Taking advantage of downside market action in international and emerging markets can now be implemented through new ETFs from ProShares. No comments on this from me as I’ve already said for a while that the market has needed this so here’s the press release:

ProShares Launches First Short International ETFs

BETHESDA, Md.–(BUSINESS WIRE)–ProShares, the fastest-growing ETF provider this year, announced today the launch of the first-ever short international ETFs, designed to go up when a foreign market goes down. ProShares, the nation’s only short and magnified-exposure ETFs, recently crossed $9 billion in assets under management.

The six new ProShares, each to be listed on the American Stock Exchange, are:

The Short and UltraShort MSCI EAFE ProShares launched today; the remaining four are slated for release in November. After these launches, the Short ProShares lineup—providing short exposure to a wide range of domestic and international markets, capitalization sizes and investment styles—will number 35.

These launches follow ProShares breaking though $9 billion in assets under management after a significant market drop on Friday October 19. Initially launched in June 2006, ProShares had the most successful first year of any ETF company in history.¹

“The dramatic acceptance of ProShares has been fueled by investors looking to go beyond the basics and expand the strategies they employ in their portfolios. Shorting strategies have been used by serious investors such as institutions and hedge funds for years,” said ProShares Chairman and CEO Michael Sapir. “By introducing short ETFs to the marketplace—first on domestic market indexes and now on international—we have opened up opportunities for more investors to use short strategies to manage risk or to seek to benefit from market declines.”

Short and UltraShort ProShares offer many advantages over shorting baskets of stocks, individual stocks or ETFs. Investors can achieve short exposure without opening a margin account—buying short exposure is as convenient and simple as purchasing an individual stock. In addition, investors can lose only the amount that they invest, whereas when they short stocks, stock baskets or ETFs, their losses are theoretically unlimited. Moreover, these ETFs can be employed in vehicles that do not permit margin accounts—IRAs for instance. And finally, these ETFs can easily be tracked throughout the day.

Investors seeking to hedge gains should understand that they may need to make adjustments to their holdings to maintain a specific level of short exposure over time. Also, the funds have fees, expense and tax consequences of their own. These short ETFs are structured to provide the inverse of the daily performance of the market indexes that they track; that is, if MSCI EAFE declines by 1% in a day, the Short MSCI EAFE ProShares should gain 1%; if the index goes up by 1% in a day, the ETF should lose an equal amount. The UltraShort ProShares are designed to deliver twice the inverse of daily performance; in the above instance, where MSCI EAFE declined by 1% in a day, the UltraShort MSCI EAFE ProShares should appreciate by 2% and if the benchmark rose by 1%, the ETF should decline by 2%.

I am going to take a short break from posting here on my blog. Not sure for how long but as you’ve likely seen lately, I haven’t been posting that often anyway (less than ten entries per calendar month). It could be a few weeks, could be longer or shorter, we’ll see. Until then, I leave you with the underlying positions and percentage breakdowns in the new offerings from Claymore Investments here in Canada for their two new offerings:

Claymore Global Balanced Income ETF

Claymore CDN Dividend and Income Achievers ETF (CDZ) 27.07%

iShares CDN Dow Jones Canada Select Dividend Index Fund (XDV) 12.93%

Claymore Canadian Fundamental Index (CRQ) 3.75%

Claymore Oil Sands ETF (CLO) 1.25%

Claymore US Fundamental ETF - C$ Hedged (CLU) 2.50%

iShares CDN S&P/TSX Capped REIT Index Fund (XRE) 10.00%

Claymore International Fundamental Index ETF (CIE) 0.96%

Claymore Japan Fundamental Index ETF - C$ Hedged (CJP) 0.83%

Claymore BRIC ETF (CBQ) 0.71%

iShares CDN Scotia Capital All Corporate Bond Index Fund (XGB) 5.04%

iShares CDN Scotia Capital All Government Bond Index Fund (XCB) 4.96%

Claymore S&P/TSX CDN Preferred Share ETF (CPD) 10.00%

iShares CDN Scotia Capital Short Term Bond Index Fund (XSB) 20.00%

Claymore Global Balanced Growth ETF

Claymore CDN Dividend and Income Achievers ETF (CDZ) 4.70%

iShares CDN Dow Jones Canada Select Dividend Index Fund (XDV) 2.80%

Claymore Canadian Fundamental Index (CRQ) 11.03%

Claymore Oil Sands ETF (CLO) 3.97%

Claymore US Fundamental ETF - C$ Hedged (CLU) 20.00%

iShares CDN S&P/TSX Capped REIT Index Fund (XRE) 10.00%

Claymore International Fundamental Index ETF (CIE) 8.71%

Claymore Japan Fundamental Index ETF - C$ Hedged (CJP) 7.49%

Claymore BRIC ETF (CBQ) 3.80%

iShares CDN Scotia Capital All Corporate Bond Index Fund (XCB) 5.11%

iShares CDN Scotia Capital All Government Bond Index Fund (XGB) 4.89%

Claymore S&P/TSX CDN Preferred Share ETF (CPD) 10.00%

iShares CDN Scotia Capital Short Term Bond Index Fund (XSB) 7.50%

More information from Claymore on these two funds can be found in this guide.

Well, not here if you’re anywhere outside of Canada. And not here, meaning not “right now”. But close (if you’re an American) and soon in terms of wait time.

As a follow up to my recent posting, “Funds Of ETFs Are On Their Way“, we now have news from Claymore Investments in Canada of the world’s first ETFs of ETFs. If someone knows of others already available, please let me know.

Here’s what I know and it’s straight from the source:

Tomorrow, Claymore Investments is launching the Claymore Global Balanced Income ETF (TSX:CBD) and the Claymore Global Balanced Growth ETF (TSX:CBN). They are the first ETF Wrap portfolios in Canada (and the world) to provide a single ETF as a core part of an investor’s portfolio.

As a wrap, these global wrap ETFs are made up of about 13 ETFs and focus on balanced portfolios bringing investors the ability to buy one product and access multiple asset classes giving exposure to fixed income, equity, real estate, commodities and other sectors.

TSX:CBD and TSX:CBN are based on a Global Balanced Index by Sabrient Systems, a partner of Claymore Investments out of California, who focus on dynamic asset allocation models using equity and fixed income.

Claymore strives to provide a lower cost option, and these ETFs follow that tradition by using lower cost structures. Management expense ratio of these ETFs is 0.7%, which includes the fees of the underlying Claymore ETFs in the portfolios. Claymore is excited to offer Canadian investors these innovative single portfolio solutions. A formal press release will be issued tomorrow – and more detailed Investor Guides (PDF documents) will be available.

So, we now have ETFs of ETFs. Not a big surprise when you think about it. Packaging a portfolio of stocks into mutual funds, mutual funds into a wrap program and hedge funds into a “fund of funds” makes sense for a lot of reasons. The application of this to ETFs would only be a logical step. Certainly, this development will expand as more competition enters the marketplace. I’m eager to see if BGI, SSGA and Vanguard decide to enter into this field. If they do, it might be a half-hearted approach with each provider building wraps with their own in-house ETFs only as ingredients. From what I understand, the Claymore offerings will not only have Claymore ETFs but those from other providers as well. We’ll know more tomorrow.

I also understand that other similar products are in the works in the US. These would be new participants in the industry … names most of you likely have not heard of yet.

I wish to reiterate my comments from the earlier posting on this subject. The fees will matter. What I hope to see is that these wrap programs develop into two groups. The first providing very low cost exposure to a well diversified group of ETFs. The second providing more of a highly active management program (GTAA?) that would justify a significantly higher fee. What “very low” and “significantly high” are, only the market will determine. But an ETF of ETFs that is well diversified, not overly traded and espouses the benefits of low cost investing, better not have a high overall MER or this exercise simply becomes counter-productive.

Today, I had a last minute invitation to speak on Canada’s Business News Network … that’s not a description, that’s its actual name. The channel was formerly known as “Report on Business Television” so you’ll have to decide if their name change was an improvement or not. The six and a half minute clip will be available for viewing online here until sometime late Monday evening of next week (when you click on this link I’ve provided, a small window with a built-in media player should pop open). If this doesn’t work, then go here and scroll down to the 4:40pm “After Hours” program. Hopefully, I will be able to have the clip viewed directly here on this blog at some point.

The opening shot of me appears to be my poker face or I’m about to enter the octagon for combat or it’s the once-a-month event when I screw up WordPress and lose a big chunk of my blog posting. Either way, it’s my “death stare” and I can only imagine that I felt pretty lousy running from my car to the building entrance of the studio in what has to be Toronto’s heaviest rain storm so far this year.

Anyway, the discussion was on market volatility but unfortunately the focus was almost entirely on VIX. I say “unfortunately” only because VIX can be (well, it is) a dry subject due to its rather technical nature. Despite being on the channel several times before, you’ll note that the topic of VIX was not quite enough to get me really loosened up until just a tiny bit near the end.

Well, here are two charts which I discuss during the interview:

3 Year VIX Chart

17.5 Year VIX Chart

I was hoping to get into a discussion on emerging markets, gold and oil markets, and a broader geopolitical debate. But at the end of the day, VIX is a tool worth considering for the defensively oriented investor so there’s merit in its discussion. Along with outright shorting and inverse ETFs, there’s not much out there in terms of true diversifiers/stabilizers available in this high correlation world.

On the other hand, I have actually noticed lately that a lot of hedge funds (fund-of-funds, multi-strategy funds and even some single strategy funds) have had better than decent performance in 2007 YTD. Could it be a result of the VIX spike up since late February? I’m sure it’s more than that but this good performance comes after a fairly long period of so-so returns.

On a separate note, after my interview, I had dinner with one of the ProShares directors who was up here in conjunction with Horizon BetaPro’s launch of their new Canadian energy sector index levered and inverse ETFs. This follows up BetaPro’s launch last week of similar long and short exposure ETFs for the Canadian financial sector.

Based on this BetaPro press release from April, it’s safe to say that we’ll be seeing the gold sector ETFs sometime soon as well.

For review, this is BetaPro’s lineup as of today:

Horizons BetaPro S&P/TSX 60 Bull Plus ETF - HXU
Horizons BetaPro S&P/TSX 60 Bear Plus ETF - HXD
Horizons BetaPro S&P/TSX Capped Financials Bull Plus ETF - HFU
Horizons BetaPro S&P/TSX Capped Financials Bear Plus ETF - HFD
Horizons BetaPro S&P/TSX Capped Energy Bull Plus ETF - HEU
Horizons BetaPro S&P/TSX Capped Energy Bear Plus ETF - HED

The Canadian ETF marketplace has basically doubled in a very short time especially due to the recent product development efforts at both BetaPro and Claymore. Unlike in the US, we don’t have as robust - some may say saturated - ETF marketplace here in Canada. Frankly, we don’t have the broad acceptance of ETFs here like there exists in the US so there is some balance there. I would guess by looking at reports, such as those from Deb Fuhr at Morgan Stanley, that all other markets outside of the US also have a rather small but growing ETF industry and that is likely where we’ll see significant growth as the ProShares, PowerShares, WisdomTree and other smaller participants do the same as BGI, SSGA and Vanguard with their already established global expansions.

I won’t get into the discussions I had with the gentleman from ProShares except for the fact that I asked the question that I think many want to have answered: When do we get the international exposures?

I’ll just leave you with a “let’s wait and see”. Let me be blunt as usual … I’d kind of like to see them, specifically inverse exposures for EAFE and emerging markets available before the end of the summer. Certainly before the end of the year.

Oh, and one last thing to consider for those of you who want to get some inverse exposure to emerging markets. I don’t know if that’s the right call (bearish on emerging markets) but considering the strong run up in China, central/eastern Europe and basically all subgroups in the developing world, it’s worth making preparations. But what to do when there’s no inverse ETF and shorting EEM or VWO is the only reasonable alternative? I suggested to my dinner partner from ProShares that the BetaPro S&P/TSX 60 Bear Plus Fund might be a good choice especially considering the relatively high correlation between the Canadian equity market (TSX 60) and a broad emerging market ETF like EEM. I would only guess that the new inverse energy sector ETF from BetaPro would be an even better proxy for a short EEM strategy. There’s not enough historical ETF data but your friendly neighborhood Bloomberg terminal, Thomson Datastream or similar data source should provide you with data for the underlying index as the evidence you need.

It’s a tough, high correlation world. But perhaps there are ways like this to use high correlations to your advantage. The problem is correlations change in time. I’d much rather have the inverse ETF.

Interesting finding in the Globe and Mail’s Streetwise blog where Andrew Willis provides news of an upcoming IPO for GHG Emission Credit Participation Corp. on the Toronto Stock Exchange. Willis mentions that this is a pure play into the carbon emissions market similar to other funds on the TSX that provide pure play exposure to gold, molybdenum and uranium. I’ve mentioned Uranium Participation Corp. (U) as a unique and easy means to uranium price exposure however there are now futures for this commodity as well.

This press release give a bit more on the IPO.

Technically neither of these “Participation Corp.” (uranium and now emission) instruments are ETFs but they are traded on an exchange like a stock and for the vast majority of investors do the job of providing indirect commodity exposure as GLD and SLV do for gold and silver respectively.

I’ve discussed carbon markets in the past and some googling will provide more background information … more than you need, of course. I find Wikipedia may not be the most reliable source of information for a particular subject, but it usually provides a decent set of links and this is true when you look here and here.

Not surprisingly, there’s also news of problems in this new space. Fertile ground for active managers.

Another interesting angle is to explore getting a piece of the infrastructure by purchasing shares in Climate Exchange PLC (CLE) which is covered in the topmost link as well as in this National Post article.

For the large institutional investors, I’d speculate that they would gain exposure to emission markets through hedge funds. Frankly, I would be surprised if internal managers in even the largest pension funds included direct carbon instrument exposures within their GTAA programs. For most investors, this market is still in its infancy and therefore getting in quick and easy may be the best approach simply for practical reasons. Alternative energy will be hot for a long while and emissions may be the next uranium. Perhaps exposure to the market itself through GHG Emission Credit Participation Corp. as well as to the exchanges through Climate Exchange PLC should provide more than enough of an allocation replacement should uranium investors decide to take their profits and move on.

The concept of a “wrap program” has been around for years and the idea is quite simple. The novice investor hands over one of the more fundamental components of the portfolio construction process, namely the asset mix decision, to a professional. Of course, this service should also include the ongoing rebalancing required for the portfolio. If asset allocation is the main driver of portfolio returns (actually, the 1986 Brinson/Hood/Beebower study says it’s the key determinant of the variability of portfolio returns), then it makes sense that novice investors should get advice from professionals for this key function as much as they do for securities selection.

Of course,this service comes at a cost so one of the primary downsides for such programs is the added layer of fees. For a portfolio of mutual funds, however, the risk is that the overall portfolio provides little beyond market returns at a high price. Despite this, the concept exists not only with mutual fund wrap programs but beyond. Another example is the “fund of hedge funds” (more commonly known as simply a “fund of funds”). In this case, the fund of funds manager must consider the mix of hedge fund strategies which is altogether a different sport from the mutual fund wrap program. In either case, the overseeing manager is a “manager of managers” and will likely assert in their marketing material that they have skills in selecting managers. Of course, just like no one wins in a sport all the time, managers can’t be top decile for long which is why I’ve labeled the manager selection process earlier as “sport”. Ali, Pele, Jordan, Schumacher, Tiger Woods, Federer … there are countless examples of sporting figures who did or are doing more than simply excel beyond the competition. Dominate would be a better term. But just like Peter Lynch, Bill Miller or Warren Buffett, winning streaks don’t last forever. Dynasties like those from the Chicago Bulls or the New York Islanders are rare but I think are rarer still in the fund management space. Thus, the idea of picking winning managers is truly a tough sport.

So, how about an “ETF of ETFs”? It’s still tough but at least you’re taking the active management component away from the process … or are we? The way the ETF industry is moving, active management will soon be as common to ETFs as it is in the rest of the fund universe. Whoa, I suppose there’s a case for a wrap program of ETFs or some “fund of ETFs” or “ETF of ETFs”? Well, based on what I’ve just said about selecting managers, maybe not a case for the investor but maybe one for the product provider. Oh, they’re coming.

Here’s news of a fund company that will build a series of mutual funds holding only ETFs to track the Lipper ETF Indexes which David Hoffman of InvestmentNews has recently covered. As a quick review, Lipper has essentially created a family of “target risk benchmarks” made up entirely of ETFs (which I don’t think have been made public and I wonder if they will be?!). The five indexes are:

• Lipper Optimal Aggressive Growth Index
• Lipper Optimal Growth Index
• Lipper Optimal Moderate Index
• Lipper Optimal Conservative Index and
• Lipper Optimal Very Conservative Index.

Sounds like a typical family of wrap programs … the one that you get slotted into after filling out a form with a couple dozen standard questions. I’m not sure if other such target benchmarks exist, but this could be a place to start for investors who have built a portfolio consisting primarily, or exclusively, of ETFs. I’ve said this before but I think it’s worth repeating … why someone would limit themselves to just using ETFs is beyond me. ETFs are great and have many worthy benefits but to put such constraints on oneself is rather pointless. ETFs are ideal but not for every investor in every situation … there are areas of the capital markets where an ETF is simply not the best choice for you. As much as I may like any financial instrument, I wouldn’t want to be handcuffed to them exclusively.

Still, for those who have built a portfolio with extensive use of ETFs, these Lipper benchmarks provide a gauge for comparison. A good or bad gauge, I just don’t know because, again, I don’t know what are the ingredients nor the recipe.

I started this post talking about the asset mix decision. But is this the case for a fund of ETFs? In a way, it’s still about the asset mix but talk to any advisor who uses ETFs in their client portfolios, or in fact any ETF focused investor, and they’ll likely tell you that the selection process is as important. With all the ETFs out there, is that a surprise?  And with the exponential growth in terms of the number of new offerings, perhaps asset allocation will take a back seat to securities selection.  Right away it makes me wonder if that’s a good thing. Although it’s not manager specific selection (or at least, until more actively managed ETFs are introduced to act as components within a “fund of ETFs”), it’s still moving towards the sport of chasing returns. So, one area of inquiry into these new wrap products (that’s essentially what they are, right?), as well as existing services at financial advisory firms that focus on managing ETF based portfolios, is the extent to which active management is applied to these programs. Questions could include:

• What is the overall portfolio’s turnover?
• Is rebalancing based on fixed periods (semi-annually, annually, etc.), based on volatility (for example, if a position moves X% from its initial allocation then it moves back to X%) or some other rule?
• What is the average holding time for core and non-core positions?
• What are the total number of holdings at any given time and is there a minimum or maximum number of holdings?
• What is the universe in which the manager can select funds from?
• How does the manager deal with new ETFs that get introduced into the market and what determines if it becomes part of the opportunity set?
• What would make one holding be deemed more appropriate than another holding?  For example, would VWO ever be considered a full replacement for existing EEM positions.

Active management will always be a part of the investment industry and that’s no surprise for many obvious reasons. Furthermore, the use of ETFs in organized portfolio is not new. Many financial advisors in North America have built a practice around the use of indexed instruments (index funds, ETFs, etc.) but no matter how much they believe in efficient markets, there’s some degree of active management in what they do. There are many planners who focus their practice on the exclusive use of a certain family or families of funds usually with names such as Vanguard and Dimensional Fund Advisors. Like ETFs in general I don’t like absolutes and exclusivity, but these two firms in particular are cult-like in their focus on disciplined asset class investing with a minimal use of active management. It is the advisor who listens to such advice who I believe is doing the greatest service to their clients.

These are services but what about products? The next logical step is for fund companies to get into the action with funds of funds. In addition to the news mentioned above, through my contacts and with some poking around I know that there are more similar products on the way. It’s only a matter of time before we see ETFs of ETFs. Again, it’s about the movement towards greater active management in the ETF space. The real question is what degree of active management will be applied to such products and will investors in these products receive the benefits that ETF promoters have long suggested make them an asset rather than a liability versus more traditional actively managed products such as mutual funds.

What would be the worst thing for the ETF focused investor who gets into a managed program such as an “ETF of ETFs”? Some may think that it would be the decision to go with a manager who trades opportunistically and, like some well publicized hedge funds, shoots its lights out. There are mandates like this and the managers are not afraid to call them hedge funds nor are they shy about their performance fees. I’m talking about a totally different animal … the more traditional mandate.  To me, the real risk is that the overall portfolio provides little beyond market returns at a high price. In that case, the whole point of using ETFs has been lost.

Many observers of the ETF industry have commented on the thinner slices to sector exposures provided by fund manufacturers in recent years. My take is different. Although there are some “sectors” that are indeed quite narrow, many new fund offerings are more “thematic” in nature. These include water, alternative energy and infrastructure and are more broad that they are, in my opinion to be considered asset classes themselves. Of course, some would consider this issue semantics but that’s for the final user to decide within their own investment process. Certainly, many institutional investors look at infrastructure as an asset class. I don’t know if I would consider water to be an asset class … actually, I don’t … but it certainly is broader than a sector and can be considered thematic in nature.

At the end of the day, I am interested in finding things (call it a sector, call it a theme, I really don’t care) that help in the overall risk-adjusted return potential for any given portfolio. I think Van Eck is a firm that thinks the same way. Steel company exposures (through their Steel ETF, SLX) may not be a diversifier for many, but I could see it as one for many unique types of investors. The same could be said for their Environmental Services ETF (EVX), their Gold Miners ETF (GDX), their Global Alternative Energy ETF (GEX) and their new Russia ETF (RSX).

To take RSX as another example, for an investor with a need for emerging market exposure outside of what they likely already hold (China, India, EEM) and with a strong commodity bias, this fund makes sense. For someone like a Canadian or Australian, it likely doesn’t make so much sense.

But now I’m getting word of some new ETF product development in the Van Eck pipe as seen from this recent SEC filing.

What have we here? (Think Lando when he first met Leia for all the fellow Star Wars geeks out there.) Here are some of the more interesting excerpts:

Market Vectors—Global Agribusiness ETF and Market Vectors—Global Nuclear Energy ETF (the “Funds”) are distributed by Van Eck Securities Corporation and seek to track the DAXglobal^® Agribusiness Index and DAXglobal^® Nuclear Energy Index, respectively, each of which is published by Deutsche Börse AG (“Deutsche Börse”).

More specifically on the Agribusiness ETF:

MARKET VECTORS-GLOBAL AGRIBUSINESS ETF

Principal Investment Objective and Strategies

Investment Objective. The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal^®® Agribusiness Index.” Agribusiness Index (the “Agribusiness Index”). For a further description of the Agribusiness Index, see “The DAXglobal^® Agribusiness Index.”

Principal Investment Policy. The Fund will normally invest at least 80% of its total assets in equity securities of U.S. and foreign companies primarily engaged in the business of agriculture. Companies primarily engaged in the agriculture business include those engaged in agriproduct operations, livestock operations, agricultural chemicals, providing or transporting agricultural equipment, and providing or transporting ethanol/biodiesel, and which derive at least 50% of their total revenues from such activities. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.

Indexing Investment Approach. The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the Agribusiness Index by investing in a portfolio of securities that generally replicate the Agribusiness Index.

The Adviser anticipates that, generally, the Fund will hold all of the securities which comprise the Agribusiness Index in proportion to their weightings in the Agribusiness Index. However, under various circumstances, it may not be possible or practicable to purchase all of those securities in these weightings. In these circumstances, the Fund may purchase a sample of securities in the Agribusiness Index. There also may be instances in which the Adviser may choose to overweight another security in the Agribusiness Index, purchase securities not in the Agribusiness Index which the Adviser believes are appropriate to substitute for certain securities in the Agribusiness Index or utilize various combinations of other available investment techniques in seeking to replicate as closely as possible, before fees and expenses, the price and yield performance of the Agribusiness Index. The Fund may sell securities that are represented in the Agribusiness Index in anticipation of their removal from the Agribusiness Index or purchase securities not represented in the Agribusiness Index in anticipation of their addition to the Agribusiness Index. The Adviser expects that, over time, the correlation between the Fund’s performance and that of the Agribusiness Index before fees and expenses will be 95% or better. A figure of 100% would indicate perfect correlation.

The Fund will normally invest at least 95% of its total assets in securities that comprise the Agribusiness Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and other regulatory requirements.

Because of the passive investment management approach of the Fund, the portfolio turnover rate is expected to be under 30%, generally a lower turnover rate than for many other investment companies. Sales as a result of Agribusiness Index changes could result in the realization of short or long-term capital gains in the Fund resulting in tax liability for shareholders subject to U.S. federal income tax. See “Shareholder Information—Tax Matters.”

Market Capitalization>. The Agribusiness Index is comprised of companies with market capitalizations greater than $150 million that have a worldwide average daily trading volume of at least $1 million and have maintained a monthly trading volume of 250,000 shares over the past six months. The total market capitalization of the Agribusiness Index as of [ • ], 2007 was in excess of $[ • ] billion.

So we now have a competitor to the up to the PowerShares-Deutsche Bank agriculture ETF (DBA). A quick review from its website gives us this description:

The PowerShares DB Agriculture Fund is based on the Deutsche Bank Liquid Commodity Index – Optimum Yield Agriculture Excess Return™ and managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities – corn, wheat, soy beans and sugar. The index is intended to reflect the performance of the agricultural sector.

With all the focus on metals and energy, diversifying into agriculture is a reasonable move for investors with the size to spread their allocations out even further. Those who lean more towards a Jim Rogers philosophy will look to DBA and/or this new Van Eck offering as more of a strategic (I would say tactical) bet.

And like applying a GLD/GDX combo for exposures to both the gold bullion price and gold miners, a similar DBA/new Van Eck combo makes sense here. For those implementing a position to a specific commodity, I think this dual positioning is ideal and the tilting between the two positions can be a significant source of alpha in the long-term (in my opinion). If only this were also available to the commodity I’ve been commenting on recently and for quite some time: uranium.

More specific to the upcoming Nuclear Energy ETF from Van Eck:

MARKET VECTORS-GLOBAL NUCLEAR ENERGY ETF

Principal Investment Objective and Strategies

Investment Objective. The Fund’s investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal^®® Nuclear Energy Index.” Nuclear Energy Index (the “Nuclear Energy Index”). For a further description of the Nuclear Energy Index, see “The DAXglobal

Principal Investment Policy. The Fund will normally invest at least 80% of its total assets in equity securities of U.S. and foreign companies primarily engaged in various aspects of the nuclear energy business. Companies primarily engaged in the nuclear business include those engaged in uranium mining, uranium enrichment, uranium storage, providing equipment for use in the provision of nuclear energy, nuclear plant infrastructure, nuclear fuel transportation and nuclear energy generation, and which derive at least 50% of their total revenues from such activities. This 80% investment policy is non-fundamental and requires 60 days’ prior written notice to shareholders before it can be changed.

Indexing Investment Approach. The Fund is not managed according to traditional methods of “active” investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Instead, the Fund, utilizing a “passive” or indexing investment approach, attempts to approximate the investment performance of the Nuclear Energy Index by investing in a portfolio of securities that generally replicate the Nuclear Energy Index.

The Adviser anticipates that, generally, the Fund will hold all of the securities which comprise the Nuclear Energy Index in proportion to their weightings in the Nuclear Energy Index. However, under various circumstances, it may not be possible or practicable to purchase all of those securities in these weightings. In these circumstances, the Fund may purchase a sample of securities in the Nuclear Energy Index. There also may be instances in which the Adviser may choose to overweight another security in the Nuclear Energy Index, purchase securities not in the Nuclear Energy Index which the Adviser believes are appropriate to substitute for certain securities in the Nuclear Energy Index or utilize various combinations of other available investment techniques in seeking to replicate as closely as possible, before fees and expenses, the price and yield performance of the Nuclear Energy Index. The Fund may sell securities that are represented in the Nuclear Energy Index in anticipation of their removal from the Nuclear Energy Index or purchase securities not represented in the Nuclear Energy Index in anticipation of their addition to the Nuclear Energy Index. The Adviser expects that, over time, the correlation between the Fund’s performance and that of the Nuclear Energy Index before fees and expenses will be 95% or better. A figure of 100% would indicate perfect correlation.

The Fund will normally invest at least 95% of its total assets in securities that comprise the Nuclear Energy Index. A lesser percentage may be so invested to the extent that the Adviser needs additional flexibility to comply with the requirements of the Internal Revenue Code and other regulatory requirements.

Because of the passive investment management approach of the Fund, the portfolio turnover rate is expected to be under 30%, generally a lower turnover rate than for many other investment companies. Sales as a result of Nuclear Energy Index changes could result in the realization of short or long-term capital gains in the Fund resulting in tax liability for shareholders subject to U.S. federal income tax. See “Shareholder Information—Tax Matters.”

Market Capitalization. The Nuclear Energy Index is comprised of companies with market capitalizations greater than $150 million that have a worldwide average daily trading volume of at least $1 million and have maintained a monthly trading volume of 250,000 shares over the past six months. The total market capitalization of the Nuclear Energy Index as of [ • ], 2007 was in excess of $[ • ] billion.

Perhaps the whole green ETF thing has gone a bit far in the past year but, a bit surprisingly, this would be the first pure play on the nuclear energy story. I have commented recently on uranium as have so many other industry watchers in recent months after having seen the commodity double in price in the past four calendar years … it’s up roughly 70% so far this year according to the chart found here.

I just said “pure play”, but it’s important for prospective investors to consider the 50% and 80% values quoted in the above descriptions. That’s 50% of the revenue of an underlying holding must fit the required parameters and 80% of the fund’s assets is to be invested in companies whose primary business operations are in the field of agriculture or nuclear energy respectively.

I don’t want to comment too much on this nuclear energy ETF as I don’t have enough information at this time. But here’s the problem I foresee: There’s just not an even spread of companies involved in the nuclear energy business. Let’s take uranium mining for example. It’s Cameco (CCJ), a very small number of competitors who are close in terms of size and a large number of small cap, if not micro cap, producers. Having an ETF based just on uranium miners would be a logistical nightmare and investors would have to accept a few stocks dominating the fund. An equal weighted ETF for this sector would make sense except for the fact that the thinly traded smallcaps/microcaps would provide an interesting (to say the least) situation for the market makers of the fund. I could see hedge funds getting into that game on the other side. We can only hope that there is a more robust mix in other related businesses mentioned in the prospectus namely uranium enrichment, uranium storage, providing equipment for use in the provision of nuclear energy, nuclear plant infrastructure, nuclear fuel transportation and nuclear energy generation.

In the past I’ve mentioned both Cameco and Uranium Participation Corp (U) as appropriate uranium plays. This new nuclear energy ETF would be an even more appropriate holding in the place of Cameco and with recent uranium derivatives on the market, exposure to the price of uranium itself allows for more complete exposure (and inverse through shorting) than in the past.

No word yet on fees as well as other details on these upcoming Van Eck ETFs.

I’d say that of all the ETF providers, it’s the news out of Van Eck that gets me the most interested and I always look forward to finding out what’s next from them.  Nothing too fancy … just new exposures, but I like it!

No, not that The Guess Who although now I can’t get the song American Woman out of my head. News from MarketWatch today of Vanguard about to fire another shot across the bow and as usual, it’s more of a shotgun approach than a rifle. It’s broad access to the international space with nothing new but the same old EAFE exposures we’ve had from ETFs like EFA. But unlike BGI’s offering with a 35bps MER, this new fund from Vanguard (VEA) will sit at 15bps.

Vanguard already allows investors cheap international exposures to Europe and the Far East (VGK and VPL respectively) both at 18bps but this new ETF will allow international exposure in one position. With the ETF world having focused in recent years on the narrowest of regions and sectors, we’re now seeing quite a few product launches for broader international exposures.

For example, SSGA now has three ETFs allowing for very broad international exposures:

• The SPDR S&P World ex-US ETF (GWL) covers most of world outside of the US market. The underlying index is the S&P/Citigroup BMI World Ex US Index. This ETF has roughly 670 holdings and has an MER of 35bps.
• The SPDR S&P International Small Cap ETF (GWX) does the same as CWI but limits holdings to small cap equities. The underlying index is the S&P/Citigroup World Ex US Range < 2 Billion USD Index. This ETF has roughly 500 holdings and has an MER of 60bps.
• The SPDR MSCI ACWIsm ex-US ETF (CWI) is very similar to CWI in most respects except the underlying index is the MSCI ACWIsm ex USA Index. This ETF has roughly 680 holdings and has an MER of 35bps.

These SSGA funds allow for some (although not much) exposure to emerging markets while EFA and Vanguard’s new offering do not. Focusing on the large cap exposures (GWL and CWI) from SSGA, in general, you’re getting greater diversification from these compared to the BGI and Vanguard offerings which both track the MSCI EAFE Index. According to the iShares website, this factsheet for EFA shows that the three top country exposures are the UK (23.11%), Japan (22.29%) and France (9.46%). A total of about 55% in these three countries. Based on the SSGA website, GWL and CWI have the same top three countries but with decreased weights. Both GWL and CWI have about 45% in these three countries. I don’t see that significant a divergence among these funds in terms of general country and sector allocations.

Of course, many investors will want to make their own decision on how to split the developed and developing world within their portfolio. SSGA has recently launched a broad emerging market ETF (GMM) as well as five regional emerging market ETFs but with all of them at a 60bps MER, they like EEM (75bps) are relatively expensive compared to Vanguard’s VWO at 30bps. I think it’s worthwhile to explore the SSGA site to dig into their new emerging market ETFs as it allows investors to implement asset mix decisions within the emerging markets space and I’ve discussed this area a few months back here. SSGA’s emerging market ETFs weren’t available until the middle of March 2007 so they weren’t a part of that February posting but as you can see from this chart, the four broad emerging market ETFs track closely with a few times when the month-to-month return difference is rather significant.

I should also note that Vanguard has a competitor to SSGA’s GWL and CWI in their Vanguard FTSE All-World ex-US ETF (VEU). According to Vanguard’s website, VEU holds about 1,500 stocks (overkill?) yet is quite similar in terms of asset mix to the international funds from SSGA. Again, I find the same top three country exposures for its underlying index as the UK (17.3%), Japan (15.7%) and France (8.6%). But SSGA’s funds are at 35bps and VEU is at 25bps. In general, it looks like Vanguard is the cheapest with the broadest international exposure. Was there ever any doubt?

VEU began trading earlier this year so this chart goes back as early as will allow analysis of it versus the other broad international ETFs I’ve mentioned above (Note: SSGA’s GWL was not available until April 20, 2007 so I’ve excluded it here just so that it won’t be a one month chart).

A tighter group but again some spread in time. I don’t want to comment too positively on the good performance of Vanguard in both charts above, but if international exposure is a long-term hold for you, then the effects of fees and the benefits of diversification should allow consideration for Vanguard’s VEU and VWO as core holdings.

Many may disagree, but on top of these two core holdings, I would overlay some active tilting using a VGK/VPL combination for the developed world as well as SSGA’s new emerging market ETFs for the developing world.

Update! Last month I commented on some developments here in Canada that saw a closed end fund converted into an ETF. I asked if that was the beginning of a trend.

Maybe not a massive trend, but I now see that First Trust is doing the same with one of their closed end funds. It’s the First Trust Value Line® 100 Fund (FVL) and here’s the press release discussing the conversion. First Trust must really be commended for providing A LOT of information on their funds online.

Unlike the Claymore conversion in Canada that has a truly active manager with a classic active management mandate, the First Trust closed end fund seems to fit the model of other rules-based “quasi-active” ETFs such as their own new AlphaDex funds as well as the IntelliDex and fundamental weighted (FTSE-RAFI) funds both from PowerShares.

The question is if and when we’ll see more traditional closed end funds converting into exchange traded funds? Furthermore, if by doing so, would we hopefully see a minimal spread (premium/discount) between the funds’ market price and the underlying net asset value.  I’m sure that many investors who have exposures to the various country specific funds and thematic funds (infrastructure, for example) on the NYSE would be interested to see a structure, if possible, that would reduce, if not eliminate, this problem with closed end funds.

I’m fairly sure that a part three in this series will follow quite soon.

Just a quick comment on the new global water ETF from Claymore that should provide some competition for PowerShares. I commented on this topic back in December with a post on a new global water index but instead of that leading to a follow up offering for PowerShares (the index in that case was developed by Palisades Indexes who was behind the work on PHO), we have Claymore working with S&P on this competing fund (ticker symbol CGW traded on the AMEX).

More news on today’s launch here and here.

For specific news related to water specific equities, take a look here.

But more on this new offering from Claymore:

It’s an incredibly sad fact that globally there are more than one billion people who simply do not have access to safe water. Shocking numbers but when you consider that roughly double that number lacks adequate sanitation, you begin to understand the rationale and necessity for infrastructure investments. It’s not just about uncorrelated returns but providing the basics of life to the world. If it is indeed true that about three million people die annually simply because of inadequate access to safe water supplies, then this type of infrastructure is not a “nice to have” but a certain “must have”.

From a business sense, it’s self evident that as developing countries become wealthier they will first look to bring these “must have” necessities to their populations which makes water the world’s most significant untapped commodity. Where there is demand, global companies will capitalize. Today, companies have the capability to derive new sources of water and deliver it to those places that will pay for it. The size of this market must simply be enormous, especially when considering that despite the earth’s surface being 75% water, only about 3% of the world’s supply is drinkable, let alone available for modern irrigation.

Although this isn’t the first water ETF, one of the major points of differentiation between this new ETF and that from PowerShares is its global exposure. For the Claymore offering, its underlying index, the S&P Global Water Index ETF, has the following properties as cited from the BusinessWire press release linked above:

The index is comprised of 50 equity securities selected from a universe of companies listed on global developed market exchanges and based on the relative importance of the global water industry within those companies’ business models. The index is designed to have a balanced representation from different segments of the water industry consisting of the following two clusters: 25 Water Utilities and Infrastructure companies (water supply, water utilities, waste water treatment, water, sewer and pipeline construction, water purification, water well drilling and water testing) and 25 Water Equipment and Materials companies (water treatment chemicals, water treatment appliances, pumps and pumping equipment, fluid power pumps and motors, plumbing equipment, totalizing fluid meters and counting devices) based upon Standard & Poor’s Capital IQ (”CIQ”) industry classification.

Companies included in the Index have market capitalizations ranging from US$250 million to US$25 billion and the Fund will normally invest at least 90% of its total assets in common stocks and ADRs that comprise the Index. The Index is rebalanced annually.

Recent product offerings which could loosely be defined as thematic sector funds (infrastructure, real estate and now water) have been globally oriented ETFs and it just makes sense – for the broad spectrum of investors, why focus these themes on just the US market? If it’s all about diversification, then that should be geographically as well as based on sector/themes. Furthermore, regarding the global exposures:

• CGW’s regional breakdown: 28% US, 20% France, 16% Japan, 14% Britain (PowerShares is 84% US). However, it’s important to note that many of the positions in the PowerShares offering, although primarily but not exclusively consisting of US domiciled securities, have significant operations (and revenues) generated internationally.
• CGW invests in sixteen countries (versus six for PowerShares).
• CGW is the first Global Water Index ETF to invest in foreign ordinaries (PowerShares and provides some of their international exposures through ADRs).

My comments here have been limited to comparisons with PHO. However, Roger Nusbaum has recently discussed another ETF offering from First Trust that is to provide water exposure. From his posting here as well as from other sources, my understanding is that this ETF (not available yet) is quite similar to PHO in that it more domestically focused. The chart Roger has provided on that posting , comparing PHO and the underlying index for the First Trust offering, seems to confirm this. If, for whatever reason, you want to focus more on domestic markets, than the PowerShares or First Trust offerings may be better suited for you.

And having held PHO since its inception would have not been a bad call as here’s its chart since inception versus the S&P 500:

Looks a bit like a high beta stock compared to the S&P 500. But after having glanced at the portfolio holdings of PHO, I decided to try this graph again but against the Nasdaq:

No suprise, they track quite well. Looks like PHO is more of a bet than a diversifier, especially for investors heavily weighted in US equities. I look at thematic sector plays as diversifiers. And I would look to the global water ETF to provide better diversification properties than PHO (not difficult based on these charts).

Another important factor when looking at this new Claymore offering is its strict focus (pure play) on water. On the PowerShares website, for example, you’ll see the list of holdings for PHO here. I’m not entirely sure how health care fits into water exposure but a more important point is that conglomerates like General Electric can not be considered a pure play on water. Frankly, GE should already be well exposed in core equity holdings. It’s a minor point, my focus on GE which is less than 2% of PHO, but the point is valid … when you want a water ETF, you want a water ETF.

This is the same point with the recent global infrastructure ETF from SSGA. It’s as much a utility ETF as it is an infrastructure ETF. With all the slicing and dicing of the capital markets based on sectors, it gets a bit “dicey” with these thematic offerings. Understanding the list of ingredients as well as the recipe helps in can often be helpful in avoiding an upset stomach.