of investors. In 2006, just six fixed income ETFs existed, representing approximately $20 billion in assets. In the first half of 2010, six of the 10 ETFs with the highest net cash flows were bond ETFs.
The growth in bond ETFs was broad based — every category, from corporate bonds to municipal bonds to Treasury Inflation Protected Securities (TIPs) and US Treasuries, saw positive cash flows year-to-date. The most popular fixed-income asset classes included short-term bond and US Treasury ETFs, which attracted more than $7 billion and $5 billion in net cash flows, respectively.
Gold ETF Assets Reach New High
Amid concerns about the European debt crisis and the pace of economic recovery in the US, investors continued their search for non-correlated returns, as assets in gold ETFs increased by 30.2 percent during the first half of the year. SPDR Gold Shares (GLD) currently leads all exchange traded funds in net cash flows, attracting more than $7.6 billion during the first half of the year, as GLD’s total assets surpassed $50 billion in the second quarter — a milestone that reflects both the increased acceptance and application of gold ETFs as a means of gaining exposure to this asset class.
“Flash Crash” Does Not Shake Investor Confidence in ETFs
With ETFs accounting for more than 60 percent of all cancelled trades during the market disruption that occurred between 2:40 p.m. and 3:00 p.m. on May 6, 2010, several third parties questioned their role in the market turmoil. Preliminary findings, which are consistent with internal reviews, indicate that the events of May 6 were the result of market structural issues, including the lack of published, uniform standards on erroneous trades, market circuit breakers and speed bumps, and were not caused or exacerbated by ETFs or ETF trading. Investor confidence in ETFs in the weeks that followed the “flash crash” remained strong, as net new inflows into ETFs totaled $20.2 billion in May and June.
Equal Sector ETF Marks Its 1st Anniversary by Beating the S&P 500
July 28, 2010--Equal Sector investing notched another victory earlier this month when the ALPS Equal Sector Weight Exchange Traded Fund (“ETF”) (NYSE: EQL) outperformed the S&P 500 Index in its first year of operations. EQL, which was launched on July 7, 2009, generated a total return of 17.06% vs. 16.74% for the S&P 500 for the year ended July 7, 2010.1
While the concept of equal-weight indexing is not altogether new, Equal Sector investing takes a slightly different approach. “Most equal-weight indexes are based at the stock level” states ALPS Director of Investment Research and Strategy, Jeremy Held.* “EQL is an important extension of the equal-weight concept in that it specifically addresses sector risk, which we consider to be a much more important and fundamental risk to client portfolios than individual stocks.”
“Over the last 30 years the largest annual declines in the S&P 500 have been precipitated by a crash in the market’s largest sector. In 1981 it was Energy. In 2000 it was Technology stocks. Most recently in 2008 it was the Financial sector. An Equal Sector strategy can minimize the negative impact of any one sector. At the same time by offering meaningful exposure to each sector of the market, it allows investors the ability to participate in market rallies regardless of where they occur.”
Global Equity Index & ETF Research -- US Weekly ETP Market Review
July 28, 2010-New Listings and Delistings
There were 3 new listings in the previous week, all of them listed on NYSE Arca. AdvisorShares launched an active ETF seeking long term capital appreciation with exposure to the international markets. Global X Management Co LLC listed the first ETF focusing on Lithium; the ETF will seek to achieve its objective by investing in companies involved in the Lithium industry. Last but not least, Van Eck Funds listed a fixed income ETF offering access to Emerging Market Sovereign Debt in local currency
Net Cashflows
Total ETP inflows in the US add up to $3.8 bn during the previous week. Equity and Fixed Income ETPs had inflows of $3.5 bn and $1.0 bn, respectively. Commodity and Currency ETPs, on the other hand, experienced outflows of $621 mm and $123 mm, respectively.
Within Equity ETPs, US Sector ETPs received the largest inflows ($1.3 bn) followed by Small Cap ETPs, while Leveraged ETPs saw the largest outflows ($326 mm).
The Fixed Income ETPs space saw strong inflows again this week, with Corporates ETPs ($606 mm) and Overall ETPs ($147 mm) leading the positive flows.
Commodity ETPs experienced outflows driven mainly by Gold ETPs ($466 mm).
Turnover
Avg. Daily Turnover remained at around the same level. Turnover for this week was $71 bn.
Assets Under Management (AUM)
US ETPs AUM rose by 3.2% to $818 bn at the end of the week. Equity ETPs account for 73% of the assets with $595 bn, followed by Fixed Income funds with $139 bn and 17% of market share.
CBOE's Brodsky Says Options Exchange Can Expand Without a Merger Partner
July 28, 2010--CBOE Holdings Inc., operator of the largest U.S. options exchange that went public last month, has no need for a merger partner, Chief Executive Officer William Brodsky said.
“We’re not in need of someone else’s money,” Brodsky said in a July 26 interview. “We’ve shown we can run ourselves as an independent company, be profitable and produce a lot of cash. Other exchanges were new at managing themselves as for-profit companies” when they made initial public offerings, he said. Chicago-based CBOE has been a for-profit exchange since 2006.
CBOE sold shares on June 14 at a price that was 53 percent more expensive than NYSE Euronext and Deutsche Boerse AG after exchange operators saw at least $61 billion of acquisitions since 2007, data compiled by Bloomberg show. Nymex Holdings Inc., CBOT Holdings Inc. and International Securities Exchange Holdings Inc., which went public in 2005 and 2006, were all bought within three years of their IPOs after government regulations boosted competition.
Horizons AlphaPro Launches Canada's First Actively Managed Balanced ETF
July 28, 2010-- AlphaPro Management Inc. ("AlphaPro"), the manager of the Horizons AlphaPro Exchange Traded Funds ("ETFs"), is pleased to announce the launch of the Horizons AlphaPro Balanced ETF (the "Balanced ETF"). The Balanced ETF will begin trading today on the Toronto Stock Exchange under the symbol HAA.
The sub-advisor to the Balanced ETF is Hillsdale Investment Management Inc. ("Hillsdale"), which has been managing private client and institutional money for more than 14 years using its innovative proprietary quantitative portfolio management process.
The investment objective of the AlphaPro Balanced ETF is to seek to provide a consistent rate of return balanced between current income and long-term capital growth. The Balanced ETF invests primarily in a balanced portfolio of publicly traded equity, income trust and debt securities located predominantly in Canada. In order to obtain direct or indirect exposure to these securities, the Balanced ETF may invest in exchange traded funds and exchange traded notes.
"Balanced mutual funds are easily one of the best selling mutual fund categories, because it's a simple default investment solution for retail investors. Investors who have embraced ETF investing have had few options in selecting a balanced mandate," said Ken McCord, President of AlphaPro. "The Horizons AlphaPro Balanced ETF is another step in the evolution of ETF investing; we're offering not only, in our view, one of the best actively-managed balanced mandates out there, but we're also offering it at one of the lowest management fees in the industry."
United States Commodity Funds files with the SEC
July 27, 2010--United States Commodity Funds has filed an amendment to Form S-1.
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The Beige Book
July 28, 2010--Summary
Economic activity has continued to increase, on balance, since the previous survey, although the Cleveland and Kansas City Districts reported that the level of economic activity generally held steady. Among those Districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two Districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently
Manufacturing activity continued to expand in most Districts, although several Districts reported that activity had slowed or leveled off during the reporting period. Districts also noted improved conditions in the services sector. The five Districts reporting on transportation noted increased activity. Tourism activity also increased across the Districts, although the Atlanta District noted concerns about decreased leisure travel to the Gulf Coast. Retail sales reports generally indicated a continued rise in spending, and several Districts noted that necessities continued to be strong sellers, while big-ticket items moved more slowly. However, most Districts that reported on auto sales noted declines in recent weeks. Activity in residential real estate markets was sluggish in most Districts after the expiration of the April 30 deadline for the homebuyer tax credit. Commercial real estate markets, especially construction, remained weak. Banking conditions varied across the Districts, with some Districts noting soft or decreased overall loan demand; credit standards remained tight in most reporting Districts. Recent rains had mixed effects on crop conditions, while activity in the natural resources sector increased. Overall labor market conditions improved modestly across the Districts, with several reports of temporary hiring. Consumer prices of goods and services held steady in most reporting Districts. Input prices also held largely steady, with only a few reports of cost increases. Wage pressures continued to be contained on the whole.
Manufacturing and Other Business Activity View Summary of Commentary on
Current Economic Conditions
by Federal Reserve District U.S. International Reserve Position July 23, 2010 A. Official reserve assets (in US millions unless
otherwise specified) 1 128,279 (1) Foreign currency reserves (in convertible foreign
currencies) Euro Yen Total (a) Securities 9,121 14,891 24,013 of which: issuer headquartered in reporting country but
located abroad 0 (b) total currency and deposits with: (i) other national central
banks, BIS and IMF 13,485 7,298 20,783 ii) banks headquartered in the reporting country 0 of which: located abroad 0 (iii) banks headquartered outside the reporting country 0 of which: located in the reporting country 0 (2) IMF reserve position 2 11,898 (3) SDRs 2 55,807 (4) gold (including gold deposits and, if appropriate,
gold swapped) 3 11,041 --volume in millions of fine troy ounces 261.499 (5) other reserve assets (specify) 4,736 --financial derivatives --loans to nonbank nonresidents --other (foreign currency assets invested through reverse
repurchase agreements) 4,736 B. Other foreign currency assets (specify) --securities not included in official reserve assets --deposits not included in official reserve assets --loans not included in official reserve assets --financial derivatives not included in official reserve
assets --gold not included in official reserve assets --other Progress Software Survey Says: Over 50% of Capital Markets Firms Do Not Use Real Time Market Surveillance and Monitoring Tools
Dr. John Bates, Progress Software's chief technology officer and senior vice president of corporate development and strategy, said: "It is clear that high frequency trading is a widely accepted practice that will be at the heart of the capital markets landscape for the foreseeable future. From rogue traders to 'fat finger' errors to market panics, we've seen individuals, firms and even global economies impacted. With unprecedented trade volumes and values taking place in just fractions of a second, it is time for the capital markets culture to change with the times and embrace the tools needed to detect and avert risky trades, dangerous market movements and illicit market abuse." Other key findings include:
-- Just 36% of respondents believe that additional / stronger prohibitive
regulations are needed to effectively deal with market abuse and
anomalous market conditions.
-- 56% of believe that sponsored access, a highly-debated practice where
traders use the market participant identification of sponsoring
brokers to trade directly on electronic exchanges, should be managed
with some level of mandated pre-trade risk checks, while 31% think the
benefits outweigh the risk with sponsored access and should be freely
allowed in all forms including the highly disputed naked access. Only
13% believe that all forms of sponsored access should be banned
altogether. Morningstar Commodities Bulletin--2Q 2010 Here is a quick recap of how some individual sectors fared: * Energy: Oil was priced "close to perfection" (price at which supply and demand balance)--fluctuating within a relatively tight range of $70-$85. Regardless of the BP oil spill and imminent regulations on off-shore drilling, oil supply is expected to be plentiful throughout the near term. After tumbling 22% in the first five months of the year, natural gas prices shot up 15% in June amid forecasts for the hottest U.S. summer in 30 years, which would increase demand by power plants that use natural gas to generate electricity. In a recent article in the Wall Street Journal, "Hedge funds whipsawed by gas bets," the author discusses how the volatility in natural gas has caught even the savviest investors off guard, sparking a string of unexpected losses for top-name players. Funds that were short in natural gas incurred heavy losses due to the unexpected jump in prices. Research shows that energy prices are driven not only by demand/supply forces, but also factors such as geopolitical risk. It is for this reason that Morningstar uses a more conservative approach in our indexes. If the momentum turns negative in energy contracts or the signal is short, we move to a conservative cash (or flat) position.
* Agriculture: A bumper harvest in major commodities like corn and wheat kept the prices flat for the quarter. Coffee prices rose sharply--19% for the quarter--largely due to poor crops in Vietnam and Central America causing a fall in global supplies. Agriculture markets in the Northern Hemisphere could see increased volatility as farmers head into one of the hottest summers in years.
* Metals: Thanks to a strong rally in the price of gold, metals was the strongest performing sector with a gain of 7% for the quarter. Investors continue to view gold as a safe haven as concerns about government debt burdens continue to grow. Gold continued its multiyear rally adding 12% for the quarter. Among the industrial metals, copper was the worst performer, finishing the quarter 18% down. Slightly lower second-quarter growth numbers from China caused concerns about future demand from one of the world's largest metals consumers.
Manufacturing activity in most Districts continued to move up since the last report, although the pace of activity slowed or activity leveled off in the New York, Cleveland, Kansas City, Chicago, Atlanta, and Richmond Districts. Automobile manufacturing was a bright spot for the Cleveland, Chicago, and St. Louis Districts. Automobile parts suppliers also experienced increased demand in both the Richmond and Chicago Districts. Fuel demand at refineries in the San Francisco District improved, while gasoline demand was steady in the Dallas District. Firms in the semiconductor manufacturing industry reported relatively strong sales or demand growth in both the Boston and San Francisco Districts. Firms in aircraft and parts manufacturing saw sales pick up in both the San Francisco and Dallas Districts.
July 27, 2010--The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets totaled $128,279 million as of the end of that week, compared to $128,602 million as of the end of the prior week.
I. Official reserve assets and other foreign currency assets (approximate market value, in US millions)
July 27, 2010--Progress Software Corporation, a leading independent enterprise software provider that enables companies to be operationally responsive, today announced the results of its high frequency trading and market surveillance survey conducted at the recent SIFMA Financial Services Technology Expo 2010 in New York. More than 125 respondents from buy and sell-side firms provided their input on current high frequency trading (HFT) practices with 83 percent agreeing that increased transparency is needed to effectively deal with market abuse and irregular market activity, like the May 6 "flash crash." However, only 53 percent of firms surveyed currently have real-time monitoring systems in place.
According to the findings, 59 percent of financial services professionals believe that high frequency trading is beneficial to the market, with respondents citing increased liquidity and tightened spreads as the primary benefits. Only 18 percent believe that high frequency trading is dangerous or threatens market integrity. So while respondents generally do have a favorable opinion of HFT, they recognize that increased transparency is critical in preventing abuse and anomalous market conditions. In fact, 68 percent of respondents believe that the flash crash that derailed the financial markets in May 2010 could have been prevented.
July 27, 2010--Performance Roundup
Volatility returned to the commodity markets with a vengeance in the second quarter. While most commodities saw an upswing the in the first half of the quarter, a bleak global economic outlook led to a precipitous drop in May and early June. The Morningstar Long-Only Commodity Index recorded moderate gains in April and June (3.6% and 1.2%, respectively) to no avail due to a 7.4% decrease in May. The index ended down 2.9% on the quarter, decreasing for the second straight quarter.
Across the board, April was a good month for commodities. Only copper and sugar recorded significant losses (6.2% and 8.2%). The quarter as a whole, however, proved to be a tough one with losses in all of the long indexes and stagnation in the short ones. Coffee (19%) and gold (12%) were the top performers, followed closely by natural gas (11%). Copper was the laggard of the pack, shedding 18% of its value. The surprise story is the sluggish performance of oil with Morningstar's Brent Crude down 12%, RBOB Gas down 11%, and WTI Crude down 14%.
