ETF Update: New Exchange Regulation, Know Your Niche, CEFs Losing Ground, No PowerShares Capital Gains, British Blues

New Exchange Regulation

Regulation National Market System [NMS] introduced a new system of regulation for exchanges in the United States and the European Union to aid trading in equities and ETFs.

There are new requirements that will supplement a better execution of electronic trading, which has dominated the ETF trading platform. The program is the Markets in Financial Instruments Directive (Mifid). It's intended to break the incumbent exchanges' dominance over share transactions.

HedgeWeek reports that Reg NMS will require an equity exchange to demonstrate that it has done everything possible to prevent trade-throughs, the execution of an order in its market at a price that is worse than a price available in another market. This requirement favors electronic trading over the traditional cry-out and has allowed start-ups to challenge the dominance of NYSE Euronext and Nasdaq. This is a great protection for the investor.

Know Your Niche ETFs

ETFs within the realm of niches and emerging markets may not always be what they seem.

As an investor, it is up to you to do your research and take notice of what the ETF holds, because in some cases, you may be surprised.

Rob Mackinlay for InvestEgate explores the issue.

Deborah Fuhr for Morgan Stanley also points to the iShares Emerging Markets ETF (EEM),which has a 4.8% tracking risk, while the U.K. version has a 1.8% tracking risk. If an ETF is to track a broad-based index in a developed country, it should do so accurately. Variations are occurring between ETFs that track the same indexes or sectors.

Fuhr expects the global growth of ETFs to match that of 2007's, so be ready to scrutinize new funds.

CEFs Losing Ground

ETFs are closing in on closed-end funds' territory.

The size of the ETF industry has or will soon surpass the CEF market share. Richard Widows for TheStreet reports that in December, there were 646 ETFs to track, only 14 shy of CEFs total of 660. On average, 20 ETFs debuted per month, versus 4 CEFs per month, and so it goes.

Given the fact that CEFs have been around since 1927, while the first ETF launched in February 1993, this is milestone growth. The reasons ETFs have gained on CEFs are many: tax advantages, lower expense ratios, close proximity to net asset value [NAV] and the ability to create and redeem new shares.

Market value for ETFs is at $540 billion and for CEFs, $318 billion.

No PowerShares Capital Gains Income

ETF provider PowerShares announced that no capital gains distributions were made for any of its equity and fixed-income based ETF portfolios for 2007.

According to Market Wire, since inception the company has not made a capital gain distribution to holders of those portfolios.

Shareholders of an ETF generally only trigger a taxable event when the shares are sold. Asset managers often use the "in kind" method of share transferring, which allow portfolios to avoid year-end capital gains payouts.

British Blues

The British economy isn't looking so cheeky right now, as the economy is mirroring that of the United States', and its ETF is bearing the brunt of it.

iShares MSCI United Kingdom (EWU) is a 12-year-old fund that has $1.2 billion in assets and tracks the index performance of MSCI United Kingdom. In 2006 it returned 30% and nearly a year later only managed to give back 8%. What happened?

Joanne Von Alroth for Investors Business Daily reports that the same credit crisis haunting the United States can be seen in the United Kingdom. Add to that a troubled housing market and a reduction in consumer spending and the outlook is glum. Last week the Bank of England froze rates at 5.5% in anticipation of slower growth and inflation. Sound familiar?

Also, the hardest hit sector has been the financials. What's more, the British rely heavily on credit, much more than their U.S. counterparts. British officials are looking to other nations for help before the bleeding gets unstoppable.