October was another busy month for the ETF industry, with the launch of several new funds, including a handful that will compete directly with well-established ETFs and some that seek to address potential regulatory issues facing traditional commodity products. Highlights from the month included:

• Claymore, in partnership with AlphaShares, launched the China All-Cap ETF (YAO), the first fund to offer exposure to China across all market capitalizations. Prior to the launch of YAO, China ETFs were generally dominated by holdings in mega cap companies or focused exclusively on small cap firms. YAO has already proven to be tremendously popular, accumulating more than $65 million in assets in its first month.
• IndexIQ, the firm behind the first ever hedge fund ETF, launched two additional products designed to protect against inflation. The IQ CPI Inflation Hedged ETF (CPI) and IQ ARB Global Resources ETF (GRES) hit the market at a time when investors are increasingly concerned about how to best protect their assets from the potential ravages of inflation.
• UBS launched the E-TRACS DJ-UBS Commodity Total Return ETN (DJCI), a broad-based commodity product that will compete directly with iPath’s DJP.
• OOK Advisors launched the first state-specific ETF with a fund focusing on companies headquartered in Oklahoma. OOK Advisors also has plans for a Texas-only fund that should be launched sometime in the fourth quarter.

New Product Pipeline

In addition to the funds that actually launched during the month, several issuers announced plans for future products covering all varieties of asset classes and investment strategies. New ETFs discussed in October included:

Lots of chatter lately about endowments puking up their private equity portfolios. (And interesting companies popping up to facilitate private transactions like Sharespost and SecondMarket.)

I always wondered why big investors of private equity (like the endowments and pension funds) don’t hedge their portfolio at all? If they assume that they are top quartile, which they have to assume because otherwise they should be buying SPY and QQQQ, then they are assuming they’re generating alpha returns. So why not hedge out some of that risk through a static, or better, dynamic hedge? Hedging against long bear markets is a great idea because not only are their holdings going down in value, but their exits disappear. Anyways, ping me if anyone does this; I’d like to chat with them. Is there such a thing as a market-neutral private equity investor?

Chicago-based Invesco PowerShares announced yesterday that its Listed Private Equity Portfolio (PSP) will broaden its scope and begin tracking the Global Listed Private Equity Index, a benchmark composed of publicly-listed private equity firms around the world. Previously, PSP had tracked the Red Rocks Capital Listed Private Equity Index, a domestic benchmark.

“The universe of publicly-listed private equity opportunities outside the United States is quite significant, and we are pleased to be broadening the scope of PSP to provide investors with a global exposure to this asset class,” said Ben Fulton, executive vice president global product development at Invesco PowerShares, in a press release. “PSP addresses the needs of investors building asset allocation models that seek to include the attributes of private equity, with the added benefit of daily liquidity provided by the ETF structure.”

Below are the 20 hottest ETFs (excluding leveraged funds) at the end of August, based on the 6 month performance. Data excludes leveraged ETFs and the data source is FINVIZ.com. The theme? Financials, unlike last month which featured China as a staple. A link is available on the right hand side of Scott's Investments with this data updated monthly.

Please note that with anything I write I'm not recommending the purchase of any particular security. This is especially true here - there is no trading strategy I am advocating with this list. However, it is helpful in determining where market trends and momentum exist. For one potential strategy utilized by portfolio123.com and backtested by Fidelity, investors who purchased the top performing ETFs based on 60 day returns did quite well (click here to read the full results). For more detailed momentum strategies, visit my blog or pick up a copy of Mebane Faber's The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Now, the list:

In May, Invesco PowerShares announced the closing of 19 different exchange-traded funds. One of those was a fund investing strictly in foreign private-equity players, apparently due to low asset levels.

Now, PowerShares is proposing changes to its existing private-equity ETF. It has filed a request with the Securities and Exchange Commission for approval to what appears to be a conversion of the U.S.-focused PowerShares Listed Private Equity ETF (PSP) into a global portfolio.

I previously offered screen results for high yield ETFs trading above their 200 day moving average and with an average volume of greater then 50k. The response was well received so below are the results of a screen for ETFs with a yield of 7% or greater with no volume or trend requirement.

As I stated previously, many on the list can be especially volatile. Generally, the higher the dividend yield the more volatile the security and at-risk is the dividend (the market is not going to give something for nothing). In addition, many companies are cutting dividends during this difficult period, which means when it comes time for an equity based ETF to pay out its next dividend, the payment could be less then it has paid in the past.

I decided to run an ETF screen over at FINVIZ.com for the following:

1) Yield > 4% (to give you perspective, a 10 year treasury bond yields around 3.79%)
2) Average Volume > 50k shares
3) Trading Above the 200 Day Moving Average

“Words from the Wise” this week again comes to you in a shortened format as I am still on the road in Europe (also see my post “Gone A.W.O.L. - to Slovenia and Switzerland“) and do not have access to my normal research resources. Although only brief commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

The holiday-shortened week saw pundits pondering the depth of the economic rabbit hole as the curtain closed on the second quarter. As investors vacillated, most financial markets were characterized by a roller-coaster ride. Thursday’s worse-than-expected US jobs data left no doubt that the economy was in recession.

Fair value may be in the eye of the beholder. And when it comes to Morningstar's assessment of intrinsic worth of exchange-traded funds, bloggers have been less than kind.

Nevertheless, Morningstar makes a valid attempt at determining a price at which... above it, you might sell, below it... you might buy. So it is interesting to note that 4 out of 5 of the most "undervalued" ETFs in the Morningstar system are healthcare ETFs.

Oil prices peaked at around $147 a barrel on July 11, 2008. We are now about 11 months after that bubble burst, and Oil has recently climbed as high as $70 a barrel. A scan of the best and worst performing ETFs over a 52 week time frame (excluding Ultra and Short ETFs) shows the damage that has been seen in the Energy Sector since that time.

On the Worst Performers list below, you can see 3 directly related Energy ETFs, all down 56%+ over the past 52 weeks: Natural Gas (UNG), Crude Oil (USO), and Heating Oil (UHN). Interestingly enough, an "alternative energy" ETF that is involved in Solar stocks (TAN) is also down over 56%.

Momentum Gainers

Coal

Market Vectors Coal (KOL)

PowerShares has an ETF (PSP) that tracks private equity companies that are publicly traded. It's not news to anyone that private equity has been hit extremely hard throughout the financial crisis, and from its peak to trough over the last two years, PSP went down 87%.

Since March 9th, however, PSP is up exactly 100%. It's also the ETF in our ETF Trends report that is currently the furthest above its 50-day moving average (DMA). As shown in the 50-DMA spread chart in the second chart below, this is by far the most overbought the ETF has been in its short history. While PSP has doubled in a matter of months, it still needs to gain 287% if it wants to get back to its all-time highs seen in June 2007.

Last Thursday, Ian Salisbury's "Fund Track" item in the Journal included the following nugget:

There are 721 ETFs with about $478 billion in assets, according to the Investment Company Institute, a trade group.

A lot of the endowments are struggling with the recent market meltdown. Unfortunately, my alma mater happens to be one of the worst performers.

As an aside, I have always wondered why investors in private equity don't hedge their portfolios against long bear markets? The biggest risk factors to a P/E portfolio are a bad economy coupled with a long stock market decline - the exits disappear, there is no liquidity, funding is scarce, multiples contract, and the underlying businesses face tougher conditions. Why in the world wouldn't you hedge that, or even run the allocation with a constant percent hedge?

This year has been marked by truly horrendous returns, not just in equity markets, but in nearly every market and strategy around. Where did that free lunch go?

As evidenced by the below table, the only strategies that (relatively) preserved capital were bonds, market neutral funds, managed futures, and obviously the short funds. I remember hearing quite a bit about the demise of managed futures in 2002-2003, and the death of trend-following.

Does your investment approach have you in the dark? Feel like having an advisor or portfolio manager is like the blind leading the blind? Maybe it is time to take control of your portfolio with a systematic approach.

I have talked a lot about various strategies for systematic trend-following and mean reversion on World Beta. In "Time to Put Money to Work" we examined what happens after really bad months in asset classes.

Now that the Alliance Data (ADS) buyout is supposedly “back on" (after an attempted shutdown by Blackstone (BX)), some in the financial press might anticipate that future private equity buyouts will go more smoothly than the Alliance Data deal. It would be a mistake, however, to believe that other buyout deals have an easy road ahead. Many interested parties have incentives to hold up the deals. Investment banks want to see deals collapse, so they don’t have to take a bath on the committed financing packages they have given to PE shops for the deals. Regulators are also becoming more careful about approving deals that have foreign investors as co-investors. Even the PE shops themselves in some cases don’t want to finish some of their completed deals now that the economy is slowing. Many PE shops are also careful to not invoke the Material Adverse Clauses (MAC) in their merger agreements, because they don’t want to acquire a reputation for such actions when deals they agreed to don’t look so appealing due to the economy. Unfortunately, the PE firms and the sellers of companies successfully forced investment banks to give up the MACs related to ability to finance when the credit for LBOs was cheap. Many PE shops didn’t want to give investment banks any wiggle room back then with financing commitments. Had the PE firms not removed the ability of investment banks to declare a MAC, we would no doubt see PE shops pressuring their investment bankers to invoke a MAC to stop deals that the PE shop doesn’t want to consummate. The PE shops would have the option to make the investment bankers the bad guys while getting their way. It seems like the worst part to play in this drama is that of a seller. The security of your buyout being completed successfully is being attacked from all sides, and your business is probably not worth as much as it was at the height of the LBO boom when your stock was higher.

If you need specific examples of the problems that are plaguing other LBOs in the pipeline The Deal and The Deal’s Dealscape Blog have done some great work on this subject.

Here is an interesting list ranking PE shops by size of all PE funds combined. It is only as of May 2007 and some of these funds have raised more funds since then. However, it is interesting none the less. Here are the top 20:

1 The Carlyle Group $32.5 billion
2 Kohlberg Kravis Roberts $31.1 billion
3 Goldman Sachs Principal Investment Area $31 billion
4 The Blackstone Group $28.36 billion
5 TPG $23.5 billion
6 Permira $21.47 billion
7 Apax Partners $18.85 billion
8 Bain Capital $17.3 billion
9 Providence Equity Partners $16.36 billion
10 CVC Capital Partners $15.65 billion
11 Cinven $15.07 billion
12 Apollo Management $13.9 billion
13 3i Group $13.37 billion $
14 Warburg Pincus $13.3 billion
15 Terra Firma Capital Partners $12.9 billion
16 Hellman & Friedman $12 billion
17 CCMP Capital $11.7 billion
18 General Atlantic $11.4 billion
19 Silver Lake Partners $11 billion
20 Teachers’ Private Capital $10.78 billion

In an earlier post, I examined how some of the listed alternatives in the US performed on a few down days in 2007.

With the US equity markets down around -10% YTD as of this weekend, how are the various alternative funds holding up? ( I will be taking a look at the foreign listed hedge funds in a follow up post.)