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Shishir Nigam
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Shishir Nigam is Founder @ ActiveETFs | InFocus ( and Chief Editor @ Young & Invested ( ActiveETFs | InFocus is the only site on the web to provide the most extensive and focused coverage of Active ETFs. Active ETFs provide investors with a... More
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  • What are Active ETFs?

    In essence, Active ETFs are a new breed of exchange-traded funds that combine the benefits of ETFs with the benefits of active management. The benefits of ETFs are well-known and widely accepted, which is what has lead the ETF industry to surpass the $1 trillion mark recently, in terms of assets being managed. However, that is dwarfed by the behemoth of the US mutual fund industry which collectively manages in excess of $12 trillion and a large portion of these assets lie in actively-managed mutual funds.  Active ETFs are innovations that are trying to bridge this gap and provide the low cost, tax efficient structure of ETFs to investors who believe in active management.

    Active ETFs vs Actively-Managed Mutual Funds

    There are numerous points that differentiate these two types of investment instruments that both utilize active management strategies.

    1. 1. Active ETFs provide tax advantages over active mutual funds. The ability to have in-kind creation and redemption allows investors to avoid adverse tax consequences that are experienced by mutual funds which involve cash transactions when units are redeemed. This mechanism of ETFs minimizes taxable capital gains that result from redemptions. These tax advantages are common across all ETFs.
    2. 2. Active ETFs are also much more transparent than their mutual fund counterparts because ETFs have to disclose their portfolio holdings on daily basis while mutual funds may make such disclosures only once every 3 months. This ensures that the ETFs’ price does not deviate from their NAV too much.
    3. 3. And finally the hallmark of Active ETFs, including ETFs in general, is their much lower expense ratios compared to mutual funds. For example, a case in point is the newly launched PIMCO Intermediate Municipal Bond Fund (NYSEARCA:MUNI), which is an Active ETF, compared to the PIMCO Municipal Bond Fund A (MUTF:PMLAX), which is a mutual fund. Both funds are managed by the same portfolio manager, and have nearly identical investment strategies. However, the mutual fund has a net expense ratio of 0.75% (aside from a sales charge of 3.75%) while the Active ETF has an expense ratio of just 0.35%.

    Active ETFs vs Passively-Managed ETFs

    Nearly the entire ETF industry is currently made up of Index ETFs, with Active ETFs only managing around $140 million in total. These Index ETFs are designed to track a certain index and their mandate is merely to replicate the returns of the index. The expenses on Index ETFs are usually smaller than those for Active ETFs. In contrast, Active ETFs are managed by portfolio managers who take active positions to provide alpha or excess return over their benchmark.  Though as a result of this, Active ETFs have higher turnover and hence transaction costs, which partially explains the higher fees.

    The number of issuers providing Active ETFs is exploding, with many new filings in the works. The long-term future of Active ETFs will depend largely on whether they do any better than mutual funds in beating their indexing counterparts. So place your bets!

    Disclosure: No positions in Active ETFs
    Image Credit: Oberazzi under a Creative Commons license.
    Jan 30 9:48 PM | Link | Comment!
  • Watching the USD drop? Look again.

    The USD vs the JPY is weakest in years. Yes, the DXY dollar index has been hitting new lows around 74. Yes, US government debt and deficits (the 2 infamous “D”s) have been skyrocketing and are projected to keep on growing in the coming years. Yes, the printing presses started by Ben Bernanke might be running faster than most people are comfortable with. And yes, the coming inflation will lead to further devaluation of the dollar which the government will not attempt to stop because they are happy to inflate away their piles of debt.

    We’ve all heard the reasons for the demise of the US dollar. But here’s the bigger picture. The USD does not exist in isolation in the forex markets. Every USD exchange rate that is quoted is RELATIVE to other currencies. The US dollar will depreciate relative to other currencies in the long term, if and only if, fundamental conditions in the US are RELATIVELY MORE worse than in other major economies. And probably the most important currency cross to RE-consider is the USD-JPY, which has recently touched 10-year lows.

    Worried about the US debt burden are you? There is enough reason to be – the debt-to-GDP ratio is projected to rise from 65% to 80%. The ageing population in the US is going to stress the social welfare programs which will cause deficits to rise even further. But you just might be worrying about the wrong deficit. Here’s a reference point – Japan’s debt-to-GDP ratio at the end of 2008 was 173% (trumped only by Zimbabwe at 241%) and is forecasted by the IMF to rise to 200% by 2010. Japan’s population structure is now so lopsided that its death rate per 1000 people exceeds its birth rate (despite having one of the world’s highest life expectancy), and Japan hardly benefits from the growing young immigrant populations that the US enjoys. As a result, Japan’s population has been declining since 2007. Let’s talk about social welfare. The US has fewer and fewer people in its workforce that are available to support the growing pool of retired citizens. In 2009, this ratio stood at around 4.5 working age citizens for every person above 65. In Japan, this ratio stands at 2.5. While the US economy derives about 70% of its GDP from its consumers, the Japanese economy is much more export driven and hence much more dependent on global demand. With the kind of conditions and start-stop recovery forecasted globally, Japan has a lot more to lose than the US. And finally, one of the biggest arguments against the USD is countries diversifying their reserves away from US treasuries. Contrary to popular belief, China does not OWN the US. In May 09, the US owed China (the biggest foreign holder) $772 billion which is only about 6% of the roughly $12.9 trillion in total national debt. Any attempts to diversify could just be a ripple in the ocean, a ripple that might just hurt the lenders more than the debtor.

    All that to say, with the USDJPY cross standing near 10-year lows, we could be staring at a huge opportunity, only to watch it go by. How could you translate this into a strategy? Go short JPY, long USD. Or more directly, go short Japanese Government Bonds (JGBs). Remember that this is a view for the medium-to-long term, as traditional moves to the “safety” of the USD might persist in the near-term. UUP (US Dollar Bull) filed to issue 100 million new shares to meet rising investor demand – if that’s any indication, the tide may already be turning.

    Disclosure: Long US stocks, no exposure to JPY.

    For more analysis, check out my blog:

    Tags: UUP
    Nov 08 4:22 PM | Link | Comment!
  • Betting on Natural Gas – Part I

    Why Natural Gas?

    The NYMEX Natural Gas Futures (Front Month) hit 10 year lows of around $2.50 a few weeks ago and have since sky-rocketed to around $4.80 at the close of Oct 9, 09. In the process, it has very powerfully broken the downtrend that it was in for the past year. This could well be the best opportunity to get exposure to natural gas, here’s why:

    1.       The period of seasonally high demand for natural gas is nearly upon us. With forecasts of a harsh winter in North America, the additional heating usage will provide the necessary demand that has been missing for the past quarters. The market perception is that the inventory overhang is too large for a demand increase to cause a recovery in prices. I continue to believe that the market is over-reacting to the supply glut – producers have already been cutting production for months as the National Energy Board has said drilling in Canada and the US has already slowed to half the level of previous years. July 09 data shows the number of operating drills in the US is down 55% (or down by 851 rigs) year-on-year.

    2.       The economic recovery itself will increase demand for natural gas from the big industrials such as Dow Chemicals. Steel producers will also contribute to demand as their markets recover. Both industrial production and manufacturing numbers have been positive in the last few months. The recovery and the weather will help reduce the large inventories of natural gas in storage.

    3.       The US government is continuing to push on clean energy initiatives that will reduce greenhouse gas emissions. One example is the DOE Clean Cities Program through which $300 million has been earmarked for the advancement of alternative vehicles on the road and a significant number of these projects involve natural gas. Clean energy acts around the world focus on reducing coal-produced energy in power plants and at the moment, natural gas is the next best alternative. Wind and solar energy are still too expensive in terms of $/kWh to match the power needs. In 2008, 21.3% of US energy production came from natural gas while all other renewable energy sources made up 9.8% of production. It’s important to point out though that the power hungry economies of India and China have little impact on natural gas prices in North America, because natural gas, unlike oil, cannot be transported across oceans easily (except LNG), resulting in markets which are very geographically separated. LNG is not an important enough factor yet – LNG requires major investment in ports to provide access to LNG tankers and in liquefaction and gasification plants on both ends of the transport route. As of Dec 08, there were only 8 LNG terminals in the US.

    The wild card may be shale gas and new drilling technologies that have lead to soaring on-shore production. It is hard to predict how much of an effect this new production will have on supplies and whether it will be enough to offset curtailment in production elsewhere.

    As I see it, there may be some limited downside to natural gas prices at this point, but there is quite a huge upside potential. NG futures seem to be pricing this already in as the Feb 2010 futures are trading at a 28% premium to the Nov 2010 futures.  Aside from the decision to go long, an equally important decision is to figure out where to invest along the natural gas value chain which is very long and has many participants. I will write about the possible strategies of getting exposure to natural gas in Part II of this post.  

    Disclosure: Long GAS.TO.

    Oct 15 11:10 PM | Link | Comment!
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