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Hedge Fund Traders Favor ETFs For a Reason

indexuniverseCourtesy of Paul Amery, IndexUniverse.com

Hedge funds and index trackers are polar opposites: the highest- and lowest-fee ends of the investment product scale.


And yet a surprising number of hedge funders are fans of indexing. Reportedly, many are closet admirers, buying ETFs and index funds for their own portfolios—as though stepping out of a Ferrari and into a well-used family diesel when away from the public gaze.


Others have switched career to embrace tracker funds. Alan Miller, manager of a fund of ETFs at SCM Private, was once a hedge fund investor at New Star. Victor Haghani, partner at Long Term Capital Management in the 1990s, now looks after a $200 million portfolio of index funds and ETFs, Elm Partners.


Lars Kroijer, who ran an equity hedge fund, Holte Capital, between 2002 and 2008, is another convert. But the Dane no longer manages client money himself (though he sits on several fund boards). Instead, he’s turned author.

Following a well-received account of his hedge fund experiences (“Confessions of a Hedge Fund Manager”), published three years ago, Kroijer has written a new book, “Investing Demystified”, with the objective of explaining why index investing is the rational approach for almost all of us.

To continue reading the full story from IndexUniverse, please click above IU logo.



The Follies of ETF “Flows”: Understanding the Trading Data

indexuniverseCourtesy of Dave Nadig

In yesterday’s flows article, I talked about one of the biggest problems with ETF flows data; that is, a lot of times, that data is buggy.

The second problem is thornier. Even if you believe the data, it’s important to understand how it can be misleading.

The Second Problem: Misinterpretation

Even assuming that the flows data was perfect, I frequently see flows stories with headlines like “Investors put $100 million into GLD yesterday,” which give me pause. The reality of why money flows into and out of an ETF is slightly more complex than that.

If you’re an investor—whether you’re a hedge fund or my mother—you get ETFs the same way. You buy them on the open market. Only APs actually “put money” into an ETF. And they only do it when it makes financial sense for them to do so. So while ETFs can go in and out of favor—and experience enormous swings in volume—they’ll only actually grow or shrink in size when the ETF becomes over- or underpriced.

Let’s look at a simple example. Below illustrates the data on the Market Vectors Indonesia ETF, IDX. It’s an annoying fund for a market maker, because to make new shares, they have to go buy a bunch of Indonesian stocks, and that market’s not open during U.S. trading hours. Consequently, they’ll let the fund trade to a bit of a premium or discount before they’ll step in. Continue reading

An Obamacare ETF Winner

indexuniverseCourtesy of Tom Lydon

The Patient Protection and Affordable Care Act, or Obamacare as it is widely known, is this country’s most sweeping health care legislation in multiple generations. It has also been highly controversial, but political partisanship aside, select stocks and ETFs have benefited from President Obama’s efforts to increase access and affordability to healthcare while holding insurance companies more accountable.

The iShares U.S. Healthcare Providers ETF (NYSEArca: IHF) is one such fund. Year-to-date, IHF is up 22.8% and the ETF has surged 34.3% in the past year. Those performances have come after many analysts originally had less-than-encouraging outlooks for the health care sector in a post-Obamacare world. IHF and its 47-stock roster have also remained sturdy in the face of the fiscal cliff and sequestration debates. [ETF Spotlight: Affordable Care Act]

With the U.S. moving forward with the Affordable Care Act, millions of new clients are expected to flow into the health care sector. That portends potentially rosy future outlooks for IHF constituents such as Dow component UnitedHealth (NYSE: UNH) and Express Scripts (NasdaqGS: ESRX). As a result, IHF has jumped almost 23% since Election Day 2012. [ETFs for Obama’s Second Term]

Despite IHF’s obvious success, the ETF’s gains, fueled by its components, have caught some health care sector analysts and observers by surprise. “In some ways, the sector’s good fortune seems counterintuitive: All sectors of the industry are under stress, thanks to various provisions of the federal Affordable Care Act that seek to wrestle with health costs, hospital performance and health insurer profit margins. Hospital and prescription use is flattening,” reports Bill Tolland for the Pittsburgh Post-Gazette.   For the remainder of the article, please visit IndexUniverse.com


Dennis Gartman is a Raging Bull..


Courtesy of Olly Ludwig at IndexUniverse.com

Dennis Gartman is about as raging a bull as you can find these days. At a time when many investors remain beaten down in the volatile “risk-on/risk-off” aftermath of the crash of 2008, and uncertain about how high taxes will go in 2013, the editor of The Gartman Letter looks at rising crude and natural gas production in the U.S. and sees the makings of the most promising economic circumstances in a long time.

Gartman told IndexUniverse.com Managing Editor Olly Ludwig that he’s not exactly pleased about President Obama’s re-election, but that doesn’t mean he’s wallowing in pessimism about the goings on in Washington, D.C. He reckons that while it may take time and great effort, Democrats and Republicans will do the right thing and cut spending, even as the “leftist” president goes ahead and raises taxes on the wealthiest Americans.

In all his optimism, Gartman is also bullish on gold, but not in the way you might expect. He’s not buying gold because he thinks the economy is going to the dogs and that the Federal Reserve is unhinged. Rather, he says that Ben Bernanke’s Fed is doing a fine job, and that investors should buy gold with a weakening Japanese yen. What’s more, Gartman even has his name on a quartet of funds now in registration that will allow investors to own gold in yen, British pounds and euros.

Ludwig: Could gold end lower this year?

Gartman: No. It ended last year at $1,566 an ounce. The odds of it closing unchanged on the year, I think, are zero.

Ludwig: I ask because you don’t see gold going through the roof these days, in spite of what the Fed is doing to keep bond yields so low. It has been falling and is now around $1,700.

Gartman: Well, the Fed is buying $40 billion to $45 billion worth of securities every month, but we forget that they’re also allowing about $35 billion to $40 billion—if not more—to mature off on the back end. So the monetary base has actually not grown at all in the course of the last year.

Ludwig: So what is your general overview of how the Fed is performing?

Gartman: I think the Fed has done yeomen’s work since the autumn of 2008. Publicly, they’re very clear about buying securities on a regular basis; privately, they’re circumspect and quiet about allowing them to mature off. I think they have expanded all that they’ve wanted to. And I think they have done the right thing heretofore. Continue reading

Debunking The Myth re: ETF Spreads

A daily double courtesy of IU’s Dave Nadig

ETFs can be more efficient than the stocks they track, even in surprising places.

At almost every conference and ETFs 101 webinar we do, you’ll hear us saying again and again that spreads matter.

In fact, getting investors to understand the importance of spreads, depth of book, and limit orders make up the bulk of the live trading sessions we do.

After all, next to expense ratios, the spreads and commissions you pay on your ETF trades are one of the only things knowable in advance and, depending on your time horizon, they can have a real impact on your performance.

One of the maxims we always put out there, almost as an oddity, is that ETFs can often be more efficient than the stocks they’re composed of. We usually pull a chart of an extreme case to prove the point: an enormously liquid ETF, like the iShares Emerging Markets ETF (NYSEArca: EEM) and its comparatively wide-spread and thinly traded stocks—thinly traded by New York Stock Exchange standards, anyway.

When it came time to update the chart, however, I took a different approach.

Instead of hunting for illiquid underlying stocks and super-liquid ETFs, I went for the opposite. I cast around for an example of an ETF with thin volume, where the portfolio was small enough so that most investors could, if they wanted, just buy all the stocks themselves. Surely in such a case, the spreads of the liquid stocks would beat the spreads of the illiquid ETF, right?

Software was the perfect place to look, and IGV was our poster child. IGV is the iShares S&P North American Technology-Software Index Fund (NYSEArca: IGV). It holds 54 stocks, including some of the most liquid companies in the world, like Microsoft and Oracle. IGV, however, is a wee bit less liquid, trading less than 50,000 shares on an average day.

To see the full article, click here!

Knight Seeks Lifeline After $440 Mil Loss : What’s Next?

Courtesy of Olly Ludwig/IndexUniverse

Knight Capital (NYSE: KCG), the biggest ETF market maker in the U.S., is seeking financing after saying that a trading glitch involving its systems on Wednesday that affected 148 stocks will result in a $440 million pre-tax loss. The company’s stock was down 45 percent in early morning trade.

“The company is actively pursuing its strategic and financing alternatives to strengthen its capital base,” Knight said on Thursday in a press release, stressing that it will be business as usual for the company in the wake of the wayward trading episode.

The swiftly moving story is one of the more astonishing developments in the world of electronic securities trading, where Knight plays a dominant role. Industry sources say that whatever reputational challenges Knight faces at this very moment pale in comparison to the attractiveness of its business, or at least particular pieces of it.

The Jersey City, N.J.-based firm, the biggest ETF U.S. market maker, said in the press release that while the whole episode “severely impacted” its capital base, its broker-dealer units remain in compliance with net capital requirements.

*Editor insert: MarketsMuse spoke with one industry expert, who requests no mention of his name, but framed the Knight story as follows: “This is exactly the type of episode that should cause institutional fund managers to re-think how/where their orders are executed. Relying on a single market-making firm–which by definition, is counter-intuitive to the notion of best execution–is a recipe for disaster. The right approach is to use a qualified, agency-only liquidity aggregators– firms that focus on capturing best prices by canvassing a broad list of market-makers. The latter approach addresses the PM’s fiduciary obligation, and significantly mitigates dependence on one market-maker, particularly one that may have been perceived for being “too big to fail.”

The Accident That Happened

On Wednesday, Knight saw its stock drop by a third due to the wayward program trading involving its system. The episode was reportedly triggered by a human error that caused hundreds of trades to be executed in minutes instead of over a longer period.

“An initial review by Knight indicates that a technology issue occurred in the company’s market-making unit related to the routing of shares of approximately 150 stocks to the NYSE,” the company said in a prepared statement on Wednesday.

For the full IndexUniverse coverage, click here

Don’t Forget Index Trading Costs


Courtesy of Paul Amery

Remember to check the assumptions made for the cost of trading when examining a new index concept.  ( Editor note: read between the lines, even though the phrase “best execution” is missing from this piece, the article should inspire thoughtful consideration re what true best execution entails).

Vanguard’s warning of the perils of index data mining is timely. As the number of “smart beta” index concepts increases, each promising superior performance than old-fashioned, capitalisation-weighted benchmarks, the possibility of investors getting hoodwinked also grows.

Just about anything can be used to “predict” something else if you use historical data series creatively enough. According to fund manager David Leinweber, the Wall Street Journal reports, annual butter production in Bangladesh “explained” 75% of the annual returns of the S&P 500 over a 13-year period. If you throw in data for US cheese production and the combined sheep population of the US and Bangladesh, Leinweber says, you get to “forecast” US stock prices with 99% accuracy.

Not everyone got the joke. A number of firms asked Leinweber to share his data on Bangladeshi butter production so that they could build a trading strategy around them, the WSJ tells us. Were any index and ETF providers looking for a new smart beta concept among them, by any chance?

Vanguard has its own axe to grind in all this, we shouldn’t forget. The firm sticks religiously to using traditional, cap-weighted indices as the basis for its passive funds, arguing that anything else is an active bet on market behaviour and should be recognised as such. I’ve argued before that this is as much as a commercial strategy as anything else—Vanguard’s huge size precludes it from even considering index concepts that are in any way capacity-constrained, as many non-cap-weighted approaches are. Continue reading

Post Peregrine Financial Fraud: Futures ETFs Offer Safe Haven For Commodities Players

Courtesy of Cinthia Murphy

In connection with all that news re futures broker Peregrine Financial’s fraud-induced collapse, Sal Gilbertie, head of Teucrium Fundsan ETF provider offering futures-based commodities ETFs—told IndexUniverse’s Correspondent Cinthia Murphy that futures-based ETFs might be the answer to retail investors’ futures-related concerns . Gilbertie, whose firm sponsors the red-hot, $100 million Teucrium Corn Fund (NYSEArca: CORN), argued that the transparency of the ETF structure ensures that investors’ interests are guarded closely.
Murphy: What makes fund providers like Teucrium immune to contagion from the negative publicity, or more importantly, from the apparent risks in the system? Where does the risk lie for an investor?

Gilbertie: I can only speak for Teucrium and what we do. There’s a lot of transparency in the publicly traded ETP system, something you don’t always see at the FCM level, as many of them are not publicly traded. As a NYSE listed security, any Teucrium ETP is subject to the SEC reporting requirements of a public company, including regular independent audits. In the futures market, investors are protected by the clearing mechanism that backs-up their margin. Investors that leave excess margin in the hands of their FCM subject this excess capital to risk. Non-public FCMs are not subject to the same level of SEC required scrutiny and regulation that applies to publicly traded ETPs. The Teucrium family of NYSE funds sweeps its excess capital from our FCM on a daily basis.

Murphy: Should we assume, then, that in light of all that has gone down with Refco and Peregrine, investors will be less willing to leave excess capital sitting around? How would that affect the system?

Gilbertie: Professionals sweep their excess margin daily. Smaller investors may find it expensive and difficult to regularly sweep excess capital. As such, these investors may turn to professionally managed futures accounts or to publicly listed commodity-based ETPs that meet their investment objectives. Continue reading

June ETF Short Report: ‘Q’s’ Shorts Drop 42%

Courtesy of Olly Ludwig

Short-sellers last month significantly cut their bets against an array of the broadest U.S. stock indexes, which looks quite sensible in the rearview mirror considering both the S&P 500 and the Dow Jones industrials average rallied by nearly 4 percent in June.

While financial markets are again on tenterhooks over the dismal fiscal situation in Europe—and Spain’s in particular—last month marked something of a respite from the three-year-old eurozone debt crisis, as short interest on non-U.S. stocks fell as well.

Most conspicuously, the number of shares short on the PowerShares QQQ Trust (NasdaqGM: QQQ), the Nasdaq 100 ETF, dropped 42.6 percent in June, compared with a nearly 9 percent rise in the prior month. The decline left short interest on the “Q’s” at 10 percent of the ETF’s outstanding long float, compared with more than 18 percent at the end of May, according to data compiled by IndexUniverse.

Shorts on the SPDR S&P 500 ETF (NYSEArca: SPY) meanwhile fell by almost 23 percent in June, compared to a 13 percent jump in May. Also, short interest on the iShares Russell 2000 Index Fund (NYSEArca: IWM) fell by more than 7 percent last month, after holding about steady in the prior month.

Dark Clouds Ahead? Continue reading

Popular ETFs You Should Never Use..

  Courtesy of CNBC..By: Lee Brodie

Exchange traded funds are among the more popular ways to trade. Called ETFs on the Street they allow investors to diversify risk through a basket of stocks.

A pro like trader Steve Grasso of Stuart Frankel who works on the floor of the NYSE, can barely move a foot or two without hearing “Buy the XLF or get me out of the GLD, now!’

But these and other popular ETFs may not always be your best bet.

According to Matt Hougan, IndexUniverse president of ETF analytics, there are alternative ETFs that aren’t as widely known, but may actually better serve your needs. He profiled five of them on CNBC’s Fast Money. They follow:

Sector      Widely Traded
Gold                  GLD

Hougan’s Alternative: IAU

Looking at the GLD, Hougan says the IAU  holds exactly the same thing. “It’s plenty liquid and owning it is about half the cost of the GLD.”

Sector         Widely Traded
Financials                XLF 

Hougan’s Alternative: IYF

Hougan says this is something of a popularity content. “People know the XLF .” However, the XLF only tracks large caps. (Click here to see top holdings on Yahoo! Finance.) If you want exposure to the entire banking sector Hougan recommends the IYF  for “the full spectrum.” Continue reading

ProShares To Reverse-Split VIX ETF UVXY


Courtesy of IndexUniverse, reporting from Oliver Ludwig:

ProShares, the fund company known for its large family of inverse and leveraged ETFs, set a 1-for-6 reverse split on its now-super-popular VIX-related ETF “UVXY” to ensure that bid/ask spreads on the security don’t grow too large as a percentage of its declining share price.

The fund, the double-long ProShares Ultra VIX Short-Term Futures ETF (NYSEArca: UVXY), has been in the news since last week, when its popularity began soaring in the wake of Credit Suisse’s decision to halt creations of the VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX)—an exchange-traded note that delivers similar exposure to the VIX volatility curve as UVXY.

The decision to do a reverse split on UVXY isn’t related to the explosion of interest in the ETF, but is a function of the downward pressure on VIX futures over the past several months. UVXY was worth more than $34 a share when it came to market in October of last year, and it’s now trading at $5.60, according to Google Finance. It has lost more than half its value since the beginning of the year.

Even though UVXY often trades with a bid/ask spread of just 1 cent, that penny becomes a more conspicuous trading cost the cheaper the ETF becomes. The 1-for-6 reverse split, effective March 8 for shareholders of record as of the close on March 7, will pump up the share price about six times and cut the number of outstanding shares by about the same amount.

At today’s price, UVXY, now the only double-long exchange-traded product that’s taking in new money, would be worth more than $33 a share on a post-split basis. Continue reading

Amsterdam Hosting 3rd Annual InsideETFs Europe

Where’s a better place than Amsterdam for an International ETF conference in the month of May? Our global concierge says,  “No place compares to Amsterdam, for a variety of reasons!”

Which is exactly why IndexUniverse, the largest ETF conference producer, is once again hosting its “Annual InsideETFsEurope” for the third year in one of the most entertaining cities in all of Europe.

US-based ETF market players who have attended InsideETFsEurope in prior years will confirm this program is a  “great do” for those that want to refresh relationships and make new acquaintances with the growing number of European fund managers that are building out their ETF portfolios.

Observed upcoming attendee David Beth, President of NYC-based WallachBeth Capital, one of the “go-to” firms for those seeking ETF best execution in US ETF products, “Having recently formed an alliance with London’s NSBO to replicate our best execution model for Europe, this conference will provide a great opportunity for portfolio managers and head traders to better understand what we do, and how we do it with respect to capturing better price executions than they might ordinarily be accustomed to.”

Cheers to all..click on the conference logo to register and don’t forget to make your dinner reservations well in advance!

iShares Adds More Junk (Bond) ETFs

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For those raising their hands high and asking for more high yield bond ETFs, iShares is serving up two more corporate bond ETFs that “will cover a spectrum of credit quality ranging from low-investment-grade to junk bonds.” Both of the new funds will own corporates issued in US dollars, euros, British pounds and Canadian dollars.

iShares announcement is on the heels of Van Eck registering a bucket full of corporate bond ETFs earlier this week.

Kudos to Cinthia Murphy at IndexUniverse for keeping her fingers on the pulse of the new registration market!