ETF Update: Exotic ETNs, Slowing Growth?, Bruce Bond on Actively Managed ETFs

Exotic ETNs

Exchange traded notes (ETNs) are beginning to gain popularity, as they allow financial advisors and investors to reach areas of the markets that were previously difficult to access.

The ETN offers access to exotic markets that are not completely suited to an ETF or mutual fund. For example, the iPath Dow Jones AIG Cocoa Total Return sub-Index (NIB) can give investors access to a rich part of the commodities market.

One of the best benefits of owning an ETN is that they do not generate capital gains distributions and do not require a K-1 tax form. They are treated as prepaid forward contracts for tax purposes, reports David Hoffman for Investment News.

As of right now, the tax treatments for ETNs is being challenged, but many ETN providers are not swayed. They see the popularity of this debt instrument as a wonderful opportunity for everyone involved. As debt, ETNs are backed by the issuer, so you’re taking the risk that they won’t run into financial trouble. It’s an important thing for investors to be aware of in this climate of heavy losses by financial institutions.

ETNs don’t have to disclose their holdings on a daily basis, either.

As of mid-August, there were 92 ETNs on the market, 66 of which launched just this year. Providers say it’s too early to judge how successful they will be based solely on assets; it wasn’t until recently that they reached for a wider audience.

Other exotic ETNs:

• iPath MSCI India Index ETN (INP)
• E-TRACS UBS Bloomberg CMCI Food ETN (FUD)
• E-TRACS UBS Bloomberg Long Platinum ETN (PTM)
• Market Vectors Renminbi/USD ETN (CNY)

Slowing Growth?

ETFs have seen growth slow over the past three months. During this period, assets under management globally shrank by a substantial amount.

Phil Craig for the Wall Street Journal reported that at the end of July, assets under management in ETFs had fallen to $786 billion from $805 billion in April, down 2.4% during this time.

These numbers will surely have to grow if ETFs are going to even come close to maintaining growth from the previous two years. Total ETF assets grew 41% in 2007 and 37% in 2006. Unless investing increases to a significant degree, 2008 is likely to see slower growth or potentially negative growth in assets under management.

Another negative for ETFs is pointed out by David Hoffman of InvestmentNews. He reports that the first half of 2008 was scarred with an increase in ETF closings, as 11 ETFs provided by Claymore Securities and 5 ETFs from Ameristock Corp were liquidated due to slow asset growth.

However, despite signs of slowing growth, there is still overwhelming evidence for future growth in ETF assets.

First off, the decline in assets can merely be traced to a global bear market. As the global ETF industry has more exposure to equities than any other asset class, the decline in assets under management essentially reflects market movement.

Also, ETF providers are still planning as though the ETF market has not been slowed by any means, reflecting their optimism. These providers of ETFs are proposing new products as though nothing has changed. As of Aug. 7, there was roughly 538 ETFs and ETNs in registration.

As we continue to experience a down market, it is highly unlikely that the industry will see a significant flow of investing into ETFs. However, once we get past the bear and start riding the bull, assets under management in ETFs undoubtedly have the potential to climb to greater new heights.

Bruce Bond on Actively Managed ETFs

The ETF world became more exciting with the recent introduction of actively managed ETFs this year. As ETF providers continue to offer successful and innovative products, the success of ETFs may depend heavily on educating investors.

In a dialogue with InvestmentNews’ David Hoffman, PowerShares CEO Bruce Bond discussed his views on ETFs and what he feels is essential to continuing the growth of the ETF marketplace.

Bond elaborated on his reception to the release of the first actively managed ETFs and how they are performing. He sees bringing out compelling products to win over investor interest, and have them start to participate on the actively managed side as a big obstacle.

He also touched on ETFs and what they need to overcome as they try to enter the retirement and 401(k) market. Also, he explained how he feels there needs to be more of a focus on retail to increase net flows into ETFs.

Throughout this conversation, Bond alluded to many different aspects of ETFs and the direction they are heading. However, he feels as though the primary obstacle for the ETF industry is education. His company sees education as being one of their greatest focuses at this time, as PowerShares Universities pop up around the country, in an effort to educate advisors.

At ETF Trends, we agree that education is key, and it is one reason we started the site. If we can contribute to the education of investors, explain how ETFs work, and spread information showing that ETFs are a better alternative to mutual fund investment, ETFs will thrive in the investment world.