modi-backed etf may fuel india sales after $1.4b haul · pdf filemodi-backed etf may fuel...
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Tuesday
March 21, 2017
March 21, 2017
Modi-Backed ETF May Fuel India Sales After $1.4B HaulBy Viren VaghelaThe success of an exchange-traded fund backed by Prime Minister ’s Narendra Modigovernment may help boost the acceptance of such products in the world’s second-fastest growing ETF market.
Investors poured 92 billion rupees ($1.4 billion), or 3.7 times the targeted amount, into a fund of the top 10 state-run companies, according to , which Reliance Mutual Fundmanages the pool. It was the third time in three years the government used the Central Public Sector Enterprises ETF ( ) to raise assets. A first sale in March 2014 CPSEgenerated 43 billion rupees and a second tranche in January raised at least 45 billion rupees. Proceeds will be used to maintain public spending without increasing the fiscal deficit.
“India’s ETF market is expected to witness robust growth in the coming years due to the structural shift in asset-class preference from fixed income to equities,” Rajendra
, an analyst at , said in an interview. CPSE is a Prasad Karvy Stock Broking Ltd.“catalyst for the broader development of ETFs in India.”
Indian households are putting more money into financial assets as slowing inflation reduces the value of gold and Modi’s cash ban shock damps demand for real estate. Money managed by local ETFs have almost tripled to $6 billion in the past three years, the fastest pace after Japan, data from the Association of Mutual Funds in India show. The investments still make up just 2 percent of the industry’s total 18-trillion rupee assets, the data show.
The global growth of the ETF industry, now with assets of around $4 trillion, has been aided by the poor performance of active managers and their high fees. Yet in India, ETF growth has been held back by stock-picking money managers that have beaten their benchmarks. Local actively-managed equity funds have risen an average 20 percent annually over the past three years, versus a 13 percent gain in the benchmark S&P BSE Sensex, data compiled by Bloomberg show.
“Flows into Indian ETFs are less than those into mutual funds due to lower returns,” said Prasad. “This is partly due to information asymmetry in the Indian stock market that gives active managers an advantage.”
In the case of CPSE, retail investors put bids of more than 35 billion rupees, swayed by its performance. The fund has climbed 43 percent in the past year, more than double the gain in the Sensex, data compiled by Bloomberg show. The outperformance will helpstoke interest for such products, according to Outlook Asia
.Capital Pvt“As the size
of ETF assets grow, fund managers are now seeing a viable business model,” said
, chief executive officer at the Mumbai-based investor advisory firm. Manoj Nagpal“More niche ETFs are getting filed with the market regulator. That’s a positive trend.”
Modi is using the CPSE ETF to pare the government’s extensive ownership in companies including , the largest explorer, and , Oil & Natural Gas Corp. Coal India Ltdthe world’s top producer of the fuel.
Japan
ETFs 2 March 21, 2017
Japan
BOJ Buying Spree Is Making Stocks Quieter — For NowBy Viren VaghelaThe Bank of Japan’s exchange-traded fund buying spree, which is making the country’s quiet equity markets even calmer, could end up making them a lot rougher, too.
BOJ Governor ’s increased purchases of ETFs recently had the Haruhiko Kurodabiggest impact ever on the realized volatility of the Tokyo Stock Exchange Tokyo Price Index and is now suppressing it by 1 percentage point, according to a March 14 report from analysts led by . It’s having a similar effect Bank of America Corp. William Chanon the country’s Nikkei 225 Stock Average, where volatility is the lowest it’s been since 2014, Chan said in a telephone interview.
Since it began scooping up ETFs in 2011, eighty-five percent of the BOJ’s purchases have come during market corrections, according to BofA. For six years, the bank has been purchasing funds that mimic the country’s most popular stock indexes — the Topix and Nikkei 225 — in an effort to revitalize Japan’s stagnant economy and support firms that promote certain governance policies.
"Downside volatility should theoretically pick up when the BOJ eventually exits its ETF buying program," said , head of flow strategy and solutions for Asia Andrew ScottPacific at in Hong Kong. "Whenever it states an intention to sell, Societe Generale SAthis could also accentuate downside moves," he said.
The BOJ is expected to purchase 6 trillion yen ($53.3 billion) of ETFs in 2017, equivalent to 1.4 percent of the current Topix free float, according to BofA. The central bank is also on course to become the No. 1 shareholder of 55 companies in Japan’s Nikkei 225 by the end of 2017, according to estimates compiled by Bloomberg.
Governor Kuroda has defended the buying and said there’s room to increase purchases if needed.
Chan estimates that the Topix’s six-month realized volatility would be 1 point higher than its current level of 16.3 percent without BOJ intervention. Nikkei 225 volatility would also be a point higher, said Chan.
In a 2014 paper, three academics argued that U.S.-listed ETFs increased the volatility of stocks held in their portfolios. The authors of the paper estimated that increasing the ETF ownership of a stock by one standard deviation boosted its daily volatility by 16 percent. The increased volatility came from traders arbitraging the difference between an ETF’s price and the value of its holdings.
While the BOJ’s impact on the Topix has been climbing, it’s not the only factor affecting volatility. "The uncertainty of BoJ QE policy, the impact from USDJPY, and rates volatility will still be the key drivers," wrote Chan.
One group of investors who have been visibly affected are holders of volatility products like the NEXT NOTES Nikkei 225 VI Futures Index ETN ( ). The 1 2035 JPbillion yen note, which benefits when Nikkei volatility climbs, is the worst-performing Japan-listed ETF this year, down 45 percent, according to Bloomberg data.
"As the BOJ is there to support the market in down days,” products that capitalize on rising volatility have been hurt, said Chan.
Flows
ETFs 3 March 21, 2017
Flows
Q&A
ETFs 4 March 21, 2017
Q&A
Money Managers Using Sector ETFs for Equitization, Shorting: Source's Mellor
Asset managers use sector funds to park cash while hedge funds are using them for shorting.
Factor ETFs take similar approaches to what active managers have been doing for years.
Interviewed by Yakob Peterseil on March 16. Comments have been edited and condensed for clarity.
Chris Mellor, Executive Director for Equity Product Management at Source
Q: Source recently launched FTEK LN, a fund of 50 fintech stocks. What makes fintech a good investment theme and what makes a good theme ETF in general?A: It's got to tick a couple of boxes. The underlying theme has to be genuinely interesting and genuinely useful for investors. Fintech is probably a great example of this. It's a long-term theme that is not just a 1-year, 2-year, 3-year short-term event. It's part of a secular change in the way we live our lives. The second most important thing is it's also got to be a theme you can access through traded equities that are liquid enough and large enough.
Q: Why is using sector ETFs better than picking individual stocks?A: The key difference is if you're picking one, three or five stocks, it's a very concentrated portfolio, which is doable for a single investor — and certainly we have clients who both use ETFs and do single stock selection, as well — but what this is doing differently is it's effectively a one-stop shop. It's giving you one trade rather than 50 trades. There are economies of scale, and there are much lower costs for transacting however many shares of the ETF versus however many different shares of the underlying.
If you're going down to the level of three or five stocks, there's going to be an awful lot of company-specific, idiosyncratic risk in that very small portfolio. One of the benefits of going the ETF route is to reduce that idiosyncratic risk and give you better exposure to the theme.
Q: How do institutions actually use these products?A: The big clients that we talk to, [like] large asset managers who are using
ETFs within their own multiasset-type products — they'll often use them within their stock-picking products as an equitization approach. So if they have inflows they don't want to invest in individual stocks in the short term, they may want to make sure they're invested in the market and then adjust their exposures as good opportunities come up. A lot of hedge funds use our products for hedging their exposures, both long and short, so if they're long an individual stock and want to take out the sector exposure, they can do that through borrowing and shorting the ETF. And similarly if they're short the stock, they can offset the sector exposure by going long the ETF.
Q: What do institutions look for when deciding among ETFs?
: For some investors, they have holding Alimits, so that they can't own more than a certain percentage of the fund. Obviously, if they're a large investor and they want to put in a large amount of money, then size matters in that case. Most institutional investors will look at the cost of the fund, but measuring cost not just in terms of OCF [ongoing charge figure] or TER [total expense ratio], but actually looking at the true cost of holding the fund, which is best measured in my experience by looking at the tracking difference. So if you have
performance over the last year relative to the benchmark you're supposed to be tracking, that's going to give you a true measure of the cost of holding a fund.
Tracking error is another important factor and becomes increasingly important the shorter your holding period. The better the fund is at efficiently tracking the index, the more likely you are to get the performance you expect.
Q: What has been the take-up of smart beta and factor products?A: I think there has been a good take-up of those themes and those ideas because a lot of our end clients think about their portfolio risk exposures in terms of factors — size, value, momentum, etc. Some use them as a replacement for their simple beta exposure. If they buy into the long-term outperformance argument for factors, then it makes sense rather than to buy MSCI World, you buy EFIW LN, and you get something that looks very similar to MSCI World in terms of sector exposure and country exposure, but has a skewed pick to stocks that are more likely to outperform over the longer term. A lot also use it increasingly as a replacement for active strategies, as well. The sorts of things that factor-type approaches are investing in are exactly the same types of approaches that active managers have been using for many, many years.
At a Glance
Age: 43Prior to joining Source, spent about 15 years working as an investment Career:
strategist for various banks. Bachelors degree in chemistry from the University of Bath and PhD degree Education:
in inorganic chemistry from Oxford University.Married with a daughter, age 9, and a son, age 7.Family:
Cub scout leader, and has recently taken up tae kwon do.Hobbies:
Volatility
ETFs 5 March 21, 2017
Volatility
Quietest Funds Most Vulnerable to Shock: Ned Davis
Nearly three-quarters of ETFs in the top 60 percent of liquidity have a 100-day volatility that is below their five-year median, according to , a strategist at Tony Welch Ned Davis
Why does that matter? It's possible that "areas that have seen lower Research Inc.volatility than average are likely to get hurt the worst by a pick-up in broad market volatility," Welch wrote in a Mar. 13 note. In other words, holders of these ETFs may be in for a nasty surprise if there's a correction. Above are the ten funds most vulnerable to a shake-up, according to Ned Davis Research.
— Yakob Peterseil
Low Volatility Hurts ETF With Option Selling Strategy
Low volatility has slashed the dividend yield on the PowerShares S&P 500 BuyWrite Portfolio ( ), which relies on selling call options to generate income. A year ago, PBP PBPyielded 5.3 percent, but today it's more like 2.3 percent. The quietest stock market since 2014 has crimped the value of the calls it sells as part of its "buy write" strategy.
Last year, investors pulled $95 million from PBP but recently the outflows have slowed, maybe in anticipation of a market decline. The CBOE S&P 500 2% OTM BuyWrite Index has outperformed the S&P 500 every year that U.S. stocks fell, according to data going back to 1988.
— Tom Lagerman
This story was written by a Bloomberg LP employee involved with data collection and was edited by the News Department. To suggest ideas or provide feedback, contact the editor for this story: Yakob Peterseil at [email protected]
High Yield
ETFs 6 March 21, 2017
High Yield
Goldman Unveils Junk Bond ETF Just as High-Yield Exodus DeepensBy Rachel EvansIt’s said that timing is key to launching a successful exchange-traded fund. If so,
picked an Goldman Sachs Group Inc.odd moment to reveal its latest offering.
The New York-based finance firm is planning an ETF that will invest in high-yield corporate debt, according to documents filed March 16 with the U.S. Securities and Exchange Commission. That’s despite an ongoing exodus from junk bonds that saw $5.68 billion in fund assets desert the securities in the week ended March 15, the most since August 2014, according to Lipper U.S. Fund Flows data.
“One hurdle they may face with this launch is timing,” said , Eric Balchunasan ETF analyst for Bloomberg Intelligence. “This is a huge factor for new products and investors have been fleeing high yield ETFs lately.”
A junk bond fund run by State Street lost $1.1 billion of assets in the Corp.
week through March 10, the most since December 2015, data compiled by Bloomberg show. BlackRock’s high-yield bond ETF also suffered, hemorrhaging $1.4 billion in the week through March 10, the most in almost five months. Both however booked inflows the following week.
Investors are recoiling from riskier assets amid a mix of deteriorating credit fundamentals for retailers and energy companies and higher interest rates from the Federal Reserve, which will make it harder to refinance debt.
But Goldman has a trick up its sleeve: its fund will steer clear of the most indebted issuers and those that are likely struggle to repay their borrowings. Basically, it’s looking for the highest quality junk available.
The ETF will track an index of dollar-denominated bonds sold by U.S. or
Canadian companies, the filing shows. Issuers that have the lowest debt service and leverage metrics within each of three broad industry groups will be excluded from the benchmark.
The bank currently has just one bond ETF — investing in U.S. Treasuries — alongside six stock funds. It is also planning a local currency-denominated fund of sovereign debt. The emerging-market focused ETF will buy bonds from nations with the best money supply growth and balance of trade.
ETFs 7 March 21, 2017
ETFs on the Bloomberg Terminal
ETFs 8 March 21, 2017
ETFs on the Bloomberg Terminal
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