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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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  • BMO Launches New Canada, U.S. ETFs

    BMO Financial Group launched four ETFs on the Toronto Stock Exchange Thursday, making the company the first major Canadian financial group to offer a family of ETFs. The new ETFs offer exposure to two major markets and three asset classes. The funds are:

    • BMO Dow Jones Canada Titans 60 Index (BCA): Will track the Dow Jones Canada Titans 60 Index.
    • BMA Dow Jones Diamonds Index (BDJ): Will track the Dow Jones Industrial Average.
    • BMO U.S. Equity Index (BUE): Will track the Dow Jones U.S. Large-Cap Index.
    • BMO Canadian Government Bond Index (BGB): Will track the Citigroup Canadian Government Bond Index.

    Both BDJ and BUE will hedge their exposure to U.S. dollars. Commenting on the launch of the ETFs, BMO president and CEO Gilles Oullette noted, "we are pleased to provide a home-grown Canadian investment option that can help investors achieve their financial goals."

    BMO's new ETFs will likely compete with several existing Canadian iShares products for investor funds. BCA is similar to iShares' CDN Large Cap 60 Index, and BGB follows an index similar to the one tracked by iShares CDN DEX All Government Bond Index. BDJ will compete directly with State Street's DIA, while BUE is similar to ELR. Expense ratios on the new BMO funds range from 0.15% to 0.23%, making their costs comparable to competing funds. State Street and iShares funds, however, are well-established funds with high levels of liquidity, an obstacle BMO's products will have to overcome.

    Three additional BMO ETFs have received final prospectus approval from regulators and will likely be launched in coming months. According to Oullette, "this is the first phase of our ETF offering, with additional products to come. Based on the popularity of ETFs world-wide, we anticipate this will contribute to the growth of BMO's wealth management business."

    View MBO's press release here.

    Disclosure: No positions

    Tags: DIA, ONEK, New ETFs
    Jun 05 1:05 PM | Link | Comment!
  • Guide to ETF Index Weightings

    ETFs have enjoyed a tremendous surge in popularity in part because they allow investors to gain exposure to a broad (or narrow) market index in a timely and cost efficient manner. When implementing their investment strategy through construction of an ETF portfolio (or when using ETFs to round out a portfolio), investors have the option to choose from dozens of equity indices, as well as numerous commodity and fixed income benchmarks. While the underlying constituents of each index obviously vary from index to index, the manner in which returns are calculated and individual stocks are weighted can also be quite different. Here's a quick guide to understanding the various weighting methodologies applied to most market indices.

    Price-Weighted Index

    In a price-weighted index, each component stock makes up a fraction of the index proportional to its trading price. Think of a price-weighted index as if it holds one share of each of the constituent companies.  There are several drawbacks of a price-weighted index. First, absolute stock prices are somewhat arbitrary, since then can be influenced through stock splits and dividend payouts. Second, development of a price-weighted index won't accurately reflect changes in the market values of the constituents, since stock trading at $100 will make up 10 times more of the index than a stock trading at $10, regardless of the total market capitalizations of the company. Finally, price-weighted indices need to be constantly rebalanced to reflect changes in stock prices.

    Consider a hypothetical price-weighted index consisting of ten stocks: Berkshire Hathaway, IBM, Microsoft, Wal-Mart, Pfizer, GE, Google, Boeing, Exxon Mobil, and Intel (with the exception of GOOG and BRK-A, all of these are current components of the Dow Jones Industrial Average Index). Berkshire would account for more than 99% of the total index weighting, due to the fact that its share price is significantly higher than any other stock in the index.

    The Dow Jones Industrial Average (tracked by DIA), perhaps the most widely reported market index in the world, is an example of a price-weighted index.

    Market Capitalization-Weighted Index

    In a market capitalization-weighted index, each component stock is weighted according to its market capitalization (i.e., trading price multiplied by number of shares outstanding). Think of a market capitalization-weighted index as if it holds all outstanding shares of each constituent company. If we were to implement a market capitalization weighting methodology to the same index presented above, we can see that the weightings to each company would be dramatically different.

    Many market capitalization-weighted indices are now float adjusted, meaning the number of shares used in the calculation of the weighting is is adjusted to include only publicly-floated shares (i.e., excludes shares held by insiders, large holders (generally more than 5%), and restricted shares).

    Examples of market capitalization-weighted indices include the S&P 500 (tracked by SPY, IVV, IVW, IVE), NASDAQ 100 (QQQQ), Hang Seng (Hong Kong), Russell Indices (IWV, IWF, IWD), IBEX 35 (Spain), and the NYSE Composite Index.

    Equal-Weighted Index

    Think of an equal-weighted index as if it holds an equal dollar amount (say $1,000) in each of the component companies. The S&P 500 Equal Weight Index (EWI) holds the same stocks as the traditional S&P 500, but assigns a weight of 0.20% to each. An issue with equal-weighted indices is the frequency of rebalancing. As stock prices change, the weightings will move away from an equivalent level, but if the index rebalances too frequently, it becomes impractical for funds to track the index in a cost-efficient manner. So the rebalancing frequency must strike a balance between representation and investability. The S&P 500 EWI rebalances its constituents to 0.20% on a quarterly basis.

    Fundamentally Based Index

    Here's where things get a little unconventional. In fundamentally based indices, stocks are weighted based on one or many fundamental factors, such as book value, revenue, EPS, number of employees, etc. This sounds a bit bizarre, but the logic behind such an index is quite interesting. Traditional market capitalization-weighted indices, by nature, overweight overvalued stocks and underweight undervalued stocks. Equal-weighted indices avoid these problems, but are susceptible to high turnover and volatility (as discussed above). Fundamentally based indices remove the systematic inefficiencies of a capitalization-weighted system while avoiding drawbacks of simple equal-weighted indices.

    Disclosure: Long IVV.

    Tags: DIA, SPY, IVV, IVW, IVE, QQQ, IWV, IWF, IWD, ETFs
    Jun 02 11:44 AM | Link | Comment!
  • Deutsche Bank Launches 14 New ETFs on Paris Exchange

    Deutsche Bank announced it is expanding its ETF product offering in France, launching 14 new ETFs under its "db x-trackers" line. The new funds, which will be listed on NYSE Euronext' Paris exchange, are significant because they represent the introduction of several new features to the French ETF market.

    Seven of the ETFs will track inverse indices, the first time France short sector indices have been offered. The inverse funds include:

    • Short European Sectors: inverse exposure to European sector indices, including Banks, Oil & Gas, Healthcare, Technology, and Telecommunications.
    • S&P 500 Short: similar to ProShares' SH.
    • FTSE 100 Short

    In addition to the inverse ETFs, Deutsche Bank will launch funds tracking:

    • FTSE 100 Vietnam: Tracks the largest and most liquid Vietnamese stocks.
    • S&P/ASX 200: Tracks 200 large-cap Australian equities.
    • Russell 2000: Tracks a broad base of U.S. equities.

    With the addition of these funds, db x-trackers now offers 37 ETFs in France, including 10 ETFs on short indices. NYSE Euronext's European markets now offer 396 ETFs with 434 listings from 14 issuers. These ETFs cover more than 275 indices encompassing a variety of assets and strategies.

    View the NYSE Euronext Press Release

    Disclosure: No positions

    Tags: SH
    May 28 2:02 PM | Link | Comment!
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