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Michael Johnston
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Michael Johnston is the co-founder and senior analyst at ETF Database, an online investment resource for ETF investors. ETF Database offers a proprietary ETF Screener that allows investors to filter the universe of 900+ ETFs to find the right fund. ETF Database also provides news, analysis,... More
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  • Leveraged ETF Boom Goes Global

    Just as leveraged ETFs are prompting warnings from regulatory agencies and drawing criticisms from U.S. investors, these controversial funds are enjoying tremendous popularity in Europe, where ETF Securities has launched the first complete platform of 2x leveraged and 2x inverse leveraged funds tracking Europe's most popular equity indexes. The funds offer both leveraged bull and bear market exposure to the following indexes:

    • Dow Jones EURO STOXX 50
    • FTSE 100
    • CAC 40
    • DAX

    All of the new funds will be issued utilizing ETF Securities "third generation ETF model," which the firm believes will offer increased price compettion, enhanced liquidity, and reduced counterparty risk for investors. This third generation model diversifies index replication across a consortium of the industry's strongest financial institutions, whereas "second generation" ETFs use only a single counterparty. "First generation" ETFs replicate index returns by replicating the underlying holdings, thereby introducing potential tracking error resulting from rebalancing costs. Commenting on the launch of the new funds, Hector McNeil, head of sales and marketing at ETF Securities said, "It is clear that the continued issuance of ‘third generation’ ETFsgive investors peace of mind during these turbulent times." With the launch of these funds, ETF Securities now manages 140 exchange-traded products with $12 billion in assest, establishing itself as one of the leaders in Europe's ETF industry.

    This significant expansion in leveraged ETF offerings in Europe comes at a time when these funds are enjoying tremendous popularity, but also attracting numerous criticisms, in the U.S. Morningstar's Scott Burns recently made a case for subjecting these funds to the same regulations as their underlying holdings (derivatives), and his call has been echoed by countless parties in the industry. On Monday, the Financial Industry Regulatory Authority (FINRA) issued a warning to financial advisers reminding them of their fiduciary duty and implying that these leveraged funds are appropriate for only a very small percentage of clients.

    The concern over leveraged ETFs is that while they offer sophisticated investors a powerful short-term investment tool, they are being used by both "average Joe" investors and dangerously ignorant financial advisers who do not understand exactly how these instruments work. While leveraged ETFs generally do an excellent job of tracking the daily performance of their target indexes, due to the compounding returns, performance over any period longer than a day can vary (sometimes significantly) from the amplified return on the underlying benchmark. ETF Securities fully acknowledges that these funds have a relatively narrow target audience, peppering warnings and disclosures throughout its literature on these products as well as its web site. ETF Securities notes that their funds are "only suitable for sophisticated investors who understand leverage, compounded daily returns, and are willing to magnify potential losses." 

    Despite similar warnings and transparency from the primary U.S. issuers of leveraged ETFs, ProShares and Direxion, however, concerns over misuse continue. It will be interesting to see how these funds are received in Europe (I'm guessing they will be tremendously popular) and how much scrutiny they receive from both the public and the industry regulators. Hopefully our friends from across the pond will be able to provide some insight as to how we might solve the dilemma posed bythese securities.

    Disclosure: No positions at time of writing.

    Tags: ETFs
    Jun 23 11:15 AM | Link | Comment!
  • BRIC Countries Conclude Uneventful Summit

    Lost in the headlines of yet another eventful week on Wall Street was news of the first BRIC summit, held this week in Yekaterinburg, Russia. BRIC ETFs have been risen sharply in the first half of 2009, but investors looking for good news out of the summit to continue the rally were largely disappointed, as the meeting failed to yield any substantive action points or resolutions. Worse yet, obvious conflicts between the members seem to indicate that future collaboration may be largely for show, as the differences between member nations are abundant.

    BRIC countries include Brazil, Russia, India, and China. The term was introduced by Goldman Sachs in 2001 to collectively describe the four fast-growing emerging markets that were hot investment options at the time. It was theorized that given the tremendous growth rates of these four small (at the time) economies, the BRIC countries could eclipse the combined economies of the world's richest countries by 2050. While BRIC leaders have previously held less formal meetings during UN conferences, this week's summit in Russia market the first effort of these disparate nations to formally organize themselves and convert their collective economic resources to geopolitical clout.

    Conflicts Abound

    The BRIC countries have evolved into four extremely different nations, not only in terms of population and location, but in terms of economic and international policies as well. Such differences appeared to prevent any meaningful resolutions from emerging from this week's summit. Their differences are perhaps best highlighted by the clash between countries over the role of the U.S. dollar as the world's reserve currency. When Russia and Brazil called for the BRIC to try to loosen the grip of the dollar on the world's financial system, China passed up the opportunity to show its support for such an effort, likely out of concern for the value of its huge holdings in U.S. government bonds. Recent Treasury Department data indicates that China has $767.9 billion of U.S. Treasuries, making it the world's largest holder.

    Russia and China also clashed over policies towards metals-rich central Asia. China recently announced plans to give $10 billion of loans to the region, potentially embarrassing Russia, whose promises of support and aid have been downsized or delayed as a result of the financial crisis. "While both China and Russia are keen to keep the U.S. and Europe out of the region, Moscow is none too keen to be displaced as the political power in the region by its eastern neighbour," said Chris Weafer, a chief strategist at Uralsib, a Moscow brokerage.

    Pointless Endeavor?

    The BRIC countries have agreed to work together to ensure that the interests of developing countries continue to receive appropriate attention at G8 and G20 summits. But such a resolution seems obvious and vague, and no specific details emerged on how these countries might work together to further their collective economic development. While they have agreed to convene again next year in Brazil, future meetings seem more likely to result in clashes of political and economic policies than empowering resolutions. Aligning their interests and presenting a unified front to the world's rich countries would no doubt aid the BRIC nations. But failure to reach a consensus on certain issues could result in escalating tensions that hinder development.

    While this week's BRIC summit was, in my mind, a pointless endeavor, future meetings may very well prove to be destructive and destabilizing. The BRIC partnership seems forced and vulnerable. Perhaps we've made too much out of a "partnership" that was, after all, devised by an analyst with an investment bank in an economic environment very different from the current global situation. BRIC investments have flourished as these countries operated independently and took little action to further the notion of a cohesive and unified group. Attempting to do so know seems like an unnecessary step that could only backfire.

    BRIC ETFs, including Claymore's EEB, are up nearly 40% on the year but were little changed following the conclusion of this week's summit.

    Claymore/BNY BRIC ETF

    Disclosure: No positions

    Jun 19 10:39 AM | Link | Comment!
  • Iran Goes To The Polls: Three ETFs To Watch

    Millions of Iranians headed to local polling places on Friday to participate in the most heated presidential race since the founding of the Islamic Republic 30 years ago. The passions of Iranians surrounding this election have been evidenced by numerous (mostly peaceful) rallies and demonstrations spilling into the streets throughout the country in recent days. Three candidates are challenging incumbent Mahmoud Ahmadinejad, with Mir Hossein Mousavi, the former prime minister, emerging as the primary competitor. Results will likely begin to leak as early as Saturday morning, although official results won't be available until that evening at the earliest. If no candidate captures more than 50% of the vote, there will be a June 19 run-off between the top two vote getters.

    Mousavi is a stark contrast to the hardline Ahmadinejad, promising to seek improved relations with the U.S. and soften Iran's global image. He's even floated the idea of a world consortium overseeing uranium enrichment in Iran. Ahmadinejad, on the other hand, views uranium enrichment and Iran's pursuit of a nuclear program as a nonnegotiable "right." While the most interested observers will be in Washington, Wall Street is likely to keep a close eye on the elections as well. Here's a look at three ETFs that could be on the move as the results are reported:

    • iPath S&P GSCI Crude Oil Total Return Index (OIL): Iran, one of OPEC's founding members, holds approximately 136 billion barrels of proven oil reserves, representing the third largest supply in the world and approximately 10% of worldwide reserves. As oil prices are frequently impacted by escalations in geopolitical tensions, election of a leader viewed as more open to international cooperation may reduce volatility in prices.
    • Van Eck Market Vector Russia ETF Trust (RSX): At more than 900 trillion cubic feet, Iran's proven natural gas reserves are second to only Russia. A more stable and integrated Iran could allay fears of existing and potential natural gas customers and weaken Russia's control over prices in certain regions. The oil and gas industry accounts for nearly 40% of the index tracked by RSX.
    • iShares Don Jones U.S. Aerospace & Defense Fund (ITA): As the Obama administration has sought to distance itself from Bush policies, a war with Iran is much less likely than it was a year or two ago. But given Ahmadinejad's anti-U.S. views, commitment to pursuing a nuclear program, and volatile personality, such a conflict is certainly within the realm of possibility. Although there is no certainty as to how Mousavi's foreign policies would actually play out, he pledged during the campaign to improve U.S. relations, indicating that a conflict would be less likely if he wins election.

    Disclosure: No positions.

    Tags: ITA, RSX, OIL, ETF
    Jun 12 11:23 AM | Link | Comment!
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