New PowerShares Wind ETF and FAN — Same Commodity, Different Construction

July 01, 2008

by Tom Lydon

Just two weeks after the first wind exchange traded fund (ETF) blew into the market, PowerShares now has its own offering.

The PowerShares NASDAQ OMX Clean Edge Global Wind Energy Index (PWND ) is a fund with 31 companies and an expense ratio of 0.75%.

There are significant differences between this new fund and the First Trust ISE Global Wind Energy Index (FAN ). including size and expense ratio. FAN clocks in with 67 companies and a 0.60% expense ratio.

PWND is a little more spread out among the countries, reports Murray Coleman for Index Universe. The top countries are Germany (17.1%), Denmark (13.9%), Spain (12%) and the United States (11.3%). Fan’s top countries are Germany (23%), the United States (17.9%) and Spain (16.1%).

FAN is 66% weighted in pure-plays, while PWND is 90% weighted in them. Those numbers could shift as cap rules shift for the individual holdings.

The unique methodologies used by each of these funds could make them appealing to different types of investors looking to capitalize on the growing market for wind energy both here and around the world.

New Index Rates Better Than OK, With An ETF To Track It

June 29, 2008

by Tom Lydon

SPADE Indexes has published the SPADE Oklahoma Index, which will serve as the basis of the upcoming Oklahoma exchange traded fund (ETF).

The index is designed to track companies that have corporate headquarters within the state of Oklahoma, and OOK Advisors already have an ETF in registration to track it. OOK is a full service brokerage firm based in Oklahoma City, and is the parent corporation to Capital West Securities.

The modified market-capitalization weighted index contains more than 30 companies that meet a range of criteria. The market-cap must be greater than $100 million, the share price must average more than $5 per day, and liquidity must be sufficient.

Many of the index’s constituents are in the energy field, or have located to Oklahoma because of its reputation as a business-friendly state with low tax rates. Through the end of May, the index had a year-to-date return of 27.6%, and has outperformed the S&P 500 annually since 2000 by an average of 21%.

S&P Jumps On The Asian Bandwagon

June 19, 2008

by Tom Lydon

Asia has been one of the most popular areas for exchange traded fund (ETF) investors to gain some international exposure. So, why not provide indexes that focus on specific portions of the region?

Standard & Poor’s has launched the S&P Asia Thematic Index Series made up of three new investible indexes for Asian equity markets, based on special investment themes, reports ETF Express .

The Asia Thematic Index Series contains the largest and most liquid companies from China, Hong Kong, Japan, Malaysia, Singapore, South Korea and Taiwan.

The new indexes are:

• S&P Asia Infrastructure Index
• S&P Asia Water Index
• S&P Asia Alternative Energy Index

The infrastructure index holds 30 stocks across three infrastructure clusters: energy, transportation and utilities. The water index has 30 stocks in two water-focused clusters: water utilities and infrastructure. The alternative energy index has 20 stocks involved in the production of energy from alternative sources.

When Outperformance Isn’t Enough, The 130/30 ETN Can Take You Beyond

June 19, 2008

by Tom Lydon

A strategy that’s popular with hedge fund investors is now being applied to an exchange traded note (ETN).

JP Morgan Chase & Co. ETN 130/30 (JFT ) tracks the First Trust Enhanced 130/30 Large Cap Index and replicates the long-short strategy. Although this strategy is usually appreciated by hedge fund investors, many fund providers are picking up on it. A 130/30 strategy allows the fund manager to leverage outperformance or alpha, through shorting stocks.

An ETN is a debt instrument, listed on an exchange, and tracks an index. They differ from exchange traded funds (ETFs) in that they are securities that represent a promise from a bank or financial institution to pay the holder the return of a specified index, minus expenses, reports John Spence for MarketWatch.

The 130/30 method allows the manager to begin with a sample of stocks and ranks them on their attractiveness as investments.The portfolio manager would then invest 100% of the stocks, and then short-sell the 30% lowest-ranking stocks. The shares are loaned out to investors and the short stocks are betting against the market. When the price of the short stocks decline they can buy them back at a later date and keep the difference.

The manager then takes that profit and puts that 30% back into the 100% long portfolio.

The key to such a fund’s success? The manager has to be good at stock picking. Other ETF providers have filed for their own 130/30 funds, and watching how they all perform relative to one another could be illuminating.

Not All ETFs Are Created Equally

June 17, 2008

by Tom Lydon

Opportunity is knocking on investors’ doors in the form of exchange traded funds (ETFs). They are becoming increasingly popular with both investors and advisors and they’re bringing more technique and innovation to the table than ever before.

Now investors can access a wide range of markets across the world, as well as tap into currencies and commodities and more, and be diversified by just owning a few funds. The key word is simplicity.

Stephen Spurden for Telegraph UK reports on the different ways indexes are constructed when it comes to ETFs:

• Full Replication: A basket of shares directly mirroring the underlying index.
• Strategic Sampling: A basket of shares reflecting the major stocks in the underlying index, and a representative sampling of shares in each sector; uses derivatives such as futures, too.
• Synthetic Replication: Uses 90% of the index plus cash held in the portfolio exchanged as collateral as a derivative instrument called a swap that copies the exact movement of the full underlying index.

Knowing the method by which your ETF is constructed is important, especially if you’re buying the fund because of a particular holding. You want to be sure the holding is there, after all. It’s just another argument in favor of doing your homework and knowing what you own.

For a further explanation of index optimization vs. replication, visit our post where we discuss the pros and cons of each.