Van Eck ETFs Push The Envelope For Thematic Exposure

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 |  Includes: EVX, GDX, GEX, RSX, SLX
by: Richard Kang

Many observers of the ETF industry have commented on the thinner slices to sector exposures provided by fund manufacturers in recent years. My take is different. Although there are some “sectors” that are indeed quite narrow, many new fund offerings are more “thematic” in nature. These include water, alternative energy and infrastructure and are more broad that they are, in my opinion to be considered asset classes themselves. Of course, some would consider this issue semantics but that’s for the final user to decide within their own investment process. Certainly, many institutional investors look at infrastructure as an asset class. I don’t know if I would consider water to be an asset class … actually, I don’t … but it certainly is broader than a sector and can be considered thematic in nature.

At the end of the day, I am interested in finding things (call it a sector, call it a theme, I really don’t care) that help in the overall risk-adjusted return potential for any given portfolio. I think Van Eck is a firm that thinks the same way. Steel company exposures (through their Steel ETF, (NYSEARCA:SLX)) may not be a diversifier for many, but I could see it as one for many unique types of investors. The same could be said for their Environmental Services ETF (NYSEARCA:EVX), their Gold Miners ETF (NYSEARCA:GDX), their Global Alternative Energy ETF (NYSEARCA:GEX) and their new Russia ETF (NYSEARCA:RSX).

To take RSX as another example, for an investor with a need for emerging market exposure outside of what they likely already hold (China, India, EEM) and with a strong commodity bias, this fund makes sense. For someone like a Canadian or Australian, it likely doesn’t make so much sense.

But now I’m getting word of some new ETF product development in the Van Eck pipe as seen from this recent SEC filing.

What have we here? (Think Lando when he first met Leia for all the fellow Star Wars geeks out there.) Here are some of the more interesting excerpts:

Market Vectors—Global Agribusiness ETF and Market Vectors—Global Nuclear Energy ETF (the “Funds”) are distributed by Van Eck Securities Corporation and seek to track the DAXglobal® Agribusiness Index and DAXglobal® Nuclear Energy Index, respectively, each of which is published by Deutsche Börse AG (“Deutsche Börse”).

More specifically on the Agribusiness ETF:

MARKET VECTORS-GLOBAL AGRIBUSINESS ETF

Principal Investment Objective and Strategies

Investment Objective. The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal®® Agribusiness Index.” Agribusiness Index (the “Agribusiness Index”). For a further description of the Agribusiness Index, see “The DAXglobal® Agribusiness Index.”

Principal Investment Policy. The Fund will normally invest at least 80% of its total assets in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture. Companies primarily engaged in the agriculture business include those engaged in agriproduct operations, livestock operations, agricultural chemicals, providing or transporting agricultural equipment, and providing or transporting ethanol/biodiesel, and which derive at least 50% of their total revenues from such activities. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.

Indexing Investment Approach. The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the Agribusiness Index by investing in a portfolio of securities that generally replicate the Agribusiness Index.

The Adviser anticipates that, generally, the Fund will hold all of the securities which comprise the Agribusiness Index in proportion to their weightings in the Agribusiness Index. However, under various circumstances, it may not be possible or practicable to purchase all of those securities in these weightings. In these circumstances, the Fund may purchase a sample of securities in the Agribusiness Index. There also may be instances in which the Adviser may choose to overweight another security in the Agribusiness Index, purchase securities not in the Agribusiness Index which the Adviser believes are appropriate to substitute for certain securities in the Agribusiness Index or utilize various combinations of other available investment techniques in seeking to replicate as closely as possible, before fees and expenses, the price and yield performance of the Agribusiness Index. The Fund may sell securities that are represented in the Agribusiness Index in anticipation of their removal from the Agribusiness Index or purchase securities not represented in the Agribusiness Index in anticipation of their addition to the Agribusiness Index. The Adviser expects that, over time, the correlation between the Fund’s performance and that of the Agribusiness Index before fees and expenses will be 95% or better. A figure of 100% would indicate perfect correlation.

The Fund will normally invest at least 95% of its total assets in securities that comprise the Agribusiness Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and other regulatory requirements.

Because of the passive investment management approach of the Fund, the portfolio turnover rate is expected to be under 30%, generally a lower turnover rate than for many other investment companies. Sales as a result of Agribusiness Index changes could result in the realization of short or long-term capital gains in the Fund resulting in tax liability for shareholders subject to U.S. federal income tax. See “Shareholder Information—Tax Matters.”

Market Capitalization>. The Agribusiness Index is comprised of companies with market capitalizations greater than $150 million that have a worldwide average daily trading volume of at least $1 million and have maintained a monthly trading volume of 250,000 shares over the past six months. The total market capitalization of the Agribusiness Index as of [ • ], 2007 was in excess of $[ • ] billion.

So we now have a competitor to the up to the PowerShares-Deutsche Bank agriculture ETF (NYSEARCA:DBA). A quick review from its website gives us this description:

The PowerShares DB Agriculture Fund is based on the Deutsche Bank Liquid Commodity Index – Optimum Yield Agriculture Excess Return™ and managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities – corn, wheat, soy beans and sugar. The index is intended to reflect the performance of the agricultural sector.

With all the focus on metals and energy, diversifying into agriculture is a reasonable move for investors with the size to spread their allocations out even further. Those who lean more towards a Jim Rogers philosophy will look to DBA and/or this new Van Eck offering as more of a strategic (I would say tactical) bet.

And like applying a GLD/GDX combo for exposures to both the gold bullion price and gold miners, a similar DBA/new Van Eck combo makes sense here. For those implementing a position to a specific commodity, I think this dual positioning is ideal and the tilting between the two positions can be a significant source of alpha in the long-term (in my opinion). If only this were also available to the commodity I’ve been commenting on recently and for quite some time: uranium.

More specific to the upcoming Nuclear Energy ETF from Van Eck:

MARKET VECTORS-GLOBAL NUCLEAR ENERGY ETF

Principal Investment Objective and Strategies

Investment Objective. The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal®® Nuclear Energy Index.” Nuclear Energy Index (the “Nuclear Energy Index”). For a further description of the Nuclear Energy Index, see “The DAXglobal

Principal Investment Policy. The Fund will normally invest at least 80% of its total assets in equity securities of U.S. and foreign companies primarily engaged in various aspects of the nuclear energy business. Companies primarily engaged in the nuclear business include those engaged in uranium mining, uranium enrichment, uranium storage, providing equipment for use in the provision of nuclear energy, nuclear plant infrastructure, nuclear fuel transportation and nuclear energy generation, and which derive at least 50% of their total revenues from such activities. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.

Indexing Investment Approach. The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the Nuclear Energy Index by investing in a portfolio of securities that generally replicate the Nuclear Energy Index.

The Adviser anticipates that, generally, the Fund will hold all of the securities which comprise the Nuclear Energy Index in proportion to their weightings in the Nuclear Energy Index. However, under various circumstances, it may not be possible or practicable to purchase all of those securities in these weightings. In these circumstances, the Fund may purchase a sample of securities in the Nuclear Energy Index. There also may be instances in which the Adviser may choose to overweight another security in the Nuclear Energy Index, purchase securities not in the Nuclear Energy Index which the Adviser believes are appropriate to substitute for certain securities in the Nuclear Energy Index or utilize various combinations of other available investment techniques in seeking to replicate as closely as possible, before fees and expenses, the price and yield performance of the Nuclear Energy Index. The Fund may sell securities that are represented in the Nuclear Energy Index in anticipation of their removal from the Nuclear Energy Index or purchase securities not represented in the Nuclear Energy Index in anticipation of their addition to the Nuclear Energy Index. The Adviser expects that, over time, the correlation between the Fund’s performance and that of the Nuclear Energy Index before fees and expenses will be 95% or better. A figure of 100% would indicate perfect correlation.

The Fund will normally invest at least 95% of its total assets in securities that comprise the Nuclear Energy Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code and other regulatory requirements.

Because of the passive investment management approach of the Fund, the portfolio turnover rate is expected to be under 30%, generally a lower turnover rate than for many other investment companies. Sales as a result of Nuclear Energy Index changes could result in the realization of short or long-term capital gains in the Fund resulting in tax liability for shareholders subject to U.S. federal income tax. See “Shareholder Information—Tax Matters.”

Market Capitalization. The Nuclear Energy Index is comprised of companies with market capitalizations greater than $150 million that have a worldwide average daily trading volume of at least $1 million and have maintained a monthly trading volume of 250,000 shares over the past six months. The total market capitalization of the Nuclear Energy Index as of [ • ], 2007 was in excess of $[ • ] billion.

Perhaps the whole green ETF thing has gone a bit far in the past year but, a bit surprisingly, this would be the first pure play on the nuclear energy story. I have commented recently on uranium as have so many other industry watchers in recent months after having seen the commodity double in price in the past four calendar years … it’s up roughly 70% so far this year according to the chart found here.

I just said “pure play”, but it’s important for prospective investors to consider the 50% and 80% values quoted in the above descriptions. That’s 50% of the revenue of an underlying holding must fit the required parameters and 80% of the fund’s assets is to be invested in companies whose primary business operations are in the field of agriculture or nuclear energy respectively.

I don’t want to comment too much on this nuclear energy ETF as I don’t have enough information at this time. But here’s the problem I foresee: There’s just not an even spread of companies involved in the nuclear energy business. Let’s take uranium mining for example. It’s Cameco (NYSE:CCJ), a very small number of competitors who are close in terms of size and a large number of small cap, if not micro cap, producers. Having an ETF based just on uranium miners would be a logistical nightmare and investors would have to accept a few stocks dominating the fund. An equal weighted ETF for this sector would make sense except for the fact that the thinly traded smallcaps/microcaps would provide an interesting (to say the least) situation for the market makers of the fund. I could see hedge funds getting into that game on the other side. We can only hope that there is a more robust mix in other related businesses mentioned in the prospectus namely uranium enrichment, uranium storage, providing equipment for use in the provision of nuclear energy, nuclear plant infrastructure, nuclear fuel transportation and nuclear energy generation.

In the past I’ve mentioned both Cameco and Uranium Participation Corp (U) as appropriate uranium plays. This new nuclear energy ETF would be an even more appropriate holding in the place of Cameco and with recent uranium derivatives on the market, exposure to the price of uranium itself allows for more complete exposure (and inverse through shorting) than in the past.

No word yet on fees as well as other details on these upcoming Van Eck ETFs.

I’d say that of all the ETF providers, it’s the news out of Van Eck that gets me the most interested and I always look forward to finding out what’s next from them.  Nothing too fancy… just new exposures, but I like it!