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News SPY Turns 20 “SPY,” the very first U.S.-listed exchange-traded fund and the biggest ETF in the world, turned 20 in January—a $125 billion portfolio that’s now in the company of some of the biggest U.S. mutual funds, making it the perfect symbol for an industry that’s on a roll. Officially known as the SPDR S&P 500 ETF (NYSE Arca: SPY), SPY was seeded on Jan. 22, 1993, and began trading on Jan. 29. It was dreamed up by the late Nate Most as a vehicle for traders that he hoped would help pump up volume at the American Stock Exchange. Most and his entourage thought they’d be lucky if SPY hauled in $1 billion. SPY did indeed end up appealing to traders, and a whole lot more. The biggest ETF in the world now sits atop a universe of more than 1,400 ETFs that’s increasingly poaching market share from actively managed mutual funds. It represents about 9 percent of the record $1.4 trillion now invested in ETFs. Housing Recovery Continues In November U.S. home prices were again stronger, year-on-year, in November, with the recovery in housing moving forward, even as the seasonal downdraft in prices associated with the colder months of the year was also in evidence. Indeed, the latest S&P/Case-Shiller Home Prices Indices report showed that while home values around the country were 5.5 percent higher in November than they were in the same prior-year period, on a month-tomonth basis, several cities saw home prices decline in November. The 10-City and 20-City composites dropped 0.2 percent and 0.1 percent, respectively, in November from October levels, with 10 out of the 20 cities surveyed seeing prices decline month-on-month. That’s a departure from the market’s performance last summer when all cities surveyed were posting higher and higher home prices on a monthly basis for several consecutive months. But that slowing momentum isn’t necessarily surprising given that, from a seasonal perspective, the fall and winter months tend to be the housing market’s weakest periods. Boston, Chicago and New York have been some of the worst-faring cities in recent months. Each has seen more than six months of declining prices in the past 12 months. In November, Chicago was the worst-performing city, with home prices there declining 1.3 percent from month-earlier levels. In New York, home values remained 1.2 percent lower year-on-year in November, while in Boston, homes have appreciated 2.3 percent in the 12 months ended in November. On the flip side, cities like Phoenix, San Francisco, Detroit and Las Vegas have all managed to tally double-digit gains in home values in the 12-month period. All in all, an average home in the U.S. in November cost roughly what it did in the fall of 2003, and remains about 30 percent off its highest price level seen when the market peaked in 2006. Nasdaq OMX Rolls Out Global Index Family Nasdaq OMX continued its push into the world of indexing in early December with the rollout of the first piece of a comprehensive global family of equity indexes that will ultimately canvass 98 percent of the investable universe and cover 9,000 securities with a combined float-adjusted market capitalization of $32 trillion. The initial rollout covered about 4,000 indexes calculated in dollars. The remaining indexes were to be organized around different currencies and introduced in different phases at unspecified future dates, Nasdaq said in a press release. The index family will ultimately result in the development of 24,000 separate indexes, Nasdaq said. The new index family covers 45 countries classified as developed and emerging markets across the following regions: the Americas, Europe, Asia-Pacific and Middle East-Africa. Like all Nasdaq OMX indexes, the Nasdaq Global Index Family is based on a transparent, rules-based index methodology. More than 10 years of historical backtested data are available for the entire global family, and price, total return and net total return versions are calculated for each index, the company said. FINRA Targets ETFs In Letter The Financial Industry Regulatory Authority singled out exchange-traded products as one area it will focus on in 2013 as it seeks to manage risks to investors, though sundry concerns related to “significant downside risks” in the bond market easily topped FINRA’s list of 2013 regulatory worries. Borrowing a page from an inquiry it launched in 2009 concerning leveraged funds, FINRA again singled out such strategies in a letter dated Jan. 11 outlining its priorities for the coming year. Crucially, a class action suit charging that ProShares didn’t properly warn investors about the risks of its leveraged and inverse funds was dismissed by a federal court last summer. More broadly, FINRA said in the letter that it worries investors may not grasp crucial differences among the various ETP structures, and highlights leveraged products and new investment areas—such as volatility, emerging mar- 10 March / April 2013
kets and currencies—as particular areas of concern. Such concerns from the financial industry’s self-regulator are shared in the industry, which is growing rapidly. ETF and ETN inflows hit a record $188 billion in 2012, according to data compiled by IndexUniverse. Concern about ETPs notwithstanding, FINRA’s chief concerns center on the bond market, which has been rallying sharply on and off since the market crashed in 2008. FINRA is hardly alone in identifying the dangers of the bond market unraveling, but is specifically focused on limiting the possibility of irresponsible marketing of fixed-income products at a potentially crucial time in financial markets. ICE To Acquire NYSE The New York Stock Exchange entered into an agreement to be acquired by the Atlanta-based IntercontinentalExchange in a cash and stock transaction that values the NYSE at $8.2 billion, the companies said in a Dec. 20 press release. The transaction valued NYSE Euronext at $33 a share—a 37.7 premium over NYSE Euronext’s (NYSE: NYX) closing share price on Dec. 19, 2012. The transaction, which is expected to close in the second half of 2013, will leave NYSE Euronext shareholders with an ownership stake in the new company of about 36 percent. The companies estimated about $450 million in “run rate expense synergies,” with the bulk of those coming in the second full year following the closing. They also estimated earnings “accretion” of more than 15 percent in the first year after closing. It’s not the first time ICE has made a bid for NYSE. It tried unsuccessfully to acquire a piece of NYSE Euronext in a joint bid with the Nasdaq exchange in the spring of 2011. But the initiative fell apart a bit more than a month later after U.S. regulators, citing antitrust concerns, signaled they would reject the proposed transaction. The companies noted that the 2013 second-half closing is subject to approvals by regulators in Europe and the United States and by shareholders. IndexUniverse Debuts Currency ETFs IndexUniverse LLC and Structured Solutions AG announced the full commercial launch of a new family of currency indexes in late January. Jointly developed by IndexUniverse and Structured Solutions, the indexes are intended to fill a substantial gap in the modern indexing space by measuring the performance of the U.S. dollar against broadly diversified trade-weighted baskets of currencies, according to IndexUniverse. The benchmarks are available through Bloomberg under the following symbols and include “investable” indexes: • IndexUniverse–Solactive U.S. Dollar TW Index (Long USD) (IUSLATL Index) • IndexUniverse−Solactive U.S. Dollar TW Index (Short USD) (IUSLATW Index) • IndexUniverse–Solactive Developed Markets Currencies TW Index (IUSLADTW Index) • IndexUniverse–Solactive Emerging Markets Currencies TW Index (IUSLAETW Index) • IndexUniverse–Solactive Asia- Pacific Currencies TW Index (IUSLAATW Index) • IndexUniverse−Solactive U.S. Dollar TW Investable Index (Short USD) (IUSLTWI Index) IndexUniverse LLC and Structured Solutions AG announced the launch of a new family of currency indexes in late January. www.journalofindexes.com March / April 2013 11
Page 1 and 2: Plus an interview with Robert Mayna
Page 3 and 4: www.journalofndexes.com Vol. 16 No.
Page 5 and 6: McGRAW-HILL You can never have too
Page 7 and 8: ©2013 Morningstar, Inc. All rights
Page 9 and 10: THE POWERSHARES DB COMMODITY INDEX
Page 11: InsideIndexing risk, return & inDex
Page 15 and 16: and the Nasdaq-100 Technology Secto
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Page 19 and 20: Over 70 years ago, Benjamin Graham
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Page 25 and 26: JOI: But PERSI’s strategy does se
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Page 31 and 32: Figure 5 Five Key Issues With Equit
Page 33 and 34: Figure 8 Important Issues When Sele
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Page 61 and 62: Morningstar Index Funds U.S. Style
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ETF Analytics There are over 1,000
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