ETF Update: GCE Moves To Arca, HOLDRs: Endangered Species?, November ETF Assets, No ETN Tax Break, Muni-Bond ETFs Unappealing

Includes: GCE, MUB, TFI
by: Tom Lydon

GCE Moves To Arca

The Claymore CEF Index-Linked GS Connect ETN (NYSEARCA:GCE) launched Monday on the NYSE Arca, another addition to the growing line-up of ETNs. This ETN gives investors access to a portfolio of liquid closed-end funds listed in the U.S. Remember to keep in mind that closed-end funds trade at a premium or discount to their net asset value.

HOLDRs: Endangered Species?

As the ETF industry takes off, there is one investment fund brand that is getting left in the dust. HOLDRs, by Merrill Lynch (MER), is an ETF type investment tool that trades on exchanges like the others. Ian Salisbury for The Wall Street Journal reports that HOLDRs have steadily lost assets over the past several years and questions whether they are going into extinction.

While Merrill Lynch declined any response to the endangered species theory, the dwindling popularity could cause issues for investors. Thinly traded securities are more expensive to buy and sell. A few HOLDRS do have have higher trading volumes than similar ETFs. The total assets held by HOLDRs dropped 24% to $7.1 billion from $9.3 billion in early 2005. During that same period, ETF assets surged 76% to $560 billion, from $320 billion.

HOLDRs do have an advantage over ETFs - since they charge no management fee, they are cheaper to own. A quirk that presents itself is that HOLDRS are a fixed slate of stocks and only readjust if a corporate buyout or sell off occurs. Investors who own HOLDRs get proxy materials from every company they own within the tool. This type of paperwork is overwhelming.

November ETF Assets

State Street Global Advisors reported on ETF assets for November's month end. November was a volatile month for the markets and ETF assets seemed to reflect this. David Hoffman of InvestmentNews reports they found that assets dropped $8 billion to $576 billion. Barclays still leads the providers with $326 billion in assets and 149 ETFs. SSgA follows with $132 billion in 64 ETFs.

Although there was a drop in assets, there was an increase in offerings, as 26 new ETFs were launched. There are now 612 ETFs available to investors. New listings include timber, global dividends, global small-caps and fixed income.

No ETN Tax Break

The U.S. Treasury Department isn't giving ETN investors the break they were hoping for. Barclays financial products linked to currency exchange rates will not qualify for the tax savings which was originally advertised by the company as a key feature. Ryan J. Donmoyer for Bloomberg explains that these ETNs that are linked to currencies are debt for tax-related purposes and the interest is taxable to investors. Barclays says owners don't owe tax on the notes' distributions.

This government notice brings to attention a more general explanation for the tax treatment of ETNs. They are products that give investors tax-efficient access to a wide array of commodities, and assets ranging from oil to foreign stock indexes at a fraction of the cost of making direct investments.

The tax battle continues.

Muni-Bond ETFs Unappealing

Investors haven't flocked to the latest branch of ETFs, the municipal bonds. Although the individual investor is the target, interest hasn't grown quite yet. Heavyweights such as Barclays, State Street Global and PowerShares have entered into the municipal market, and Van Eck Global launched an intermediate-term muni-ETF last week, reports Michael A. Pollock for The Wall Street Journal.

The smaller fragmented muni-market has thousands of smaller bond issues that trade less frequently than the regular ETF shares. Muni-ETFs so far have had limited appeal to individual investors who comprise the bulk of the tax-exempt bond market. These types of investors tend to buy and hold the bonds until maturity to benefit from the daily compounding, whereas frequent ETF trades could eat into the returns with brokerage fees.

ETF providers believe that after some time investors will see the benefits of having a muni-ETF and will hop on the bus.