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News New SPDR Offers Twist On Mortgage Finance At the end of April, SSgA launched the SPDR KBW Mortgage Finance ETF (NYSE Arca: KME), which holds banks focused on mortgage loans and related services. It also includes a healthy dose of title insurers and claims managers, as well as homebuilders. The ETF, which comes with an expense ratio of 0.35 percent, uses a benchmark created by investment banker and asset manager Keefe, Bruyette & Woods. The new ETF joins four other SPDRs using KBW indexes to slice financials into different subsectors. There are several MBS-focused ETFs on the market, but they all hold fixed-income securities rather than the stocks of mortgage lenders. First Convertible Bond ETF Debuts On April 16, State Street Global Advisors launched the SPDR Barclays Capital Convertible Bond ETF (NYSE Arca: CWB). According to SSgA, it’s the first ETF to focus solely on convertible bonds available to U.S. investors. Convertible bonds have been gaining attention lately, in part due to their impressive year-to-date performance. Convertible bonds can be ex - changed—at the option of the holder—for a specific number of shares of the issuer’s preferred or common stock. For investors, that means convertibles provide the safety of a bond with the upside potential of equities; the trade-off is that they typically pay lower yields than standard corporate bonds. Although the ETF’s underlying index included about 160 issues, the fund holds only 36 names. CWB comes with an expense ratio of 0.40 percent. Direxion Plans Monthly ETFs Direxion Funds has filed to offer 40 new inverse and leveraged funds. In the February-dated request, Direxion proposed launching the first ETFs to provide leveraged and inverse returns on a monthly basis. The company already has a lineup of successful ETFs offering 300 percent and -300 percent exposure to the daily movements of a variety of indexes. Direxion’s filing covers 10 indexes, including the likes of the MSCI EAFE Index and the Russell 2000, among others. Four different funds are planned for each index—two offering 200 percent exposure (one leveraged, the other inverse), and two offering 300 percent exposure. The monthly return focus would The new ETF joins four other SPDRs using KBW indexes to slice financials into different subsectors. change the performance of the funds dramatically. When funds rebalance daily, compounding causes the longterm returns of the funds to deviate from a simple long-term multiple of the benchmark performance. Because they rebalance less often, the monthly funds would be less exposed to this problem. However, investors who bought in the middle of the month would achieve a different kind of return from investors who bought on the first of the month. Vanguard Launches Ex-U.S. Int’l Small-Cap ETF Vanguard launched an international small-cap ETF on April 6. The Vanguard FTSE All-World ex-US Small-Cap ETF (NYSE Arca: VSS) is the ETF share class of the Vanguard FTSE All-World ex-US Small-Cap Index Fund, which launched in March. The ETF comes with an expense ratio of 0.38 percent, the cheapest in its field. It holds a massive 2,100 different names, and is the only broad-based small-cap ETF to cover developed as well as emerging markets in a single fund. ProShares Looks To Triple Leverage ProShares has requested that the Securities & Exchange Commission allow it to provide up to 300 percent leverage and 300 percent inverse exposure to more than 35 different indexes covering the domestic stock market, international stocks and fixed income. Currently, Direxion is the only firm offering ETFs providing 300 percent exposure. ProShares’ offerings currently provide no more than 200 percent exposure. Its chief rival, Rydex, is also awaiting approval from the SEC of its own proposed triple-exposure ETFs. Note that the filing does not say what the exact exposure of the funds eventually launched based on the filing will be—just that it will be up to 300 percent; meaning, for example, that 250 percent exposure would be another possible option for the company. 48 July/August 2009
No portfolio details were provided by ProShares about the focus of any future 3 times leveraged or inverse fund. ETFS Files For Platinum, Palladium Bullion ETFs In U.S. April filings by London-based ETF Securities (ETFS) indicate that U.S. investors may soon be able to access two precious metals via products structured in a way similar to the SPDR Gold Shares ETF (NYSE Arca: GLD). The ETFS Palladium Trust and the ETFS Platinum Trust each will hold physical bullion of its respective metal. ETF Securities already offers platinum and palladium bullion ETFs in Europe. The most recent filings bring the number of ETFS products in registration in the U.S. to four—all of them trusts that will hold precious metals (silver, gold, palladium and platinum). Although the silver and gold trusts will compete directly with offerings from SSgA and BGI, the palladium and platinum products will likely be the first ETFs to cover their respective metals. BACK TO THE FUTURES CME Contracts Down In April; E-Minis Up CME Group’s average daily contract volume in April 2009 was down 23 percent from April 2008, to 9.2 million. However, the group’s e-mini equity index contract volume was up 18 percent from the prior year, to 2.9 million, representing nearly a third of the average daily volume. Although the e-mini contracts are by no means the sole index-based contracts trading on the CME, they do represent the vast majority of the volume in index-based products. KNOW YOUR OPTIONS CBOE Volumes Grow In April The Chicago Board Options Ex - change saw April’s average daily volume jump to over 5 million contracts this year, a 28 percent increase over the prior year. While average daily volume for News cash-settled index options was up just 4 percent, ADV for ETF options rose a more significant 21 percent. Combined together, the two categories are slightly less than 40 percent of the total average daily volume for the exchange. FROM THE EXCHANGES ICE Clears $70 Billion In CDS The Intercontinental Exchange said in April that it cleared $70 billion in CDS contracts in its first four weeks of operation as a CDS clearinghouse. The ICE US Trust is the only CDS clearinghouse in the country that is currently handling trades, at least for now. CME Group, partnered with Citadel Investment Group, has also received regulatory approval to operate a CDS clearing platform, but its CMDX has yet to open for business. CME Buys Hurricane Index In April, CME Group announced the acquisition of the Carvill Hurricane Index from Carvill America Inc. The index underlies futures and options contracts listed with the CME and has been renamed the CME Hurricane Index. The exchange has also enlisted risk management firm EQECAT as the index’s calculation agent. EQECAT uses risk modeling technology based on a storm’s velocity and radius to determine the index’s value. NYSE, SGX Terminate JV NYSE Euronext and the Singapore Exchange Ltd. (SGX) announced the termination of a joint venture signed by SGX and the American Stock Exchange, which has since been acquired by the NYSE. However, the two exchange groups said that they would continue to collaborate with each other. They also said there was no longer a need for the joint venture due to good relations between the two exchanges. The joint venture dates back to 2001 and essentially created a platform for cross-listed U.S. ETFs to trade on the Singapore exchange. The platform will be terminated and the six ETFs listed on it will be migrated to the SGX’s main trading platform. All but one are U.S.-listed ETFs and include the SPDR S&P 500 (NYSE Arca: SPY) and the DIAMONDS (NYSE Arca: DIA). In all, the SGX says it has a total of roughly 30 listed ETFs. ON THE MOVE ETF Securities Adds Execs ETF Securities has added two senior executives to its team. Scott Thompson, who joins the firm as head of UK and Irish sales, was previously head of ETF marketmaking at JP Morgan, where he set up the ETF operation in 2006. Thompson also has a background in the derivatives team at UBS. Townsend Lansing is joining the firm’s product development and structuring team as a senior manager. He previously worked at Bank of America in equity derivatives product development, and also as a lawyer in capital markers, mergers and acquisitions, and private equity. ETF Securities’ headcount has increased from 17 to 40 in the last 12 months. IndexIQ Gains Two VPs Kevin DiSano and Andrew Cook have both joined IndexIQ as vice presidents and regional directors, the firm said in May. DiSano will be in charge of the firm’s sales in the Midwest. He was previously a senior vice president in the capital advisory group at Lazard Asset Management and has 17 years of experience in the financial services field. Cook will oversee sales in the Eastern U.S. He joins IndexIQ from The Charles Schwab Company, where he was involved in sales efforts directed at registered investment advisers and was a vice president, regional director and new business manager. He has 16 years’ experience in the investment industry. www.journalofindexes.com July/August 2009 49
Page 1 and 2: How to Kill a Black Swan Remy Brian
Page 3 and 4: www.journalofindexes.com Vol. 12 No
Page 6 and 7: FREE subscRiption oFFER! The Journa
Page 8 and 9: David Smith Publisher dsmith@fa-mag
Page 10 and 11: Editor’s Note Got Risk? Jim Wiand
Page 12 and 13: How To Kill A Black Swan Risk and a
Page 14 and 15: Figure 2 Comparison Of Asset Return
Page 16 and 17: Figure 5 Historical Real Returns Fo
Page 18 and 19: Figure 8 Subset Of A Multi-Asset Cl
Page 20 and 21: Benchmarking Policy Portfolios How
Page 22 and 23: investor has decided to benchmark 8
Page 24 and 25: An Interview With Susan Mangiero By
Page 26 and 27: How To Minimize Your Cost Of Tradin
Page 28 and 29: Figure 2 Offer NAV Proxy Bid Using
Page 30 and 31: ETF Trading Volume Is Huge, Growing
Page 32 and 33: Figure 5 Hypothetical ETF Limit Ord
Page 34 and 35: Gastineau continued from page 31 th
Page 36 and 37: Portable alpha approaches—which e
Page 38 and 39: to write the book “Portable Alpha
Page 40 and 41: sitated more routine adjustment in
Page 42 and 43: Bogle’s Corner The Fiduciary Prin
Page 44 and 45: at the direct expense of the invest
Page 46 and 47: Talking Indexes Managing The Risks
Page 48 and 49: News CVC To Buy iShares … Or Mayb
Page 50 and 51: S&P Introduces Risk-Controlled Inde
Page 54 and 55: Global Index Data Selected Major In
Page 56 and 57: Morningstar U.S. Style Overview: U.
Page 58 and 59: Exchange-Traded Funds Corner Larges
Page 60: “For a strong foundation in my cl

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