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nomura suspends leveraged ETF new creations
ETF News

Nomura Says Sayonara to New Leveraged ETF Creations

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Sayonara City As Japan Getting Crash Course in Leveraged Returns With Nikkei ETF

MarketsMuse ETF update courtesy of Bloomberg LP Oct 15–Nomura Asset Management Co. said it would suspend on Friday the creation of new shares in a large leveraged exchange-traded fund, as well as two others, citing liquidity concerns.

The move applies to the Next Funds Nikkei 225 Leveraged Index Exchange Traded Fund (BBRG Ticker: 1570 JP Equity <GO>), which has about ¥734 billion ($6.2 billion) in assets. The fund’s shares are up about 8.7% this month. Nomura said shares will continue to trade.

“The temporary suspension has been determined, considering the current situations of fund management including the liquidity of the underlying Nikkei 225 futures and the total assets under management of three ETFs,” Nomura posted on its website. The firm will continue to receive redemptions, it said.

A Nomura representative wasn’t available to comment.

The decision highlights an increasingly warned-about side effect of exchange-traded products’ growing popularity: a mismatch between the liquidity of some funds and their holdings.

The Nomura decision also highlights concerns about leveraged products, which provide investors with outsize exposure to certain asset classes, employing tactics such as borrowed money and derivatives. The $6.2 billion fund provides investors with two times the exposure to the Nikkei 225.

The products have been popular in the U.S., but the size of Nomura’s Next Funds Nikkei 225 Leveraged Index ETF is larger than any such leveraged exchange-traded product in the U.S., said Dave Nadig, director of ETFs at financial-data provider FactSet. There are close to 1,800 exchange-traded products listed in the U.S., and about 230 of them are leveraged, he said.

Regarding how leveraged funds operate, Mr. Nadig said: “The math makes people’s heads hurt.”

It’s not the first time an exchange-traded product has run into obstacles because of its own popularity. Credit Suisse Group AG had to suspend the creation of new stock in the VelocityShares Daily 2x VIX Short-Term ETN in February 2012, after demand for the security hit a limit set when the product was created in 2010. Barclays Plc also halted issuance in its iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN in August 2009.

For the full story from Bloomberg LP, please click here

ETF News, Fixed Income

New Rules: SEC Set to Level Playing Field for ETF Issuers

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Are you beginning to wonder why there is an avalanche of news stories profiling corporate bond ETFs? As we’ve posted here at MarketsMuse.com, one good reason might be rising concerns that when interest rates tick up and bond prices tick down, there could be a rush to the exits on the part of investment managers seeking to sell their corporate bond ETFs (or looking to sell select ETFs so as to hedge portfolio exposure in underlying issues held by these managers). Reuters’ Jessica Toonkel and Ashley Lau touch on that topic in recent story profiling a plan on the part of the SEC to “level the playing field” for newer firms entering the ETF Issuer club.

Here’s the extract:

By Jessica Toonkel and Ashley Lau

Reuters – The U.S. Securities and Exchange Commission may strip Vanguard Group, BlackRock Inc and State Street Corp, the oldest and biggest providers of exchange-traded funds, of an advantage they hold over newer rivals in how they assemble the shares of their funds, said sources familiar with the SEC.

etf-issuer-sec-level-playing-fieldsBut BlackRock, Vanguard and a few others, who were among the first to apply with the SEC to create ETFs, are allowed greater leeway: if they need a difficult-to-find security to create shares of their funds, they are permitted to use a similar security – not necessarily the same one – in the fund. This greater flexibility makes it easier and cheaper to run the older funds, and harder for newer entrants into the market such as Northern Trust, Van Eck Global and Charles Schwab Corp to compete.

The agency’s tentative plan – still in its early stages – would affect how companies manage their portfolios in illiquid markets, such as bonds. It may result in allowing the likes of Schwab to compete better with their older rivals, as well as manage their existing bond products at a lower cost.

The agency’s tentative plan – still in its early stages – would affect how companies manage their portfolios in illiquid markets, such as bonds. It may result in allowing the likes of Schwab to compete better with their older rivals, as well as manage their existing bond products at a lower cost.

For the full story from Reuters’ Jessica Toonkel and Ashley Lau, please click here