Friday, November 04, 2005

ETFs are hot

ETFs (exchange traded funds) are a hot topic among investment managers. That's what I gathered from the strong turnout and lively Q&A at the "ETFs: Investment Strategies and Portfolio Management" program held today by the Boston Security Analysts Society.

New products are coming

ETFs are coming in more flavors, according to speaker Clifford J. Weber, SVP of the ETF marketplace at the American Stock Exchange.

ETFs began as fully disclosed products based on broad indexes, such as the S&P 500. They're already branching into specialty indexes, such as narrowly defined as PowerShares' Lux Nanotech Portfolio (PXN), and into commodities. Expect more offerings in these areas, said Weber. You'll also see more fully disclosed ETFs that:
  1. Use weighting schemes -- such a Rob Arnott's fundamental indexing -- that aren't based on market capitalization
  2. Are actively managed and run by managers who, unlike many of their peers, are willing to fully disclose their holdings
  3. Are leveraged so that, for example, a 2% gain in the S&P would produce a 4% gain in the ETF
  4. deliver returns that are the inverse of an index, so, for example, a 2% gain in the S&P would result in a 2% decline for the fund
A new phenomenon will be non-disclosed, active ETFs, starting with large-cap equity products, said Weber. Many active managers don't want to disclose all of their holdings for fear that others grasp their strategy and try to trade ahead of them. Another fear is that investors may mimic the manager's investment strategy independently of the manager. These ETFs will use model portfolios that disclose only enough to meet the needs of pricing, specialists' hedging and creation/redemption.

Six ways for RIAs to use ETFs

Six ways that registered investment advisors (RIAs) use iShares -- his firm's brand of ETFs -- were highlighted by Kevin Quigg, business development officer with Barclays Global Investors:
  1. Cash equitization
  2. Portfolio management
  3. Tactical rotation
  4. Tax management
  5. Duration management
  6. Core/satellite investing

Biggest topic during Q&A

"Can you explain why ETFs are more tax-efficient than index funds?" That was the question that the BSAS audience hammered away at. The key is that ETFs do redemption in kind, which allows them to transfer out low-cost-basic stock.

I looked for an easy-to-understand online explanation of this topic, but couldn't find one. Can you?

SSgA rolls out new sales force

Apparently SSgA is rolling out a new sales force to focus on ETFs for the institutional market. Also, they have a bunch of new ETFs coming out later this month.

You can't find much about ETFs on the SSgA website. You've got to mosey on over to the SectorSPDRs site, just as Barclays Global Advisors pushes ETF investors over to

ETFs will supplant index funds

"I see ETFs supplanting index funds," said James Lowell, III, the founding editor of The ETF Trader, among many other qualifications. "It's hard to know why you'd choose an index fund over an ETF today." Index funds just can't compete on costs. Other reasons why Lowell likes ETFs: tax efficiency, niches underrepresented in funds offered by Vanguard and Fidelity, and the cost saving and diversification achieved when they're paired with active managers of emerging market stocks. "We've heard nothing but positive feedback from clients since starting to use ETFs," he said.

Will clients pay you to manage portfolios of ETFs?

Can you manage portfolios composed mainly of ETFs and still charge clients an active management fee? That's a question on the minds of many investment managers.

Yes, you can, according to David Elan, a principal with Windward Investment Management. Windward hasn't cut its fees as it has migrated portfolios into ETFs from mutual funds. However, clients are benefiting from lower overall portfolio fees thanks to the lower fees associated with ETFs.

Useful websites

To learn more about ETFs and the companies represented by the program's speakers, check out these websites.

American Stock Exchange
ETF Connect
ETF Trader:
Sector SPDRs -- Check out their relatively new Correlation Tracker
State Street Global Advisors' ETFs:

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Blogger SusanW said...

An old friend sent me this link to Sheldon Jacobs' helpful explanation of the creation/redemption in kind of ETFs.

10:25 AM  
Blogger SusanW said...

Here's the URL for a MarketWatch article on SSgA's ETF strategy.¶m=archive&siteid=mktw&guid=%7BC1106B24%2D81FD%2D4C44%2D9410%2D35C2898BDB48%7D&garden=&minisite=

11:53 AM  
Blogger SusanW said...

Check out this Morningstar article for another perspective on actively managed ETFs.

The Quest for the Holy Grail of ETFs Continues

Will actively managed ETFs become a reality? Should you care?

by Dan Culloton | 11-08-05 |,,148354,00.html

Morningstar has a whole section on ETFs at

5:59 PM  
Blogger SusanW said...

Here's a link to Morningstar's review of what happened in the ETF world during 2005:

6:48 PM  
Blogger SusanW said...

Morningstar recently published an article of ETFs' tax efficiency at

3:16 PM  

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