Podcast: New Frontiers for ETFs

Listen in as Tom Lydon joins in on a discussion about where exchange traded funds (ETFs) are headed.

Also featured on the panel are PowerShares CEO Bruce Bond and author/CEO of Portfolio Solutions Richard Ferri.

You can either click above to listen now or save it to your iPod to listen to on your afternoon jog!

Bond Indexes Are Broke, and He Says His ETFs Can Fix It

Ron Ryan says there’s a problem with bond indexes that are tracked by exchange traded funds (ETFs). In fact, the CEO of Ryan ALM says that there are several problems and he’s out to fix them.

Tom Lydon Discusses ETFs on CNBC

Tom Lydon appeared on CNBC's "ETF Tracker" segment of Closing Bell earlier this afternoon to discuss how different ETFs may become beneficiaries of new presidential policy with the inauguration of a new president in 2009. Video of Tom's segment appears below:

ETFs Adapt To Ever-Changing World and Business Dynamics

Mutual funds don't seem to be stepping up to the challenge that a global economy presents, possibly creating a wide-open door for the exchange traded fund (ETF) industry.

The power of global business has arrived, with less anchored in the mindset of the nation-state and more concentrated in private enterprise. ETFs offer greater flexibility in accessing these global opportunities at a generally lower cost than mutual funds, reports Tom Pochari for World Affairs Monthly.

Have a listen to my discussion with Tom to hear about the future of the investment business as it relates to ETFs.

Northern Trust Enters ETF Arena With First ETFs To Track Major Foreign Market Indexes

With its new line of exchange traded funds (ETFs), Northern Trust opted to stay true to their principles while traveling around the world.

Is it a sign that ETFs are slowly entering the mainstream and gaining acceptance as more than just a passing fad? An institution as old and well-known as Northern Trust entering the market could be a sign.
 

"We know who we are. We knew what we needed to bring to the market, something that was consistent with our notions of asset management overall," says Peter Ewing, the managing director of Northern Trust's ETF group.

The first batch of funds, the first to track major foreign market indexes, were a year in the making. Ideas were kicked around as the world's third-largest asset manager of institutional index-based assets felt it needed to seriously consider an ETF product line. In 2007, the management committee gave the go-ahead and they filed with the Securities & Exchange Commission (SEC).

"Our opening salvo is traditional," Ewing says. But the provider isn't averse to more inventive ETFs and strategies. But for now, "We want to stay true to our principles."

Northern Trust's ETFs, which all have an expense ratio of 0.47%, are:

• NETS S&P/ASX 200 Index Fund (AUS): Represents Australia
• NETS DAX Index Fund (DAX): Tracks Germany's major exchange
• NETS FTSE 100 Index Fund (LDN): Invests in the largest companies by market cap on the London Stock Exchange
• NETS CAC40 Index Fund (FRC): Represents France
• NETS Hang Seng Index Fund (HKG): Represents Hong Kong
• NETS TOPIX Index Fund (TYI): Represents Japan

At a later date, there will be funds issued that cover Belgium, Ireland, Portugal, South Africa and more.

Oil Down ETF Moves Up On Oil Price's Slide

As oil prices head south, one exchange traded fund (ETF) shot way up.

MACROshares Oil Down (DCR) closed up 10.6% in trading today after oil speculators pulled out of the market. Crude settled at $112.52, stripped of its appeal to investors as the dollar gained strength, says John Wilen for the Associated Press. Oil is sitting at its lowest level since April 14, but analysts caution that it could be temporary.

Meanwhile, the MACROshares continue to trade as they normally would after hitting a termination trigger on April 16. Sam Masucci, MacroShares' CEO, says both Oil Down and MACROshares Oil Up (UCR) will trade as though they normally would.

On June 25, they'll cease trading. On July 3, shareholders of the funds will receive payouts based on the fund's net asset value (NAV) on that day. The funds are raking in assets, says Masucci, pulling in $120 million this week.

The company has filed with the Securities & Exchange Commission (SEC) for its second set of up/down oil ETFs. The hope is that they'll get the go-ahead before the first set of funds terminate.

ETF Holdings' Fundamentals Go Under the Microscope

Michael Krause has ESP for ETFs (exchange traded funds).

Instead of using a crystal ball, though, the president of AltaVista Independent Research looks at the fundamentals of every one of an ETF's constituents.

Energy-Focused ETFs Capitalize on a Booming Sector

Commodity exchange traded funds (ETFs) and exchange traded notes (ETNs) have come a long way since Nov. 18, 2004. That's when the first single-commodity ETF - streetTRACKS Gold Shares (GLD) - was launched.

Tom Lydon with Neil Cavuto

Tom Lydon appeared on Neil Cavuto's show on Fox Business earlier this afternoon to discuss rising food prices. Video of Tom's segment appears below:

The Long and Short of Long and Short ETFs

Everyone knows about short and leveraged exchange traded funds (ETFs), but some might be wondering "How do they do that?"

Michael Sapir, CEO of ProFunds, gave us a call and explained it. "The best way to understand how a [short or leveraged] fund works is to compare how an S&P fund works."

Tom Lydon Talks Oil ETFs on CNBC

Tom Lydon appeared on CNBC's "ETF Tracker" segment of Closing Bell earlier today to discuss how near-record oil prices has been making oil ETFs look pretty attractive lately. Video of Tom's segment appears below:

Just In Time for Warm Weather, Claymore Launches Solar ETF

While there are several clean energy exchange traded funds (ETFs) out there, none of them have focused solely on one aspect of the sector until now.

Claymore this morning launched the Claymore/MAC Global Solar Energy Index (TAN) on the NYSE Arca. Claymore President Christian Magoon told us the potential for growth in the solar industry is huge. Currently, it accounts for less than 1% of global electricity.

It's Bond ETF Time - Munis Are Yielding More Than Treasuries

It's an event like Halley's Comet, although with a little more frequency: municipal bond yields are higher than those of treasury bonds. For that reason, it makes more sense than ever to grab exchange traded funds (ETFs) that hold them.

"It's something that doesn't happen very often," says Glenn Smith, associate of ETF sales at Van Eck. "Maybe once every 7-10 years or so."

Tom Lydon Talks ETFs on Fox Business

Tom Lydon appeared on Fox Business Network earlier today with anchor Cheryl Casone. Tom discussed hot ETFs in Asia and Latin America as well as poorly performing ETFs in the retail sector. Video of Tom's segment appears below:

Tom Lydon on CNBC's Power Lunch

Tom Lydon was a guest on CNBC's "Smart Money" segment of Power Lunch earlier today. He spoke with show host Sue Herera about agriculture ETFs. Video of Tom's segment can be seen below:

ETF Tracking Error Is Sometimes a Necessary Evil

Logically, exchange traded funds (ETFs) should have minimal tracking error. That's because they track an index, and in theory, if the index zigs, so does the ETF - and vice versa. It's not always the case, though, and tracking error does occur.

Tom Lydon on Fox Business Network

Tom Lydon was a guest on Fox Business Network earlier today and discussed some of the basics of exchange traded funds one-on-one with host Dagen McDowell. Video of Tom's segment appears below:

Tom Lydon Discusses Taiwan Economy on "ETF Tracker"

Tom Lydon appeared on CNBC's "ETF Tracker" segment last Thursday to discuss the Taiwan economy. While global markets around the world have been declining recently, there is one area -- Taiwan -- which has been showing positive numbers year-to-date. Video from Tom's segment appears below:

Tom Lydon Talks Foreign Currency ETFs on "ETF Tracker"

Tom Lydon appeared on CNBC's "ETF Tracker" segment last Tuesday and discussed how the falling USD is opening opportunities for individual investors to buy foreign currencies as a way to hedge against low yields in money market funds, bonds, and CDs. Video from Tom's segment appears below:

Costly Oil Could Hurt Two ETFs

Could one of the more innovative exchange traded funds (ETFs) become a casualty of the rising oil prices?

MacroShares Tradeable Oil Shares (UCR) and (DCR) have had a hard time proving themselves since their inception in November 2006. Not technically ETFs, each fund is designed to track the variations in the price of oil futures. As one fund rises in value, assets shift to it from the fund that's declining. We spoke with the creators of the funds in January, and how they operate is very interesting.

Brad Zigler for Seeking Alpha says that as the price of oil has gone up, assets have been going into UCR (the "up" fund) at the expense of DCR (the "down" fund). Assets in DCR are finite, and it can only continue for so long.

MacroShares' prospectus calls for early redemption if certain points are hit, one of which is if the price of oil settles at or above $111 for three consecutive trading days.

We came dangerously close to that a few days ago, but now that oil has once again retreated from its record levels, it looks like the funds are safe - for now.

New ETF Committee Hopes to Bridge the Gap

One year ago, there were no major committees to explore and address the unique issues of the rapidly growing exchange traded fund (ETF) market. Now there are two.

The Security Traders Association of New York (STANY) has established a committee to address all aspects of exchange traded funds (ETFs), to be chaired by XShares' CEO Anthony Dudzinski.

Dudzinski, who worked as a market making trader for about 20 years, told us that he first broached the idea of a committee to STANY a year ago. "I said 'This is a growing business...there will be more products like this trading and you should pay attention.' " He's been a standing member of the organization for 18 years.

While STANY's committee was in the works, Dudzinski got the call from the Investment Company Institute (ICI): would he be on their new ETF committee, too? Sure, he said.

While both committees are going to represent the interests of ETFs, they'll focus on different aspects. While the ICI is a group of managers concerned with issues surrounding the 40 Act and the packaged product business, STANY's group will focus on market structure issues that may not be familiar to the ICI and its core constituents.

The overall hope is that the ETF industry will be better served with more voices, more research and more informed opinions behind it.

"As with every industry, there are different constituents focused on different things and don't always have the same opinions," Dudzinski says. "The purpose of a group is to sort, commingle, put in a blender and come out with some kind of commonality."

ETF Investors Dig for Platinum, Gold and Silver

Yes, investors are flocking to gold exchange traded funds (ETFs) as the dollar weakens.

Case in point is streetTRACKS Gold Shares (GLD): after gold surged to a record $992 an ounce earlier this week, the fund traded nearly 11.5 million shares, reports Joanne Von Alroth for Investor's Business Daily. No one is particularly surprised, though.

What is surprising is the performance of white metals.

Platinum, in particular, has continually hit record highs. On Tuesday, it rose to $2,275 an ounce, and is up 50% year over year. The supply has also taken a hit from the continuing power supply problems in South Africa, which are interrupting mining activity. In addition to that, there has been a platinum deficit since 1999. Mining gets about 7 million ounces of platinum a year.

Why, with all of this shortage and growing investor demand, is there no platinum ETF available in the United States? We've been getting a lot of questions from our readers, so we put the question to Kevin Rich, CEO of DB Commodity Services.

"[Platinum] is not liquid enough to support an ETF," is the simple answer. "There are not enough players transacting it."

The last thing anyone would want, Rich says, is for a fund to take money in but find that it couldn't buy the underlying asset. Platinum is scarce enough that it's possible for an investment product to take away the supply. "When you bring in an ETF, you make sure the supply and demand of the commodity are still driving the market," Rich says.

The Commodity Futures Trading Commission (CFTC) is careful to make sure that trading activity doesn't lead to a situation in which investors corner the market.

The London Stock Exchange lists a platinum ETF from ETF Securities (PHPT), and its existence is likely just a matter of different rules and regulations. "They've done things that wouldn't be as easy to do here in the U.S. from a regulatory perspective," Rich says.

The largest silver ETF, iShares Silver Trust (SLV), is up  33.7% year-to-date.

The metal could be benefiting from its versatility. Not only is it used in jewelry and some is held for profit, but it has a number of industrial applications. It's the best conductor of both heat and electricity. It's used in batteries, conductors, fuses, contacts and a water purifier.

You'd think there would be a ton of the stuff lying around, but it isn't the case: the price bottomed in 1980, much of the existing stockpile was melted down and mining slowed down.

Metals, like any commodity, are volatile. They're doing great now, but be wary of sudden dips and watch the trends closely so you know when it's time to jump ship.

SEC's Proposed Rule Changes Could Lead to More ETFs, More Innovation

The exchange traded fund (ETF) approval process could become streamlined, thanks to moves by the Securities and Exchange Commission (SEC).

We caught up with John McGuire, partner at Morgan, Lewis & Bockius LLP, and he weighed in with his thoughts about the changes.

The SEC is making these changes largely because of demand from ETF sponsors to speed up the process and as the funds become increasingly popular. Typically, the ETF approval process involved staff at the SEC subjecting a fund to a review, resulting in approvals on a case-by-case basis, report Kara Scannell and Diya Gullapalli for the Wall Street Journal. The new rule would eliminate the need to obtain specific relief.

"The ultimate short cut is to adopt a rule that permits ETFs without the need for obtaining and SEC exemptive order," McGuire says. "I do think that the success of ETFs has led to a large backlog of exemptive orders."

The changes don't necessarily mean that ETFs won't go through less scrutiny before they land in the marketplace. But McGuire says that "ETF sponsors won't have to go through this exemptive process, but there will still be scrutiny as the ETFs go through the registration process."

The changes aren't in place yet, though, and any changes may not be immediately apparent. After the SEC makes its proposal, there will be a period for public comment. The Commission will then analyze that input and make a decision based on that. "The new rule will likely impact those sponsors seeking to get in the ETF business in 2009 or later," says McGuire. It could also affect providers already in the business who are looking to add to their ETF lineups.

If the new rules go into effect, McGuire says it could free up staff to focus on new products that don't fit the current models, and it will also make it easier for fund groups to enter the ETF business. "Either of these things could lead to more, and more innovative, ETFs."

The meeting at which the SEC will make its recommendations for the new rules will take place next Tuesday.

Now That Active ETFs Are Here, It's Up to Investors to Bite

Actively managed exchange traded funds (ETFs) are just about here, as the Securities and Exchange Commission (SEC) granted exemptive relief to PowerShares, the first fund provider to receive it.

And PowerShares President Bruce Bonds believes that they'll catch on with investors. There has been criticism of actively managed funds - they defeat the purpose of ETFs, they might not be as cost-effective as ETFs, and so on. But Bonds says that when investors finally sit down to compare actively managed funds with mutual funds, the transparency of the active ETFs, their liquidity and tax efficiency will ultimately win them over.

Will they someday take the place of mutual funds? Not quite, Bonds says, but he believes that they will certainly give mutual funds a run for their money. Mutual funds will continue to pull in assets, but ETFs will remain a strong challenger.

The funds may or may not change their holdings each day, depending on what the markets are doing. Whether they do or not, whatever holdings there are will be disclosed each evening. Bonds says this is an effort to preserve transparency, and was a condition of the SEC's granting of the relief. By disclosing holdings at the end of the day, any possible front-running that might take place will be discouraged.

The four funds are:

• PowerShares Active AlphaQ Fund: seeks to provide long-term capital appreciation by investing in a portfolio of 50 Nasdaq-listed securities. It's designed to beat the Nasdaq 100 benchmark.

• PowerShares Active Alpha MultiCap Fund: Designed to achieve returns in excess of the S&P 500 with a portfolio of 50 securities.

• PowerShares Active Mega-Cap Fund: Seeks to primarily invest in mega-caps and outperform its benchmark, the Russell Top 200.

• PowerShares Active Low Duration Fund: Invests in a portfolio of U.S. government and corporate bonds, and seeks to outperform its benchmark, the Lehman Brothers 1-3 Year US Treasury Index.

Now that they've gotten the go-ahead, the waiting game begins. Bonds says that PowerShares is aiming for an April launch.

Keep an eye out. This new breed of ETF has been long-awaited, and it's just the beginning. Are investors going to bite?

 

Rumors of Target-Date ETFs' Demise Have Been Greatly Exaggerated

Let's get this straight: No target-date exchange traded funds (ETFs) are closing.

However, portfolio provider XTF Advisors is shutting down its lineup of target-date ETF portfolios.

Since Claymore's announcement that it's booting 11 of its weakest-performing ETFs, you'll forgive the alarm these days when investors see "closing" and "ETFs" in the same sentence.

We repeat: No other ETFs are actually closing this time.

"No animals have been injured in this movie," says Jeffrey Feldman, chairman of XShares. XShares has nothing to do with XTF, but somehow in the spreading of the news, their similar-sounding names were linked. XShares currently offers the only target-date ETFs in the marketplace through its line of TDAX products.

Feldman set the record straight: "They went out of business for reasons totally unrelated to ETFs. There was an inability to raise capital. They had a very good business model, but they never built or managed ETFs."

Meanwhile, State Street Global Advisors filed with the Securities and Exchange Commission (SEC) to launch a series of actively managed target-date ETFs, reports Stacy Schultz for On Wall Street. They're going to be a "fund of funds" and hold other ETFs, according to Matthew Hougan for Index Universe.

The XShares line consists of ETFs of stocks and bonds - analogous but different products, Feldman says.

Tom Lydon on ETF Tracker Yesterday

Tom Lydon appeared on CNBC's "ETF Tracker" segment of Closing Bell yesterday to discuss the surge in demand for silver. Below is a video of Tom's appearance:

Video of Tom Lydon on CNBC's ETF Tracker

Tom Lydon was featured on CNBC's "ETF Tracker" segment of Closing Bell earlier this afternoon, where he discussed gaming-related ETFs and the Sin Index.

New Claymore ETFs Almost Have It All - Literally

If you were looking for a one-stop shop to get access to the U.S. capital markets via exchange traded funds (ETFs), it's here.

Today, Claymore launched a group of Capital Markets ETFs on the American Stock Exchange:

• Capital Markets Index (UEM)
• Claymore U.S. Capital Markets Bond Index (UBD)
• Claymore U.S. Micro-Term Fixed Income (ULQ)

UEM is the first ETF that covers all U.S. investment-grade capital markets. "It's probably the broadest ever launched, as far as we know, in the world," says Christian Magoon, head of the ETF group at Claymore Securities.

High Yield Bond ETFs Inviting During Dicey Market

In troubled times, investors are on the hunt for safe havens, and one of those is bond exchange traded funds (ETFs). There is always the concern about interest rate risk, but with the possibility of further rate cuts by the Federal Reserve, short-term threats should be small.

Video of Tom Lydon on FBN This Morning

Tom Lydon was on Fox Business Network's Opening Bell this morning and discussed silver ETFs, agriculture ETFs, and the advantages of ETFs versus mutual funds with hosts Connell McShane, Ray Hennessey, and Ashley Webster. Below is video from Tom's morning segment:

ICI's New ETF Committee Under the Microscope

The exchange traded fund (ETF) industry is finally getting more attention from the Investment Company Institute (ICI) - something it has been wanting for some time. But it has some in the industry wondering if there aren't some ulterior motives.

ETF sponsors have often complained that the ICI doesn't do enough on their behalf, reports Brooke Southall at Investment News, and they've wondered if a separate association isn't in order. Southall's excellent article reveals that the ICI's move is seen by many as an effort to head off any possibility a new association developing. The committee is a possible precursor to a separate ETF unit in the organization, according to Jim Ross, managing director of State Street Global Advisors.

The concern on ETF providers' minds is whether the ICI, as an organization vested primarily in the interest of mutual funds, will actually do enough to meet their needs.

Carl Verboncoeur, Rydex's CEO, feels strongly that the ETF industry has a need for advocacy. As an involved member of the ICI for many years, he's looking forward to observing the committee's progress.

Bruce Bond, CEO of PowerShares, has been appointed chairman of this committee. I've known and observed Bruce for a few years now and wouldn't say that patience is one of his outstanding characteristics. Just take a look at PowerShares' expanding product line.

"The committee itself will determine the topics and issues facing the ETF industry that they want to pursue first," Bond said. He adds that between the size of the ETF industry and the ICI, they hope to use their strength to address the issues.

If this new committee's proposals aren't accepted by the ICI membership right out of the gate, I'd expect Mr. Bond will be very vocal.

I think the jury is still out as to the effectiveness of this committee. The priorities of ETF providers clearly do not align with the priorities of conventional mutual fund companies for a few important reasons:

1. There's an ongoing need for ETF education not only for individuals, but financial advisors as well. As more investors understand and utilize ETFs, assets will come at the expense of underperforming fund companies.
2. Congress is looking closely at fees disclosure in investments and retirement plans. This bodes well for ETF providers, as expense ratios in most cases are a fraction of what they are in conventional funds.
3. ETF providers are justified in feeling strongly that ETFs should play a role in 401k investment options. Conventional mutual fund companies and plan providers are clearly not motivated to include ETFs while sacrificing the lucrative fees.

Video of Tom Lydon on Squawk Box This Morning

Tom Lydon appeared on CNBC's Squawk Box this morning to discuss ETFs with host Becky Quick. A video of this morning's segment with Tom is below:

Coal ETF Mines the Opportunities

Last week, a new exchange traded fund (ETF) covering a commodity that had many asking, "Wait, wasn't there one for that already?" began trading on the American Stock Exchange.

Market Vectors Coal (KOL), as you might guess from the name, tracks an index made up of 60 companies involved in the mining or transportation of coal, manufacture of coal mining equipment and the production of clean coal.

But with coal's ubiquity and everyday use, one has to wonder what took so long for a fund that tracks the commodity to finally appear.

Title of 'Worst' ETF is Up for Debate

Uh-oh. There appears to be some fallout over a story about the worst exchange traded funds (ETFs) of 2007.

Jeffrey Ptak of Morningstar took a look at his picks for the worst performers, singling out a few funds that were victims of bad timing, launched as certain sectors were hitting their peaks. Emerging markets, real estate and even natural resources were among them. As an example, he cited the SPDR S&P China (GXC) and the First Trust ISE ChIndia (FNI).

Ptak's pick for the worst ETF, however, is the Claymore Clear Global Timber (CUT), which launched in November. He says that there's a big difference between investing in timber forests and investing in forest companies, which is what CUT does. As a result, there are factors such as cost-efficiency, exchange-rate fluctuations and more that can put a drag on returns.

Christian Magoon, head of the ETF group at Claymore, wonders if Morningstar "gets it."

Play the Oil Non-ETF Market Both Ways

MacroShares Oil Up (UCR) and MacroShares Oil Down (DCR) are "paired" exchange traded securities - not exchange traded funds (ETFs). They don't hold commodities or futures and they don't track an index. But what does all of that mean, exactly? A lot, it turns out.

Bob Tull, head of the MacroShares division, and Sam Masucci, the company's CEO, explained it to us. "We're very different than an ETF," Masucci said. "If you look at the SPDR, they manage a pool of stocks to replicate the movement of the S&P."

There's More to Timber ETF Than Meets the Eye

Andrew Corn, in his own words, is known as “a bleeding heart, tree-hugging person in real life.” So, the founder and CEO of Clear Asset Management was a bit taken aback when a friend of his daughter’s called and, in a dramatic fashion that is the hallmark of 14-year-olds everywhere, asked him how he could possibly be a part of something called “CUT.”

That is, the Claymore/Clear Global Timber exchange traded fund (ETF). Its underlying index is made up of 27 companies from 11 countries that produce wood and paper products. And it has little to do with lumber and its price.

“The thing I have found is that people look at what we’re doing, and they wanted to take our information and compare it to the spot price of lumber in the Midwest. Why not compare the prices to a banana? There is that little correlation to lumber prices,” Corn says.

Tax-Loss Harvesting Made Breezy With ETFs

One of the big fears investors have is that when they're holding a losing position, as soon as they sell it, it's going to turn right back around and start performing well. Dan Dolan, the director of wealth management strategies at Select Sector SPDRs, believes that exchange traded funds (ETFs) offer a perfect opportunity to circumvent those concerns.

"One of the challenges for people is to realize losses in their portfolios. 'The second I sell my security, it's going to move higher.' It's difficult for people," Dolan says. "The trick is: sell that fund and buy something else that contains that position."

Known as tax-loss harvesting, it involves selling a losing position in order to claim a tax loss, then immediately buying a new index fund or ETF that holds that same position, so you don't lose your stake if things do indeed make a turnaround. Once you've held the new fund for 31 days, you're free to sell it and re-purchase the old position.

The 31 days is key -- that's to prevent triggering the IRS's "wash-sale" rule, which states that if you buy a security that is "substantially identical" to the one you just sold, you cannot claim the loss.

The beauty of ETFs, Dolan says, is that for the first time, investors have insight and can see precisely what they're buying, making tax-loss harvesting a breeze, relatively speaking. "What's changed here is the ETF structure and their total transparency. With mutual funds, you never really knew what was in there. When you were making trades, you just didn't know."

S&P 500 Marks Its Golden Anniversary

This year marked the anniversary of the index on which the first exchange traded fund (ETF) was based: the S&P 500. In March 1957, the index that would become the most widely used U.S.-linked index was born and Standard & Poor's has been celebrating all year long. Part of the party was in New York, where they rang the closing bell in March.

David Blitzer, Standard & Poor's chief investment strategist, says that while he knew the index was no doubt valuable, he didn't realize just how much of an impact it truly had until he began putting together a book about its first fifty years. A slew of contributors quickly signed on to lend their voices to the project, including such thought leaders as John Bogle and Jeremy Siegel.

"Consistently, as we went through, this history of the index was the history of everything we knew. I knew the index was pretty significant. It was present in the creation of anything significant," Blitzer said.

His favorite discovery? Learning that it was the first index to have its calculations done by computer during the trading day. "It was not quite real time. It took about an hour. But it was the first time anyone had set up an index and tried to calculate it during the day."

In 1993, the SPDRs (SPY) were launched -- no doubt a nod to the S&P 500 as a major, important player in the world of indexes.

In 1995, Blitzer was appointed to be the chairman of the committee that decides which stocks are added or bumped from the index. As he settled into the role, he asked his predecessor what he could do differently than he had. "Go and tell everyone about [the index]," came the response.

"Thirty-eight years the index was around, yet we had never promoted it in a huge way in the public. That was my charge," Blitzer said. Getting it to become a household name like the Dow Jones industrial average became a goal.

It's safe to say his mission has been accomplished.

Using ETFs to Track IPOs

Getting in on an initial public offering (IPO) can be a hit-or-miss proposition -- how do you know what's going to take off and stay taken off vs. what's going to peter out after an initial rush of excitement? What's the next Google and what's the next Krispy Kreme? Joseph Schuster, the creator of the index that U.S. IPOX 100 Index Fund (FPX) exchange traded fund (ETF) tracks, believes he has identified a solution to the problem.

This ETF tracks an index of 100 top IPOs in the U.S., measuring the performance of them by their market cap and rebalancing quarterly. They're added into the index on their seventh day of trading in order, Schuster says, to capitalize on a long-term "buy and hold" perspective. On their 1,000th day, it's time to move on and the once hot new things are bumped out of the index in favor of a new IPO.

"Only a few IPOs are really interesting from an investor's perspective. Ninety percent of them turn out to really be dogs, underperformers. We provide a stable solution to the problem," Schuster says.

The IPOX 100, launched in April 2006, is the first offering to track U.S. IPOs, but there's a whole line of IPO indexes that IPOX-Schuster offers that target IPOs around the world. Later in 2006, Dow Jones launched the Dow Jones STOXX IPO indexes in the European market. They track the performance of European IPOs over three time periods: 3 months, 12 months and 60 months. A key difference between STOXX and IPOX is that STOXX includes IPOs on the day after their initial offering.

While IPOX has more exposure in large-cap IPOs, Schuster believes IPOs ultimately should be seen as a separate asset class because their returns and risks are different than that of the average, everyday stock. "We think the industry makes a mistake in not classifying them separately, and that's what IPOX is all about."

ETFs in 401(k) Plans: The Technology Is Here

We spoke with Darwin Abrahamson, the CEO of Invest n Retire, and asked him about why ETFs should be in 401(k) plans and what his firm is doing to make it happen.




Aside from the usual reasons (transparency, liquidity, low cost, etc.), why are ETFs better investment options for managed accounts (asset allocation models) than mutual funds?

There are several advantages ETFs have over mutual funds as investments for asset allocation models. Primarily, ETFs are required to maintain a 99% correlation to their index. Mutual funds average 4-5% in cash, which creates a cash drag on the returns and have style drift from the index.

As an example, the AIM Mid-Cap has only 73% of its assets in mid-cap stocks, 6% in cash and 21% international stocks. Therefore, the fund has different returns (style drift) than the mid-cap index. Using mutual funds in asset allocation models corrupts the asset allocation model.

Do ETFs reduce the fiduciary liability for fiduciaries?

Yes. Language contained in the American Law Institute’s Restatement of the Law Third, Trusts, which serves as the basis for the Uniform Prudent Investor Act states: “A trustee’s departure from valid passive strategies may actually increase the trustee’s burden of justification and continuous monitoring.”

Don Trone, president of the Foundation for Fiduciary Studies stated, “One could argue that the failure to at least consider ETFs could be deemed a breach of fiduciary responsibility.”

With the GAO report, congressional hearings, the DOL 408 project and class action suits on revenue sharing with mutual funds, what advantage do ETFs have?

(In November 2006, the United States Government Accountability Office (GAO) published a report titled Changes Needed to Provide 401(k) Plan Participants and the DOL Better Information on Fees. The GAO did the study because of concerns about the effects of fees on participants’ retirement savings. The GAO recommended that Congress should amend the Employee Retirement Income Security Act (ERISA) to require fee disclosure to participants and plan sponsors by 401(k) service providers.

The DOL 408(b)(2) project requires plan sponsors to disclose indirect compensation on their 5500s starting in 2008 and require service providers, such as advisers and record-keepers, to disclose indirect compensation to plan sponsors and will mandate disclosure of indirect compensation to plan participants.)

ETFs do not have any of the baggage of hidden fees that mutual funds have. The hidden fees include 12(b)1 fees, revenue sharing (sub-TA fees), multiple share classes and internal brokerage costs. Therefore, disclosure and cost of disclosure of hidden fees is eliminated.

Target date funds – a fund that matures by a target date of your choosing and, as you near that date, becomes incrementally more conservative – are the hottest investment option in 401(k) plans. What is creating this growth?

Mutual fund companies are increasing their fees and increasing assets by limiting the funds in the target date funds exclusively to their own funds. The average target date fund has a fee of 0.93% compared to 0.50% on the core funds. Example: the BGI LifePath 2040 portfolio’s total expense ratio is 1.19% and the ETFs used in this fund have an expense ratio of 0.35%. Therefore, a participant in the LifePath 2040 fund is paying BGI 0.84% more in fees. LifePath funds are a great cash cow for Barclay’s, but not for the investor.

Why are current providers such as Vanguard and Fidelity not offering ETFs in 401(k) plans?

There are two reasons. The first and foremost reason is revenue stream to the mutual fund companies and providers is much greater with mutual funds. The second is that other providers – except for Invest n Retire – do not have the technology to trade and record-keep with ETFs in 401(k) plans.

Gus Sauter, chief financial officer at Vanguard stated in an interview, “Our ETFs typically have a lower expense ratio than our conventional share classes. If a record keeper just offers ETFs alone, how will the record keeper get enough?”

The press continually quotes mutual fund companies that claim there is no demand from plan sponsors for ETFs. It is the mutual fund companies that do not want to offer ETFs in 401(k) plans, not the plan sponsors. Mutual fund companies have every reason to discourage ETFs in 401(k) plans.

The low cost of ETFs, which makes them very attractive to investors, makes their distribution into 401(k) plans unattractive to mutual fund companies. ETFs do not generate cash flow to their preparatory funds, nor can they receive revenue-sharing from other fund companies.

The way business is done in the mutual fund industry is to add fees to the “traditional” mutual funds in order to compensate intermediaries for distributing the funds. Distribution fees are paid in the form of 12b-1 fees, sub-transfer fees and find’s fee – known collectively as revenue-sharing fees. ETFs do not have any built-in structures for payment of revenue-sharing.