TAG | commodities based ETFs
Today, in an article in InvestmentNews.com, we learn that the emerging-markets mutual funds managed by Goldman Sachs Group Inc. and Franklin Resources Inc., along with leveraged raw material ETFs, were among the U.S.-registered funds affected the most in this week’s commodities selloff.
It was noted that the mutual funds and exchange-traded funds dedicated to commodities, including index-based products, suffered steeper declines. The ProShares Ultra Silver ETF, designed to return twice the daily performance of silver, plummeted 51 percent from Monday to Thursday, although it was up 2.85% as of midday on Friday. Non-leveraged silver ETFs fell about 30 percent.
In the $831 million Goldman Sachs BRIC Fund and the $825 million Templeton BRIC Fund, which focus on Brazil, China, India and Russia, both fell 5.7 percent in the week ended yesterday. The funds, from New York-based Goldman Sachs Group Inc. and San Mateo, California’s Franklin Resources Inc., lost the most among diversified equity funds with more than $500 million in assets and at least 20 percent in energy or basic materials stocks, according to data compiled by Bloomberg.
The InvestmentNews.com article says that Bill Miller, manager of the $3.94 billion Legg Mason Capital Management Value Trust, said in an April 19 letter to investors that he saw little value in commodities. He pointed to research from Stifel, Nicolaus & Co. showing that commodity returns relative to stock returns were at a 200-year high on a rolling 10-year basis.
“One thing is clear from the analysis of long-term commodity returns: they are cyclical,” Miller wrote.
Commodities plunged yesterday as investors accelerated sales following year-to-date gains through April of more than 23 percent for silver, oil, gasoline and coffee. The Standard & Poor’s GSCI index of 24 commodities sank 6.5 percent at 4:32 p.m. New York time in the biggest one-day drop since January 2009, bringing its loss this week to 9.9 percent.
“It’s panic,” said Michael Shaoul, chairman of Marketfield Asset Management, which oversees $1 billion in New York. “There’s nothing to do with weak U.S. economic data. It’s not a global financial crisis. It’s a classic liquidation move in a crowded trade.”
Oil tumbled 8.6 percent yesterday, the most in two years, to $99.80 a barrel. Silver dropped 8 percent, extending the worst four-day slump since 1983 to 25 percent. The Dow Jones BRIC 50 Index declined 5.1 percent from April 28 through yesterday.
These leaders of the four countries plus South Africa, a group known as the BRICS, said last month that excessively volatile commodity prices pose “new risks for the ongoing recovery of the world economy.”
The $726 million DWS Latin America Equity Fund, managed by the funds unit of Frankfurt’s Deutsche Bank AG, fell 5.4 percent in the past week. Boston-based Fidelity Investments’ $5.46 billion Canada Fund lost 5.3 percent, and the $1.4 billion FPA Capital Fund, run by Los Angeles-based First Pacific Advisors LLC, dropped 4.6 percent.
Open interest in silver futures has tumbled about 15 percent since the Comex exchange in New York began raising margin requirements on April 25. Futures on Brent crude, crude oil, heating oil, gasoline and natural gas plunged more than 6.9 percent yesterday.
Also, crude oil dropped below $100 a barrel for the first time since March 17. Copper futures slumped 3.3 percent, falling below $4 a pound for the first time in five months. Among agricultural commodities, cocoa, cotton, corn and weak retreated more than 2.3 percent in futures trading.
If you have invested in ETFs or mutual funds and lost money, you may have valuable legal rights to be compensated for your losses. Call a Securities arbitration lawyer for a free consultation on how to recover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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The executives at BlackRock Inc. and Invesco PowerShares Capital Management LLC are calling on regulators to address suitability requirements for the sale of sophisticated ETFs, such as commodities-based and leveraged funds.
Although BlackRock would like to see increased suitability requirements for the sale of these kinds of exchange-traded funds, Invesco PowerShares hopes that regulators create a separate class of investors who could invest in more-sophisticated products, executives at the firms said.
ETFs have been growing rapidly, surpassing $1 trillion in assets at the end of last year. And a portion of that growth is from retail investors.
At The Charles Schwab Corp., retail investor ownership of ETFs jumped and incredible 61% last year. This could spoil things for other providers, turning ETFs into “the new CDO,” said Christian Magoon, an ETF consultant and chief executive of Magoon Capital LLC, referring to collateralized-debt obligations, the instruments that fueled the mortgage crisis. “And with products that are traded on the exchange, you can’t control how people are using them.”
This lack of control has caused problems and given ETFs something of a black eye.
Commodity ETFs — dubbed the “Worst Investment in America” in a recent Bloomberg BusinessWeek article — were linked to the May 6 flash crash during which smaller investors were hit hard.
In a report in the Financial Times on Feb. 10, 2011,it was noted that the Securities and Exchange Commission is investigating whether ETFs are being used to hide large bets based on inside information. This may have nothing to do with ETFs but it doesn’t help to have more negative press.
Additional problems are most likely to arise from complicated ETFs, particularly leveraged and inverse funds, observers said. Leveraged ETFs use derivatives and debt instruments to outperform their market indexes, while inverse ETFs use derivatives to achieve high returns when their benchmark indexes decline.
The regulators have already expressed concerns about these products.
It was noted that in 2009, the SEC and Financial Industry Regulatory Authority Inc. published notices warning investors about leveraged and inverse ETFs.
In March, the SEC stopped approving new ETFs that use derivatives. At the time, the SEC indicated that it wanted to see if additional investor protections were warranted, particularly for leveraged and inverse ETFs.
In October, Finra came out with another notice specifically about disclosures for commodity futures-linked securities. Finra said that the returns on these products, which include ETFs, can deviate substantially from the performance of their referenced commodities, particularly over longer periods of time.
BlackRock, however, is worried that just asking firms to disclose the risks associated with these kinds of funds isn’t enough, said Noel Archard, head of U.S. product at the firm’s iShares unit.
“I am not sure a pop-up disclosure is enough,” he said during a panel discussion at a conference last week. “Leveraged and inverse ETFs are very hard to explain.”
Mr. Archard has talked to the SEC about creating some type of suitability requirement that would address these issues, he said. Although some broker-dealers do have approved lists for ETFs, not all do, he said.
“This is something that everyone — the sponsors and the distributors — need to get involved in,” Mr. Archard said in comments following the panel discussion.
Nancy Condon, a Finra spokeswoman, said that the regulator already has suitability requirements in place that apply to both simple and sophisticated ETF products.
If BlackRock ever launches leveraged or inverse ETFs, it probably would only make them available to institutional investors, given their complexity.
“These products are difficult to explain. So for now we make them available only through institutions,” Mr. Archard said.
For its part, Invesco PowerShares would like regulators to allow firms to offer complicated ETFs such as leveraged or inverse funds. But Benjamin Fulton, head of the firm’s global ETF business, suggested that regulators allow the sale of these kinds of ETFs to sophisticated investors, such as high-net-worth investors.
“You could qualify investors by assets under management or by whether they are an institutional investor or not,” said Mr. Fulton, who said that he has discussed this idea with the Investment Company Institute, the mutual fund trade association.
In turn, the ICI has asked the SEC “not to hold up consideration of new and pending ETF applications during its review” of the use of derivatives by mutual funds and ETFs, said Ianthe Zabel, a spokeswoman at the ICI.
Not everyone thinks that there should be formal rules about who should be allowed to buy complex ETFs or how advisers should sell them.
“I am not sure you need to put a structure around it,” said Andrew O’Rourke, chief marketing officer at Direxionfunds, which offers leveraged ETFs. “There is a responsibility of the adviser and the investor to know what they are buying.”
Direxion offers online modules explaining its ETFs, but the firm thinks that broker-dealers could do more in terms of education.
“I would like to see more guidance for broker-dealers on how to explain and sell these products, rather than have regulators create guidelines about who should invest in them,” Mr. O’Rourke said.
The broker-dealer industry will have to weigh the costs and benefits of increasing suitability requirements for complex-ETF buyers, said Jim Ross, senior managing director at State Street Global Advisors Inc.
“I see both sides of the argument,” he said. “The challenge is that the broker-dealers would need to build the infrastructure to support this.
If you had invested in complex, high-risk ETFs and lost money, you may have valuable legal rights to be compensated for your losses. Call a Securities arbitration lawyer for a free consultation on how to ecover your losses. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
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