ETF Update: Commodity Run-Up, New ETF Committee, Clean Energy ETFs, CFTC, SEC Cooperation, Microcap Suspensions

by: Tom Lydon

Traders Responsible For Commodity Run-Up?

Since August 2007, the most commonly traded commodity-centric ETFs are up about 50%. The spiking commodity prices are shouldering much of the blame for the inflationary threat to the economy.

But those price jumps can't be blamed on the supply factors, says Mike for HedgeFolios. That leaves demand, but the type of demand is up for debate. There's consumption demand taking place in China. It couldn't be entirely the result of natural demand - the prices are rising much more sharply than the natural demand.

Many politicians and investors point the finger at commodity traders for the run-up in prices. Hedge funds do not have the power to make prices rise so fast. The combination of monetary and fiscal policy of the U.S. government mixed with investment demand can be blamed, as the failure of the policies, too. If the Treasury and The Fed continues to devalue the dollar, the trend will continue.

The only way commodities will start dropping in value is if: the economy stabilizes, the dollar appreciates, the stock market bottoms out or the credit crisis clears. Until then, they are adding to the growing inflation problem.

New ETF Committee

One year ago, there were no major committees to explore and address the unique issues of the rapidly growing ETF market. Now there are two.

The Security Traders Association of New York [STANY] has established a committee to address all aspects of ETFs, to be chaired by XShares' CEO Anthony Dudzinski.

Dudzinski, who worked as a market making trader for about 20 years, told us that he first broached the idea of a committee to STANY a year ago. "I said 'This is a growing business...there will be more products like this trading and you should pay attention.' " He's been a standing member of the organization for 18 years.

While STANY's committee was in the works, Dudzinski got the call from the Investment Company Institute [ICI]: would he be on their new ETF committee, too? Sure, he said.

While both committees are going to represent the interests of ETFs, they'll focus on different aspects. While the ICI is a group of managers concerned with issues surrounding the 40 Act and the packaged product business, STANY's group will focus on market structure issues that may not be familiar to the ICI and its core constituents.

The overall hope is that the ETF industry will be better served with more voices, more research and more informed opinions behind it.

"As with every industry, there are different constituents focused on different things and don't always have the same opinions," Dudzinski says. "The purpose of a group is to sort, commingle, put in a blender and come out with some kind of commonality."

Clean Energy Loses Some Shine

While clean energy ETFs may have gotten socked hard in the recent market correction, it doesn't mean the fad is over. Most sectors are taking a hit these days, and alternative energy is no exception.

The clean energy sector got ahead of itself, green advocates say. Last year, for example, WilderHill Clean Energy Global Innovation Index was up 58% while the S&P 500 gained 3.5%.

In January's sell-off, the S&P was down 6% while the WilderHill index was down 20%, says Dan Jamieson for InvestmentNews.

Robert Wilder, the founder of WilderShares LLC and manager of the indexes, says areas such as solar power may have been bid up. They rose a whopping 163% last year.

One analyst says that people will support clean energy until the cost goes up too much, and that the promise of the sector is more talk than reality at this point.

Despite the sell-off alternative energy practices will not go by the wayside, even if oil prices fall. New energy technologies will be driven by the need to preserve the environment and energy security and it's the beginning of a trend. The way power is produced is undergoing a transformation.

If you're ready to think about green ETFs, here are a few to look at:

  • First Trust NASDAQ Clean Edge US Liquid [QCLN], down 33.6% year-to-date
  • PowerShares Cleantech Portfolio (NYSEARCA:PZD), down 15.2% year-to-date
  • PowerShares WilderHill Clean Energy Portfolio (NYSEARCA:PBD), down 21.6% year-to-date
  • Market Vectors Global Alternative Energy (NYSEARCA:GEX), down 25.6% year-to-date

Just bear in mind, green ETFs have been popular, but when it comes down to it, investors are going to look at them like they've been looking at other investments lately.

CFTC, SEC Sign New ETF Agreement

The Commodities Futures Trading Commission [CFTC] and the Securities and Exchange Commission [SEC] have signed a mutual cooperation agreement designed to help bring new ETFs to the market.

The agreement will go into effect immediately, just in time to conduct a coordinated review of two new derivative products based on streetTRACKS Gold Trust (NYSEARCA:GLD).

Over the long-term, Hedgeweek says, the partnership will provide enhanced information sharing that will guide the two agencies in the launch of new products that have elements of securities and commodities futures or options.

Energy, Natural Resources Enjoy Good February

February turned out to be the month of energy and natural resources ETFs, beating out the juggernaut that is precious metals.

Richard Widows for The Street says funds that included an international focus took five of the next nine spots, while global income and emerging market equities took second and third place respectively.

Global equity managed a slightly negative total return for the month, but was still better than the average performance of -0.61% for all 652 ETFs tracked.

The best-performing fund for February was ProShares Ultra-Short Financials (NYSEARCA:SKF) up 22.64% taking an inverse position and leveraging the worst-performing financial services category. The sector continued to take a hit on recession fears.

iPath Dow Jones AIG Natural Gas Total Return (NYSEARCA:GAZ), iShares Silver Trust (NYSEARCA:SLV), iShares MSCI Taiwan (NYSEARCA:EWT) and Market Vectors Steel (NYSEARCA:SLX) all achieved returns in the double digits and led their respective categories.

SEC Microcap Suspension Doesn't Effect ETFs

The SEC suspended trading of 26 microcap companies, but the microcap ETFs don't appear to be affected.

The suspensions will be in effect until March 27, and they're part of the SEC's increased effort to address fraud in microcap securities. There are questions about the accuracy of information regarding the companies' status as publicy traded, reports The Associated Press.

The SEC cautions investors be be aware of the risks associated with microcaps and to consider these suspensions and any information currently available or released by them in the future.

Microcaps are seen as particularly risky because they're not regularly researched by analysts, information can be hard to come by and they are thinly traded. The majority of these companies, which have a market capitalization of $250 million or less, are highly volatile, according to Microcap Markets.

The ETFs that contain microcaps are:

  • First Trust Dow Jones Select Microcap (NYSEARCA:FDM), down 12.2% year-to-date
  • iShares Russell Micorcap Index (NYSEARCA:IWC), down 15% year-to-date

None of the suspended companies appear to be major holdings of these ETFs.

The suspended companies are: Andros Isle Development Corp.; Asante Networks Inc.; Beluga Composites Corp.; Cobra Energy Inc.; Complete Care Medical Inc.; Disability Access Corp.; El Alacran Gold Mine Corp.; Extreme Fitness Inc.; Gaming Transactions Inc.; Global Equity Fund Inc.; HealthSonix Inc.; IQ Webquest Inc.; JSX Energy Inc.; Kensington Industries Inc.; Kingslake Energy Inc.; L International Computers Inc.; Let's Talk Recovery Inc.; Mobilestream Inc.; Mvive Inc.; Native American Energy Group Inc.; Paramount Gold and Silver Corp.; Regal Technologies Inc.; Remington Ventures Inc.; Straight Up Brands Inc.; Transglobal Oil Corp.; and Turquoise Development Co.