US-Listed ETFs Sorted by Asset Class and Year-to-Date Return

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Hidden In The Margins: Can CME Drive Commodities Prices? By Cory Banks Between March 25 and May 9—the height of the silver bubble—the Chicago Mercantile Exchange increased required margins on silver commodities futures trades six times. Each change adjusted the amount of margin investors needed to put up for futures contracts through the world’s largest commodities exchange, and sent chills down the spines of dyed-in-the-wool futures traders. The CME stated in vague press release language that margin increases were due to rising volatility. Some serious futures traders question that, however, concerned over the lack of transparency behind what amounts to more required buy-in. Meanwhile, ETF investors were left scratching their heads. Is it really possible that the exchange was trying to manipulate the market? The CME’s Safety Valves Margins are the safety valves set for every contract traded on the CME—the amount of collateral investors must put up to purchase a futures contract in any of the products traded on the exchange. Instead of paying all $100,000 of a contract for wheat delivery in August, a futures trader can post the minimum amount required. Here’s how it works: Suppose Bob the investor buys a 12-month contract for cotton for $100, using $20 of his own money, and $80 borrowed from his broker. The net value (share minus loan) is $20. The broker wants a minimum margin requirement of $10, which means that the net value of the loan must remain above $10. The next day, the price of cotton goes down to $85. The net value of the contract is now only $5. Bob has hit the margin requirement: He will either have to sell the contract or put up more margin (i.e., repay part of the $80 loan) so that the net value of his position is again above $10. Add in quite a few zeroes and you’ve got the situation for millions of traders and billions of dollars a day. Each type of commodity traded through the CME’s system has an assigned set of margins. The initial amount of collateral you’d pay to trade oil is different from sugar or cotton. According to the CME, the amount of collateral required depends on the volatility of the chosen commodity, as well as a variety of other factors. I think there is some truth that the speculators in funds and new products are driving a lot of volume that was never here before. —Kevin Kerr “The largest piece of data we’re looking at is historical volatility,” said Amy McCormick of the CME clearing group. This includes tracking the price for each product every day and monitoring the changes. For many commodities, Mc- Cormick says volatility is the biggest component of the equation. What the rest of that equation is, however, remains a well-guarded secret. Smoke And Mirrors? Because CME keeps its calculations behind a veil, many traders are convinced that some sort of conspiracy exists between the exchanges and the commodities offered. The stories range from mere coincidence (the CME raised margins to make a profit as the bubble grew) to full-blown conspiracy theories (the CME is working in an interagency conspiracy to control the price of silver). The latter is fueled by memories of how a margin call ruined the Hunt brothers’ attempts to corner the silver market in 1980. With little hard information available, the chatter between traders ranges from speculative to spooked. Even experienced investors are cautious. “Eight increases so far in one year— it sends the wrong signal, let’s put it that way,” said Kevin Kerr of Kerr Trading, an investor with 20 years of futures trading experience. “When any of these margins increase, we’re talking about significant amounts of money. People have to liquidate, and traders see the liquidation.” With “increased volatility” the only official reason given for the changes, the opportunity for whispered rumormongering increases. One of the biggest rumors is that the CME, due to increased pressure from the U.S. Commodity Futures Trading Commission (CFTC) and members of Congress, is trying to flush out speculators from fragile commodities markets. Many point to this scenario in gasoline—in early May, CME increased margins on the fuel by 48 percent, and shortly afterward, gasoline prices dropped significantly. The rapid change in the market, according to some, comes from the CME pricing out speculative traders. “I think there is some truth that the speculators in funds and new products are driving a lot of volume that was never here before,” said Kerr. But he also understands the exchange’s position, to a point. “I think CME is saying, ‘Yes, we’re raising the margins, because we want to protect those people. We want to protect the integrity of the exchange.’” “We’re not trying to send the market any messages with our chang- 13 6 ETFR • July 2011
YOU CAN’T FORCE A ROUND INVESTMENT INTO A SQUARE STRATEGY. Some people think it takes dog years to find an investment that fits their strategy. So they wind up settling for whatever is “close enough.” At State Street, we believe precision is an investor’s best friend. With over 100 SPDR ® Exchange Traded Funds, we’re sure to have an investment that precisely matches your investment strategy. Interested in Emerging Markets? Fixed Income? Dividends? Whatever the market segment, you’ll get exactly what’s on the label. Nothing more. Nothing less. If you’re tired of barking up the wrong tree, scan the QR code with your smartphone or visit spdrs.com for details. Before investing, consider the funds’ investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus, which contains this and other information, call 1.866.787.2257 or visit www.spdrs.com. Read it carefully. ETFs trade like stocks, fl uctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. The SPDR S&P 500 ® ETF Trust, SPDR S&P MidCap 400 ® ETF Trust and the SPDR Dow Jones Industrial Average ETF Trust are all unit investment trusts and issue shares intended to track performance of their respective benchmark indices. “SPDR,” S&P, S&P 500 and S&P MidCap 400 are registered trademarks of Standard & Poor’s Financial Services, LLC (“S&P”) and have been licensed for use by State Street Corporation. No fi nancial product offered by State Street or its affi liates is sponsored, endorsed, sold or promoted by S&P. Distributor: State Street Global Markets, LLC, member FINRA, SIPC, a wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affi liates. Certain State Street affi liates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., a registered broker-dealer, is distributor for SPDR S&P 500 ETF Trust, SPDR S&P MidCap 400 ETF Trust and SPDR Dow Jones Industrial Average ETF Trust, all unit investment trusts and the Select Sector SPDRs Trust. IBG-3345
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US-Listed ETFs Sorted by Asset Class and Year-to-Date Return

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