Last week, a wave of new exchange-traded products–fully 25 in total–began trading, offering investors a wide variety of new funds of all kinds, from leveraged volatility ETNs to an actively managed high-yield bond ETF to an ETF of a basket of physically backed white metals.
Here, we provide investors quick snapshots of all 25 ETFs and ETNs that have just hit the market, in order of the size of the providers’ respective product roll-outs.
Barclays Launches 11 Long and Short ETNs
On Tuesday, Nov. 30, Barclays Bank PLC launched 11 leveraged exchange-traded notes under its iPath brand that offer investors long and short exposure in the form of paired products that track a variety of equity indexes covering everything from broad U.S. capitalisation ranges to emerging markets. The bank also issued a new leveraged ETN tied to a volatility-linked index.
Unlike most other leveraged exchange-traded products currently offered by providers like ProShares and Direxion, the Barclays ETNs differ in one crucial way: They will not reset exposure on a daily basis and as a result will not try to deliver results that are a multiple of, or the inverse multiple of, a given index’s daily return. Because of compounding arithmetic, daily leveraged exchange-traded products cannot promise that level of return over periods longer than one day. (A smaller number of leveraged exchange-traded products seek results that are a multiple of or the inverse of a given index’s monthly return.)
The new iPath ETNs offer investors a multiple of or the inverse multiple of the return of their respective indexes from the time the notes were launched until they mature in 2020. As time passes, the leverage itself will be either greater or lesser depending on the performance of the ETNs’ underlying indexes.
Four new iPath ETNs linked to Russell indexes charge expense ratios of 0.50%; two ETNs linked to S&P 500 indexes assess fees of 0.35%; four ETNs tracking MSCI indexes levy expense ratios of 0.80%; and a VIX-related ETN has an annual price tag of 0.89%. The Russell-linked and the S&P 500-linked ETNs offer 3 times and -3 times leverage, while the MSCI-linked ETNs offer 2 times and -2 times leverage. The VIX-related ETN is just the latest in a long line of volatility-related ETNs to launch that provide directional exposure to the implied volatility of large-cap U.S. stocks by tracking the Chicago Board Options Exchange’s VIX index, which also is known as the “fear gauge.” The new iPath VIX ETN offers 2 times leverage on “mid-term” VIX index futures, which involve exposure to a daily rolling long position in the fourth-, fifth-, sixth-, and seventh-month VIX futures contracts. The new ETN is a leveraged version of iPath S&P 500 VIX Mid-Term Futures ETN (VXZ).
The 11 new iPath ETNs are as follows:
- iPath Long Extended Russell 1000 TR Index ETN (ROLA)
- iPath Short Extended Russell 1000 TR Index ETN (ROSA)
- iPath Long Extended Russell 2000 TR Index ETN (RTLA)
- iPath Short Extended Russell 2000 TR Index ETN (RTSA)
- iPath Long Extended S&P 500 TR Index ETN (SFLA)
- iPath Short Extended S&P 500 TR Index ETN (SFSA)
- iPath Long Enhanced MSCI EAFE Index ETN (MFLA)
- iPath Short Enhanced MSCI EAFE Index ETN (MFSA)
- iPath Long Enhanced MSCI Emerging Markets Index ETN (EMLB)
- iPath Short Enhanced MSCI Emerging Markets Index ETN (EMSA)
- iPath Long Enhanced S&P 500 VIX Mid-Term Futures ETN (VZZ)
As always, we remind investors that exchange-traded notes are unsecured debt instruments that do not guarantee any return of principal at maturity or upon redemption because they carry with them the risk of default of the issuing bank. While this risk is not huge given the capitalisation of Barclays, investors need to be mindful of this risk, particularly given that three ETNs issued by Lehman Brothers went belly up when that bank failed, leaving ETN investors in bankruptcy court, standing in line behind the bank’s secured creditors.
VelocityShares Rolls Out Six VIX ETNs
Also on Tuesday, Nov. 30, the newly formed, New Canaan, Conn.-based company VelocityShares rolled out six volatility-linked exchange-traded notes.
VelocityShares’ six VIX ETNs track the daily performance of either the S&P 500 VIX Short-Term Futures ER Index or the S&P 500 VIX Mid-Term Futures ER Index, which are indexes tracking one or more maturities of futures contracts on the Chicago Board Options Exchange’s VIX Index, which measures implied volatility embedded in the prices of S&P 500 Index options at various points along the forward volatility curve.
Typically, VIX-related exchange-traded products are vehicles used by traders to hedge against market volatility. And as we have noted previously in the ETF Weekly, investors are not able to invest in the VIX itself. Here, VelocityShares’ ETNs track the performance of futures tied to the VIX Index.
VelocityShares’ ETNs are leveraged, seeking to provide the inverse of daily returns of the futures indexes and twice the daily returns of the futures indexes. Because of compounding arithmetic, we caution (as we noted above with the Barclays/iPath launch) that investors owning leveraged ETNs beyond the close of a trading day are not guaranteed to reap double an index’s return or an index’s inverse return.
The short-term ETNs track futures with a constant weighted average maturity of one month, while the medium-term ETNs track futures with a constant weighted average maturity of five months. The short-term futures index measures the return from a rolling long position in the first and second month VIX futures contracts, and rolls continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract, while the medium-term futures index measures the return from a rolling long position in the fourth, fifth, sixth, and seventh month VIX futures contracts, and rolls continuously throughout each month from the fourth-month contract into the seventh-month contract while maintaining positions in the fifth- and sixth-month contracts.
The ETNs and ticker symbols are as follows:
- VelocityShares Daily Inverse VIX Short-Term ETN (XIV)
- VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV)
- VelocityShares Daily Long VIX Short-Term ETN (VIIX)
- VelocityShares Daily Long VIX Medium-Term ETN (VIIZ)
- VelocityShares Daily 2X VIX Short-Term ETN (TVIX)
- VelocityShares Daily 2X VIX Medium-Term ETN (TVIZ)
VelocityShares’ co-founder, Greg King, launched the iPath ETN platform while working for Barclays Capital in 2006.
PowerShares Launches Four New ETFs Tied to KBW Indexes
On Thursday, Dec. 2, PowerShares launched four new ETFs tracking financial sector indexes managed by investment bank Keefe, Bruyette & Woods.
The new ETFs are fairly straightforward, offering exposure to overseas financial companies, property and casualty insurers, premium-yielding equity REITs and high-dividend yielding financial companies.
PowerShares KBW Property & Casualty Insurance Portfolio represents a new ETF market niche, as a pure-play fund holding solely P&C insurers like Allstate, travellers Companies, and Chubb. KBWP charges an expense ratio of 0.35% and has no true direct competitor–it’s one of a kind. Other insurance ETFs include the biggest and most liquid insurance ETF, SPDR KBW Insurance, which also charges 0.35%, iShares Dow Jones US Insurance (0.47%), and PowerShares Dynamic Insurance (0.63%). P&C companies represent close to one third of PIC’s assets, almost 34% of KIE’s assets, and almost 57% of IAK’s assets.
PowerShares KBW International Financial Portfolio (holds a basket of about 60 foreign-domiciled financial companies, including insurers, banks, and diversified financial services firms. KBWX owns almost exclusively large-cap names largely domiciled in developed markets like Canada, the United Kingdom, Switzerland, Spain, Japan, South Korea, and Australia, although firms from Brazil, India, and Chile are represented as well. KBWX competes most against the fairly diversified, cap-weighted iShares S&P Global Financials, which charges a 0.48% expense ratio, and the small and thinly traded SPDR S&P International Financial Sector ETF , which charges 0.50%. To a lesser extent, KBWX competes against the tiny, emerging-markets-only EGShares Emerging Markets Financials, which charges 0.85%. Some iShares ETFs own financial companies based in defined geographic regions, and there even are two single-country financial ETFs that Global X offers.
PowerShares KBW High Dividend Yield Financial Portfolio (is a concentrated, higher-risk but higher-yielding small-cap financial industry ETF consisting of 24 to 40 small- and mid-cap financial firms like banks, insurers, and equity and mortgage REITs. The fund’s 0.93% total expense ratio includes a 0.35% management fee and acquired fund fees and expenses of 0.58%. KBWD has no direct competitor, because no other ETFs own a concentrated basket of higher-risk and higher-yielding small-cap financial companies. However, investors can consider high-yielding ETFs like SPDR S&P Dividend, Vanguard High Dividend Yield Index, or other focused ETFs tracking KBW financial indexes, such as SPDR KBW Bank or SPDR KBW Regional Banking.
Finally, PowerShares KBW Premium Yield Equity REIT is a concentrated, high-risk, high-yield REIT-focused ETF that is best for investors who believe the commercial property market will continue to improve and that constituent companies as a result will be able to maintain their high dividend payments. KBWY contains 24 to 40 small- and mid-cap equity REITs, which own leveraged positions in commercial property and generally are quite volatile. We consider KBWY’s 0.35% expense ratio to be reasonable for a niche sector ETF. KBWY has no direct competitors, because no other ETF holds mid- and small-cap REITs and follows a yield-weighting methodology. Instead, other REIT ETFs are cap-weighted, resulting in a large-cap tilt. Examples of these include Vanguard REIT Index ETF, which charges 0.13% and owns 99 U.S. REITs; SPDR Dow Jones REIT, which charges 0.25% and owns 83 REITs; and the more concentrated iShares Cohen & Steers Realty Majors, which holds about 30 large-cap REITs and charges 0.35%.
AdvisorShares Rolls Out Actively Managed High-Yield Bond ETF
On Wednesday, Dec. 1, Bethesda, Md.-based ETF provider AdvisorShares rolled out its long-awaited, actively managed high-yield bond ETF, Peritus High Yield ETF.
The new junk-bond fund’s name comes from subadvisor and Santa Barbara, Calif.-based money manager Peritus I Asset Management. As the first-ever actively managed high-yield bond ETF, HYLD contains a focused portfolio of 40 to 60 high-yield debt securities whose coupons generate high current income streams. HYLD largely avoids new issues and the highly leveraged buyouts that dominate the high-yield indexes, instead playing in the secondary market, where Peritus believes competition is less and opportunity for capital gains is greater.
HYLD leaves open the possibility of tapping U.S. Treasuries to hedge against adverse market declines, giving the chance to profit from the “flight to quality” trade if a market disruption occurs. Peritus sees the Treasury hedge as both an opportunity cost foregone (because yields are less) and as a way to reduce risk and maximise the income stream, regardless of the market environment. Finally, HYLD’s managers take little interest in credit ratings, concluding that “the agencies lag the market perception of risk, often ignore critical components of a company’s credit profile and historically have put too much emphasis on a business’ size and longevity,” AdvisorShares said in a statement. “Peritus views credit as either ‘AAA’ or ‘D’: either a company is expected to pay its coupon and principal obligations or it isn’t.”
“We are very excited to be the first firm to offer an actively managed high-yield bond ETF to investors, and as identified by an active ETF panel at this year’s Morningstar ETF conference, high yield is one of the top asset classes that benefits from professional active management,” AdvisorShares founder and CEO Noah Hamman said in a statement.
HYLD charges a very high expense ratio of 1.35%, giving it a price tag that is more in line with actively managed open-end mutual funds.
UBS Launches E-TRACS Long-Short VIX ETN
On Wednesday, Dec. 1, investment bank UBS launched a volatility-linked ETN, UBS E-TRACS Daily Long-Short VIX ETN
UBS’ new ETN is the latest volatility-related exchange-traded product to begin trading, and it becomes the 18th ETN in UBS’ E-TRACS stable and UBS’ first VIX-related ETN. Like other volatility-linked ETNs, XVIX aims to provide directional exposure to the implied volatility of large-cap U.S. stocks through a link to the Chicago Board Options Exchange’s VIX index, which also is known as the “fear gauge.”
However, what differentiates XVIX from the many other volatility-related ETNs is that XVIX tracks an index that measures the return from a 100% weighting in a long position in the S&P 500 VIX Mid-Term Futures Index Excess Return and a 50% weighting in a short, or inverse, position in the S&P 500 VIX Short-Term Futures Index Excess Return. The index then rebalances the weightings of the long and short positions each day. The rationale behind the product’s simultaneous long and short positions is to short the riskier short-term VIX futures while going long on the relatively less risky mid-term VIX futures, which are between four and seven months in length. In theory, XVIX is less exposed to the steep contango inherent in the VIX futures curve while still giving investors exposure to market volatility.
UBS charges an expense ratio of 0.85%. The note will mature in 2040.
ETF Securities Rolls Out White Metals ETF
On Friday, Dec. 3, London-based ETF provider ETF Securities rolled out ETFS White Metals Basket Trust ETF, an exchange-traded fund holding physical silver, platinum, and palladium that is the latest precious-metals ETF to launch.
WITE becomes ETF Securities’ sixth physically backed precious-metals ETF, joining those holding physical gold, physical silver, physical platinum, and physical palladium, along with ETFS Physical Precious Metal Basket Shares ETF GLTR, which holds all four of those physical metals. Now, WITE offers exposure to just the “white metals,” which are silver, platinum, and palladium.
WITE unquestionably is a different play from the recently launched GLTR, because investors typically flock to gold when times are tough. While gold is seen as a safe investment during periods of economic weakness, the “white metals” may remain strong even in a rebounding economy, given their many industrial applications.
Like GLTR, WITE charges an annual expense ratio of 0.60%.
A New Short-Term TIPS ETF from iShares
On Friday, Dec. 3, iShares launched iShares Barclays 0-5 Year TIPS Bond, an ETF that holds short-term, Treasury Inflation-Protected Securities.
STIP gives investors exposure to the short end of the domestic TIPS curve and is the only fund providing access to the very shortest part of the curve (one year or less). It competes most with PIMCO 1-5 Year US TIPS Index ETF.
STIP is intended to protect investors by shielding them from inflation by paying monthly income distributions that rise with inflation. It also can help diversify a portfolio, given that TIPS historically have a low correlation with other asset classes.
Unlike other TIPS ETFs, STIP holds securities to maturity, meaning that the securities that STIP buys pay out inflation-adjusted income through fund distributions and then return principal to the fund at maturity–proceeds to be used to buy more TIPS securities. As such, a greater percentage of an investor’s return in STIP is made up of inflation-adjusted income relative to other TIPS funds.
Like STPZ, STIP charges an annual expense ratio of 0.20%.
AdvisorShares Files for Three Actively Managed ETFs
On Tuesday, Nov. 30, AdvisorShares submitted paperwork to the Securities and Exchange Commission seeking permission to launch three actively managed ETFs.
AdvisorShares is proposing the Madrona Forward Domestic ETF, the Madrona Forward International ETF, and the Madrona Forward Global Bond ETF, all of which would be subadvised by Everett, Wash.-based Madrona Funds.
FWDD would aim to exceed the S&P 500 Index’s return by picking up to 500 of the largest U.S.-listed stocks, chosen through a weighted allocation system based on consensus analyst estimates of firms’ earnings relative to current share prices. FWDI would target beating the MSCI EAFE Index by buying ADRs issued by companies in Europe, Australasia, the Far East, and Canada. The international offering also would potentially provide emerging-markets exposure in the form of U.S.-traded securities of large-cap foreign companies. The proposed bond fund would aim to outperform the Barclays Capital Aggregate Bond Index and own a portfolio of ETFs and ETNs that would provide exposure to at least 12 distinct bond classes, including short-term Treasuries, municipal bonds, and junk bonds.
Established in September 2010, Madrona Funds is the creation of Brian K. Evans and Bob Bauer, who run the Bauer Evans accounting firm in Everett, Wash.
Don’t Miss Morningstar’s ETF Webcasts, Dec. 14, on BrightTALK
Paul Justice, Morningstar’s associate director of ETF research, will host “Generating Income With ETFs and Shielding From Inflation.” This presentation will give an overview of the current state of the markets and how ETFs can be used for income generation and to reduce the impact of inflation. The session will also discuss the unique features of some ETFs commonly used for those purposes.
Morningstar ETF Analyst Michael Rawson will host “Building a Strategic Portfolio With ETFs,” which will offer an introduction to ETFs and describe how they can be used to build a strategic asset allocation.
ETF Performance Last Week
Last week, precious-metals ETFs–in particular, those containing the “white metals”–were among the best performers. Silver continues to be driven by increased industrial demand, including for use in solar panels. However, silver prices also have skyrocketed in 2010 amid strong investment demand, including by physically backed ETFs. In addition, ETFS Physical Palladium Shares soared as palladium prices have risen to near 10-year highs. A precious-metals analyst at UBS told the Financial Times that strong ETF inflows have driven prices and noted that “investor participation in this market is significant and therefore heavily price-influential.”
Also, homebuilding ETFs posted strong performance, driven by a Realtor group’s reports of 10% increases in pending home sales in October. The report came almost immediately after previous data had suggested that the housing recovery had stalled.
Finally, India ETFs did well amid continued strong investments in Indian stocks by foreign investors. Helping to justify some of this investor interest has been solid economic reports, with strong GDP growth driven by higher agricultural output and increased manufacturing activity.
Slowly improving economic news led to a lower VIX on the week, hurting ETFs that attempt to track measures of market volatility, including C-Tracks Citi Volatility Index ETN and iPath S&P 500 VIX Short-Term Futures ETN. Monthly auto sales surpassed the 12 million mark for the second month in a row, and retail sales rose 6% compared with just 0.5% in the year-earlier period. That strong economic news trumped the Fed’s attempt to lower interest rates through quantitative easing, as long-term rates rose. ETFs that focus on longer-term bonds were particularly impacted as they have a greater duration, or sensitivity to interest rates. Both PIMCO 15+ Year US TIPS Index ETF and Vanguard Long-Term Bond Index ETF (were down more than 1%.
Strong natural gas production and continued soft demand has led to record inventories of natural gas and prices that have fallen from $7 a million British Thermal Unit to about $4.31. After nearly going bankrupt building a liquefied natural gas import facility, the excess supply of natural gas from U.S. shale formation has led Cheniere Energy to plan to build an LNG export facility. United States Natural Gas was down about 1%, adding insult to that fund’s 83% cumulative loss over the past three years.
Disclosure: Morningstar licenses its indexes to certain ETF and ETN providers, including BlackRock Asset Management, First Trust, and ELEMENTS, for use in exchange-traded funds and notes. These ETFs and ETNs are not sponsored, issued, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on Morningstar indexes.
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