The other day I made a passing reference to the fact (hope?) that there would be some new ETP launched as the year winding down was a busy time. Well there have indeed been several interesting product launches that we can talk about.
First up is First Trust with the Smart Grid Infrastructure Fund (GRID)--the symbol is GRID; nice. As an amusing anecdote before talking about the fund I was asked to go on CNBC for a segment about Smart Grid stuff a few weeks ago but had to decline because about all I could have said was that I think a smart grid is better than a dumb one; ahem.
Anywhoo GRID is an international fund with noticeable weightings in France, Germany and Japan (I did not see the country breakdown anywhere) but is heaviest by far in the US. Industrials are the largest sector at 72%. While the foreign exposure is light, it seems as though the fund will actually capture this segment of the market for better or for worse. It has a couple of mega-caps in it as space filler (GE and Siemens) but they are not the largest stocks in the fund which is a good thing.
There are several funds in this general space already and more on the way. While I do not think the construction is bad there doesn't seem to be anything that really grabs your attention. I will be surprised if this gains any meaningful traction.
Next up is the iShares Diversified Alternative Trust (ALT). This is an absolute return vehicle that appears to be actively managed. Looking at the holdings, this thing is funky. It is long some currency futures and equity index futures and short some other currency and equity index futures. There have been a lot of absolute type product that have come in the last couple of years and some have worked better than others and some have stunk. You can read about the strategy from IndexUniverse and without criticizing the folks at IU it is not easy to glean the specifics of the overall tactic. The fund does not make a good first impression.
If the fund can prove itself great but by prove itself I mean hold up in a nasty downturn.
The Build American Bond ETF (BAB) is finally out and the PowerShares website avails a look under the hood. As I mentioned before it is a long dated product. Half of the holdings are 25 years or more and a quarter of the fund is 20-25 years. The average coupon reports at 6.37% but with no indication of current prices the actual yield of the fund is not yet available (if the average price paid is 110 then the yield would obviously be less than the coupon).
California appears to be the largest state with four issues totaling 16% of the fund. While a real problem is unlikely a good scare is quite possible meaning that prices on those issues could face a blip at some point. There is no North Dakota or Montana (the only two states without a budget problem) in the fund but maybe there are no BAB issues for those states or maybe if there are they are too small for the fund.
Pending the info on what the fund will yield (keep in mind yields for bond ETFs fluctuate) I think this fund will be popular. Just about every fixed income segment offers better value than the US treasury market but some are still quite risky. BAB might offer a tie in to closer to normal yields without crazy risk although I would like to see the exposure to California come down some as new assets come into the fund and it buys more issues from the index (it is my understanding that the fund is sampling the index).
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11 comments:
I'd like very much to get into BAB but PowerShares has not been very forthcoming with info about the product. I feel like it's a bit of a pig in a poke right now so I'm going to wait and see. Disappointing.
With its focus on long-term and the current low interest rate environment, seems BAB would have a very large interest rate risk. Would this keep you away from it? Thanks.
I worry about that with all my bond funds, anon 6:32. On the other hand, Rick Santelli just held up a sign that most traders are betting the Fed won't raise rates until 2012.
I reached the same conclusion on ALT. Funky is a great descriptor.
It may fill a small niche within a speculative portfolio, but not mine until if, or when, it is marked with a successful track record. Thanks for sharing your thoughts on ALT.
T
Well, this time of the year gets me thinking about over-eating and inactivity. So, in the spirit of today's post, I'd like to see an etf focused on obesity.
It would be "attitude neutral," containing both good guys and bad guys. The culprits would be candy and snack food companies, soda makers, fast food, video games, and the like. On the other side of the ledger would be health care (heart and diabetes focus,) weight loss companies, athletic apparel and footware, etc.
It would trade under the symbol FAT :)
As a retiree with a need for income streams without crazy risk, I purchased a fair amount of BAB yesterday for myself and for elderly relatives whose assets I manage. I made an assumption that this ETF will yield around 5% and the BAB bonds seem to have minimal default risk from my readings. Interest rate risk does exist but with an ETF you can dump it at the first sign that that interest rates will start rising. I'm betting that "they" keep rates low until after the next Presidential election. Time will tell....
I keep seeing comments from bond investors, big and small, who say they'll head for the door at the first whiff of rate increases.
The rush to the exit might prove amusing.
BillM
as far as interest rate risk yes there is interest rate risk but of course there always is risk. if you can get a "normal-ish" yield in some part of the market then I perceive the risk to be worth taking with a small portion. My "neighbor" mentioned above buying some and thinking the yield was in the fives. Maybe but I would want to know before buying. In 2006 I bought a lot of 2 year treasuries yielding 5% so that level for 25 years is a little tougher sell but 6% or 7% that would easier with, again, a small portion. But after knowing the yield it might make more sense to seek out individual issues. Might the Triborough Bridge issue in the fund be better and simpler than the fund. It might be. I don't know at this point but it might be.
GRID is an important thesis, but perhaps a disappointing product. You can find details here: http://www.ftportfolios.com/Retail/etf/etfsummary.aspx?Ticker=GRID
The #1 holding at 11% is SMA Solar. Nothing against PV solar systems, but that's not how I would go about investing in a much-needed grid buildout (or smartening). So it seems to me the index is not well designed for the investment thesis.
I'll put BAB on the watch list.
Roger,
My reason for being interested in and purchasing the ETF instead of individual issues in the fund is mostly on the "sell" side.
I can sell the ETF at a moments notice at current known price with hopefully only a tiny spread. Selling an individual muni bond prior to maturity is a much more difficult task for an individual as the pricing is seldom transparent and it's been my experience that most individuals do not get good pricing when trying to sell such bonds themselves. Hence,the ETF gives me the liquidity of an instant trade at pretty much of a known price.
I would gently challenge the chase for "normal-ish" interest rates. Low rates could be the new normal for a while. If rates are higher there has to be a reason, and you will have to deal with that reason some day possibly with loss of principle.
The BAB concept sounds insane to me. If I understand it correctly the only thing holding open the arbitrage opportunity is federal spending on interest subsidies - financed with conventional treasury debt currently at lower rates. Basically the treasury will have to issue more and more of its own debt into a market that is selling to move to BABs.
Could BABs be: "the first sign that that interest rates will start rising"?
On another note here is an interesting animated map showing the un-employment situation by county. It looks like if you want a job you might consider a red state in fly-over country.
http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html
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