ETF Update: New Vanguard Offerings, Going Electronic, Inverse ETFs, Goodbye, ETN Tax Breaks, Transport ETF Takes A Hit, China Real Estate ETF

Includes: IYT, MGC, MGK, MGV, SH, TAO
by: Tom Lydon

3 New Vanguard ETFs

Vanguard launched three new ETFs on the NYSE Arca. They seek to track three MSCI Indexes and each fund has an expense ratio of 0.13%, reports Aaron Seigel for InvestmentNews.

  • Vanguard Mega Cap 300 Index Fund (NYSEARCA:MGV) tracks the MSCI Large-Cap US 300 Index
  • Vanguard Mega Cap 300 Growth Index Fund (NYSEARCA:MGC) tracks the MSCI US Large-Cap Growth Index
  • Vanguard Mega Cap 300 Value Index fund (NYSEARCA:MGK) tracks the MSCI US Large-Cap Value Index

The firm now has 37 ETFs listed and $1.3 trillion in assets.

Going Electronic

It's a move that will no doubt be a lot less controversial than Bob Dylan's decision to go electric in 1965: by year's end, the New York Stock Exchange will have moved ETFs to its electronic platform.

The platform, the NYSE Arca, was launched in April. Moving ETFs to the platform simplifies trading and processing, writes Jesse Emspak at Investor's Business Daily. It eliminates the need for intermediaries to trade and price the funds, so trading will be faster, and Arca automatically seeks the best price for a trade no matter which exchange the security resides on.

Inverse ETFs

For many many ETFs designed to go up when their underlying index goes up, you can often find a corresponding ETF designed to go up when the underlying index heads south.

They're known as "inverse" ETFs, and as David Gonzalez at Investopedia reports, they're just one more tool in the ETF workshop that help investors hedge risk and keep their portfolios afloat when the markets take a stumble. For example, if you felt that the S&P was going to go down, you would get the ProShares Short S&P 500 (NYSEARCA:SH). Likewise, you wouldn't want a short ETF in a sector that's heading upward.

Going a step further, there are some inverse ETFs that seek to double the performance of an index (a clue is if "ultra" appears in the name). These double ETFs either double the performance or move in twice the inverse direction of their benchmark.

Unlike regular long ETFs, the investment capital held in the legal trust underlying each inverse ETF generally is not invested directly in the securities of the index's constituents.

Most importantly, Gonzalez stresses the risks of inverse ETFs. The potential to lose and lose big is still there, so an investor should always make the most informed decision possible.

No More ETN Tax Breaks

The tax breaks given to ETNs were once considered an entry in the "pro" column for the funds, but now those breaks may become non-existent.

The IRS, which has been considering the tax treatment of ETNs for awhile now, finally ruled earlier this month that ETNs tracking foreign currencies should be considered debt for tax purposes, reports Lawrence Carrel at Because of the ruling, both capital gains and interest will be taxed as ordinary income on these notes, at rates of up to 35%. Ouch.

Before the ruling, any difference between the sale and the purchase price of an ETN would be considered capital gains, and holding onto an ETN for more than a year would mean you'd get the long-term capital gains rate. Now, not only are investors taxed on this income, they don't actually see the income until they sell their shares, which could come well after the taxes have been paid.

Just to be clear: this only affects currency-related ETNs. The IRS has yet to decide on ETNs that track stocks and commodities.

Transport ETF Takes A Hit

The Dow Jones Transportation Index (NYSEARCA:IYT) hit a three-week low after Union Pacific Corp. (NYSE:UNP) lowered its outlook for the fourth quarter. Union Pacific is 12.9% of IYT's portfolio. IYT is up 0.5% year-to-date.

It looks like the rising cost of fuel is affecting the transportation sector. Thomson Financial News reported that the railroad operator lowered its projected earnings to between $1.70 and $1.80 a share, down about 20 cents from a previous forecast. The company cited rising diesel costs and a lag in fuel surcharge recoveries.

New China Real Estate ETF

Recently, the first U.S.-listed China Real Estate ETF hit the market. The Claymore/AlphaShares China Real Estate ETF (NYSEARCA:TAO) began trading on the New York Stock Exchange Arca. It is the first vehicle to offer investors the opportunity to invest in the growing Chinese real estate market.

Real estate news in the U.S. has not been so positive lately, but there are reasons to look at other real estate markets as a possible investment. Here are a few reasons the Chinese real estate market is beckoning:

  • China’s 1.3 billion residents are becoming wealthier and with increased foreign investment in China, there has been a boom in Chinese property values.
  • China is urbanizing very quickly as more residents move from rural areas to the cities to seek greater economic opportunity, creating increasing demand for housing.
  • Today, 40% of China’s citizens live in cities. But by 2020, that number is expected to grow to 60%.

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