Interview: ETF
>> for the year, the benchmark stock index had been bouncing between gains and losses with only the s&p 500 higher right now year to date. where can investors put their money? one alternative might be exchange-traded fund. greg ehret is co-head of advisers, strategists at state street global adviser, joining me from washington with a closely look at e.t.f.’s. welcome to the program. for many investors, an e.t.f. is no different from an index fund except for the fact it trades throughout the day, right? what would be the difference, to someone that isn’t day trading these things, why is the difference important?
>> i think it offers a number of different things for the end investor. you mentioned the flexibility, buying and selling it throughout the day. the flexibility of going short an e.t.f. to hedge your exposures whether to a stock or industry. finally, the tax advantages and cost efficiency of the vehicles is something that makes them stand out against traditional indexed mutual funds.
>> cuquantify that, the cost advantage?
>> the cost advantage, sure. i’ll give you an example. the spider’s at 10 basis points and has had 16 cents of capital gains distribution since its inception in 1993.
>> are there any e.t.f.’s that are actively managed the same way mutual funds can be divied into index funds that aren’t actively managed and more actively managed funds. are there e.t.f.’s that are more likely the actively managed funds?
>> not yet. the transparency that e.t.f.’s provide the investor, investors know exactly what’s in each one of these e.t.f.’s and most fund managerss of active portfolios are reluctant to provide portfolio holdings on a day-by-day basis.
>> one of the nascent industries is options on e.t.f.’s. people buying puts and calls. why does that make sense?
>> it’s another way to hedge exposure, whether on the s&p 500 or some other benchmark index. you can really hedge your risk by using an options strategy. >> one of the such e.t.f.’s is ticker symbol x.l.e. on the bloomberg terminal right now, a one-year chart of that drawn. talk about this, an energy e.t.f., right?
>> that’s right, it’s made up of the energy stocks in the s&p 500. it’s a cost-effective way of gaining exposure to these different energy stocks, the total expense ratio is 25 basis points and it has a lot of liquidity. in particular, with the sector e.t.f.’s, we see a considerable amount of liquidity driven by the news and with the hurricanes and oil prices where they are, x.l.e. obviously has significant volume.
>> let’s talk about the e.t.f. industry. isn’t it true that barclays is really leading this industry with the ishares product?
>> barclays is definitely a formidable competitor. there are a number of very good service providers. what we do at state street global is try to add value to the end user by providing the tools financial advisers can use to effectively implement strategies, using e.t.f.’s alongside actively managed portfolios.
>> what does that mean, you say you’re better because you provide tools?
>> from a value perspective, we want to make sure that on our website, for example, advisers.ssg.com, we allow individuals to build portfolios using active and passive techniques. we believe e.t.f.’s are a complementary strategy to active management.
>> one of the techniques is to hedge and to be more specific, i know you’ve alluded to this, but if you think one stock will outperform a group, you may buy that stock but short the e.t.f. associated with the group in a way that if the whole group moves, you’re protected, right?
>> that’s a hedge fund strategy we see more and more often utilized by hedge funds and individuals, a pair strategy where you might like a long stock, exxon-mobil, for example, but not happy with the energy sector. there’s also a number of different reasons why you would want a hedge exposure with e.t.f.’s. you may be a wealthy individual with a concentrated stock position and to hedge that exposure, you may choose to take a sector bet on the short side with a highly correlated sector. >> you mentioned the puts and calls in e.t.f.’s. that volume can’t be too big, though, it must be thinly traded, right?
>> no, actually, the larger options, actually, two of the three largest actively traded options contracts today are e.t.f.’s. those would be the options on the q.q.q. as well as on the spider.
>> tell us about state street’s growth in e.t.f.’s. what are the growth rates you’ve seen in in-flows?
>> we’ve started the business in 1993 with the advent of the spider and have seen our assets climb from $100 million to $80 billion. much of that growth happened in the bear market of 2000’s where we’ve seen growth over 30% per anum through those years.
>> our thanks to greg. we’ll look at crude on the rise. also, where the international monetary fund says prices are headed for crude oil.
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crude oil prices touched the highest level in the last 12 sessions, now at $66.80 in the electronic trading. but the bigger impact might be in natural gas prices, rising to another all-time record. you see there, $12.59 per million b.t.u. and 13% move in the last week. moving on, the effect on stocks evident, large cap oil stocks all up, exxon, chevron, conoco, hitting all-time highs today. drillers reacting more. x.t.o., chesapeake, devon energy and petroquest, all of those stocks hitting all-time highs. oil field services stocks, particularly those with offshore, specialty or refinery specialty, rallied, like ocean gating. reaction even in coal stocks as coal competes with natural gas to generate electricity in the u.s. so if we have natural gas supply impacted by the hurricane, that could drive up demand for coal and the three biggest cap coal stocks, peabody, consol and arch coal all hitting all-time highs this week. recapping the day on wall street, the dow jones industrial average on the day for the third session in a row down, down to the tune of 1% for the dow. s&p 500 down .9%, both finishing at the lows of the session and nasdaq also near or at the lows of the session, the worst three of those performers, down 1.2%. christopher cox, new chairman of the securities and exchange commission, presided over his first s.e.c. meeting today. cox, a former republican congressman, says the commission may write new rules for executive pay. allan dodds frank has the latest on that story.
>> the new chairman of the securities and exchange commission says he is willing to examine whether more disclosure of executives’ multi-million dollar pay packages is needed.
>> if there are concerns about disparities or levels of executive compensation, i have every confidence that the market can sort that out and that shareholders can act in their best interests but they have to have the best information in order to do that. so in the very near future, i think the s.e.c. will put out additional guidance and perhaps rules on this subject.
>> in his interview with bloomberg television, cox talked about new regulations on hedge funds and the ongoing revelations about fraud at the bayou fund.
>> as a first step to getting a grip on the regulatory interest in this area, that will provide census information, as it were, about the scope of the matters that we might concern ourselves with. whether or not this kind of information would have been enough to tip us off in advance to what was going on at bayou is a fair question.
>> the chairman cautioned that the new hedge fund rules will strain the s.e.c. resources. he said before more measures are implemented, “we want to make sure we can bite off and chew what is already on the menu.” in the first meeting presided over by cox, the commission votedum amly today to delay until 2007 the deadline for small companies to file enhanced financial reports under the sarbanes-oxley act. small businesses complained that meeting the original deadline would have been too expensive.
>> thank you. billionaire investor kirk kerkorian’s tracinda corp. said it may ask for representation on the g.m. board. tracinda, in a filing today with the s.e.c., tuesday intends to raise its stake in the automaker to as much as 9.9% from 9.53% now. tracinda has a total of 53.8 million g.m. shares and bets the automaker will recover from a $1.4 billion loss in the first half. after a 13-year ban because of safety concerns, inamed corp. received notice from regulators its silicone breast implants may be approved for cosmetic use. the food and drug administration issued an approvable letter outlining conditions to be met. here’s a look at inamed shares at the close, gaining almost 9% in a day where the market was down, finishing at $77.froompt government advisers voted in april against recommending approval because of questions about the implant’s safety. when we return, all three u.s. stock benchmarks dropped for the third consecutive day. we’ll look at investing in exchange-traded funds.
