Archives: May , 2012
ETF News

Actively Managed ETFs Are Less Volatile, Lipper Finds

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Courtesy of  Barron’s Brendan Conway:

By Brendan Conway

Actively managed exchange-traded funds attempt to pick winners much like, say, Bill Miller does in mutual funds. The number of such funds has taken off, and while they’ve tended to underperform versus passive index-tracking ETFs, they’ve also been less volatile.

Those are some of the findings of a new Lipper report by Sasha Franger, the company’s fiduciary research analyst. The group has returned an annualized 2.78% over the last four years, versus 3.20% for “pure” index peers, Franger found. The trend turned in the last year, however: Actively managed ETFs’ performance pulled ahead slightly.

Market gyrations appear to be blunted in actively managed ETFs. This makes intuitive sense: An active manager should be able to pull your assets out of plunging equities or bonds when the environment calls for it. Passive funds can’t.

Median active ETF annual performance ranged from 1.31% to 10.83% for the last four years, while median performance for pure index ETFs has experienced huge swings and has ranged from -40.09% to 55.59%, coinciding with the economic downturn and recovery.

Click here for the full article

ETF News

NYSE Backs Payments for ETF Market Makers; Incentives To Street For Providing Liquidity

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Reporting courtesy of James Armstrong/Traders Mag.

Following a similar proposal by Nasdaq OMX, NYSE Euronext has unveiled a plan to allow market makers to get paid for providing liquidity for exchange-traded funds. If approved, the plan could reduce the number of funds listed without lead market makers.

On April 27, NYSE formally asked the Securities and Exchange Commission to authorize a pilot program that would add incentives for firms that become LMMs. Under the proposal, issuers would be allowed to pay an additional $10,000 to $40,000 per year to attract market makers.

Bryan Johanson, managing director for global index and exchange-traded products at NYSE Euronext, said firms have been increasingly reluctant about becoming LMMs, and the exchange wanted to offer an additional incentive to attract market makers to that role.

Under the NYSE plan, issuers could pay an optional quarterly incentive fee to the exchange, which would then use that money to distribute credits to LMMs that meet minimum performance standards.Johanson said the exchange discussed the matter with market makers and found that around $10,000 to $40,000 was the level at which they started to consider taking on new exchange-traded products.

“We didn’t want this to be overly burdensome for the issuers,” Johanson said. “We tried to balance their interests with the market makers so we could come up with a figure that was appropriate and fair.”

A Financial Industry Regulatory Authority rule prohibits payments for market making, but NYSE argues this rule applies to securities of individual companies, not to exchange-traded products. Continue reading →

ETF News, Strike Price

UofMass Study: Option Collar Strategies Deliver Better Performance With Less Risk

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As reported by Pension&Investments Magazine, a newly-published research report from the University of Massachussetts has found options-based collar strategies would have outperformed the market in most asset classes, while providing drastically reduced risk leading up to the 2008 financial crisis, AND as well, throughout the subsequent recovery.

“The contagion across asset classes during the financial crisis suggests that protective options-based investment strategies, such as collars, when implemented on a wide range of asset classes, could provide portfolios with greater downside risk protection than standard multi-asset diversification programs,” according to a summary release of the report issued by the Options Industry Council, which helped sponsor the research by Edward Szado and Thomas Schneewies. Mr. Szado is a research analyst and Mr. Schneewies a professor of finance, Isenberg School of Management, University of Massachusetts.

The research covers the 55 months from June 2007 to Dec. 31, 2011, and expands on a 2010 paper that studied the effects of a collar strategy against the PowerShares QQQ ETF from 1999 to 2010.

The authors evaluated the impact of collar strategies against ETFs across a wide range of asset classes such as equities, commodity, fixed income, currency and real estate, based on a set of rules where a six-month put option is purchased and consecutive one-month calls are written. While Australian dollar and Japanese yen currency ETFs, two bond ETFs and Nasdaq and gold ETFs outperformed the collars, the strategy outperformed other ETFs across asset classes while providing significant risk protection. Continue reading →

ETF News, People Profiles

Narrowing Spreads for Illiquid ETFs

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Excerpts Courtesy of James Armstrong/Traders Magazine

For some illiquid exchange-traded funds, the price isn’t always right. Spreads can be unreasonably wide, luring the less informed to take the bait and accept a price that is far from reasonable. Fortunately, those spreads are slowly narrowing due to competition.

With illiquid funds, the screen does not always match what an ETF is really worth. If a fund rarely trades, both the bid and the offer will be posted by professional trading shops and will be skewed to a premium or a discount. That means spreads can be more than a dollar wide at times.

Even if liquidity is present, it’s not showing up in the posted prices. Recent data from Index Universe shows more than 10 percent of ETFs still have spreads of 100 basis points or more. The vast majority of those funds have an average daily volume of fewer than 5,000 shares.

Many in the industry are trying to help investors who want access to these lightly traded ETFs but don’t want to get soaked every time they buy or sell. Gradually, they are starting to get some of those spreads down to more reasonable levels, though certain funds still have a way to go.

High-Touch + High-Tech Approach

The agency shop WallachBeth Capital has built a niche for itself with ETFs that trade in lesser quantities. Though liquid ETFs can be plugged into algos without much of a problem, less liquid ones cannot, so WallachBeth combines high tech with a high-touch approach to its trading. The firm uses a highly-sophisticated trading technology platform to support its ETF desk of 12 traders to find liquidity that doesn’t show up on the screen.

Andrew McOrmond, managing director at WallachBeth, said if a broker only calls one or two people, and counterparties know there isn’t much competition for that order, they won’t get the best price. But when a firm calls 22 people, he said, and their counterparties are aware of this, firms on the other side tend to give their best price rather than dangle an outlier number in hopes of catching a big spread.  Continue reading →

ETF News

Finra Fines Wells Fargo, Three Others Over ETF Sales

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Citigroup Inc. (C), Morgan Stanley, UBS AG (UBSN) and Wells Fargo & Co. (WFC) agreed to pay a combined $9.1 million to settle regulatory claims they failed to adequately supervise the sale of leveraged and inverse exchange-traded funds in 2008 and 2009.

The firms also didn’t have a reasonable basis for recommending the securities to their clients, the Financial Industry Regulatory Authority said today in a statement. They will pay fines of about $7.3 million and reimburse $1.8 million to customers.

“The added complexity of leveraged and inverse exchange- traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers,” Brad Bennett, Finra’s chief of enforcement, said in the statement.

Finra warned brokers in June 2009 that leveraged and inverse ETFs were difficult to understand and not a good fit for long-term investors. ETFs typically track indexes and trade throughout the day on an exchange like stocks. Leveraged versions use swaps or derivatives to amplify daily index returns, while the inverse funds are designed to move in the opposite direction of their benchmark.

Because gains or losses in the funds are compounded daily, returns of more than one day can differ from expected returns gauged by the underlying index.

Firm Assessments

Wells Fargo, based in San Francisco, was assessed the highest fine at $2.1 million and must pay $641,489 in restitution. Citigroup, based in New York, received a $2 million fine and must pay $146,431 in restitution; New York-based Morgan Stanley will pay a $1.75 million fine and $604,584 in restitution; and Zurich-based UBS will pay a $1.5 million fine and $431,488 in restitution.

In settling the claims, the firms neither admitted nor denied the charges, said Washington-based Finra, the brokerage industry’s self-funded regulator.

For more on this “believe-it-or-not, this sh*t still happens story”, please go to Bloomberg LP; the first reader comment is a doozy!

ETF News, People Profiles

BNY Mellon Awarded Best ETF Service Provider In The Americas for Sixth Year in Row

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Here’s a morale booster for BNY Mellon staff:

NEW YORK, May 1, 2012 /PRNewswire via COMTEX/ — BNY Mellon, the global leader in investment management and investment services, has been named as the 2011 “Best Service Provider – The Americas” at the eighth annual Global ETF Awards, which is sponsored by exchangetradedfunds.com. This is the sixth consecutive year that BNY Mellon has been honored as the top service provider to ETFs (exchanged-traded funds).

“Our industry-leading technology platform coupled with the unmatched expertise of our global service group have enabled us to quickly adapt to the wide array of innovative ETFs entering the marketplace,” said Joseph F. Keenan, managing director for BNY Mellon Asset Servicing and head of its global ETF services business. “Our unwavering commitment to providing the highest quality customer service and our passion for partnering with sponsors to help drive the evolution of the ETF industry are both key reasons for consistently winning this award.”