Category archive: Week 13 2012
(NEW YORK CITY) Everyone wants a piece of Apple these days, but at $600 a share, it’s pricey. Exchange-traded funds with significant exposure to the tech giant may be a way for some investors, Karina Frayter writes in a recent article. “Technology ETFs have been great ways to take part in Apple’s stellar run so far this year,” says Morningstar ETF analyst Robert Goldsborough.
About a dozen exchange-traded funds have exposure to Apple of 10 percent or more, according to ETF Database. Among them: Dow Jones U.S. Technology Index Fund, Focus Morningstar Technology Index ETF , Technology Select Sector SPDR, PowerShares QQQ, S&P Global Technology Index Fund, and Vanguard Information Tech ETF.
With price tags running from $30 to $80, as of Thursday afternoon, these ETFs are up about 20 percent so far this year. Apple shares are up 48 percent over the same period. Notably, PowerShares QQQ, which has 16 percent exposure to Apple, has had $3.9 billion in new cash come in so far this year, according to Matt Hougan, president of ETF Analytics. Although he sees this huge inflow of funds into QQQ as mostly an indication of investors’ confidence in the broader market, Hougan says there is some Apple overlay as well: “The Apple halo extending over the broader tech and markets rise.”
Hougan says investors who are thinking about using exchange-traded funds to play the Apple boom should ask themselves what they are really buying into: Is it “The technology renaissance? The mobile device boom? Or Apple’s specific creativity, brand and ability to execute?” If the answer is one of the first two, ETFs are a good way to play it. If the answer is the last one, buy Apple stock, says Hougan.
Morningstar’s Goldsborough, who likes the idea of using tech ETFs to play Apple, says investors should keep in mind their relative lack of diversification. “One of the whole points behind an ETF is the notion of getting a relatively diversified basket of names; these ETFs have become fairly top-heavy recently because of Apple’s meteoric rise, and that obviously has removed some of the diversification benefits,” says Goldsborough.
According to Goldsborough, technology ETFs are suitable for either a short-term or long-term investment. “Despite Apple’s run, tech is not especially richly valued right now, so one could envision owning one of these until it becomes fully valued (which could play out over six, nine, 12 or even 18 months),” says Goldsborough.
There are concerns that ETFS are too complex and risky for retail investors. But Hougan dismisses such concerns: “ETFs are inherently safer than buying a single stock. Apple’s been an amazing investment, but it’s neither cheap nor unknown at this point. I’d be worried about people buying closer to the top than the bottom. Single stocks can be very volatile, and no company dominates forever,” says Hougan.Details
(NEW YORK) The flow of fresh capital into U.S. equity mutual funds slackened sharply in the week ended March 21 while big selling in money market funds indicates corporations were freeing up cash for tax bills, data from Thomson Reuters’ Lipper showed on Thursday. In the reporting of last week, the U.S. benchmark Standard & Poor’s 500 stock index rose 0.62 percent, having hit a four year high on March 19 before losing some ground.
Overall, U.S. equity mutual funds had net inflows of just $282 million. Excluding exchange traded funds that figure rises to $729 million, indicating individuals were chasing the returns. Domestic equity funds, excluding ETF activity which is anecdotally viewed as representing institutional investment behavior, had net inflows of nearly $1 billion versus an outflow of $261 million for non-domestic equities. The inflows for domestic equities, ex-ETFs, was the best weekly performance since August 2011, indicating the retail investor was putting cash to work. “Some surveys are showing the retail side has bullish views running at high, and the concern I have is they are coming in at the top of the market,” said Matthew Lemieux, analyst at Lipper. “The overall inflows for equities were pretty low, with the ETFs showing outflows and part of that appears to be quarter end profit-taking and perhaps some concerns about U.S. economic growth being thrown backward by high energy prices.
The economic data out of Europe and China is not so comforting either,” he said. Money market funds had outflows for a fourth consecutive week, with the $16.7 billion in net redemptions the largest since the week ended Jan. 25. “The vast majority of that was likely due to tax liabilities of corporations which use money market funds as cash management vehicles. There was no strong counter inflows elsewhere,” Lemieux said. There was however the continued strength of taxable bond funds, which pulled in $3.1 billion, marking the 14th consecutive week of net new money. The breakdown was relatively even, with $1.3 billion moving into corporate investment grade and nearly $1 billion into corporate high yield funds. Hunting for yield continued in equity income funds as well, although the inflows were the lowest since the week ended Aug. 3, 2011, with just $153.7 million in fresh capital. This sector has been one of the hottest over the past two years as government interest rates have held near zero. Retirees especially have been forced to forage for yield outside of the traditional fixed income arena while corporations with fat balance sheets have been able to fund or raise dividends. Tax-free municipal bond funds pulled in fresh capital for a sixteenth consecutive week, albeit a paltry $88.5 million. That represented an 87 percent decline from the week before.
(KANSAS CITY) BATS Global Markets, the U.S. exchange operator that withdrew its public offering Friday after a computer glitch sent its newly-issued stock into a tailspin, should develop a “credible IPO plan” and go through with it in the second quarter, its founder and current director said. BATS’ own stock was to be its first listing. But the initial public offering on Friday ended up a disaster after a software bug briefly sent the price of the shares down from $16 to less than a penny, before trading was halted. Later in the day, BATS took the extremely rare step of withdrawing the IPO altogether.
Founder, Dave Cummings also advocated suspending all bonus plans at BATS, writing in an open letter emailed to industry insiders on Sunday: “In this business, mistakes cost money.” BATS is an electronic exchange owned by many of the world’s largest banks and trading firms. In the last decade it has taken on the New York Stock Exchange and Nasdaq in the trading of stocks and, recently, also wanted to challenge them in listings. “This was a freak one-time event,” wrote Cummings, also the outspoken chairman of Tradebot Systems, an electronic trading firm that like BATS is based in Kansas City, MO. “BATS management should develop a plan to go public in the second quarter, if possible,” he said. “This might seem tough, but I believe it is the only way to move past the issue.” Cummings, who remains a BATS investor after stepping down as its CEO in 2007, said the deal would need to be re-priced. But he defended BATS’ technological record and argued that the “botched IPO” does not have much long-term impact on earnings because the exchange has “solid fundamentals.”
Late on Friday, BATS outlined how the bug set off a series of fast-paced glitches through the trading day, including a halt in the trading of Apple Inc shares and the cancellation of erroneous trades in both Apple and BATS stock. The software code used for the IPO was new and lab-tested, Cummings said, but “bugs do occur” in the real world. “BATS just happened to discover a bug at the most embarrassing time possible.” The letter was titled “What should BATS do now?” Cummings, a trailblazer and fierce defender of electronic trading, occasionally sends such emails to finance executives, traders, regulators and journalists. He founded BATS, an acronym for “Better Alternative Trading System,” in 2005 with 13 employees. It now handles about 11 percent of all U.S. stock trading, runs an options market, and recently completed the cross-Atlantic takeover of alternative trading venue Chi-X Europe. IPO underwriters included Citigroup Inc, Morgan Stanley and Credit Suisse Group, which along with trading firm Getco LLC and others are major BATS shareholders.Details
(FRANKFURT) Three new ETFs issued by UBS Global Asset Management are tradable on Xetra. The MSCI Daily TR Net Growth USA USD Index includes all companies domiciled in the United States that are part of the companies that represent 85% of market capitalisation in the US and in addition are defined as growth stocks.
Growth stocks are characterised by a higher price/earnings ratio. The index currently contains 374 companies. The ETFs reflect the performance of this reference index with the difference that unit class I is primarily aimed at institutional investors and unit class A at private investors. The MSCI Daily TR Net Growth EMU Local Index also focuses on growth stocks, but in the euro zone. The third UBS ETF enables investors to invest in the performance of a current total of 149 companies which have demonstrated continual high growth.Details
(BRUSSELS) Exchange-traded funds may face tougher regulation of derivatives trades as part of a European Union clampdown on so-called shadow banks that could pose a threat to the region’s financial system, Bloomberg Businessweek. The European Commission said today that it is examining potential “conflicts of interest” affecting ETFs, a type of fund that tracks an index and whose shares are publicly traded. The regulator is also reviewing whether banks and other financial firms are using so-called repurchase agreements, or repos, to build up excessive levels of debt.
Regulators will not allow “new sources of risk to accumulate in the financial sector,” Michel Barnier, the EU’s financial-services chief, said in an e-mailed statement. While financial watchdogs have reined in excessive risk taking by banks in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008, they are concerned that lenders and other financial firms can use ETFs, repos and other off-balance sheet activities to evade the rules. Adair Turner, chairman of the U.K. Financial Services Authority, said last week that shadow banking is “potentially very unstable” and vulnerable to liquidity shocks. Supervisors shouldn’t allow “complex interconnectivity” and “high leverage to develop in unregulated institutions or markets,” he said. The shadow banking industry in Europe is worth $22 trillion, and $25 trillion in the U.S., by some estimates, Turner said.
The Financial Stability Board, which brings together G-20 regulators, central bankers and finance ministry officials, said last year that ETFs may “generate new types of risks, linked to the complexity and relative opacity of the newest breed” of funds. The global ETF industry had $1.2 trillion of assets under management at the end of September 2010, according to the FSB. While the U.S. remains the largest market in terms of assets, the number of ETFs listed in Europe surpassed the U.S. in April 2009, according to data from BlackRock Inc. Some so-called synthetic ETFs use derivatives to track an index’s movements.
“We’ve seen a dramatic rise in the role of ETFs in recent years and of course this causes regulators’ warning bells to start ringing,” Richard Reid, research director for the London- based International Centre for Financial Regulation, said in an e-mail. Still, such funds can “provide investors with much needed access to financial markets,” he said.Details
As demand grows, a wider range of prime brokers are emphasising the offering. HSBC, for example, is specialising in building global exposures, increasingly to frontier markets, which leverages their unique local presence in many markets. “In certain markets, clients can’t get access on a cash basis, only on a derivative basis,” says Paul Hamill, global head of prime services at HSBC. “Delta one traders have that capability and often have deeper local market knowledge.”
For now, synthetic products still must compete with traditional listed derivatives, such as options or futures. Exchange traded funds that replicate indices or attempt to deliver specific exposures, such as leveraged or inverse returns, are also major competitors.
In some instances, the over-the-counter product is cheaper. “If we can create a synthetic exposure efficiently, it’s often much cheaper and more liquid,” says Keith Skeoch, chief executive of Standard Life Investments, who says the manager’s Global Absolute Return Strategies fund generally prefers derivative positions to cash ones.
However, listed products, with their more readily understood risks, are still the default tool. According to Greenwich, about three-quarters of equity options trading is done via listed products rather than via over-the-counter trades. At present, only clients of banks with which they have documented agreements about collateral and credit risk can do swap trades with the bank.
That may be changing somewhat, as G20 countries have struck an agreement to push more derivatives trades into exchanges and central clearinghouses. The advent of electronic platforms is also streamlining the creation and clearing of swaps as a way to dampen the risk of a broadening client base and the complications of new regulations.
Some banks, such as Barclays and Deutsche Bank, have created tech-nology to carry out necessary pre-trade risk checks in fractions of a second.
“It really comes down to the institution and their internal technology step-up,” says Andrew Jamieson, head of Emea equity finance at JPMorgan. “We have traditionally had more of a cash prime brokerage bias, but have invested heavily in technology and are definitely ramping up synthetically.”
(PHILADELPHIA) Assets held in Vanguard’s US exchange traded fund business reached the $200bn mark at the start of March and have since risen to $204bn, despite the Pennsylvania-based group being a relative latecomer to the ETF market, the FT reports. Vanguard remains the third-largest ETF player globally, well behind longer established rival iShares, which had assets of $670bn at the end of February. But it could soon overhaul State Street Global Advisors, on $298bn.
Vanguard did not launch its first ETF until 2001, in spite of its history as a pioneer of index investing in the 1970s. Bill McNabb, chief executive, said Vanguard was slow to recognise the importance of ETFs, initially viewing them as a potential threat to its indexing business rather than an opportunity. That attitude was influenced by John Bogle, Vanguard’s founder, who remains unenthusiastic about ETFs, criticising them for encouraging investors to trade frequently, rather than following a “buy and hold” strategy.
Mr McNabb said Vanguard’s attitude changed once the US adviser market started to shift from a commission-based sales model to one based on fees for advice. “That was when we began to realise that ETFs could be phenomenally helpful fundamental holdings for advisers as they started to build low-cost, highly diversified portfolios for their clients.” ETFs have become increasingly important to Vanguard, accounting for 45.2 per cent of net inflows in 2011, up from 28.4 per cent in 2009.
Over the past two years, Vanguard has taken almost a third of inflows into US ETFs while a quarter has gone to iShares and 15.3 per cent to SSgA. That strong performance has continued in 2012 with Vanguard’s US ETFs gathering $12.5bn in the first two months of the year, an 86.6 per cent rise on the same period of 2011. Mr McNabb said ETFs would become “a global phenomenon” as more countries moved away from commission-based sales. However Vanguard’s focus remained on providing low-cost investing in all its forms.
ISE announced plans last week for options on a new “Max SPY Index”, which represents ten times the size of the SPDR S&P 500 ETF Trust, the popular exchange-traded fund that tracks the S&P 500. ISE claims the new index and the options linked to it are proprietary, although S&P has an exclusive agreement with the CBOE, which gives the Chicago exchange sole rights to trade options on the S&P 500 stock index. S&P 500 options are the most popular of those traded on the CBOE.
The CBOE said on Friday it had asked a court in Chicago to enforce an injunction against ISE to prevent it from listing and trading options on the ISE Max SPY index, saying the proposed contracts “actually are structured to be options on the S&P 500”. “CBOE and S&P brought this action in order to prevent this violation of both CBOE’s license rights in S&P 500 index options and S&P’s proprietary rights in the S&P 500,” said Bill Brodsky, CBOE chief executive. “These rights were firmly established by legal precedent years ago and were reinforced by the 2010 injunction that prohibited ISE from listing or trading options on the S&P 500.”
ISE refused to comment on the legal action. The exchange asked regulators last week to approve the new contracts for trading. This week, the Securities and Exchange Commission asked for comments on the plan.
(LONDON) Barclays Wealth is to drop the ‘Wealth’ from its formal title as the group rebrands itself in a shakeup which will also see Barclays Capital trade under the single-name banner, according to a recent CityWire report. Barclays chief executive Bob Diamond said that the group would be moving to more closely align its various divisions under the single banner in a conference call last month.
The Corporate division will also be subject to the decision. He group said the decision was part of Diamond’s attempts to cut costs, with a target of £2 billion in savings hoped to be met by 2013. A spokesperson said: ‘We believe that we better serve our clients by bringing them the best of Barclays, from across the entire organisation. We can do that more easily, and more efficiently, by bringing our divisions together under one brand.’Details