Andrew Herdman

Vanguard Offers Four New Bond ETFs

Agree diversification is of less value in fixed income, but precious little alpha outperformance is evident, so it really comes down to costs. The annual expense of an ETF has to be offset by lower administration and transaction costs compared to individual direct investment in bonds. Given retail bid/offer spreads including commission on bonds are typically 30-40 basis points, bond ETF's with annual TERs of 10-20 basis points may well be a more cost effective option. Non-US investors do have to be careful not to be exposed to US withholding taxes. US bonds pay interest gross to foreign investors, but dividend income from a bond ETF may not enjoy the same exemption, suffering a 30% US dividend withholding tax.

Do Your ETF Dividends Qualify For the 15% Rule?

Interesting post, thanks. Just to complicate matters further, spare a thought for those international investors who are still subject to 30% dividend withholding taxes on US listed shares and ETF's. There is no withholding tax on interest paid on US bonds held directly by foreign investors, thanks to the portfolio interest exemption. Without this concession it would of course be much harder to persuade foreign investors to finance the US deficit. However, as far as I know, fixed income ETFs held by foreign investors do not enjoy the same treatment and may therefore be subject to 30% dividend withholding taxes on what is actually bond interest. If so, foreign investors do better to hold bonds direct.

In Largest Single Filing Ever, ProShares Petitions SEC For 66 New ETFs

When someone gets a chance to look under the hood of these and other leveraged ETFs, apart from the stated expense ratio, it will be interesting to find out what the implicit interest rate is on the embedded leverage in these products, and how much additional expense that represents to the investor. Until then, caveat emptor. Similar issues arise in relation to commodity ETF's where the financing costs are embedded in the futures and may be only partially offset by interest earned on the collateral bonds.

Morningstar's ETF Ratings -- What's the Use?

Absolutely right of course. The average investor has no time for serious analysis of risk-adjusted returns and proper selection of appropriate factor-weighted benchmarks. So instead we're showered with simplistic ratings of little or no predictive value. Meanwhile, clever fund managers and ETF sponsors show increasing ingenuity in gaming the rather arbitrary fund categorisation and benchmark selection process, whilst disguising their underlying risk factor tilts. Still, it will be interesting to see whether Morningstar tries to keep the funds and ETFs ratings segregated. Otherwise it really could end up looking like the SPIVA results, with lower cost index funds and ETF's dominating the long term performance charts. By the way, does anyone know what licensing fees Morningstar obtains, if any, for the use of its star ratings, as well as for its indexing methodologies?

The New Currency ETFs Add Little For Investors

Indeed, the new currency ETF's seem like a complicated wrapper for what is in essence an unleveraged foreign currency deposit. Outside the US, banks routinely offer multi-currency accounts and term deposits to retail investors which would achieve the same result. A currency ETF would only make sense if it offers tighter exchange rate spreads and competitive interest rates.

In any case, US investors wanting to hedge US dollar currency risk in their portfolios would be better advised to invest in non-US stocks and bonds rather than foreign cash deposits.

Two Concerns With the New ETFs Hitting the Market

I agree with your comments on DFA and characterisation of fundamental indexing as quasi-active 3-factor tilts disguised as passive indexing, flattered by misleading benchmark comparisons.

As for DFA's reluctance to offer ETF's, Vanguard were similarly reluctant to embrace the ETF model but now offer VIPERS. Interestingly I saw an article recently penned by a couple of DFA directors complaining that index mutual funds are disadvantaged in capital gains tax terms compared to ETF's and seeking equivalent tax treatment. As you note, DFA's business model for retail investors is built around selected IFA's charging an additional management fee, partly on the basis of gaining exclusive access to DFA funds. Offering ETF's would make DFA funds available to all, so would require some changes to their distribution model. But I would not be surprised if DFA were to also join the ETF bandwagon.

Meanwhile, keep an eye out for iPath Exchange Traded Notes from BGI, perhaps the start of another wave.
Andy Herdman

ETF Torrent -- Getting Your Head Around the New Funds

And just in case your appetite for new ETF's is waning, please welcome some new creations: iPath Exchange Traded Notes from BGI. See Matthew Hougan's article at
www.indexuniverse.com/...;id=1481

Andy Herdman

Too Many ETFs? Buyer Demand Doesn't Indicate it

www.indexuniverse.com/ does a pretty good job of keeping up with new ETF developments. Interesting article today on iPath Exchange Traded Notes by Matthew Hougan, about two new commodity index trackers from BGI, but structured as financial derivatives rather than redeemable ETF's. See
www.indexuniverse.com/...;id=1481

Andy Herdman